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, 2009
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) | | 34-1406303
(I.R.S. Employer Identification No.) |
457 Broadway, Lorain, Ohio
(Address of principal executive offices) | | 44052-1769
(Zip Code) |
(440) 244-6000
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class | | Name of Each Exchange on Which Registered |
Common Shares
Par Value $1.00 Per Share
Preferred Share Purchase Rights | | The NASDAQ Stock Market |
Securities Registered Pursuant to Section 12(g) of the Act:
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Title of Each Class | | Name of Each Exchange on Which Registered |
| None | | None |
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 ofRegulation 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 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 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” inRule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer þ | | Smaller reporting company o |
| | | (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined inRule 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, 2009 was approximately $39,668,482.
The number of common shares of the registrant outstanding on March 1, 2010 was 7,363,161.
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 and brokerage services, and other traditional banking services. These services are generally offered through the Corporation’s wholly-owned subsidiary, The Lorain National Bank (the “Bank”). The Bank, through an agreement with a registered third-party broker-dealer, Investment Centers of America, Inc., offers mutual funds, variable annuity investments, variable annuity and life insurance products, along with investments in stocks and bonds. Investment Centers of America, Inc. is a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation.
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 27 automated teller machines (“ATM’s”) 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 Bank’s 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 Bank’s wholly-owned subsidiary, North Coast Community Development Corporation, offers commercial loans with preferred interest rates on projects that meet the standards for the federal government’s New Markets Tax Credit Program.
Residential, Installment and Personal Lending. The Bank’s 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 Bank’s 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 Bank’s 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, ATM’s, 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 $454,000 to over $793 million. These competitors, as well as credit unions and financial intermediaries, compete for Lorain County deposits of approximately of $3.8 billion.
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The Bank’s market share of total deposits in Lorain County was 23.64% in 2009 and 21.22% in 2008, and the Bank ranked number one in market share in Lorain County in 2009 and number two in 2008.
The Corporation’s Morgan Bank division operates from one location in Hudson, Ohio. The Morgan Bank division competes primarily with nine other financial institutions for $566 million in deposits in the City of Hudson, and holds a market share of 22.12%.
The Bank has a limited presence in Cuyahoga County, competing primarily with 26 other financial institutions. Cuyahoga County deposits as of June 30, 2009 totaled $53.7 billion. The Bank’s market share of deposits in Cuyahoga County was 0.4% in 2009 and 0.04% in 2008 based on the FDIC Summary of Deposits for specific market areas dated June 30, 2009.
Business Strategy
The Bank competes with larger financial institutions by providing exceptional local service that emphasizes direct customer access to the Bank’s 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 Corporation’s 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 Board’s 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, 2009.
Both federal and state law extensively regulate various aspects of the banking business, such as reserve requirements,truth-in-lending andtruth-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 bank’s extension of credit to an affiliate. Additionally, all transactions with an
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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.
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 Corporation’s participation in the CPP, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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 will expire on December 31, 2013.
Deposit Insurance Assessments. Substantially all of the Bank’s 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 on30-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 institution’s 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 institution’s 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 institution’s 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.
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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 institution’s 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.
Employees
As of December 31, 2009, 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 iswww.4LNB.com. Copies of the annual report onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 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 iswww.sec.gov.
Forward-Looking Statements
ThisForm 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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| | • | significant increases in competitive pressure in the banking and financial services industries; |
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| | • | changes in the interest rate environment which could reduce anticipated or actual margins; |
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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 Corporation’s financial condition; |
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| | • | persisting volatility and limited credit availability in the financial markets, particularly if actions taken by the U.S. Treasury, in coordination with other financial institution regulators and other initiatives undertaken by the U.S. government, do not have the intended effect on the financial markets; |
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| | • | limitations on the Corporation’s ability to return capital to shareholders and dilution of the Corporation’s 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 Corporation’s ability to pay dividends; |
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| | • | increases in interest rates or further weakening economic conditions that could further constrain borrowers’ ability to repay outstanding loans or diminish the value of the collateral securing those loans; |
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| | • | adverse effects on the Corporation’s ability to engage in routine funding transactions as a result of the actions and commercial soundness of other financial institutions; |
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| | • | general weakness in the economy that may disproportionately impact the financial services industry; |
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| | • | uncertainties and potential additional regulatory or compliance burdens as a result of the Corporation’s participation in TARP; |
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| | • | risk of failure of third party vendors; |
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| | • | changes in accounting standards; |
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| | • | limits on executive compensation due to the Corporation’s participation in the CPP; |
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| | • | potential lack of capital when needed by the Corporation; |
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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 the 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 attractingand/or retaining key executivesand/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 Corporation’s reports as filed with the SEC. |
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 onForm 10-K and in the Corporation’s other filings with the SEC, before making any investment decision with respect to the Corporation’s securities. In particular, you should consider the discussion contained in Item 7 of this annual report onForm 10-K, which contains Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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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 Corporation’s business. If any of these known or unknown risks or uncertainties actually occur or develop, the Corporation’s business, financial condition, results of operations and future growth prospects could change. Under those circumstances, the trading prices of the Corporation’s securities could decline, and you could lose all or part of your investment.
Current market developments may adversely affect the Corporation’s industry, business and results of operations.
Dramatic declines in the housing market during prior years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers including other financial institutions. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect the Corporation’s business, financial condition and results of operations.
Recent developments in the financial services industry and the U.S. and global capital markets may adversely impact the Corporation’s operations and results.
Developments in the last two years in the capital markets have resulted in uncertainty in the financial markets in general, with the expectation of the general economic downturn continuing in the first quarter of 2010 and beyond. Loan portfolio performance has deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of collateral. The competition for the Corporation’s deposits has increased significantly due to liquidity concerns at many of these same institutions. Stock prices of bank holding companies, like the Corporation’s, have been negatively affected by the current conditions of the financial markets, as has the Corporation’s ability, if needed, to raise capital or borrow in the debt markets, compared to prior years. As a result, there is a potential for new federal or state laws and regulations regarding lending and funding practices and capital and liquidity standards, and financial institution regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement actions. Developments in the financial services industry and the impact of any new legislations in response to those developments could negatively impact the Corporation by restricting the Corporation’s business operations, including the Corporation’s ability to originate or sell loans, and adversely impact the Corporation’s financial performance.
It is unclear what impact EESA, ARRA, and other initiatives undertaken by the United States government to restore liquidity and stability to the U.S. financial system have had and there can be no assurance that they will continue to help stabilize the U.S. financial system.
EESA was enacted in response to the ongoing financial crisis affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions. It is unclear at this time what impact that EESA or ARRA, or programs and other initiatives undertaken by the U.S. government have had on the financial markets and there can be no assurance that these measures will continue to help stabilize the U.S. financial system; the high levels of volatility and limited credit availability currently being experienced may persist. The failure of EESA or other government programs to continue to help stabilize the financial markets and a continuation or worsening of current financial market conditions could have a material adverse effect on the Corporation’s business, financial condition and results of operations.
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Current levels of market volatility may have a material adverse effect on the Corporation.
The capital and credit markets have been experiencing volatility and disruption for more than 24 months. If current levels of market disruption and volatility continue or worsen, there can be no assurance that the Corporation will not experience an adverse effect, which may be material, on the Corporation’s ability to access capital and on the Corporation’s business, financial condition and results of operations.
The soundness of other financial institutions could adversely affect the Corporation.
The Corporation’s 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 Corporation’s counterparty or client. In addition, the Corporation’s 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 Corporation’s results of operations.
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 Corporation’s results of operations could be negatively affected.
Strong competition may reduce the Corporation’s ability to generate loans and deposits in its market.
The Corporation competes in a consolidating industry. Increasingly, the Corporation’s 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 Corporation’s ability to grow its assets and earnings.
Changes in interest rates could adversely affect the Corporation’s earnings and financial condition.
The Corporation derives the majority of its revenue from net interest income. Net interest income may be reduced if more rate sensitive assets than interest-bearing liabilities reprice or mature during a time when rates are declining, or if more interest-bearing liabilities than rate sensitive assets reprice or mature during a time when rates are rising. However, the Corporation has historically experienced improved net interest income during periods of rising interest rates, so if interest rates fall, the Corporation’s revenue may be adversely impacted. Interest rate changes also impact customer preferences for the Corporation’s products. Changing interest rates can lead to unpredictable cash flow with respect to both assets and liabilities, which can negatively impact net interest income.
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The Corporation’s business may be adversely affected by changes in government policies. The Corporation competes in a highly regulated environment.
Changes in regulation are continually being proposed which can substantially impact the Corporation’s products and cost of delivery. Regulatory burdens imposed by legislation such as The Sarbanes-Oxley Act of 2002, The USA PATRIOT Act, The International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, The Equal Credit Opportunity Act, The Fair Housing Act, The Community Reinvestment Act and the Home Mortgage Disclosure Act can materially impact the ability of the Corporation to grow should the Corporation fail to develop the systems to adequately comply with these regulations. Failure to comply with these regulations can lead to loss of customer confidence, substantial fines and regulatory constraints on the Corporation’s operations. These burdens can also materially impact the earnings of the Corporation as additional resources are expended to comply with these requirements. The government, through the open market activities of the Federal Reserve Board, can also adversely impact the Corporation’s business. The Federal Reserve Board can change the discount rate, which impacts the composition of the Corporation’s balance sheet by influencing the rates that the Corporation earns on its assets and pays on its liabilities.
The Corporation is subject to additional uncertainties, and potential additional regulatory or compliance burdens, as a result of the Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s operating results.
The Corporation’s 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 Corporation’s earnings may be adversely affected if management does not understand and properly manage loan concentrations. The Corporation’s commercial loan portfolio is concentrated in commercial real estate. This includes significant commercial and residential development customers. This means that the Corporation’s credit risk profile is dependent upon, not only the general economic conditions in the market,
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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 borrower’s 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 Corporation’s 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 Corporation’s 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, unexpectedand/or prolonged change in the level or cost of liquidity could adversely affect the Corporation’s business, financial condition and results of operations.
If the Corporation’s 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 Corporation’s ability to maintain accurate records which is critical to the Corporation’s 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 Corporation’s business infrastructure. Third party vendors provide certain components of the Corporation’s business infrastructure, such the Bank’s 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 Corporation’s ability to deliver products and services to the Corporation’s operations directly through interference with communications, including the interruption or loss of the Corporation’s websites, which could adversely affect the Corporation’s business, financial condition and results of operations.
Changes in accounting standards could materially impact the Corporation’s financial statements.
The Financial Accounting Standards Board (FASB) may change the financial accounting and reporting standards that govern the preparation of the Corporation’s 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 Corporation’s 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 wantsand/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 Corporation’s performance, including its competitive position, could suffer, and, in turn, adversely affect the Corporation’s business, financial condition and results of operations.
9
TARP and ARRA impose certain executive compensation and corporate governance requirements that may adversely affect the Corporation, including the Corporation’s ability to recruit and retain qualified employees.
The purchase agreement the Corporation entered into in connection with the Corporation’s participation in the CPP required the Corporation to adopt the U.S. Treasury’s 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 Corporation’s Chief Executive Officer, Chief Financial Officer and the next three most highly compensated senior executive officers. The standards include:
| | |
| | • | ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of financial institutions; |
| |
| | • | 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; |
| |
| | • | prohibitions on making golden parachute payments to senior executives; and |
| |
| | • | an agreement not to deduct for tax purposes executive compensation in excess of $500,0000 for each senior executive. |
ARRA imposed further limitations on compensation while the U.S. Treasury holds equity issued by the Corporation pursuant to TARP:
| | |
| | • | a prohibition on making any golden parachute payment to a senior executive officer or any of the Corporation’s next five most highly compensated employees; |
| |
| | • | a prohibition on any compensation plan that would encourage manipulation of the Corporation’s reported earnings to enhance the compensation of any of the Corporation’s employees; and |
| |
| | • | a prohibition on the payment or accrual of any bonus, retention award or incentive compensation to the Corporation’s 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. |
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 taxgross-up payments.
These provisions and any future rules issued by the U.S. Treasury could adversely affect the Corporation’s ability to attract and retain management capable and motivated sufficiently to manage and operate the Corporation’s business through difficult economic and market conditions. If the Corporation is unable to attract and retain qualified employees to manage and operate the Corporation’s business, it could negatively affect the Corporation’s business, financial conditions and results of operations.
The Corporation’s issuance of securities to the U.S. Treasury may limit the Corporation’s ability to return capital to its shareholders and is dilutive to the Corporation’s common shares. If the Corporation is unable to redeem such preferred shares, the dividend rate increases substantially after five years.
In connection with the Corporation’s sale of $25.2 million of its Series B Preferred Stock to the U.S. Treasury in conjunction with the 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 Corporation’s common shares for the 20 trading days preceding approval of the Corporation’s issuance (which was also the basis for the exercise price of $6.74). The terms of the
10
transaction with the U.S. Treasury include limitations on the Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s Common Shares, and, as a result, they could adversely affect the Corporation’s 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 Corporation’s liquidity, and as a result, adversely affect the Corporation’s business, financial condition and results of operations.
The Corporation’s ability to pay dividends is subject to limitations.
Holders of the Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s 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 Corporation’s financial condition, liquidity and results of operations. In such an event, additional capital may be required to meet requirements. The Corporation’s 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 Corporation’s 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 Corporation’s existing shareholders or reduce the market price of the Corporation’s common shares, or both.
11
If the Corporation is required to write down goodwill recorded in connection with its acquisitions, the Corporation’s 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 company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At December 31, 2009, the Corporation had approximately $21.5 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 Corporation’s financial condition and results of operations.
| |
| Item 1B. | Unresolved Staff Comments |
Not applicable.
The Corporation’s offices are located at the Corporation’s Main Banking Center, 457 Broadway, Lorain, Ohio, 44052. The Corporation owns the land and buildings occupied by nine 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:
| | | |
| Main Banking Center & Corporate Offices | | 457 Broadway, Lorain |
| Vermilion | | 4455 East Liberty Avenue, Vermilion |
| Amherst | | 1175 Cleveland Avenue, Amherst |
| Lake Avenue | | 42935 North Ridge Road, Elyria Township |
| Avon | | 2100 Center Road, Avon |
| Avon Lake | | 32960 Walker Road, Avon Lake |
| Pearl Avenue | | 2850 Pearl Avenue, Lorain |
| Oberlin | | 24 East College Street, Oberlin |
| Ely Square | | 124 Middle Avenue, Elyria |
| Cleveland Street | | 801 Cleveland Street, Elyria |
| Oberlin Avenue | | 3660 Oberlin Avenue, Lorain |
| Olmsted Township | | 27095 Bagley Road, Olmsted Township |
| Kendal at Oberlin | | 600 Kendal Drive, Oberlin |
| The Renaissance | | 26376 John Road, Olmsted Township |
| Chestnut Commons | | 105 Chestnut Commons Drive, Elyria |
| North Ridgeville | | 34085 Center Ridge Road, North Ridgeville |
| Village of LaGrange | | 546 North Center Street, LaGrange |
| Westlake Village | | 28550 Westlake Village Drive, Westlake |
| Wesleyan Village | | 807 West Avenue, Elyria |
| Morgan Bank | | 178 West Streetsboro Street, Hudson |
| Avon Pointe Loan Center | | 36711 American Way, Avon |
| Cuyahoga Loan Center | | 2 Summit Park Drive, Independence |
| Operations | | 2130 West Park Drive, Lorain |
| Maintenance | | 2140 West Park Drive, Lorain |
| Purchasing | | 2150 West Park Drive, Lorain |
| Training Center | | 521 Broadway, Lorain |
| Main Office Drive Up | | 200 West 6th Street, Lorain |
12
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.
| |
| Item 3. | Legal Proceedings |
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 Corporation’s 2008 annual meeting of shareholders. Under the Settlement Agreement, among other things, Mr. Osborne agreed not to seek representation on the Corporation’s Board of Directors or to solicit proxies with respect to the voting of the Corporation’s 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 Corporation’s 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 Corporation’s motion for a temporary restraining order. On April 3, 2009, the Court issued an order granting the Corporation’s 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 has opposed. The Court has not indicated when it will rule on the motion or whether it will do so in advance of the trial on the merits. Fact discovery has been completed. Dispositive motions are due on March 19, 2010. A trial on the merits of the Corporation’s claims has been set to commence on June 14, 2010.
| |
| Item 4. | Submission of Matters to a Vote of Security Holders |
During the fourth quarter of the year ended December 31, 2009 there were no matters submitted to a vote of security holders.
Supplemental Item — Executive Officers of the Registrant
Pursuant toForm 10-K, General Instruction G(3), the following information on Executive Officers is included as an additional item in this Part I:
| | | | | | | | | | | | | |
| | | | | | | Positions and
| | |
| | | | | | | Offices
| | |
| | | | | | | Held with
| | Executive
|
Name | | Age | | Principal Occupation For Past Five Years | | LNB Bancorp, Inc. | | Officer Since |
| |
| Daniel E. Klimas | | | 51 | | | President and Chief Executive Officer, LNB Bancorp, Inc., February 2005 to present. President, Northern Ohio Region, Huntington Bank from 2001 to February 2005. | | President and Chief Executive Officer | | | 2005 | |
| Gary J. Elek | | | 58 | | | Chief Financial Officer, LNB Bancorp, Inc., from April 27, 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 | |
13
| | | | | | | | | | | | | |
| | | | | | | Positions and
| | |
| | | | | | | Offices
| | |
| | | | | | | Held with
| | Executive
|
Name | | Age | | Principal Occupation For Past Five Years | | LNB Bancorp, Inc. | | Officer Since |
| |
| David S. Harnett | | | 58 | | | Senior Vice President and Chief Credit Officer, LNB Bancorp, Inc., August 7, 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 | | | 46 | | | 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 | | | 2009 | |
| Frank A. Soltis | | | 57 | | | Senior Vice President, LNB Bancorp, Inc., July 2005 to present. Senior Vice President, Lakeland Financial Corporation, 1997 to 2005. | | Senior Vice President | | | 2005 | |
| Mary E. Miles | | | 51 | | | Senior Vice President, LNB Bancorp, Inc., April 2005 to present. President, Miles Consulting, Inc. from 2001 to 2005. | | Senior Vice President | | | 2005 | |
| John Simacek | | | 57 | | | 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 | | | 2009 | |
| Robert F. Heinrich | | | 56 | | | 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 | |
| Craig B. Bertea | | | 56 | | | Senior Vice President, LNB Bancorp, Inc., from April 2009 to present. Department Manager and Chief Investment Officer for the Trust Department, The Lorain National Bank, from March 2008 to present. Portfolio Manager, Bank of America in Hartford, CT, from November 2007 to February 2008. Portfolio Manager, Department Manager and Chief Investment Officer, LNB Bancorp, Inc., from September 2005 to November 2007. Senior Portfolio Manager and Chief Investment Officer, Sky Trust, from August 2000 to May 2005. | | Senior Vice President | | | 2009 | |
14
PART II
| |
| Item 5. | Market for the Registrant’s 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 Corporation’s 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 Corporation’s 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 Corporation’s 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, 2010, LNB Bancorp, Inc. had 1,905 shareholders of record and a closing price of $4.47. Prospective shareholders may contact the Corporation’s Investor Relations Department at(440) 244-7317 for more information.
Common Stock Trading Ranges and Cash Dividends Declared
| | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | |
| | | 2008 |
| | | | | | | Cash
|
| | | | | | | Dividends
|
| | | | | | | Declared
|
| | | High | | Low | | Per Share |
| |
| First Quarter | | $ | 15.44 | | | $ | 11.88 | | | $ | 0.18 | |
| Second Quarter | | | 12.90 | | | | 9.65 | | | | 0.18 | |
| Third Quarter | | | 11.00 | | | | 6.50 | | | | 0.09 | |
| Fourth Quarter | | | 9.00 | | | | 4.67 | | | | 0.09 | |
The following graph shows a five-year comparison of cumulative total returns for LNB Bancorp, the Standard & Poor’s 500 Stock Index© and the Nasdaq Bank Index.
15
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among LNB Bancorp, Inc., The S&P 500 Index
And The NASDAQ Bank Index
| | |
| * | | $ 100 invested on 12/31/04 in stock or index. Including reinvestment of dividends. Fiscal year ending December 31. |
| |
| | | Copyright 2010 S&P, a division of The McGrew-Hill Companies Inc. All rights reserved. |
The graph shown above is based on the following data points:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 12/04 | | | 12/05 | | | 12/06 | | | 12/07 | | | 12/08 | | | 12/09 |
LNB Bancorp, Inc. | | | | 100.00 | | | | | 92.89 | | | | | 86.46 | | | | | 82.82 | | | | | 31.47 | | | | | 26.95 | |
S&P 500 Index | | | | 100.00 | | | | | 104.91 | | | | | 121.48 | | | | | 128.16 | | | | | 80.74 | | | | | 102.11 | |
NASDAQ Bank Index | | | | 100.00 | | | | | 98.57 | | | | | 111.92 | | | | | 89.33 | | | | | 71.39 | | | | | 60.47 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities
The following table summarizes share repurchase activity for the quarter ended December 31, 2009:
| | | | | | | | | | | | | | | | | |
| | | | | | | 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, 2009 — October 31, 2009 | | | — | | | | n/a | | | | — | | | | 129,500 | |
| November 1, 2009 — November 30, 2009 | | | — | | | | n/a | | | | — | | | | 129,500 | |
| December 1, 2009 — December 31, 2009 | | | — | | | | 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 Corporation’s stock option and employee benefit plans. The share repurchase program provides that share repurchases are to be made primarily on the open market fromtime-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. However, the terms of the Corporation’s sale of
16
$25.2 million of its Series B Preferred Stock to the U.S. Treasury in conjunction with the CPP include limitations on the Corporation’s 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 Corporation’s 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 Corporation’s 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, 2009, the Corporation had repurchased an aggregate of 202,500 shares under this program.
17
| |
| Item 6. | Selected Financial Data |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | (Dollars in thousands except share and
| |
| | | per share amounts and ratios) | |
| |
| Total interest income | | $ | 57,647 | | | $ | 58,328 | | | $ | 58,762 | | | $ | 49,242 | | | $ | 43,432 | |
| Total interest expense | | | 19,925 | | | | 26,189 | | | | 29,092 | | | | 20,635 | | | | 13,402 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 37,722 | | | | 32,139 | | | | 29,670 | | | | 28,607 | | | | 30,030 | |
| Provision for Loan Losses | | | 19,017 | | | | 6,809 | | | | 2,255 | | | | 2,280 | | | | 1,248 | |
| Other income | | | 10,182 | | | | 11,213 | | | | 10,362 | | | | 9,514 | | | | 10,092 | |
| Net gain on sale of assets | | | 1,774 | | | | 1,246 | | | | 1,137 | | | | 237 | | | | 285 | |
| Other expenses | | | 35,330 | | | | 34,281 | | | | 31,751 | | | | 28,985 | | | | 30,267 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | (4,669 | ) | | | 3,508 | | | | 7,163 | | | | 7,093 | | | | 8,892 | |
| Income tax (benefit) | | | (2,668 | ) | | | 112 | | | | 1,651 | | | | 1,669 | | | | 2,479 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | (2,001 | ) | | | 3,396 | | | | 5,512 | | | | 5,424 | | | | 6,413 | |
| Preferred stock dividend and accretion | | | 1,256 | | | | 91 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income available to common shareholders | | $ | (3,257 | ) | | $ | 3,305 | | | $ | 5,512 | | | $ | 5,424 | | | $ | 6,413 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash dividend declared | | $ | 1,459 | | | $ | 3,940 | | | $ | 5,097 | | | $ | 4,641 | | | $ | 4,760 | |
| | | | | | | | | | | | | | | | | | | | | |
Per Common Share(1) | | | | | | | | | | | | | | | | | | | | |
| Basic earnings (loss) | | $ | (0.45 | ) | | $ | 0.45 | | | $ | 0.79 | | | $ | 0.84 | | | $ | 0.97 | |
| Diluted earnings (loss) | | | (0.45 | ) | | | 0.45 | | | | 0.79 | | | | 0.84 | | | | 0.97 | |
| Cash dividend declared | | | 0.20 | | | | 0.54 | | | | 0.72 | | | | 0.72 | | | | 0.72 | |
| Book value per share | | $ | 10.84 | | | $ | 11.22 | | | $ | 11.33 | | | $ | 10.66 | | | $ | 10.45 | |
Financial Ratios | | | | | | | | | | | | | | | | | | | | |
| Return on average assets | | | (0.17 | )% | | | 0.31 | % | | | 0.58 | % | | | 0.66 | % | | | 0.81 | % |
| Return on average common equity | | | (1.86 | ) | | | 4.09 | | | | 7.06 | | | | 7.89 | | | | 9.11 | |
| Net interest margin (FTE)(2) | | | 3.39 | | | | 3.23 | | | | 3.39 | | | | 3.78 | | | | 4.09 | |
| Efficiency ratio | | | 70.37 | | | | 76.12 | | | | 76.41 | | | | 76.03 | | | | 75.44 | |
| Period end loans to period end deposits | | | 82.68 | | | | 87.23 | | | | 87.94 | | | | 87.60 | | | | 91.91 | |
| Dividend payout | | | n/a | | | | 120.00 | | | | 91.14 | | | | 85.78 | | | | 74.23 | |
| Average shareholders’ equity to average assets | | | 9.00 | | | | 7.67 | | | | 8.15 | | | | 8.39 | | | | 8.88 | |
| Net charge-offs to average loans | | | 1.46 | | | | 0.38 | | | | 0.41 | | | | 0.27 | | | | 0.34 | |
| Allowance for loan losses to period end total loans | | | 2.34 | | | | 1.45 | | | | 1.04 | | | | 1.16 | | | | 1.13 | |
| Nonperforming loans to period end total loans | | | 4.84 | | | | 2.44 | | | | 1.44 | | | | 2.04 | | | | 1.10 | |
| Allowance for loan losses to nonperforming loans | | | 48.39 | | | | 59.47 | | | | 72.20 | | | | 56.98 | | | | 101.97 | |
At Year End | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 26,933 | | | $ | 36,923 | | | $ | 23,523 | | | $ | 29,122 | | | $ | 23,923 | |
| Securities and interest-bearing deposits | | | 255,841 | | | | 234,665 | | | | 212,694 | | | | 155,688 | | | | 151,509 | |
| Restricted stock | | | 4,985 | | | | 4,884 | | | | 4,704 | | | | 3,293 | | | | 3,690 | |
| Loans held for sale | | | 3,783 | | | | 3,580 | | | | 4,724 | | | | — | | | | 2,586 | |
| Gross loans | | | 803,197 | | | | 803,551 | | | | 753,598 | | | | 628,333 | | | | 588,425 | |
| Allowance for loan losses | | | 18,792 | | | | 11,652 | | | | 7,820 | | | | 7,300 | | | | 6,622 | |
| Net loans | | | 784,405 | | | | 791,899 | | | | 745,778 | | | | 621,033 | | | | 581,803 | |
| Other assets | | | 73,562 | | | | 64,184 | | | | 65,222 | | | | 41,962 | | | | 37,610 | |
| Total assets | | | 1,149,509 | | | | 1,136,135 | | | | 1,056,645 | | | | 851,098 | | | | 801,121 | |
| Total deposits | | | 971,433 | | | | 921,175 | | | | 856,941 | | | | 717,261 | | | | 640,216 | |
| Other borrowings | | | 64,582 | | | | 96,905 | | | | 106,932 | | | | 57,249 | | | | 86,512 | |
| Other liabilities | | | 9,353 | | | | 10,996 | | | | 10,119 | | | | 7,891 | | | | 5,987 | |
| Total liabilities | | | 1,045,368 | | | | 1,029,076 | | | | 973,992 | | | | 782,401 | | | | 732,715 | |
| Total shareholders’ equity | | | 104,141 | | | | 107,059 | | | | 82,653 | | | | 68,697 | | | | 68,406 | |
| Total liabilities and shareholders’ equity | | $ | 1,149,509 | | | $ | 1,136,135 | | | $ | 1,056,645 | | | $ | 851,098 | | | $ | 801,121 | |
| | |
| (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 2005, 2006, 2007, 2008 and 2009. |
18
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following commentary presents a discussion and analysis of the Corporation’s financial condition and results of operations by the Management. The review highlights the principal factors affecting earnings and significant changes in the balance sheet for 2009, 2008 and 2007. Financial information for the prior five years is presented where appropriate. The objective of this financial review is to enhance the reader’s 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 Management’s insights of known events and trends that have or may reasonably be expected to have a material effect on the Corporation’s operations and financial condition.
Summary(Dollars in thousands except per share data)
The Corporation’s 2009 financial performance continued to be affected by the recession which began in 2008 and the weakness of the national and local economies. During 2009, the Corporation saw a significant increase in credit cost as nonperforming loans increased and the valuation of the underlying collateral decreased. The result was an increase to the provision for loan losses. Even with the weak economy, the Corporation was able to grow both deposits and loans by increasing market share in its existing markets as well as expanding its presence into new markets and, as a result, revenues grew 11.39% compared to 2008. During this time, Management continued to focus on controlling expenses. Excluding the increased FDIC assessment in 2009, operating expenses decreased 2.54%.
Net loss for 2009 was $2,001. Net loss available to common shareholders was $3,257, or $0.45 per diluted common share. Net income in 2008 was $3,396. Net income available to common shareholders was $3,305, or $0.45 per diluted common share in 2008 and $5,512 or $0.79 per diluted common share in 2007. Earnings per diluted share in 2007 were affected by the issuance of 851,990 common shares in May, 2007 as part of the acquisition of Morgan Bancorp. Earnings per diluted common share in 2009 were affected by the increased loan loss provision as well as the dividends and discount accretion on preferred shares discussed below.
On December 12, 2008, in connection with its participation in the CPP, the Corporation issued 25,223 shares of fixed rate cumulative perpetual Series B Preferred Stock. In conjunction with the issuance of the Preferred Stock, the Corporation also issued a warrant to purchase 561,343 common shares. No shares of Series B Preferred Stock, or any other class of preferred stock, were outstanding during the year ended December 31, 2007.
Net loss as a percent of average assets in 2009 was 0.17%. This compares to a return of 0.31% and 0.58% in 2008 and 2007, respectively. Return on assets is one measurement of operating efficiency. As a percentage of average shareholders’ equity this represents a loss of 1.86% for 2009 as compared to a return of 4.09% and 7.06% in 2008 and 2007, respectively. 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 17.37% to $37,722 in 2009 from $32,139 in 2008. Since the Corporation is highly dependent on net interest income for its revenue, minimizing net interest margin compression is a very important factor in the Corporation’s financial performance. The net interest margin (FTE) for 2009 was 3.39% versus 3.23% for 2008. The Corporation experienced solid growth in its loan portfolio during 2009 with an increase in average loans of 4.25% over 2008. Average interest-bearing deposits in 2009 also grew 12.38% in comparison to 2008. The spread between the yield on portfolio loans and the cost of interest-bearing deposits increased 20 basis points during 2009.
Noninterest income in 2009 was $11,956, a decrease of $530 compared to 2008. The largest component of noninterest income is deposit and other service charges and fees. Deposit service charges decreased in 2009 over the prior year while other service charges and fees increased $65. Other service charges and fees include electronic banking and merchant service fees. Noninterest income derived from trust and investment management services increased during 2009 as compared to 2008. Many of the fees earned by the trust department are market-based, and the increase is reflective of an improving stock market.
Noninterest expense was $35,330 in 2009, compared to $34,281 in 2008. There were two significant increases in expense in 2009 as compared to 2008. FDIC assessments significantly increased in connection with higher
19
standard maximum deposit insurance coverage limits and a special assessment of approximately $580. Expenses related to the collection of delinquent loans and foreclosed properties increased as well. These expenses increased $1,900 and $438, respectively, compared to 2008. The increase in loan and collection expense is primarily the result of increased delinquencies and foreclosures due to the declining economic conditions in 2009. Included in noninterest expense during 2008 was $572 related to the special shareholders meeting requested by a shareholder of the Corporation. This affected third party services, marketing and public relations and postage expenses. Third party services for 2009 include $195 related to this same shareholder.
The Corporation experienced solid growth in commercial loans, home equity lines of credit and installment loans during 2009. Average portfolio balances for the year ended December 31, 2009 increased 2.94% in commercial loans, 18.04% in home equity lines of credit and 9.82% in installment loans, in comparison to average portfolio balances for the year ended December 31, 2008. The overall yield on portfolio loans in 2009 was down 67 basis points from 2008 as a result of the steadily falling Treasury yield curve. Average interest-bearing deposits for the year ended December 31, 2009 were up 12.38% in comparison to average interest-bearing deposits for the year ended December 31, 2008. The cost of deposits was down 87 basis points from 2008. The resulting net interest margin (FTE) was 3.39% for 2009 versus 3.23% for 2008.
Asset quality is one key indicator of financial strength, and the Corporation continues to manage credit risk aggressively. Net charged-off loans for 2009 increased to $11,877 from $2,977 for 2008 and the ratio of charged off loans to total loans increased to 1.48% for 2009 compared to 0.37% for 2008. The declining housing market and general economic decline of 2009 continued to impact the Corporation’s commercial and residential real estate portfolios. Total delinquency as a percentage of total loans increased from 3.76% at December 31, 2008 to 5.51% at December 31, 2009. In 2009, the level of nonperforming loans increased over the prior year from $19,592 at December 31, 2008 to $38,837 at December 31, 2009, primarily due to an increase in nonperforming construction and development loans. As a result, the Corporation increased the allowance for loan losses to $18,792 during 2009, increasing the allowance to 2.34% of total loans.
Since the ability to generate deposits is a key indication of the Corporation’s ability to meet its liquidity needs and fund profitable asset growth, it is a significant measure of the success of the Corporation’s business plan. As measured by the FDIC at June 30, 2009, the Corporation’s market share of deposits in Lorain County grew to 23.64% from 21.22% in 2008. This compares to 17.99% 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.
As the local and national economic environments progressively weakened during 2009, asset quality issues negatively impacted the Corporation’s overall performance. The Corporation recorded a loan loss provision of $19,017 in 2009, in light of the continuing unpredictability of the economy, the continued decline in real estate values and the credit quality issues inherent in the portfolio. The provision for loan loss was $6,809 in 2008 and $2,255 in 2007.
20
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, 2009, December 31, 2008 and December 31, 2007.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | Average
| | | | | | | | | Average
| | | | | | | | | Average
| | | | | | | |
| | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | |
| | | (Dollars in thousands) | |
| |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Govt agencies and corporations and restricted stock | | $ | 249,517 | | | $ | 10,696 | | | | 4.29 | % | | $ | 194,633 | | | $ | 8,786 | | | | 4.51 | % | | $ | 164,876 | | | $ | 7,873 | | | | 4.78 | % |
| State and political subdivisions | | | 24,207 | | | | 1,454 | | | | 6.01 | | | | 18,697 | | | | 1,121 | | | | 6.00 | | | | 14,277 | | | | 875 | | | | 6.13 | |
| Federal funds sold and short-term investments | | | 41,691 | | | | 58 | | | | 0.14 | | | | 15,667 | | | | 451 | | | | 2.88 | | | | 9,278 | | | | 394 | | | | 4.25 | |
| Commercial loans | | | 450,730 | | | | 25,412 | | | | 5.64 | | | | 437,844 | | | | 28,082 | | | | 6.41 | | | | 400,045 | | | | 29,805 | | | | 7.45 | |
| Real estate mortgage loans | | | 87,362 | | | | 5,006 | | | | 5.73 | | | | 98,397 | | | | 5,884 | | | | 5.98 | | | | 100,161 | | | | 6,143 | | | | 6.13 | |
| Home equity lines of credit | | | 106,055 | | | | 4,245 | | | | 4.00 | | | | 89,847 | | | | 4,243 | | | | 4.72 | | | | 75,453 | | | | 5,727 | | | | 7.59 | |
| Installment loans | | | 168,545 | | | | 11,301 | | | | 6.70 | | | | 153,481 | | | | 10,200 | | | | 6.65 | | | | 122,742 | | | | 8,327 | | | | 6.78 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Earning Assets | | $ | 1,128,107 | | | $ | 58,172 | | | | 5.16 | % | | $ | 1,008,566 | | | $ | 58,767 | | | | 5.83 | % | | $ | 886,832 | | | $ | 59,144 | | | | 6.67 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan loss | | | (14,851 | ) | | | | | | | | | | | (9,732 | ) | | | | | | | | | | | (7,764 | ) | | | | | | | | |
| Cash and due from banks | | | 17,711 | | | | | | | | | | | | 20,520 | | | | | | | | | | | | 20,855 | | | | | | | | | |
| Bank owned life insurance | | | 16,058 | | | | | | | | | | | | 15,560 | | | | | | | | | | | | 15,112 | | | | | | | | | |
| Other assets | | | 47,365 | | | | | | | | | | | | 47,585 | | | | | | | | | | | | 42,748 | | | | | | | | | �� |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 1,194,390 | | | | | | | | | | | $ | 1,082,499 | | | | | | | | | | | $ | 957,783 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer time deposits | | $ | 482,482 | | | $ | 14,271 | | | | 2.96 | % | | $ | 395,686 | | | $ | 15,392 | | | | 3.89 | % | | $ | 289,906 | | | $ | 13,633 | | | | 4.70 | % |
| Public time deposits | | | 84,761 | | | | 1,683 | | | | 1.99 | | | | 63,652 | | | | 2,554 | | | | 4.01 | | | | 69,804 | | | | 3,635 | | | | 5.21 | |
| Brokered time deposits | | | 7,631 | | | | 320 | | | | 4.19 | | | | 13,890 | | | | 696 | | | | 5.01 | | | | 36,497 | | | | 1,905 | | | | 5.22 | |
| Savings deposits | | | 80,063 | | | | 177 | | | | 0.22 | | | | 82,276 | | | | 504 | | | | 0.60 | | | | 80,513 | | | | 486 | | | | 0.60 | |
| Interest-bearing demand | | | 235,144 | | | | 928 | | | | 0.40 | | | | 236,495 | | | | 3,160 | | | | 1.34 | | | | 232,691 | | | | 5,876 | | | | 2.53 | |
| Short-term borrowings | | | 24,089 | | | | 124 | | | | 0.51 | | | | 27,700 | | | | 387 | | | | 1.40 | | | | 26,334 | | | | 1,088 | | | | 4.13 | |
| FHLB advances | | | 45,425 | | | | 1,481 | | | | 3.26 | | | | 62,341 | | | | 2,322 | | | | 3.72 | | | | 37,088 | | | | 1,555 | | | | 4.19 | |
| Trust preferred securities | | | 20,737 | | | | 941 | | | | 4.54 | | | | 20,778 | | | | 1,174 | | | | 5.65 | | | | 13,466 | | | | 914 | | | | 6.79 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Interest-Bearing Liabilities | | $ | 980,332 | | | $ | 19,925 | | | | 2.03 | % | | $ | 902,818 | | | $ | 26,189 | | | | 2.90 | % | | $ | 786,299 | | | $ | 29,092 | | | | 3.70 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing deposits | | | 95,730 | | | | | | | | | | | | 87,302 | | | | | | | | | | | | 84,352 | | | | | | | | | |
| Other liabilities | | | 11,000 | | | | | | | | | | | | 9,359 | | | | | | | | | | | | 9,090 | | | | | | | | | |
| Shareholders’ Equity | | | 107,328 | | | | | | | | | | | | 83,020 | | | | | | | | | | | | 78,042 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Liabilities and Shareholders’ Equity | | $ | 1,194,390 | | | | | | | | | | | $ | 1,082,499 | | | | | | | | | | | $ | 957,783 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest Income (FTE) | | | | | | $ | 38,247 | | | | 3.39 | % | | | | | | $ | 32,578 | | | | 3.23 | % | | | | | | $ | 30,052 | | | | 3.39 | % |
| Taxable Equivalent Adjustment | | | | | | | (525 | ) | | | (0.05 | ) | | | | | | | (439 | ) | | | (0.04 | ) | | | | | | | (382 | ) | | | (0.04 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Interest Income Per Financial Statements | | | | | | $ | 37,722 | | | | | | | | | | | $ | 32,139 | | | | | | | | | | | $ | 29,670 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Yield on Earning Assets | | | | | | | | | | | 3.34 | % | | | | | | | | | | | 3.19 | % | | | | | | | | | | | 3.35 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
21
Results of Operations(Dollars in thousands except per share data)
2009 versus 2008 Net Interest Income Comparison
Net interest income, the Corporation’s primary source of earnings, is the difference between interest income earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities. 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 between interest-bearing liabilities, noninterest-bearing liabilities and equity and the growth of earning assets.
While earnings were impacted by a significant loan loss provision during 2009, net interest income reflected solid revenue increases during the year. In 2009, net interest income increased 17.37% to $37,722 from $32,139 in 2008. Average portfolio loans increased from $779,659 at December 31, 2008 to $812,692 at December 31, 2009.
The Corporation reviews net interest income on a fully taxable equivalent basis, which presents interest income with an adjustment for tax-exempt interest income on an equivalent pre-tax basis assuming a 34% statutory Federal tax rate. These rates may differ from the Corporation’s actual effective tax rate. Net interest income is affected by changes in the volumes, rates and the composition of interest-earning assets and interest-bearing liabilities. The net interest margin is net interest income as a percentage of average earning assets.
Table 2 summarizes net interest income and the net interest margin for the three years ended December 31, 2009.
Table 2: Net Interest Income
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2009 | | 2008 | | 2007 |
| | | (Dollars in thousands) |
| |
| Net interest income | | $ | 37,722 | | | $ | 32,139 | | | $ | 29,670 | |
| Tax equivalent adjustments | | | 525 | | | | 439 | | | | 382 | |
| Net interest income (FTE) | | $ | 38,247 | | | $ | 32,578 | | | $ | 30,052 | |
| Net interest margin | | | 3.34 | % | | | 3.19 | % | | | 3.35 | % |
| Tax equivalent adjustments | | | 0.05 | % | | | 0.04 | % | | | 0.04 | % |
| Net interest margin (FTE) | | | 3.39 | % | | | 3.23 | % | | | 3.39 | % |
The Corporation’s net interest income on a fully tax equivalent basis was $38,247 in 2009, which compares to $32,578 in 2008. This follows an increase of $2,526, or 8.41%, between 2008 and 2007. The net interest margin, which is determined by dividing tax equivalent net interest income by average earning assets, was 3.39% in 2009, or an increase of 16 basis points from 2008. This follows a decrease of 16 basis points for 2008 compared to 2007.
The growth in net interest income in 2009 was largely driven by lower funding cost due to lower market interest rates. Interest expense ended 2009 at $19,925 compared to $26,189 in 2008 as the cost of funds dropped by 87 basis points over this period. Interest income totaled $58,172 for 2009 compared to $58,767 in 2008, a decline of $595, or 1.01%. The decline in interest income was a result of a lower yield on earning assets due to lower market interest rates and a change in mix as investment securities and Federal funds sold equaled 27.96% of average earning assets in 2009 compared to 22.71% in 2008.
Average earning assets increased $119,541, or 11.85%, to $1,128,107 in 2009 as compared to $1,008,566 in 2008. Average loans increased $33,123, or 4.25%, to $812,692 in 2009 as compared to $779,569 in 2008. Investment securities, both taxable and tax-free, increased $60,394 to $273,724 in 2009 compared to $213,330 in 2008 while Federal funds sold increased $26,024 over the same period. 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, which was primarily 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 as well as public time deposits which increased $21,109 compared to
22
2008. Noninterest-bearing deposits increased in 2009 by $8,428, or 9.65%, offset by a decrease in interest-bearing demand deposits of $1,351, or 0.57%, compared to 2008. The Bank uses FHLB advances and brokered time deposits as alternative wholesale funding sources. The use of alternative funding sources decreased $20,527, or 22.80%, during 2009 in comparison to 2008. 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 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, 2009. 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 2009 over 2008 | | | Income/Expense in 2008 over 2007 | |
| | | Volume | | | Rate | | | Total | | | Volume | | | Rate | | | Total | |
| | | (Dollars in thousands) | |
| |
| U.S. Govt agencies and corporations and restricted stock | | $ | 2,353 | | | $ | (443 | ) | | $ | 1,910 | | | $ | 1,468 | | | $ | (555 | ) | | $ | 913 | |
| State and political subdivisions | | | 331 | | | | 2 | | | | 333 | | | | 271 | | | | (25 | ) | | | 246 | |
| Federal funds sold and short-term investments | | | 36 | | | | (429 | ) | | | (393 | ) | | | (335 | ) | | | 392 | | | | 57 | |
| Commercial loans | | | 727 | | | | (3,397 | ) | | | (2,670 | ) | | | 1,975 | | | | (3,698 | ) | | | (1,723 | ) |
| Real estate mortgage loans | | | (633 | ) | | | (245 | ) | | | (878 | ) | | | (106 | ) | | | (153 | ) | | | (259 | ) |
| Home equity lines of credit | | | 649 | | | | (647 | ) | | | 2 | | | | 532 | | | | (2,016 | ) | | | (1,484 | ) |
| Installment loans | | | 1,010 | | | | 91 | | | | 1,101 | | | | 2,090 | | | | (217 | ) | | | 1,873 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Interest Income | | | 4,473 | | | | (5,068 | ) | | | (595 | ) | | | 5,895 | | | | (6,272 | ) | | | (377 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer time deposits | | | 2,567 | | | | (3,688 | ) | | | (1,121 | ) | | | 8,049 | | | | (6,290 | ) | | | 1,759 | |
| Public time deposits | | | 419 | | | | (1,290 | ) | | | (871 | ) | | | (265 | ) | | | (816 | ) | | | (1,081 | ) |
| Brokered time deposits | | | (262 | ) | | | (114 | ) | | | (376 | ) | | | (1,178 | ) | | | (31 | ) | | | (1,209 | ) |
| Savings deposits | | | (5 | ) | | | (322 | ) | | | (327 | ) | | | 11 | | | | 7 | | | | 18 | |
| Interest bearing demand | | | (15 | ) | | | (2,217 | ) | | | (2,232 | ) | | | (164 | ) | | | (2,552 | ) | | | (2,716 | ) |
| Short-term borrowings | | | (19 | ) | | | (244 | ) | | | (263 | ) | | | 18 | | | | (719 | ) | | | (701 | ) |
| FHLB advances | | | (552 | ) | | | (289 | ) | | | (841 | ) | | | 1,112 | | | | (345 | ) | | | 767 | |
| Trust preferred securities | | | (2 | ) | | | (231 | ) | | | (233 | ) | | | 608 | | | | (348 | ) | | | 260 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Interest Expense | | | 2,131 | | | | (8,395 | ) | | | (6,264 | ) | | | 8,191 | | | | (11,094 | ) | | | (2,903 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Interest Income (FTE) | | $ | 2,342 | | | $ | 3,327 | | | $ | 5,669 | | | $ | (2,296 | ) | | $ | 4,822 | | | $ | 2,526 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest income on a fully tax equivalent basis was $58,172 in 2009 as compared to $58,767 in 2008, 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 $2,720 as increases in funding exceeded loan growth. Commercial loans by their structure are the group of assets most sensitive to interest rates accounting for $3,397 of the change in interest income due to rate. 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 a decline in rates. Time deposits, both consumer and public funds, had a significant
23
impact on both volume and rate as new accounts grew and 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 were more sensitive to falling interest rates than loans, resulting in an increase in net interest income due to rate. While experiencing growth in both loans and deposits in 2009, deposits grew 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 $5,669 during 2009 in net interest income.
2008 versus 2007 Net Interest Income Comparison
The Corporation’s net interest income on a fully tax equivalent basis was $32,578 in 2008, which compares to $30,052 in 2007. The net interest margin was 3.23% in 2008, or a decrease of 16 basis points from 2007. This decrease was primarily the result of a steepening Treasury yield curve and competitive pressures.
Average earning assets increased $121,734, or 13.73%, to $1,008,566 in 2008 as compared to $886,832 for the same period of 2007. Average loans increased $81,168, or 11.62%, to $779,569 in 2008 as compared to $698,401 in 2007. Loan growth in all areas of the portfolio except real estate mortgage loans contributed to the average increase of $81,168, with an increase in the commercial loan portfolio of $37,799, an increase in installment loans of $30,739, an increase in home equity loans of $14,394, offset by a decrease of $1,764 in real estate mortgage loans. The increase in average loans was primarily funded with $85,538 of deposit growth. During 2008, average consumer time deposits increased $105,780 compared to 2007 offset by a decline in public time deposits of $6,152, or 8.81%. Noninterest-bearing deposits increased in 2008 by $2,950, or 3.50%, as well as interest-bearing demand deposits which grew $3,804, or 1.63%. The Bank was more reliant on alternative funding which, including brokered time deposits, increased $4,012, or 4.02%, from 2007.
Total interest income on a fully tax equivalent basis was $58,767 in 2008 as compared to $59,144 in 2007. This is a decrease of $377 or 0.64%. Of this decrease, $5,895 was attributable to volume and $6,272 to a decline in rate. When comparing 2008 to 2007, the contribution from balance sheet growth improved, and rates provided a positive contribution as well. Total interest expense was $26,189 in 2008 as compared to $29,092 in 2007. This is a decrease of $2,903, or 10.00%. Of this decrease, $8,191 was attributable to volume and $11,094 to a decline in rate. Competitive margin pressure and stiff competition in the Corporation’s markets resulted in a $2,296 reduction in net interest income due to rates. This was offset by an increase in net interest income of $4,822 due to increases in the volume of loans and deposits, for a resulting increase in net interest income (FTE) of $2,526.
Noninterest Income
Table 4: Details of Noninterest Income
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | | | | | | | | | | 2009 versus
| | | 2008 versus
| |
| | | 2009 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | | | | (Dollars in thousands) | | | | |
| |
| Investment and trust services | | $ | 1,919 | | | $ | 1,908 | | | $ | 2,170 | | | | 0.58 | % | | | (12.07 | )% |
| Deposit service charges | | | 4,478 | | | | 4,760 | | | | 4,725 | | | | (5.92 | )% | | | 0.74 | % |
| Electronic banking fees | | | 2,775 | | | | 2,710 | | | | 2,339 | | | | 2.40 | % | | | 15.86 | % |
| Income from bank owned life insurance | | | 693 | | | | 979 | | | | 732 | | | | (29.21 | )% | | | 33.74 | % |
| Other income | | | 315 | | | | 856 | | | | 396 | | | | (63.20 | )% | | | 116.16 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Total fees and other income | | | 10,180 | | | | 11,213 | | | | 10,362 | | | | (9.21 | )% | | | 8.21 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Gain on sale of securities | | | 690 | | | | 538 | | | | 274 | | | | 28.25 | % | | | 96.35 | % |
| Gain on sale of loans | | | 1,146 | | | | 797 | | | | 766 | | | | 43.79 | % | | | 4.05 | % |
| Gains (loss) on sale of other assets | | | (60 | ) | | | (89 | ) | | | 97 | | | | (32.58 | )% | | | (191.75 | )% |
| | | | | | | | | | | | | | | | | | | | | |
| Total noninterest income | | $ | 11,956 | | | $ | 12,459 | | | $ | 11,499 | | | | (4.04 | )% | | | 8.35 | % |
| | | | | | | | | | | | | | | | | | | | | |
24
2009 vs 2008 Noninterest Income Comparison
Generation of noninterest income is important to the long-term success of the Corporation. Total noninterest income was $11,956 in 2009 as compared to $12,459 in 2008. This was a decrease of $503, or 4.04%. Core noninterest income, which consists of noninterest income before other income and gains and losses, was $9,865 in 2009 as compared to $10,357 in 2008. This was a decrease of $492, or 4.75%.
Noninterest income from investment and trust services increased slightly in 2009. Trust and investment management fees increased $11, or 0.58%, during 2009 in comparison to 2008. Net trust fees, which are primarily based on market valuation, decreased $21, or 1.22%, in 2009 from the same period of 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 compared to $207 in 2008.
Overall, deposit service charges and electronic banking fees decreased 2.90%, to $7,253 in 2009, compared to $7,470 in 2008. Deposit service charges which consist largely of overdraft, stop payment and return item fees, amounted to $4,478 during 2009. The Corporation experienced a decrease in the number of overdrawn accounts as customers challenged by the economy managed their accounts more closely. This trend may also be indicative of the uncertainty related to new legislation scheduled to become 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 Corporation’s FDIC assessments, fee income from deposit service charges declined during 2009. Electronic banking fees include debit, ATM and merchant services and 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 as compared to $856 in 2008. This is a decrease of $541. Other income consists of miscellaneous fees such as safe deposit box rentals and fees, gift card income and Other Real Estate Owned rental income. During 2008, as a result of a membership interest, the Corporation received stock from an initial public offering completed by VISA and a subsequent mandatory partial redemption of stock in the amount of $460 which was recorded as noninterest 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 2009 decreased $104 compared to 2008 primarily due to an impairment charge of $96 recorded for mortgage servicing rights as of December 31, 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 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 2009 due largely to the number of customers refinancing existing mortgages. As a result, the gains on the sale of mortgages during 2009 were $672 compared to $307 for 2008. 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 Corporation’s portfolio and the remainder is sold to a number of other financial institutions with servicing retained. The gain on the sale of indirect auto loans was $474 for 2009, compared to $490 for 2008.
During 2009,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 falling 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 $37,808 of itsavailable-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 ofavailable-for-sale securities andmark-to-market adjustments of trading securities were $690 during 2009, including $154 in unrealized gain on trading securities.
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2008 vs 2007 Noninterest Income Comparison
Total noninterest income was $12,459 in 2008 as compared to $11,499 in 2007. This was an increase of $960, or 8.35%. Core noninterest income was $10,357 in 2008 as compared to $9,966 in 2007. This was an increase of $391, or 3.92%.
Trust and investment management fees decreased $262, or 12.07%, during 2008 in comparison to 2007. Net trust commission decreased $301, or 15.07%, in 2008 from the same period in 2007. Net brokerage fee income was $207 in 2008, in comparison to $136 in 2007.
Overall, deposit service charges and electronic banking fees increased 5.75% to $7,470 in 2008, compared to $7,064 in 2007. Other income was $856 in 2008 compared to $396 in 2007. This was an increase of $460, or 116.16%. During 2008, a mandatory redemption of VISA stock resulted in additional income of $460. Net servicing fee income for 2008 decreased $71 compared to 2007. Gains on the sale of mortgage and indirect auto loans during 2008 were $307 and $490, respectively.
Noninterest Expense
Table 5: Details on Noninterest Expense
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | | | | | 2009 versus
| | 2008 versus
|
| | | 2009 | | 2008 | | 2007 | | 2008 | | 2007 |
| | | (Dollars in thousands) |
| |
| Salaries and employee benefits | | | 15,142 | | | | 15,255 | | | | 15,708 | | | | (0.74 | )% | | | (2.88 | )% |
| Furniture and equipment | | | 4,344 | | | | 3,950 | | | | 3,515 | | | | 9.97 | % | | | 12.38 | % |
| Net occupancy | | | 2,354 | | | | 2,386 | | | | 2,256 | | | | (1.34 | )% | | | 5.76 | % |
| Outside services | | | 2,459 | | | | 2,490 | | | | 1,815 | | | | (1.24 | )% | | | 37.19 | % |
| Marketing and public relations | | | 961 | | | | 987 | | | | 1,116 | | | | (2.63 | )% | | | (11.56 | )% |
| Supplies, postage and freight | | | 1,260 | | | | 1,468 | | | | 1,357 | | | | (14.17 | )% | | | 8.18 | % |
| Telecommunications | | | 813 | | | | 850 | | | | 849 | | | | (4.35 | )% | | | 0.12 | % |
| Ohio Franchise tax | | | 908 | | | | 895 | | | | 788 | | | | 1.45 | % | | | 13.58 | % |
| FDIC Assessments | | | 2,622 | | | | 722 | | | | 89 | | | | 263.16 | % | | | 711.24 | % |
| Other real estate owned | | | 367 | | | | 1,070 | | | | 585 | | | | (65.70 | )% | | | 82.91 | % |
| Electronic banking expenses | | | 800 | | | | 932 | | | | 809 | | | | (14.16 | )% | | | 15.20 | % |
| Other charge-offs and losses | | | 301 | | | | 389 | | | | 576 | | | | (22.62 | )% | | | (32.47 | )% |
| Loan and collection expense | | | 1,346 | | | | 908 | | | | 758 | | | | 48.24 | % | | | 19.79 | % |
| Other expense | | | 1,653 | | | | 1,979 | | | | 1,530 | | | | (16.47 | )% | | | 29.35 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Total noninterest expense | | | 35,330 | | | | 34,281 | | | | 31,751 | | | | 3.06 | % | | | 7.97 | % |
| | | | | | | | | | | | | | | | | | | | | |
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
26
includes related legal costs. These costs were offset by a $703 decline in other real estate owned expense on a year over year basis.
2008 versus 2007 Noninterest Expense Comparison
Noninterest expense was $34,281 in 2008 compared to $31,751 in 2007. This is an increase of $2,530, or 7.97%. Increases of approximately $677 in occupancy, postage, supplies and delivery, telephone and furniture and equipment primarily are associated with the acquisition of the Morgan Bank division as well as other facilities opened in 2007. Morgan contributed approximately $365 of salaries and employee benefit expense in 2007. The increase in noninterest expense also included an increase of $485 in expenses related to Other Real Estate Owned. This increase was primarily a result of the revaluation of certain properties due to the decline in real estate values during 2008. A special shareholders’ meeting requested by a shareholder of the Corporation was held during the first part of 2008 which resulted in $572 in additional expense in outside services, marketing, postage and public relations.
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 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, 2009 and $8,620 at December 31, 2008, generating a tax credit of $530 and $476, respectively. Investment tax credit for the first three years is 5%, and 6% for the next four for each layer added.
2008 versus 2007 Income taxes
The Corporation recognized tax expense of $112 during 2008 and $1,651 for 2007. This is a decrease of $1,539, or 93.22% from 2007. The Corporation’s effective tax rate was 3.19% for 2008 compared to 23.05% for the same period of 2007. Included in net income for 2008 was $2,003 of nontaxable income, including $977 related to life insurance policies and $1,026 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 $8,620 at December 31, 2008 and December 31, 2007, generating a tax credit of $476 for both years.
Financial Condition
Overview
The Corporation’s total assets at December 31, 2009 were $1,149,509 compared to $1,136,135 at December 31, 2008. This is an increase of $13,374, or 1.18%. Total securities increased $21,169, or 9.03%, over December 31, 2008. Portfolio loans decreased slightly by $354, or 0.04%, from December 31, 2008. Total deposits at December 31, 2009 were $971,433 compared to $921,175 at December 31, 2008. Total interest-bearing liabilities were $1,036,015 at December 31, 2009 compared to $924,086 at December 31, 2008.
Securities
The distribution of the Corporation’s securities portfolio at December 31, 2009 and December 31, 2008 is presented in Note 5 to the Consolidated Financial Statements contained within thisForm 10-K. The Corporation continues to employ the securities portfolio to manage the Corporation’s interest rate risk and liquidity needs.
27
Currently, the portfolio is comprised of 3.31% trading securities and 96.69% available for sale securities. Available for sale securities are comprised of 18.30% U.S. Government agencies, 72.37% U.S. agency mortgage backed securities and 9.33% municipal securities. The increase in mortgage backed securities over the past two years was a result of an interest rate environment in which the yields became more attractive than agencies and their effective duration shortened to two to three years on average. Given the current economic environment and its future outlook, Management believes a more balanced portfolio between mortgage backed securities and agencies is prudent going forward.
At December 31, 2009 the available for sale securities portfolio had unrealized gains of $7,017 and unrealized losses of $418. The unrealized losses represent 0.17% of the total amortized cost of the Bank’s 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 for less than twelve months totaled $418 at December 31, 2009. The unrealized gains and losses at December 31, 2008 were $4,458 and $511, 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, 2009.
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 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government agencies and corporations | | $ | 18,733 | | | $ | 26,409 | | | $ | — | | | $ | 45,142 | | | $ | 46,418 | | | $ | 90,046 | |
| Mortgage backed securities | | | 6,508 | | | | 19,619 | | | | 146,581 | | | | 172,708 | | | | 150,718 | | | | 72,534 | |
| State and political subdivisions | | | 2,490 | | | | 15,999 | | | | 4,099 | | | | 22,588 | | | | 21,969 | | | | 14,961 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total securities available for sale | | $ | 27,731 | | | $ | 62,027 | | | $ | 150,680 | | | $ | 240,438 | | | $ | 219,105 | | | $ | 177,541 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Table 7: The Weighted Average Yield for Each Range of Maturities of Securities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | From 1 to 5
| | | From 5 to 10
| | | After
| | | At December 31, | |
| | | Years | | | Years | | | 10 Years | | | 2009 | | | 2008 | | | 2007 | |
| |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government agencies and corporations | | | 2.91 | % | | | 3.18 | % | | | 0.00 | % | | | 3.07 | % | | | 4.55 | % | | | 4.62 | % |
| Mortgage backed securities | | | 4.66 | | | | 4.75 | | | | 4.89 | | | | 4.87 | | | | 5.25 | | | | 5.28 | |
| State and political subdivisions(1) | | | 3.01 | | | | 5.45 | | | | 4.22 | | | | 3.80 | | | | 6.24 | | | | 6.38 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total securities available for sale | | | 3.33 | % | | | 4.20 | % | | | 4.71 | % | | | 4.43 | % | | | 5.20 | % | | | 5.05 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (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 thisForm 10-K.
Total portfolio loans at December 31, 2009 were $803,197. This is a decrease of $354, or 0.04% over December 31, 2008. At December 31, 2009, commercial loans represented 56.32%, and real estate mortgage loans
28
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, 2009 in Table 8.
Table 8: Loan Portfolio Distribution
| | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | (Dollars in thousands) | |
| |
| Commercial | | $ | 452,341 | | | $ | 450,081 | | | $ | 433,081 | | | $ | 374,055 | | | $ | 363,144 | |
| Real estate mortgage | | | 77,204 | | | | 96,241 | | | | 100,419 | | | | 99,182 | | | | 81,367 | |
| Home equity lines of credit | | | 108,921 | | | | 100,873 | | | | 80,049 | | | | 70,028 | | | | 66,134 | |
| Purchased installment | | | — | | | | — | | | | — | | | | 43,019 | | | | 42,023 | |
| Installment | | | 164,731 | | | | 156,356 | | | | 140,049 | | | | 42,049 | | | | 38,343 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Loans | | | 803,197 | | | | 803,551 | | | | 753,598 | | | | 628,333 | | | | 591,011 | |
| Allowance for loan losses | | | (18,792 | ) | | | (11,652 | ) | | | (7,820 | ) | | | (7,300 | ) | | | (6,622 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net Loans | | $ | 784,405 | | | $ | 791,899 | | | $ | 745,778 | | | $ | 621,033 | | | $ | 584,389 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 |
| |
| Loan Mix Percent | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 56.32 | % | | | 56.01 | % | | | 57.47 | % | | | 59.53 | % | | | 61.44 | % |
| Real Estate Mortgage | | | 9.61 | % | | | 11.98 | % | | | 13.33 | % | | | 15.78 | % | | | 13.77 | % |
| Home Equity lines of credit | | | 13.56 | % | | | 12.55 | % | | | 10.62 | % | | | 11.15 | % | | | 11.19 | % |
| Purchased installment | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 6.85 | % | | | 7.11 | % |
| Installment | | | 20.51 | % | | | 19.46 | % | | | 18.58 | % | | | 6.69 | % | | | 6.49 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Total Loans | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | |
Commercial loans were $452,341 at December 31, 2009. This was an increase of $2,260, or 0.50%, over December 31, 2008. Commercial loans are primarily made to local businesses in the form oflines-of-credit, equipment or plant facilities.
Consumer loans are made to borrowers on both secured and unsecured terms dependent on the maturity and nature of the loan. Since the acquisition of Morgan Bank in 2007, consumer loans that were purchased from Morgan Bank, N.A. prior to the acquisition are included with installment loans. Consumer loans increased $8,375, or 5.36%, in comparison 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 aloan-to-value ratio of 80% or private mortgage insurance forloan-to-value ratios in excess of 80%. Construction loans comprised $2,873 of the $77,204 real estate mortgage loan portfolio at December 31, 2009. At December 31, 2009, given favorable interest rates and the amount of refinancing in the market place, mortgage loans decreased $19,037, or 20.06%, in comparison to December 31, 2008.
Loans held for sale, and not included in portfolio loans, were $3,783 at December 31, 2009. Mortgage loans represented 85.36% and installment loans represented 14.64% of loans held for sale. There were no commercial loans held for sale at December 31, 2009.
Table 9 shows the amount of commercial loans outstanding as of December 31, 2009 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.
29
Table 9: Commercial Loan Maturity and Repricing Analysis
| | | | | |
| | | December 31, 2009 | |
| | | (Dollars in thousands) | |
| |
| Maturing and repricing in one year or less | | $ | 92,816 | |
| Maturing and repricing after one year but within five years | | | 252,243 | |
| Maturing and repricing beyond five years | | | 107,282 | |
| | | | | |
| Total Commercial Loans | | $ | 452,341 | |
| | | | | |
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 Management’s periodic analysis of the allowance for loan losses may dictate portions of the allowance be allocated to specific problem loans, the entire amount is available for any loan charge-offs that may occur. Table 10 presents the detailed activity in the allowance for loan losses and related charge-off activity for the five years ended 2009.
Table 10: Analysis of Allowance for Loan Losses
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | (Dollars in thousands) | |
| |
Balance at beginning of year | | $ | 11,652 | | | $ | 7,820 | | | $ | 7,300 | | | $ | 6,622 | | | $ | 7,386 | |
| Charge-offs: | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | (7,528 | ) | | | (2,305 | ) | | | (2,179 | ) | | | (1,120 | ) | | | (1,582 | ) |
| Real estate mortgage | | | (1,338 | ) | | | (275 | ) | | | (304 | ) | | | (171 | ) | | | (28 | ) |
| Home equity lines of credit | | | (1,651 | ) | | | (467 | ) | | | (61 | ) | | | (81 | ) | | | (146 | ) |
| Purchased installment | | | — | | | | — | | | | (37 | ) | | | (69 | ) | | | (65 | ) |
| Installment | | | (1,741 | ) | | | (856 | ) | | | (495 | ) | | | (347 | ) | | | (435 | ) |
| DDA Overdrafts | | | (219 | ) | | | (265 | ) | | | (256 | ) | | | (240 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Total charge-offs | | | (12,477 | ) | | | (4,168 | ) | | | (3,332 | ) | | | (2,028 | ) | | | (2,256 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Recoveries: | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 252 | | | | 920 | | | | 150 | | | | 153 | | | | 75 | |
| Real estate mortgage | | | 12 | | | | 21 | | | | 21 | | | | 9 | | | | — | |
| Home equity lines of credit | | | 24 | | | | 10 | | | | 25 | | | | — | | | | 1 | |
| Purchased installment | | | — | | | | — | | | | — | | | | — | | | | 3 | |
| Installment | | | 266 | | | | 186 | | | | 249 | | | | 150 | | | | 165 | |
| DDA Overdrafts | | | 46 | | | | 54 | | | | 54 | | | | 114 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Total Recoveries | | | 600 | | | | 1,191 | | | | 499 | | | | 426 | | | | 244 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net Charge-offs | | | (11,877 | ) | | | (2,977 | ) | | | (2,833 | ) | | | (1,602 | ) | | | (2,012 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Provision for loan losses | | | 19,017 | | | | 6,809 | | | | 2,255 | | | | 2,280 | | | | 1,248 | |
Allowance from merger | | | — | | | | — | | | | 1,098 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at end of year | | $ | 18,792 | | | $ | 11,652 | | | $ | 7,820 | | | $ | 7,300 | | | $ | 6,622 | |
| | | | | | | | | | | | | | | | | | | | | |
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The allowance for loan losses at December 31, 2009 was $18,792 or 2.34% of outstanding loans, compared to $11,652 or 1.45% of outstanding loans at December 31, 2008. The allowance for loan losses was 48.39% and 59.47% of nonperforming loans at December 31, 2009 and 2008, respectively.
Net charge-offs for the year ended December 31, 2009 were $11,877, compared to $2,977 for the year ended December 31, 2008. During 2009, $5,903 of collateral dependent loans, to which specific reserves had been provided, was written down due to a decline in the valuation of the underlying collateral. Commercial and commercial real estate loans accounted for $5,240 of the write-down with the balance being real estate mortgage loans. Net charge-offs as a percent of average loans was 1.46% for 2009 and 0.37% for 2008.
Direct deposit account overdrafts are charged to the allowance for loan losses and accounted for $173 and $211, respectively, of the net charge-offs in 2009 and 2008.
The provision charged to expense was $19,017 for the year ended December 31, 2009 compared to $6,809 for 2008. The Corporation has experienced an increase in nonperforming and in substandard commercial loans along with a decline in the valuation of the underlying collateral, given the current condition of the real estate market. Consumer loans, while somewhat affected by real estate market conditions, 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, 2009. 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, 2009.
The following table shows the various sources of funding for the Corporation.
Table 11: Funding Sources
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average Balances Outstanding | | | Average Rates Paid | |
| | | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
| Demand deposits | | $ | 95,730 | | | $ | 87,302 | | | $ | 84,352 | | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % |
| Interest checking | | | 235,144 | | | | 236,495 | | | | 232,691 | | | | 0.40 | % | | | 1.34 | % | | | 2.53 | % |
| Savings deposits | | | 80,063 | | | | 82,276 | | | | 80,513 | | | | 0.22 | % | | | 0.60 | % | | | 0.60 | % |
| Consumer time deposits | | | 482,482 | | | | 395,686 | | | | 289,906 | | | | 2.96 | % | | | 3.89 | % | | | 4.70 | % |
| Public time deposits | | | 84,761 | | | | 63,652 | | | | 69,804 | | | | 2.01 | % | | | 4.01 | % | | | 5.21 | % |
| Brokered time deposits | | | 7,631 | | | | 13,890 | | | | 36,497 | | | | 4.19 | % | | | 5.01 | % | | | 5.22 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Deposits | | | 985,811 | | | | 879,301 | | | | 793,763 | | | | 1.77 | % | | | 2.54 | % | | | 3.22 | % |
| Short-term borrowings | | | 24,089 | | | | 27,700 | | | | 26,334 | | | | 0.51 | % | | | 1.40 | % | | | 4.13 | % |
| FHLB borrowings | | | 45,425 | | | | 62,341 | | | | 37,088 | | | | 3.26 | % | | | 3.72 | % | | | 4.19 | % |
| Junior subordinated debentures | | | 20,737 | | | | 20,778 | | | | 13,466 | | | | 4.54 | % | | | 5.65 | % | | | 6.79 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total borrowings | | | 90,251 | | | | 110,819 | | | | 76,888 | | | | 2.82 | % | | | 3.50 | % | | | 4.63 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total funding | | $ | 1,076,062 | | | $ | 990,120 | | | $ | 870,651 | | | | 1.74 | % | | | 2.65 | % | | | 3.34 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
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Average deposit balances grew 12.11% in 2009 compared to increases of 10.78% in 2008 and 16.76% in 2007. The Corporation benefits from a large concentration of low-cost local deposit funding. These funding sources include demand deposits, interest checking accounts and savings deposits. These sources, which experienced an increase of 2.14% between 2008 and 2007, also increased 1.19% during 2009 in comparison to 2008. Low-cost funds had an average yield of 0.27% in 2009 compared to 0.90% in 2008 and 1.60% in 2007. Included in these funds are money market accounts which carried an average yield of 0.53% in 2009 compared to 1.85% in 2008. Time deposits over the last three years to total average deposits were 48.94% in 2009, 46.18% in 2008 and 50.08% in 2007. Average time deposits were $574,874 in 2009 compared to $473,228 in 2008. This was an increase of $101,646, or 21.48%. Brokered time deposits and public fund time deposits represented 16.07% and 16.38% of total average time deposits during 2009 and 2008, respectively.
The Corporation offers various deposit products to both retail and business customers. The Corporation also utilizes its business sweep accounts to generate funds as well as the brokered CD market to provide funding comparable to other national market borrowings, which include the Federal Home Loan Bank of Cincinnati and the Federal Reserve Bank of Cleveland.
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 at December 31, 2009 were $1,457, which consisted entirely of repurchase agreements. Management believes these balances will increase going forward. Long-term borrowings by the Corporation consist of Federal Home Loan Bank advances of $42,505 and junior subordinated debentures of $20,620. Federal Home Loan Bank advances were $53,357 at December 31, 2008. Maturities of long-term Federal Home Loan Bank advances are presented in Note 11 to the Consolidated Financial Statements contained within thisForm 10-K. During the second quarter of 2007, the Corporation completed a private offering of trust preferred securities, as described in Note 12 to the Consolidated Financial Statements contained within thisForm 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.
Capital Resources
The Corporation continues to maintain a capital position that it believes is appropriate. Total shareholders’ equity was $104,141 at December 31, 2009. This is a decrease of 2.73% over December 31, 2008.
Total common stock cash dividends declared in 2009 by the Board of Directors were $1,459 compared to $3,940 in 2008. In 2009, the Corporation reduced its quarterly dividend to $.01 per share of common stock in both the third and fourth quarter. 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 possible in order to provide strength, confidence and stability. Any future dividend is subject to Board approval.
At December 31, 2009, the Corporation’s market capitalization was $31,444 compared to $38,302 at December 31, 2008. There were 1,907 shareholders of record at December 31, 2009. 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 Corporation’s Series B Preferred Stock to the U.S. Treasury in the CPP. 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 Corporation’s common shares at an exercise price of $6.74 per share. See Note 14 to the Consolidated Financial Statements for further information on the Series B Preferred Stock and common shares warrant issued pursuant to the CPP.
Net loss of $2,001 decreased total shareholders’ equity. Factors increasing shareholders’ equity were a $1,749 increase in accumulated other comprehensive gain resulting from an increase in the fair value of available for sale
32
securities, a $38 increase in the Corporation’s minimum pension liability and a $79 increase for share-based compensation arrangements. The factors decreasing total shareholders’ equity during 2009 were cash dividends payable to common shareholders of $1,459 and cash dividends, net of discount accretion, to preferred shareholders of $1,324.
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 Corporation’s stock option and employee benefit plans. The share repurchase program provides that share repurchases are to be made primarily on the open market fromtime-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, 2009, 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 2009.
The terms of the Corporation’s sale of $25,223 of its Series B Preferred Stock to the U.S. Treasury in conjunction with the CPP include limitations on the Corporation’s 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 Corporation’s 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 Corporation’s 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 14 of the Consolidated Financial Statements.
Contractual Obligations and Commitments
Contractual obligations and commitments of the Corporation at December 31, 2009 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 | | $ | 1,457 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,457 | |
| FHLB advances | | | 10,000 | | | | 30,000 | | | | 55 | | | | 2,450 | | | | 42,505 | |
| Operating leases | | | 765 | | | | 1,358 | | | | 935 | | | | 629 | | | | 3,687 | |
| Trust preferred securities | | | — | | | | — | | | | — | | | | 20,620 | | | | 20,620 | |
| Benefit payments | | | 299 | | | | 656 | | | | 747 | | | | 1,942 | | | | 3,644 | |
| Severance payments | | | 165 | | | | 198 | | | | — | | | | — | | | | 363 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 12,686 | | | $ | 32,212 | | | $ | 1,737 | | | $ | 25,641 | | | $ | 72,276 | |
| | | | | | | | | | | | | | | | | | | | | |
Critical Accounting Policies and Estimates
The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Corporation follows general practices within the banking industry and application of these principles requires the Management to make assumptions, estimates and judgments that affect the financial statements and accompanying notes. These assumptions, estimates and judgments are based on information available as of the date of the financial statements.
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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 borrower’s ability to pay. Determination of the allowance is subjective in nature. Loan losses are charged off against the allowance when Management believes that the full 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 Management’s estimate of probable credit losses inherent in the loan portfolio. The allowance is comprised of a general allowance, a specific allowance for identified problem loans and an unallocated allowance representing estimations pursuant to either Statement of Financial Accounting Standards ASC 450, “Accounting for Contingencies,” or ASC310-10-45, “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, loss factors are applied based on internal risk grades of these loans. Many factors are considered when these grades are assigned to individual loans such as current and past delinquency, financial statements of the borrower, current net realizable value of collateral and the general economic environment and specific economic trends affecting the portfolio. For residential real estate, installment and other loans, loss factors are applied on a portfolio basis. Loss factors are based on the Corporation’s historical loss experience and are reviewed for appropriateness on a quarterly basis, along with other factors affecting the collectability of the loan portfolio.
Specific allowances are established for all classified loans when Management has determined that, due to identified significant conditions, it is probable that a loss has been incurred that exceeds the general allowance loss factor from these loans. The unallocated allowance recognizes the estimation risk associated with the allocated general and specific allowances and incorporates Management’s evaluation of existing conditions that are not included in the allocated allowance determinations. These conditions are reviewed quarterly by Management and include general economic conditions, credit quality trends and internal loan review and regulatory examination findings.
Management believes that it uses the best information available to determine the adequacy of the allowance for loan losses. However, future adjustments to the allowance may be necessary and the results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.
The Corporation’s 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 Corporation’s future profitability, as well as potential changes in tax laws that could impact the deductibility of certain income and expense items. Since financial results could be significantly different than these estimates, future adjustments may be necessary to tax expense and related balance sheet accounts.
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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 institution’s 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 ofavailable-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 Bank’s allowance for loan loss policy which requires the loan officer, lending officers and the loan review committee to manage loan quality. The Corporation’s 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 2009, the unstable and declining economic conditions, especially in residential and commercial development lending, resulted in higher levels of nonperforming loans and potential problem loans. Most of the Bank’s business activity is with customers located within the Bank’s defined market area. As of December 31, 2009, 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 and junior liens 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.
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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 dueand/or in Management’s 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 borrower’s 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, 2009.
Table 13: Nonperforming Assets
| | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | (Dollars in thousands) | |
| |
| Commercial loans | | $ | 26,846 | | | $ | 14,209 | | | $ | 7,927 | | | $ | 10,322 | | | $ | 5,129 | |
| Real estate mortgage | | | 9,139 | | | | 3,465 | | | | 2,097 | | | | 2,165 | | | | 1,182 | |
| Home equity lines of credit | | | 1,417 | | | | 989 | | | | 429 | | | | 168 | | | | 25 | |
| Installment loans | | | 1,435 | | | | 929 | | | | 378 | | | | 157 | | | | 158 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total nonperforming loans | | | 38,837 | | | | 19,592 | | | | 10,831 | | | | 12,812 | | | | 6,494 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other foreclosed assets | | | 1,264 | | | | 1,108 | | | | 2,478 | | | | 1,289 | | | | 432 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total nonperforming assets | | $ | 40,101 | | | $ | 20,700 | | | $ | 13,309 | | | $ | 14,101 | | | $ | 6,926 | |
| Loans 90 days past due accruing interest | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses to nonperforming loans | | | 46.86 | % | | | 56.29 | % | | | 72.20 | % | | | 57.00 | % | | | 102.00 | % |
| | | | | | | | | | | | | | | | | | | | | |
Nonperforming loans at December 31, 2009 were $38,837 compared to $19,592 at December 31, 2008, an increase of $19,245. Of this total, commercial loans were $26,846 compared to $14,209 at December 31, 2008. 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. At December 31, 2009, construction and land development represented $7,648 of the total commercial loan nonperforming, with non-farm, non-residential representing $5,738 and the remaining being commercial and industrial. All nonperforming loans are being actively managed.
Management also monitors delinquency and potential commercial problem loans. Bank-wide delinquency at December 31, 2009 was 5.51% of total loans compared to 3.76% at December 31, 2008. Total30-90 day delinquency decreased from 1.34% of total loans at December 31, 2008 to 0.75% of total loans at December 31, 2009.30-90 day delinquency as a percent of loan type is under 1% for all loan types.
Other foreclosed assets were $1,264 as of December 31, 2009, an increase of $156 from December 31, 2008. The $1,264 is comprised of eight commercial properties totaling $1,068 and five 1-4 family residential properties totaling $196. This compares to $587 of 1-4 family residential properties with the remainder being commercial properties as of December 31, 2008.
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, 2009, the Bank’s liquidity was within its policy limits.
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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, 2009, the Corporation expects the securities portfolio to generate cash flow in the next 12 months of $78,522 and $159,805 in the next 36 months.
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. The interest rate on the line of credit is the unaffiliated financial institution’s 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, 2009.
Table 14: Liquidity
| | | | | | | | | |
| | | Borrowing
| | | Unused
| |
| | | Capacity | | | Capacity | |
| | | (Dollars in thousands) | |
| |
| FHLB Cincinnati | | $ | 59,335 | | | $ | 13,784 | |
| FRB Cleveland | | | 1,810 | | | | 1,810 | |
| Federal Funds Lines | | | 10,000 | | | | 10,000 | |
| Unaffiliated Financial Institutions | | | 4,000 | | | | 4,000 | |
| | | | | | | | | |
| Total | | $ | 75,145 | | | $ | 29,594 | |
| | | | | | | | | |
Liquidity is also provided by unencumbered, or unpledged investment securities that totaled $67,761 at December 31, 2009.
The Corporation is the bank holding company of the Bank and conducts no operations. The Corporation’s 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 company’s main source of operating liquidity is the dividend that it receives from the Bank. Dividends from the Bank are restricted by banking regulations. At December 31, 2009, the Corporation also had certain short-term investments in the amount of $2,105 which may be used for dividends and other corporate purposes. The holding company fromtime-to-time, has access to additional sources of liquidity through correspondent lines of credit as of December 31, 2009.
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 andearnings-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 institution’s 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 corporation’s 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 areearnings-at-risk simulation and economic value of equity simulation. Anearnings-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 inearnings-at-risk simulation can help identify product and pricing decisions that can be made currently to assure
37
stable net interest income performance in the future. At December 31, 2009, 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 $77, or 0.2%, and in a -200 basis point shock, net interest income would decrease $2,239, or 5.8%. The reason for the lack of symmetry in these results is the implied floors in many of the Corporation’s core funding which limits their downward adjustment from current offering 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 Corporation’s equity as the value of assets and liabilities on the balance sheet change with interest rates. At December 31, 2009, this analysis indicated that a +200 basis point change in rates would reduce the value of the Corporation’s equity by 17.7% while a -200 basis point change in rates would increase the value of the Corporation’s equity by 6.6%.
Table 15: GAP Analysis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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 | | | | 239,053 | | | | 124,806 | | | | 104,229 | | | | 19,431 | | | | 806,981 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total earning assets | | $ | 233,804 | | | $ | 140,026 | | | $ | 302,839 | | | $ | 169,139 | | | $ | 206,585 | | | $ | 19,431 | | | $ | 1,071,824 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) | | $ | (202,284 | ) | | $ | (55,082 | ) | | $ | 151,503 | | | $ | 150,314 | | | | | |
| RSA/RSL | | | 101 | % | | | 74 | % | | | 77 | % | | | 94 | % | | | 117 | % | | | 116 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | At December 31, 2008 | |
| | | 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 | | $ | 25,574 | | | $ | 24,508 | | | $ | 59,187 | | | $ | 40,362 | | | $ | 91,552 | | | $ | — | | | $ | 241,183 | |
| Trading securities | | | 11,261 | | | | — | | | | — | | | | — | | | | — | | | | | | | | 11,261 | |
| Loans | | | 173,540 | | | | 141,097 | | | | 243,721 | | | | 137,498 | | | | 101,897 | | | | 9,377 | | | | 807,130 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total earning assets | | $ | 210,375 | | | $ | 165,605 | | | $ | 302,908 | | | $ | 177,860 | | | $ | 193,449 | | | $ | 9,377 | | | $ | 1,059,574 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer time deposits | | $ | 132,284 | | | $ | 323,032 | | | $ | 71,019 | | | $ | 7,731 | | | $ | 437 | | | $ | — | | | $ | 534,503 | |
| Money Market deposits | | | 99,051 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 99,051 | |
| Savings deposits | | | — | | | | — | | | | 104,226 | | | | — | | | | — | | | | — | | | | 104,226 | |
| Interest-bearing demand deposits | | | — | | | | — | | | | 115,102 | | | | — | | | | — | | | | — | | | | 115,102 | |
| Short-term borrowings | | | 6,459 | | | | 19,377 | | | | — | | | | — | | | | — | | | | — | | | | 25,836 | |
| Long-term debt | | | — | | | | — | | | | 27,989 | | | | 3,000 | | | | 2,532 | | | | 20,620 | | | | 54,141 | |
| Fed Funds, Repos, Other | | | 22,928 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 22,928 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing liabilities | | $ | 260,722 | | | $ | 342,409 | | | $ | 318,336 | | | $ | 10,731 | | | $ | 2,969 | | | $ | 20,620 | | | $ | 955,787 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative interest rate gap | | $ | (50,347 | ) | | $ | (227,151 | ) | | $ | (242,579 | ) | | $ | (75,451 | ) | | $ | 115,030 | | | $ | 103,787 | | | | | |
| RSA/RSL | | | 81 | % | | | 62 | % | | | 74 | % | | | 92 | % | | | 112 | % | | | 111 | % | | | | |
38
| |
| Item 8. | Financial Statements and Supplementary Data |
Table of Contents
39
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
LNB Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of LNB Bancorp, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2009. We also have audited the Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying financial statements. Our responsibility is to express an opinion on these financial statements and an opinion on the Corporation’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LNB Bancorp, Inc. as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, LNB Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
March 5, 2010
Columbus, Ohio
40
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands except share amounts) | |
| |
ASSETS |
| Cash and due from banks (Note 3) | | $ | 16,933 | | | $ | 21,723 | |
| Federal funds sold and short-term investments | | | 10,000 | | | | 15,200 | |
| | | | | | | | | |
| Cash and cash equivalents | | | 26,933 | | | | 36,923 | |
| Interest-bearing deposits in other banks | | | 359 | | | | 352 | |
| Securities: (Note 5) | | | | | | | | |
| Trading securities, at fair value | | | 8,445 | | | | 11,261 | |
| Available for sale, at fair value | | | 247,037 | | | | 223,052 | |
| | | | | | | | | |
| Total securities | | | 255,482 | | | | 234,313 | |
| Restricted stock | | | 4,985 | | | | 4,884 | |
| Loans held for sale | | | 3,783 | | | | 3,580 | |
| Loans: (Note 7) | | | | | | | | |
| Portfolio loans | | | 803,197 | | | | 803,551 | |
| Allowance for loan losses | | | (18,792 | ) | | | (11,652 | ) |
| | | | | | | | | |
| Net loans | | | 784,405 | | | | 791,899 | |
| | | | | | | | | |
| Bank premises and equipment, net (Note 8) | | | 10,105 | | | | 11,504 | |
| Other real estate owned | | | 1,264 | | | | 1,108 | |
| Bank owned life insurance | | | 16,435 | | | | 15,742 | |
| Goodwill, net (Note 4) | | | 21,582 | | | | 21,582 | |
| Intangible assets, net (Note 4) | | | 1,005 | | | | 1,142 | |
| Accrued interest receivable | | | 4,072 | | | | 4,290 | |
| Other assets (Note 13) | | | 19,099 | | | | 8,816 | |
| | | | | | | | | |
Total Assets | | $ | 1,149,509 | | | $ | 1,136,135 | |
| | | | | | | | | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Deposits (Note 9) | | | | | | | | |
| Demand and other noninterest-bearing | | $ | 118,505 | | | $ | 93,994 | |
| Savings, money market and interest-bearing demand | | | 305,045 | | | | 292,679 | |
| Certificates of deposit | | | 547,883 | | | | 534,502 | |
| | | | | | | | | |
| Total deposits | | | 971,433 | | | | 921,175 | |
| | | | | | | | | |
| Short-term borrowings (Note 10) | | | 1,457 | | | | 22,928 | |
| Federal Home Loan Bank advances (Note 11) | | | 42,505 | | | | 53,357 | |
| Junior subordinated debentures (Note 12) | | | 20,620 | | | | 20,620 | |
| Accrued interest payable | | | 2,074 | | | | 3,813 | |
| Accrued taxes, expenses and other liabilities (Note 13) | | | 7,279 | | | | 7,183 | |
| | | | | | | | | |
Total Liabilities | | | 1,045,368 | | | | 1,029,076 | |
| | | | | | | | | |
Shareholders’ Equity (Notes 14 and 15) | | | | | | | | |
| Preferred stock, Series A Voting, no par value, authorized 750,000 shares, none issued at December 31, 2009 and 2008 | | | — | | | | — | |
| Preferred stock, Series B, no par value, 25,223 shares authorized and issued at December 31, 2009 and December 31, 2008 | | | 25,223 | | | | 25,223 | |
| Discount on Series B preferred stock | | | (131 | ) | | | (146 | ) |
| Warrant to purchase common stock | | | 146 | | | | 146 | |
| Common stock, par value $1 per share, authorized 15,000,000 shares, issued 7,623,857 shares at December 31, 2009 and December 31, 2008 | | | 7,624 | | | | 7,624 | |
| Additional paid-in capital | | | 37,862 | | | | 37,783 | |
| Retained earnings | | | 36,883 | | | | 41,682 | |
| Accumulated other comprehensive income | | | 2,626 | | | | 839 | |
| Treasury shares at cost, 328,194 shares at December 31, 2009 and December 31, 2008 | | | (6,092 | ) | | | (6,092 | ) |
| | | | | | | | | |
Total Shareholders’ Equity | | | 104,141 | | | | 107,059 | |
| �� | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 1,149,509 | | | $ | 1,136,135 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
41
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands except share and per share amounts) | |
| |
Interest and Dividend Income | | | | | | | | | | | | |
| Loans | | $ | 45,885 | | | $ | 48,314 | | | $ | 49,889 | |
| Securities: | | | | | | | | | | | | |
| U.S. Government agencies and corporations | | | 10,452 | | | | 8,786 | | | | 7,588 | |
| State and political subdivisions | | | 1,008 | | | | 777 | | | | 606 | |
| Other debt and equity securities | | | 244 | | | | 304 | | | | 285 | |
| Federal funds sold and short-term investments | | | 58 | | | | 147 | | | | 394 | |
| | | | | | | | | | | | | |
| Total interest income | | | 57,647 | | | | 58,328 | | | | 58,762 | |
Interest Expense | | | | | | | | | | | | |
| Deposits | | | 17,379 | | | | 22,306 | | | | 25,535 | |
| Federal Home Loan Bank advances | | | 1,481 | | | | 2,322 | | | | 1,555 | |
| Short-term borrowings | | | 124 | | | | 387 | | | | 1,088 | |
| Junior subordinated debentures | | | 941 | | | | 1,174 | | | | 914 | |
| | | | | | | | | | | | | |
| Total interest expense | | | 19,925 | | | | 26,189 | | | | 29,092 | |
| | | | | | | | | | | | | |
Net Interest Income | | | 37,722 | | | | 32,139 | | | | 29,670 | |
Provision for Loan Losses (Note 7) | | | 19,017 | | | | 6,809 | | | | 2,255 | |
| | | | | | | | | | | | | |
| Net interest income after provision for loan losses | | | 18,705 | | | | 25,330 | | | | 27,415 | |
Noninterest Income | | | | | | | | | | | | |
| Investment and trust services | | | 1,919 | | | | 1,908 | | | | 2,170 | |
| Deposit service charges | | | 4,478 | | | | 4,760 | | | | 4,725 | |
| Other service charges and fees | | | 2,775 | | | | 2,710 | | | | 2,339 | |
| Income from bank owned life insurance | | | 693 | | | | 979 | | | | 732 | |
| Other income | | | 315 | | | | 856 | | | | 396 | |
| | | | | | | | | | | | | |
| Total fees and other income | | | 10,180 | | | | 11,213 | | | | 10,362 | |
| Securities gains, net | | | 690 | | | | 538 | | | | 274 | |
| Gains on sale of loans | | | 1,146 | | | | 797 | | | | 766 | |
| Gains (loss) on sale of other assets, net | | | (60 | ) | | | (89 | ) | | | 97 | |
| | | | | | | | | | | | | |
| Total noninterest income | | | 11,956 | | | | 12,459 | | | | 11,499 | |
Noninterest Expense | | | | | | | | | | | | |
| Salaries and employee benefits (Notes 18 & 19) | | | 15,142 | | | | 15,255 | | | | 15,708 | |
| Furniture and equipment | | | 4,344 | | | | 3,950 | | | | 3,515 | |
| Net occupancy (Note 8) | | | 2,354 | | | | 2,386 | | | | 2,256 | |
| Outside services | | | 2,459 | | | | 2,490 | | | | 1,815 | |
| Marketing and public relations | | | 961 | | | | 987 | | | | 1,116 | |
| Supplies, postage and freight | | | 1,260 | | | | 1,468 | | | | 1,357 | |
| Telecommunications | | | 813 | | | | 850 | | | | 849 | |
| Ohio franchise tax | | | 908 | | | | 895 | | | | 788 | |
| FDIC assessments | | | 2,622 | | | | 722 | | | | 89 | |
| Other real estate owned | | | 367 | | | | 1,070 | | | | 585 | |
| Electronic banking expenses | | | 800 | | | | 932 | | | | 809 | |
| Loan and collection expense | | | 1,346 | | | | 908 | | | | 758 | |
| Other expense | | | 1,954 | | | | 2,368 | | | | 2,106 | |
| | | | | | | | | | | | | |
| Total noninterest expense | | | 35,330 | | | | 34,281 | | | | 31,751 | |
| | | | | | | | | | | | | |
| Income before income tax expense (benefit) | | | (4,669 | ) | | | 3,508 | | | | 7,163 | |
| Income tax expense (Note 13) | | | (2,668 | ) | | | 112 | | | | 1,651 | |
| | | | | | | | | | | | | |
Net Income (Loss) | | $ | (2,001 | ) | | $ | 3,396 | | | $ | 5,512 | |
| | | | | | | | | | | | | |
| Dividends and accretion on preferred stock | | | 1,256 | | | | 91 | | | | — | |
| | | | | | | | | | | | | |
Net Income (Loss) Available to Common Shareholders | | $ | (3,257 | ) | | $ | 3,305 | | | $ | 5,512 | |
| | | | | | | | | | | | | |
Net Income (Loss) Per Common Share (Note 2) | | | | | | | | | | | | |
| Basic | | $ | (0.45 | ) | | $ | 0.45 | | | $ | 0.79 | |
| Diluted | | | (0.45 | ) | | | 0.45 | | | | 0.79 | |
| Dividends declared | | | 0.20 | | | | 0.54 | | | | 0.72 | |
Average Common Shares Outstanding | | | | | | | | | | | | |
| Basic | | | 7,295,663 | | | | 7,295,663 | | | | 6,992,215 | |
| Diluted | | | 7,295,663 | | | | 7,295,663 | | | | 6,992,215 | |
See accompanying notes to consolidated financial statements
42
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, 2007 | | $ | — | | | | | | | $ | 6,772 | | | $ | 26,382 | | | $ | 43,728 | | | $ | (2,093 | ) | | $ | (6,092 | ) | | $ | 68,697 | |
| Cumulative affect of adoption of fair value for trading securities | | | | | | | | | | | | | | | | | | | (1,192 | ) | | | 1,192 | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | | | | | | | | 5,512 | | | | | | | | | | | | 5,512 | |
| Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension liability adjustments | | | | | | | | | | | | | | | | | | | | | | | (155 | ) | | | | | | | (155 | ) |
| Change in unrealized gains and losses on securities | | | | | | | | | | | | | | | | | | | | | | | 1,514 | | | | | | | | 1,514 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,871 | |
| Share-based comprehensive income | | | | | | | | | | | | | | | 58 | | | | | | | | | | | | | | | | 58 | |
| Issuance of 851,990 shares of common stock | | | | | | | | | | | 852 | | | | 11,272 | | | | | | | | | | | | | | | | 12,124 | |
| Common dividends declared, $.72 per share | | | | | | | | | | | | | | | | | | | (5,097 | ) | | | — | | | | | | | | (5,097 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | $ | — | | | $ | — | | | $ | 7,624 | | | $ | 37,712 | | | $ | 42,951 | | | $ | 458 | | | $ | (6,092 | ) | | $ | 82,653 | |
| Cumulative effect of change in accounting principle for split-dollar life insurance coverage | | | | | | | | | | | | | | | | | | | (725 | ) | | | | | | | | | | | (725 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | | | | | | | | 3,396 | | | | | | | | | | | | 3,396 | |
| Other comprehensive income, 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 income | | | | | | | | | | | | | | | 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 income | | | | | | | | | | | | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
43
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
Operating Activities | | | | | | | | | | | | |
| Net income (loss) | | $ | (2,001 | ) | | $ | 3,396 | | | $ | 5,512 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Provision for loan losses | | | 19,017 | | | | 6,809 | | | | 2,255 | |
| Depreciation and amortization | | | 1,632 | | | | 1,749 | | | | 1,730 | |
| Amortization (accretion) of premiums and discounts | | | 1,529 | | | | (431 | ) | | | (16 | ) |
| Amortization of intangibles | | | 137 | | | | 138 | | | | 167 | |
| Amortization of loan servicing rights | | | 422 | | | | 219 | | | | 153 | |
| Amortization of deferred loan fees | | | 103 | | | | 294 | | | | 264 | |
| Federal deferred income tax expense (benefit) | | | (2,578 | ) | | | (1,241 | ) | | | 182 | |
| Securities gains, net | | | (690 | ) | | | (538 | ) | | | (274 | ) |
| Share-based compensation expense, net of tax | | | 79 | | | | 71 | | | | 58 | |
| Loans originated for sale | | | (105,623 | ) | | | (85,164 | ) | | | (90,129 | ) |
| Proceeds from sales of loan originations | | | 106,566 | | | | 87,103 | | | | 86,171 | |
| Net gain from loan sales | | | (1,146 | ) | | | (797 | ) | | | (766 | ) |
| Federal Home Loan Bank stock dividends | | | — | | | | (143 | ) | | | — | |
| Net (gain) loss on sale of other assets | | | 60 | | | | 89 | | | | (97 | ) |
| Net increase in accrued interest receivable and other assets | | | (9,092 | ) | | | (2,345 | ) | | | (4,257 | ) |
| Net increase (decrease) in accrued interest payable, taxes and other liabilities | | | (1,930 | ) | | | 727 | | | | 2,152 | |
| | | | | | | | | | | | | |
Net cash provided by operating activities | | | 6,485 | | | | 9,936 | | | | 3,105 | |
| | | | | | | | | | | | | |
Investing Activities | | | | | | | | | | | | |
Proceeds from sales ofavailable-for-sale securities | | | 38,141 | | | | 77,069 | | | | — | |
Proceeds from maturities ofavailable-for-sale securities | | | 69,307 | | | | 37,728 | | | | 40,042 | |
Purchase ofavailable-for-sale securities | | | (129,941 | ) | | | (155,946 | ) | | | (109,044 | ) |
| Purchase of trading securities | | | (9,005 | ) | | | (81,738 | ) | | | (65,082 | ) |
| Proceeds from maturities of trading securities | | | 1,737 | | | | — | | | | — | |
| Proceeds from sale of trading securities | | | 10,462 | | | | 104,433 | | | | 79,632 | |
| Change in interest-bearing deposits in other banks | | | (7 | ) | | | (252 | ) | | | — | |
| Purchase of Federal Reserve Bank Stock | | | — | | | | — | | | | (836 | ) |
| Purchase of Federal Home Loan Bank Stock | | | (101 | ) | | | (117 | ) | | | (495 | ) |
| Acquisition, net of cash and cash equivalents acquired | | | — | | | | — | | | | 7,212 | |
| Net increase in loans made to customers | | | (12,943 | ) | | | (53,912 | ) | | | (34,951 | ) |
| Proceeds from the sale of other real estate owned | | | 917 | | | | 1,203 | | | | 1,139 | |
| Purchase of bank premises and equipment | | | (549 | ) | | | (500 | ) | | | (2,889 | ) |
| Proceeds from sale of bank premises and equipment | | | 197 | | | | 6 | | | | 15 | |
| | | | | | | | | | | | | |
Net cash used in investing activities | | | (31,785 | ) | | | (72,026 | ) | | | (85,257 | ) |
Financing Activities | | | | | | | | | | | | |
| Net increase (decrease) in demand and other noninterest-bearing | | | 24,511 | | | | 5,182 | | | | (11,751 | ) |
| Net increase (decrease) in savings, money market and interest-bearing demand | | | 12,366 | | | | (2,445 | ) | | | (2,358 | ) |
| Net increase in certificates of deposit | | | 13,381 | | | | 61,497 | | | | 51,920 | |
| Net increase (decrease) in short-term borrowings | | | (21,471 | ) | | | (19,177 | ) | | | 18,222 | |
| Proceeds from Federal Home Loan Bank advances | | | 22,500 | | | | 65,000 | | | | 233,450 | |
| Payment of Federal Home Loan Bank advances | | | (33,352 | ) | | | (55,850 | ) | | | (228,453 | ) |
| Issuance of preferred stock | | | — | | | | 25,223 | | | | — | |
| Proceeds from issuance of junior subordinated debentures | | | — | | | | — | | | | 20,620 | |
| Dividends paid | | | (2,625 | ) | | | (3,940 | ) | | | (5,097 | ) |
| | | | | | | | | | | | | |
Net cash provided by financing activities | | | 15,310 | | | | 75,490 | | | | 76,553 | |
| | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (9,990 | ) | | | 13,400 | | | | (5,599 | ) |
| Cash and cash equivalents, January 1 | | | 36,923 | | | | 23,523 | | | | 29,122 | |
| | | | | | | | | | | | | |
Cash and cash equivalents, December 31 | | $ | 26,933 | | | $ | 36,923 | | | $ | 23,523 | |
| | | | | | | | | | | | | |
Supplemental cash flow information | | | | | | | | | | | | |
| Interest paid | | $ | 21,664 | | | $ | 25,937 | | | $ | 28,170 | |
| Income taxes paid | | | 400 | | | | 2,555 | | | | 1,968 | |
| Transfer of loans to other real estate owned | | | 1,317 | | | | 688 | | | | 2,667 | |
See accompanying notes to consolidated financial statements
44
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.
New Accounting Pronouncements
On June 29, 2009, the Financial Accounting Standards Board (FASB) issued an accounting pronouncement establishing the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities. Other than resolving certain minor inconsistencies in current U.S. generally accepted accounting principles (GAAP), the ASC is not intended to change GAAP, but rather to make it easier to review and research GAAP applicable to a particular transaction or specific accounting issue. Technical references to GAAP included in these Notes to Consolidated Financial Statements are provided under the new ASC structure.
ASC Topic 820, Fair Value Measurement and Disclosure. In April 2009, an amendment to the accounting and reporting standards of fair value measurements and disclosures was issued. The amendment provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This amendment also provides guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of this standard did not have a material effect on the Corporation’s financial statements.
ASC Topic 320, Investments — Debt and Equity Securities. Effective June 30, 2009, the Corporation adopted the amendment to the accounting and reporting standards regarding recognition and disclosure ofother-than-temporary impairment (“OTTI”). This amendment requires recognition of only the credit portion of OTTI in current earnings for those debt securities where there is no intent to sell or it is more likely than not the Corporation would not be required to sell the security prior to expected recovery. The remaining portion of the OTTI is to be included in other comprehensive income. The adoption of this amendment did not have a material impact on the Corporation’s financial statements.
ASC Topic 855, Subsequent Events. On May 28, 2009, the FASB issued an accounting pronouncement establishing general standards of accounting for and disclosure of subsequent events, which are events occurring after the balance sheet date but before the date the financial statements are issued or available to be issued. In particular, the pronouncement requires entities to recognize in the financial statements the effect of all subsequent events that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities may not recognize the impact of subsequent events that provide evidence about conditions that did not exist at the balance sheet date but arose after that date.
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 transferor’s continuing involvement, if any, with the transferred assets. This accounting pronouncement will be effective in 2010. The adoption of this pronouncement is not expected to have a material impact on the Corporation’s 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
45
required to consolidate, a variable interest entity. This accounting pronouncement will be effective in 2010. The adoption of this pronouncement is not expected to have a material on the Corporation’s financial statements.
Use of Estimates
LNB Bancorp Inc. prepares its financial statements in conformity with GAAP. As such, GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving the use of Management’s estimates and assumptions include the allowance for loan losses, the valuation of goodwill, the realization of deferred tax assets, fair values of certain securities, net periodic pension expense, and accrued pension costs recognized in the Corporation’s consolidated financial statements. Estimates that are more susceptible to change in the near term include the allowance for loan losses and the fair value of certain securities.
Segment Information
The Corporation’s activities are considered to be a single industry segment for financial reporting purposes. LNB Bancorp, Inc. is a financial holding company engaged in the business of commercial and retail banking, investment management and trust services, title insurance, and insurance with operations conducted through its main office and banking centers located throughout Lorain, eastern Erie, western Cuyahoga, and Summit counties of Ohio. This market provides the source for substantially all of the Bank’s deposit and loan and trust activities. The majority of the Bank’s income is derived from a diverse base of commercial, mortgage and retail lending activities and investments.
Statement of Cash Flows
For purposes of reporting in the Consolidated Statements of Cash Flows, cash and cash equivalents include currency on hand, amounts due from banks, Federal funds sold, and securities purchased under resale agreements. Generally, Federal funds sold and securities purchased under resale agreements are for one day periods.
Securities
Securities that are bought and held for the sole purpose of being sold in the near term are deemed trading securities with any related unrealized gains and losses reported in earnings. LNB Bancorp, Inc. held trading securities as of December 31, 2009 and December 31, 2008. Securities that the Corporation has a positive intent and ability to hold to maturity are classified as held to maturity. As of December 31, 2009 and December 31, 2008, 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. A decline in the fair value of securities below cost that is deemed other than temporary is charged to earnings, resulting in establishment of a new cost basis for the security. 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.
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, is recorded at redemption value which approximates fair value, and is periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
46
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 noninterest 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 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 acase-by-case basis. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
Allowance for Loan Losses
The allowance for loan losses is Management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. Management’s determination of the allowance, and the resulting provision, is based on judgments and assumptions, including general economic conditions, loan portfolio composition, loan loss experience, Management’s evaluation of credit risk relating to pools of loan and individual borrowers, sensitivity analysis and expected loss models, value of underlying collateral, and observations of internal loan review staff or banking regulators.
The provision for loan losses is determined based on Management’s evaluation of the loan portfolio and the adequacy of the allowance for loan losses under current economic conditions and such other factors which, in Management’s judgment, deserve current recognition.
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 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.
47
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. The Corporation follows Statement of Financial Accounting StandardsASC Topic 350, Goodwill and Other Intangibles.Goodwill is tested at least annually for impairment. Under the accounting for “Goodwill and Other Intangible Assets”, the Corporation is required to evaluate goodwill impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Corporation has elected to test for goodwill impairment 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 owned (OREO) represent properties acquired through customer loan default. Real estate and other tangible assets acquired through foreclosure are carried as OREO on the Consolidated Balance Sheet at fair value, net of estimated costs to sell, not to exceed the cost of property acquired through foreclosure.
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. The liability is recognized based on the substantive agreement with the employee. In September 2006, the FASB ratified the Emerging Issues Task Force’s ASC715-60,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,which requires companies to recognize a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee extending to postretirement periods. The liability should be recognized based on the substantive agreement with the employee. This Issue became effective January 1, 2008. The Issue was applied as a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The adoption of Issue06-4 reduced retained earnings by $725 effective January 1, 2008.
Investment and Trust Services Assets and Income
Property held by the Corporation in fiduciary or agency capacity for its customers is not included in the Corporation’s financial statements as such items are not assets of the Corporation. Income from the Investment and Trust Services Division is reported on an accrual basis.
Income Taxes
The Corporation and its wholly-owned subsidiary file a 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
48
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 unfunded status of the pension plan, which are also recognized as separate components of shareholders’ equity.
Unrealized gains on the Corporation’savailable-for-sale securities (after applicable income tax expense) totaling $4,356 and $2,605 at December 31, 2009 and 2008, respectively, and the minimum pension liability adjustment (after applicable income tax benefit) totaling $1,730 and $1,766 at December 31, 2009 and 2008, respectively, are included in accumulated other comprehensive income.
| |
| (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, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands except per share amounts) | |
| |
| Weighted average shares outstanding used in Basic Earnings per Common Share | | | 7,295,663 | | | | 7,295,663 | | | | 6,992,215 | |
| Dilutive effect of stock options | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding used in Diluted Earnings Per Common Share | | $ | 7,295,663 | | | $ | 7,295,663 | | | $ | 6,992,215 | |
| | | | | | | | | | | | | |
| Net Income (Loss) | | | (2,001 | ) | | | 3,396 | | | | 5,512 | |
| Preferred stock dividend and accretion | | | 1,256 | | | | 91 | | | | — | |
| | | | | | | | | | | | | |
| Income (Loss) Available to Common Shareholders | | $ | (3,257 | ) | | $ | 3,305 | | | $ | 5,512 | |
| | | | | | | | | | | | | |
| Basic Earnings (Loss) Per Common Share | | $ | (0.45 | ) | | $ | 0.45 | | | $ | 0.79 | |
| | | | | | | | | | | | | |
| Diluted Earnings (Loss) Per Common Share | | $ | (0.45 | ) | | $ | 0.45 | | | $ | 0.79 | |
| | | | | | | | | | | | | |
No dilution exists for the year ended December 31, 2009 due to the net loss. All outstanding stock options were antidilutive for the years ended December 31, 2008 and December 31, 2007.
| |
| (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 $919 on December 31, 2009 and $1,309 on December 31, 2008.
| |
| (4) | Goodwill and Intangible Assets |
On May 10, 2007, LNB Bancorp, Inc. completed the acquisition of Morgan Bancorp, Inc., of Hudson, Ohio and its wholly-owned subsidiary, Morgan Bank, NA. Under the terms of the transaction, the Corporation acquired all of the outstanding stock of Morgan Bancorp, Inc. in a stock and cash merger transaction valued at $27,864. The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The purchase accounting fair values are being amortized under various methods and over the lives of the corresponding assets and liabilities. Goodwill recorded for the acquisition amounted to $18,755. The Corporation recorded $1,367 in core deposit intangibles related to the acquisition of Morgan Bank, NA. The consolidated
49
statements of income reflect the operating results of the Morgan Bank division since the effective date of the acquisition.
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 9.5%: and (c) a discount rate of 12.5%, which is based on the Corporation’s average cost of capital adjusted for the risk associated with its operations. A variance in these assumptions could have a significant effect on the determination of goodwill impairment. The Corporation cannot predict the occurrences of certain future events that might adversely affect the reported value of goodwill. Such events include, but are not limited to, strategic decisions in response to economic and competitive conditions, the effect of the economic environment on the Corporation’s customer base or a material negative change in the relationship with significant customers.
Based on the Corporation’s 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, 2009.
Core deposit intangibles are amortized over their estimated useful life of 10 years. A summary of core deposit intangible assets follows:
| | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
| Core deposit intangibles | | $ | 1,367 | | | $ | 1,367 | |
| Less: accumulated amortization | | | 362 | | | | 225 | |
| | | | | | | | | |
| Carrying value of core deposit intangibles | | $ | 1,005 | | | $ | 1,142 | |
| | | | | | | | | |
Amortization expense for intangible assets was $137, $138 and $167 for the years ended December 31, 2009, 2008 and 2007, 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, 2009. The Corporation’s 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) |
| |
| 2010 | | $ | 137 | |
| 2011 | | | 137 | |
| 2012 | | | 137 | |
| 2013 | | | 137 | |
| 2014 | | | 137 | |
| 2015 and beyond | | | 320 | |
50
The amortized cost, gross unrealized gains and losses and fair values of securities at December 31, 2009 and 2008 follows:
| | | | | | | | | | | | | | | | | |
| | | 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 | | | 172,708 | | | | 6,092 | | | | (21 | ) | | | 178,779 | |
| State and political subdivisions | | | 22,588 | | | | 571 | | | | (116 | ) | | | 23,043 | |
| | | | | | | | | | | | | | | | | |
| Total Securities | | $ | 240,438 | | | $ | 7,017 | | | $ | (418 | ) | | $ | 247,037 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | At December 31, 2008 | |
| | | Amortized
| | | | | | | | | Fair
| |
| | | Cost | | | Unrealized Gains | | | Unrealized Losses | | | Value | |
| | | (Dollars in thousands) | |
| |
| Securities available for sale: | | | | | | | | | | | | | | | | |
| U.S. Government agencies and corporations | | $ | 46,418 | | | $ | 1,134 | | | $ | — | | | $ | 47,552 | |
| Mortgage backed securities | | | 150,718 | | | | 2,886 | | | | (196 | ) | | | 153,408 | |
| State and political subdivisions | | | 21,969 | | | | 438 | | | | (315 | ) | | | 22,092 | |
| | | | | | | | | | | | | | | | | |
| Total Securities | | $ | 219,105 | | | $ | 4,458 | | | $ | (511 | ) | | $ | 223,052 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Trading Securities Held at December 31, 2008 | |
| | | | | | Aggregate
| | | Aggregate
| | | | |
| | | | | | Unrealized Gains
| | | Unrealized Losses
| | | Fair
| |
| | | Cost | | | Recorded to Income | | | Recorded to Income | | | Value | |
| | | (Dollars in thousands) | |
| |
| Trading Securities | | $ | 11,245 | | | $ | 16 | | | $ | — | | | $ | 11,261 | |
| | | | | | | | | | | | | | | | | |
51
The amortized cost and fair value of available for sale debt securities by contractual maturity date at December 31, 2009 follows:
| | | | | | | | | |
| | | At December 31, 2009 | |
| | | | | | Fair
| |
| | | Amortized Cost | | | Value | |
| | | (Dollars in thousands) | |
| |
| Securities available for sale: | | | | | | | | |
| Due in one year or less | | $ | 691 | | | $ | 708 | |
| Due from one year to five years | | | 20,532 | | | | 20,694 | |
| Due from five years to ten years | | | 42,407 | | | | 42,766 | |
| Due after ten years | | | 4,100 | | | | 4,090 | |
| Mortgage-backed | | | 172,708 | | | | 178,779 | |
| | | | | | | | | |
| | | $ | 240,438 | | | $ | 247,037 | |
| | | | | | | | | |
Realized gains and losses related to securitiesavailable-for-sale for each of the three years ended December 31 follows:
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
| Gross realized gains | | $ | 444 | | | $ | 612 | | | $ | — | |
| Gross realized losses | | | (111 | ) | | | (76 | ) | | | — | |
| | | | | | | | | | | | | |
| Net Securities Gains | | $ | 333 | | | $ | 536 | | | $ | — | |
| | | | | | | | | | | | | |
| Proceeds from the sale of available for sale securities | | $ | 38,141 | | | $ | 77,069 | | | $ | — | |
| | | | | | | | | | | | | |
Net gains of $357 were recorded on the sale of trading securities during 2009. This 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 $187,701 and $159,142 at December 31, 2009 and 2008, respectively.
The securities portfolio contained $4,844 and $4,159 in non-rated securities of state and political subdivisions at December 31, 2009 and 2008, respectively. Based upon yield, term to maturity and market risk, the fair value of these securities was estimated to be $5,040 and $4,301 at December 31, 2009 and 2008, respectively. Management reviewed these non-rated securities and has determined that there was no other than temporary impairment to their value at December 31, 2009 and 2008.
The following is a summary of securities that had unrealized losses at December 31, 2009 and 2008. 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. 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, 2009, the total unrealized losses of $418 were temporary in nature and due to the current level of interest rates.
52
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | | | 2,177 | | | | (21 | ) | | | — | | | | — | | | | 2,177 | | | | (21 | ) |
| State and political subdivisions | | | 4,549 | | | | (116 | ) | | | — | | | | — | | | | 4,549 | | | | (116 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 28,166 | | | $ | (418 | ) | | $ | — | | | $ | — | | | $ | 28,166 | | | $ | (418 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, 2008 | |
| | | 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 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Mortgage backed securities | | | 22,569 | | | | (195 | ) | | | 1,642 | | | | (1 | ) | | | 24,211 | | | | (196 | ) |
| State and political subdivisions | | | 6,017 | | | | (315 | ) | | | — | | | | — | | | | 6,017 | | | | (315 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 28,586 | | | $ | (510 | ) | | $ | 1,642 | | | $ | (1 | ) | | $ | 30,228 | | | $ | (511 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| (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, | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
| Amount at beginning of year | | $ | 20,306 | | | $ | 22,833 | |
| New loans | | | 6,760 | | | | 1,871 | |
| Repayments | | | (7,994 | ) | | | (5,083 | ) |
| Changes in directors and officers and /or affiliations, net | | | (335 | ) | | | 685 | |
| | | | | | | | | |
| Amount at end of year | | $ | 18,737 | | | $ | 20,306 | |
| | | | | | | | | |
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 $7,350 and $10,151, respectively at December 31, 2009 and 2008.
53
| |
| (7) | Loans and Allowance for Loan Losses |
Loan balances at December 31, 2009 and December 31, 2008 are summarized by purpose as follows:
| | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
| Real estate loans (includes loans secured primarily by real estate only): | | | | | | | | |
| Construction and land development | | $ | 65,052 | | | $ | 60,725 | |
| One to four family residential | | | 219,508 | | | | 231,757 | |
| Multi-family residential | | | 28,988 | | | | 26,284 | |
| Non-farm non-residential properties | | | 286,778 | | | | 296,393 | |
| Commercial and industrial loans | | | 61,929 | | | | 60,846 | |
| Personal loans to individuals: | | | | | | | | |
| Auto, single payment and installment | | | 135,097 | | | | 123,807 | |
| All other loans | | | 5,845 | | | | 3,739 | |
| | | | | | | | | |
| Total loans | | | 803,197 | | | | 803,551 | |
| Allowance for loan losses | | | (18,792 | ) | | | (11,652 | ) |
| | | | | | | | | |
| Net loans | | $ | 784,405 | | | $ | 791,899 | |
| | | | | | | | | |
Activity in the allowance for loan losses for 2009, 2008 and 2007 is summarized as follows:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
| Balance at the beginning of year | | $ | 11,652 | | | $ | 7,820 | | | $ | 7,300 | |
| Provision for loan losses | | | 19,017 | | | | 6,809 | | | | 2,255 | |
| Allowance from merger | | | — | | | | — | | | | 1,098 | |
| Loans charged-off | | | (12,477 | ) | | | (4,168 | ) | | | (3,332 | ) |
| Recoveries on loans previously charged-off | | | 600 | | | | 1,191 | | | | 499 | |
| | | | | | | | | | | | | |
| Balance at the end of the year | | $ | 18,792 | | | $ | 11,652 | | | $ | 7,820 | |
| | | | | | | | | | | | | |
Information regarding impaired loans is as follows:
| | | | | | | | | | | | | |
| | | At December 31, |
| | | 2009 | | 2008 | | 2007 |
| | | (Dollars in thousands) |
| |
| Year-end impaired loans with allowance for loan losses specifically allocated | | $ | 24,250 | | | $ | 13,213 | | | $ | 5,456 | |
| Year-end impaired loans without allowance for loan losses specifically allocated | | | 2,804 | | | | 2,331 | | | | 2,471 | |
| Amount of allowance specifically allocated to impaired loans | | | 7,584 | | | | 3,569 | | | | 1,549 | |
| Average of impaired loans during the year | | | 22,872 | | | | 16,094 | | | | 10,929 | |
| Interest income recognized during impairment | | | — | | | | — | | | | — | |
| Nonaccrual loans at year end | | | 38,837 | | | | 19,592 | | | | 10,831 | |
54
| |
| (8) | Bank Premises, Equipment and Leases |
Bank premises and equipment are summarized as follows:
| | | | | | | | | |
| | | At December 31 | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
| Land | | $ | 2,602 | | | $ | 2,662 | |
| Buildings | | | 11,434 | | | | 12,002 | |
| Equipment | | | 14,034 | | | | 14,031 | |
| Purchased software | | | 3,979 | | | | 3,967 | |
| Leasehold improvements | | | 1,078 | | | | 1,060 | |
| | | | | | | | | |
| Total cost | | $ | 33,127 | | | $ | 33,722 | |
| Less: accumulated depreciation and amortization | | | 23,022 | | | | 22,218 | |
| | | | | | | | | |
| Net bank premises and equipment | | $ | 10,105 | | | $ | 11,504 | |
| | | | | | | | | |
Depreciation of Bank premises and equipment charged to noninterest expense amounted to $1,330 in 2009, $1,459 in 2008 and $1,466 in 2007. Amortization of purchased software charged to noninterest expense amounted to $302 in 2009, $290 in 2008 and $264 in 2007.
At December 31, 2009, the Bank was obligated to pay rental commitments under noncancelable operating leases on certain Bank premises and equipment as follows:
| | | | | |
| | | Amount | |
| | | (Dollars in thousands) | |
| |
| 2010 | | $ | 765 | |
| 2011 | | | 738 | |
| 2012 | | | 620 | |
| 2013 | | | 500 | |
| 2014 | | | 435 | |
| 2015 and thereafter | | | 629 | |
| | | | | |
| Total | | $ | 3,687 | |
| | | | | |
Rentals paid under leases on Corporation premises and equipment amounted to $1,186 in 2009, $1,190 in 2008 and $1,106 in 2007.
Deposit balances are summarized as follows:
| | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
| Demand and other noninterest-bearing | | $ | 118,505 | | | $ | 93,994 | |
| Interest checking | | | 137,807 | | | | 115,102 | |
| Savings | | | 82,771 | | | | 78,526 | |
| Money market accounts | | | 84,467 | | | | 99,051 | |
| Consumer time deposits | | | 476,798 | | | | 449,772 | |
| Public time deposits | | | 71,085 | | | | 72,247 | |
| Brokered time deposits | | | — | | | | 12,483 | |
| | | | | | | | | |
| Total deposits | | $ | 971,433 | | | $ | 921,175 | |
| | | | | | | | | |
55
The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $185,495 and $166,160 at December 31, 2009 and 2008, respectively.
The maturity distribution of certificates of deposit as of December 31, 2009 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 | | $ | 336,939 | | | $ | 122,332 | | | $ | 17,507 | | | $ | 20 | | | $ | 476,798 | |
| Public time deposits | | | 67,468 | | | | 3,617 | | | | — | | | | — | | | | 71,085 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total time deposits | | $ | 404,407 | | | $ | 125,949 | | | $ | 17,507 | | | $ | 20 | | | $ | 547,883 | |
| | | | | | | | | | | | | | | | | | | | | |
| |
| (10) | 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, 2009, the Bank had pledged approximately $3,619 in qualifying home equity lines of credit, resulting in an available line of credit of approximately $1,809. No amounts were outstanding at December 31, 2009 or December 31, 2008. 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, 2009.
Short-term borrowings include securities sold under repurchase agreements and Federal funds purchased from correspondent banks. The table below presents information for short-term borrowings for the three years ended December 31, 2009.
| | | | | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
Securities sold under repurchase agreements | | | | | | | | | | | | |
| Period End: | | | | | | | | | | | | |
| Outstanding | | $ | 1,457 | | | $ | 22,928 | | | $ | 22,105 | |
| Interest rate | | | 0.15 | % | | | 0.50 | % | | | 3.21 | % |
| Average: | | | | | | | | | | | | |
| Outstanding | | $ | 24,089 | | | $ | 25,875 | | | $ | 23,533 | |
| Interest rate | | | 0.51 | % | | | 1.19 | % | | | 3.63 | % |
| Maximum month-end balance | | $ | 37,295 | | | $ | 30,781 | | | $ | 28,039 | |
| | | | | | | | | | | | | |
Federal funds purchased | | | | | | | | | | | | |
| Period End: | | | | | | | | | | | | |
| Outstanding | | $ | — | | | $ | — | | | $ | 20,000 | |
| Interest rate | | | n/a | | | | n/a | | | | 4.25 | % |
| Average: | | | | | | | | | | | | |
| Outstanding | | $ | — | | | $ | 1,989 | | | $ | 7,947 | |
| Interest rate | | | n/a | | | | 3.87 | % | | | 5.30 | % |
| Maximum month-end balance | | $ | — | | | $ | 12,900 | | | $ | 20,000 | |
| | | | | | | | | | | | | |
| |
| (11) | Federal Home Loan Bank Advances |
Federal Home Loan Bank advances amounted to $42,505 and $53,357 at December 31, 2009 and December 31, 2008 respectively. All advances are bullet maturities with no call features. At December 31, 2009, collateral pledged for FHLB advances consisted of qualified real estate mortgage loans and investment securities of $69,833 and $23,822, respectively. The maximum borrowing capacity of the Bank at December 31, 2009 was $59,774 with
56
unused collateral borrowing capacity of $17,222. 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, 2009 and December 31, 2008.
Maturities of FHLB advances outstanding at December 31, 2009 and 2008 are as follows:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
| Maturities January 2009 through December 2009, with fixed rates ranging from 3.36% to 5.00%, averaging 3.60% in 2008 | | $ | — | | | $ | 25,794 | |
| Maturity January 2010, fixed rate 3.58% | | | 10,000 | | | | 10,000 | |
| Maturities January 2011 through February 2011, with fixed rates ranging from 3.17% to 3.67%, averaging 3.50% for 2009 and 2008 | | | 15,000 | | | | 15,000 | |
| Maturity January 2012, fixed rate 2.37% | | | 15,000 | | | | — | |
| Maturity January 2014, fixed rate 3.55% | | | 55 | | | | 63 | |
| Maturity July 2015, fixed rate 4.76% | | | 2,450 | | | | 2,500 | |
| | | | | | | | | |
| Total FHLB advances | | $ | 42,505 | | | $ | 53,357 | |
| | | | | | | | | |
| |
| (12) | 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 Corporation’s 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 subordinated notes are redeemable in whole or in part, without penalty, at the Corporation’s 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. At December 31, 2009, the balance of the subordinated notes payable to Trust I and Trust II was $10,310 each. The interest rates in effect as of the last determination date in 2009 were 1.73% and 6.64% for Trust I and Trust II, respectively.
The provision for income taxes consists of the following:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
| Income Taxes: | | | | | | | | | | | | |
| Federal current expense (benefit) | | $ | (90 | ) | | $ | 1,353 | | | $ | 1,469 | |
| Federal deferred expense (benefit) | | | (2,578 | ) | | | (1,241 | ) | | | 182 | |
| | | | | | | | | | | | | |
| Total Income Tax (Benefit) | | $ | (2,668 | ) | | $ | 112 | | | $ | 1,651 | |
| | | | | | | | | | | | | |
57
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 2009, 2008 and 2007.
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
| Computed “expected” tax expense (benefit) | | $ | (1,587 | ) | | $ | 1,193 | | | $ | 2,435 | |
| Increase (reduction) in income taxes resulting from: | | | | | | | | | | | | |
| Tax exempt interest on obligations of state and political subdivisions | | | (386 | ) | | | (265 | ) | | | (277 | ) |
| Tax exempt interest on bank owned life insurance | | | (236 | ) | | | (332 | ) | | | (243 | ) |
| New markets tax credit | | | (530 | ) | | | (476 | ) | | | (476 | ) |
| Other, net | | | 71 | | | | (8 | ) | | | 212 | |
| | | | | | | | | | | | | |
| Total Income Taxes (Benefit) | | $ | (2,668 | ) | | $ | 112 | | | $ | 1,651 | |
| | | | | | | | | | | | | |
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 2009 and 2008 there were no material uncertain income tax positions.
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, 2009 and 2008 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 | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
| Deferred Federal tax assets: | | | | | | | | |
| Allowance for loan losses | | $ | 6,365 | | | $ | 3,922 | |
| Deferred compensation | | | 308 | | | | 375 | |
| Minimum pension liability | | | 889 | | | | 910 | |
| Equity based compensation | | | 69 | | | | 60 | |
| Accrued loan fees and costs | | | 241 | | | | 124 | |
| New Market Tax Credit | | | 430 | | | | — | |
Mark-to-market adjustments | | | 155 | | | | 250 | |
| Other deferred tax assets | | | 711 | | | | 525 | |
| | | | | | | | | |
| Total deferred Federal tax assets | | $ | 9,168 | | | $ | 6,166 | |
| | | | | | | | | |
| Deferred Federal tax liabilities: | | | | | | | | |
| Bank premises and equipment depreciation | | $ | (106 | ) | | $ | (44 | ) |
| Unrealized gain on securities available for sale | | | (2,243 | ) | | | (1,342 | ) |
| FHLB stock dividends | | | (254 | ) | | | (254 | ) |
| Intangible asset amortization | | | (586 | ) | | | (448 | ) |
| Accretion | | | (181 | ) | | | (119 | ) |
| Deferred charges | | | (597 | ) | | | (338 | ) |
| Prepaid pension | | | (353 | ) | | | (435 | ) |
| Other deferred tax liabilities | | | (303 | ) | | | (297 | ) |
| | | | | | | | | |
| Total deferred Federal tax liabilities | | | (4,623 | ) | | | (3,277 | ) |
| | | | | | | | | |
| Net deferred Federal tax assets | | $ | 4,545 | | | $ | 2,889 | |
| | | | | | | | | |
58
| |
| (14) | 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 750,000 Series A Voting Preferred Shares, none of which have been issued. As of December 31, 2009 and 2008, 25,223 shares of the Corporation’s 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 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, each a dividend payment date, starting with February 15, 2009. 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 a360-day year consisting of twelve30-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 outstanding were 7,295,663 at December 31, 2009 and 2008.
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, 2009 and December 31, 2008, 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 Corporation’s sale of $25.2 million of its Series B Preferred
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Stock to the U.S. Treasury in conjunction with the CPP include limitations on the Corporation’s 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 Corporation’s 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 Corporation’s 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 24, 2000, the Board of Directors of the Corporation adopted a Shareholder Rights Plan which was amended as of May 17, 2006. 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 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 Corporation’s common shares, at 50% of market value. This would dilute the potential acquirer’s ownership level and voting power, 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 6, 2000. One Preferred Share Purchase Right will also be distributed for each common share issued after November 6, 2000. 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 15% or more of the Corporation’s 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 Corporation’s common shares to shareholders who choose to invest all or a portion of their cash dividends plus additional cash payments for the Corporation’s common stock. The Corporation did not issue shares pursuant to the Plan in 2009 and 43,314 shares were purchased in the open market at the current market price. Similarly, the Corporation did not issue shares pursuant to the Plan in 2008 while 51,011 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 Corporation’s regulatory capital requirements and minimum regulatory guidelines. Due to the loss reported in 2009 the Bank is not able to pay any dividends or incur additional debt with prior approval of the OCC. Dividends declared and paid in 2009 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 Corporation’s 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 Corporation’s 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
60
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 Corporation’s 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 institution’s semi-annual FDIC deposit insurance premium assessments.
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, 2009 and 2008, 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 Currency’s 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 Bank’s category. Analysis of the Corporation’s and the Bank’s Regulatory Capital and Regulatory Capital Requirements follows:
| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | December 31, 2008 |
| | | Amount | | Ratio | | Amount | | Ratio |
| | | (Dollars in thousands) |
| |
| Total capital (risk weighted) | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 117,824 | | | | 13.64 | % | | $ | 114,750 | | | | 13.44 | % |
| Bank | | | 107,539 | | | | 12.46 | | | | 87,844 | | | | 10.30 | |
| Tier 1 capital (risk weighted) | | | | | | | | | | | | | | | | |
| Consolidated | | | 87,625 | | | | 10.14 | | | | 78,846 | | | | 9.24 | |
| Bank | | | 92,752 | | | | 10.75 | | | | 71,171 | | | | 8.35 | |
| Tier 1 capital (average assets) | | | | | | | | | | | | | | | | |
| Consolidated | | | 87,625 | | | | 7.70 | | | | 78,846 | | | | 7.20 | |
| Bank | | | 92,752 | | | | 8.14 | | | | 71,171 | | | | 6.44 | |
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| | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | December 31, 2008 |
| | | Amount | | Ratio | | Amount | | Ratio |
| | | (Dollars in thousands) |
| |
Well Capitalized: | | | | | | | | | | | | | | | | |
| Total capital (risk weighted) | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 86,381 | | | | 10.00 | % | | $ | 85,379 | | | | 10.00 | % |
| Bank | | | 86,307 | | | | 10.00 | | | | 85,285 | | | | 10.00 | |
| Tier 1 capital (risk weighted) | | | | | | | | | | | | | | | | |
| Consolidated | | | 51,849 | | | | 6.00 | | | | 51,199 | | | | 6.00 | |
| Bank | | | 51,769 | | | | 6.00 | | | | 51,141 | | | | 6.00 | |
| Tier 1 capital (average assets) | | | | | | | | | | | | | | | | |
| Consolidated | | | 56,899 | | | | 5.00 | | | | 54,754 | | | | 5.00 | |
| Bank | | | 56,973 | | | | 5.00 | | | | 55,257 | | | | 5.00 | |
Minimum Required: | | | | | | | | | | | | | | | | |
| Total capital (risk weighted) | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 69,105 | | | | 8.00 | % | | $ | 68,304 | | | | 8.00 | % |
| Bank | | | 69,046 | | | | 8.00 | | | | 68,228 | | | | 8.00 | |
| Tier 1 capital (risk weighted) | | | | | | | | | | | | | | | | |
| Consolidated | | | 34,566 | | | | 4.00 | | | | 34,132 | | | | 4.00 | |
| Bank | | | 34,512 | | | | 4.00 | | | | 34,094 | | | | 4.00 | |
| Tier 1 capital (average assets) | | | | | | | | | | | | | | | | |
| Consolidated | | | 45,519 | | | | 4.00 | | | | 43,803 | | | | 4.00 | |
| Bank | | | 45,578 | | | | 4.00 | | | | 44,206 | | | | 4.00 | |
| |
| (16) | Parent Company Financial Information |
LNB Bancorp, Inc.’s (parent company only) condensed balance sheets as of December 31, 2009 and 2008, and the condensed statements of income and cash flows for the years ended December 31, 2009, 2008 and 2007 are as follows:
| | | | | | | | | |
| | | Year Ended December 31, | |
Condensed Balance Sheets | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
Assets: | | | | | | | | |
| Cash | | $ | 2,106 | | | $ | 25,925 | |
| Investment in The Lorain National Bank | | | 118,053 | | | | 94,820 | |
| Other investments | | | 7 | | | | 7 | |
| Note receivable — The Lorain National Bank | | | 4,000 | | | | 6,000 | |
| Other assets | | | 864 | | | | 1,010 | |
| | | | | | | | | |
Total Assets | | $ | 125,030 | | | $ | 127,762 | |
| | | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | |
| Junior subordinated debentures | | $ | 20,620 | | | $ | 20,620 | |
| Other liabilities | | | 269 | | | | 83 | |
| Shareholders’ equity | | | 104,141 | | | | 107,059 | |
| | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 125,030 | | | $ | 127,762 | |
| | | | | | | | | |
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| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
Condensed Statements of Income | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
Income | | | | | | | | | | | | |
| Interest income | | $ | 363 | | | $ | 390 | | | $ | 368 | |
| Cash dividend from The Lorain National Bank | | | 2,190 | | | | 3,900 | | | | 5,160 | |
| Other income | | | 145 | | | | 62 | | | | 2 | |
| | | | | | | | | | | | | |
Total Income | | | 2,698 | | | | 4,352 | | | | 5,530 | |
| | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | |
| Interest expense | | | 941 | | | | 1,176 | | | | 914 | |
| Other expenses | | | 202 | | | | 272 | | | | 245 | |
| | | | | | | | | | | | | |
Total Expense | | | 1,143 | | | | 1,448 | | | | 1,159 | |
| Income before income taxes and equity in undistributed net income of subsidiary | | | 1,555 | | | | 2,904 | | | | 4,371 | |
| Income tax (benefit) expense | | | (221 | ) | | | (335 | ) | | | 6 | |
| | | | | | | | | | | | | |
| Equity in undistributed net income (loss) of subsidiary | | | (3,777 | ) | | | 157 | | | | 1,147 | |
| | | | | | | | | | | | | |
Net Income (Loss) | | $ | (2,001 | ) | | $ | 3,396 | | | $ | 5,512 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
Condensed Statements of Cash Flows | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
Net Income (Loss) | | $ | (2,001 | ) | | $ | 3,396 | | | $ | 5,512 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
| Equity in undistributed net income (loss) of subsidiary | | | 3,777 | | | | (157 | ) | | | (1,147 | ) |
| Share-based compensation expense, net of tax | | | 79 | | | | 71 | | | | 58 | |
| Net change in other assets and liabilities | | | 174 | | | | (1,082 | ) | | | 180 | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 2,029 | | | | 2,228 | | | | 4,603 | |
| | | | | | | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | | | | |
| Payments for investments in subsidiaries | | | — | | | | — | | | | (15,740 | ) |
| Payments for advances to The Lorain National Bank | | | (25,223 | ) | | | — | | | | — | |
| Payments to The Lorain National Bank for subordinated debt instrument | | | — | | | | — | | | | (4,000 | ) |
| 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 | | | | (19,740 | ) |
| | | | | | | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | | | | | |
| Proceeds from issuance of junior subordinated debentures | | | — | | | | — | | | | 20,620 | |
| Proceeds from issuance of preferred stock | | | — | | | | 25,223 | | | | — | |
| Dividends paid | | | (2,625 | ) | | | (3,940 | ) | | | (5,097 | ) |
| | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | (2,625 | ) | | | 21,283 | | | | 15,523 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash equivalents | | | (23,819 | ) | | | 25,511 | | | | 386 | |
| Cash and cash equivalents at beginning of year | | | 25,925 | | | | 414 | | | | 28 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 2,106 | | | $ | 25,925 | | | $ | 414 | |
| | | | | | | | | | | | | |
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| |
| (17) | Retirement Pension Plan |
The Bank’s 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 employee’s level of compensation. The Bank’s 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 $199 in 2009, $(16) in 2008 and $(15) in 2007. The following table sets forth the defined benefit pension plan’s 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, 2009, 2008, and 2007. The losses recognized due to settlement in the amount of $48 in 2007 results from significant lump sum distributions paid in 2007, but not actuarially projected. There were no losses recognized due to settlement in 2009 and 2008.
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
Change in projected benefit obligation | | | | | | | | | | | | |
| Projected benefit obligation at the beginning of the year | | $ | (5,723 | ) | | $ | (5,559 | ) | | $ | (5,534 | ) |
| Interest Cost | | | (324 | ) | | | (324 | ) | | | (308 | ) |
| Actuarial gain (loss) | | | (218 | ) | | | (363 | ) | | | (284 | ) |
| Settlement loss | | | — | | | | — | | | | (92 | ) |
| Benefits paid | | | 549 | | | | 523 | | | | 659 | |
| | | | | | | | | | | | | |
| Projected benefit obligation at the end of the year | | $ | (5,716 | ) | | $ | (5,723 | ) | | $ | (5,559 | ) |
| | | | | | | | | | | | | |
Change in plan assets | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 3,969 | | | $ | 5,430 | | | $ | 5,374 | |
| Actual gain on plan assets | | | 401 | | | | (968 | ) | | | 465 | |
| Employer contributions | | | 400 | | | | — | | | | 250 | |
| Gain/(Loss) | | | — | | | | 30 | | | | — | |
| Benefits paid | | | (549 | ) | | | (523 | ) | | | (659 | ) |
| | | | | | | | | | | | | |
Fair value of plan assets at end of year | | $ | 4,221 | | | $ | 3,969 | | | $ | 5,430 | |
| | | | | | | | | | | | | |
Funded status (included in accrued liabilities) | | $ | (1,495 | ) | | $ | (1,754 | ) | | $ | (129 | ) |
| | | | | | | | | | | | | |
Unrecognized actuarial loss in accumulated other comprehensive income | | $ | 2,619 | | | $ | 2,677 | | | $ | 1,037 | |
| | | | | | | | | | | | | |
Amounts recognized in the consolidated statements of income consist of:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
Net Periodic Pension Cost (Benefit) | | | | | | | | | | | | |
| Interest cost on projected benefit obligation | | $ | 324 | | | $ | 324 | | | $ | 307 | |
| Expected return on plan benefits | | | (275 | ) | | | (388 | ) | | | (389 | ) |
| Amortization of Loss | | | 150 | | | | 48 | | | | 19 | |
| Loss recognized due to settlement | | | — | | | | — | | | | 48 | |
| | | | | | | | | | | | | |
Net Periodic Pension Cost (Benefit) | | $ | 199 | | | $ | (16 | ) | | $ | (15 | ) |
| | | | | | | | | | | | | |
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Pension liability adjustments recognized in other comprehensive income include:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| |
| Amortization of unrecognized actuarial loss | | $ | 150 | | | $ | 48 | | | $ | 19 | |
| Current deferral of gains (losses) | | | (92 | ) | | | (1,688 | ) | | | (256 | ) |
| | | | | | | | | | | | | |
| Pension liability adjustments recognized | | | | | | | | | | | | |
| in comprehensive income | | | 58 | | | | (1,640 | ) | | | (237 | ) |
| Tax effect | | | (20 | ) | | | 557 | | | | 82 | |
| | | | | | | | | | | | | |
| Net pension liability adjustments | | $ | 38 | | | $ | (1,083 | ) | | $ | (155 | ) |
| | | | | | | | | | | | | |
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, 2009, 2008 and 2007:
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| 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 Moody’s 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 year’s net periodic pension cost.
Plan Assets
The Bank’s Retirement Pension Plan’s weighted-average assets allocations at December 31, 2009, 2008 and 2007 by asset category are as follows:
| | | | | | | | | | | | | |
| | | Plan Assets at December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Asset Category: | | | | | | | | | | | | |
| Equity securities | | | 57.48 | % | | | 47.53 | % | | | 59.90 | % |
| Debt securities | | | 41.82 | | | | 52.25 | | | | 35.30 | |
| Cash and cash equivalents | | | 0.70 | | | | 0.22 | | | | 4.80 | |
| | | | | | | | | | | | | |
| Total | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % |
| | | | | | | | | | | | | |
| LNB Bancorp, Inc. common stock to total plan assets | | | 3.08 | % | | | 4.25 | % | | | 8.50 | % |
| | | | | | | | | | | | | |
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 Lorain National Bank has not yet decided the contribution to The Lorain National Bank Retirement Pension Plan in 2010.
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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) |
| |
| 2010 | | $ | 299 | |
| 2011 | | | 312 | |
| 2012 | | | 344 | |
| 2013 | | | 374 | |
| 2014 | | | 373 | |
| 2015-2019 | | | 1,942 | |
| |
| (18) | Stock Options and Stock Appreciation Rights |
A broad-based stock option incentive plan, the 2006 Stock Incentive Plan, was adopted by the Corporation’s shareholders on April 18, 2006. Awards granted under this Plan as of December 31, 2009 were stock options granted in 2007, 2008 and 2009. The Corporation also 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. On January 20, 2006, the Corporation issued an aggregate of 30,000 stock appreciation rights (��SARs”) to eight employees, 15,500 of which have expired due to employee terminations. The Corporation adopted ASC Topic 718 — Compensation — Stock Compensation for the accounting and disclosure of the stock option agreements and the SARs.
The expense recorded for the year ended December 31, 2009 was $0 for SAR’s and $79 for stock options. Expense recorded during 2008 and 2007 was $0 and $0 for SAR’s and $78 and $79 for stock options, respectively. The number of options or SAR’s and the exercise prices for these nonqualified incentive options or SAR’s outstanding as of December 31, 2009 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Issued | |
| | | 2005
| | | 2005
| | | 2006
| | | 2007
| | | 2007
| | | 2008
| | | 2008
| | | 2009
| | | 2006
| |
Type | | Option | | | Option | | | Option | | | Option | | | Option | | | Option | | | Option | | | Option | | | SAR’s | |
| |
| Number of Options | | | 2,500 | | | | 30,000 | | | | 30,000 | | | | 30,000 | | | | 20,000 | | | | 50,000 | | | | 33,000 | | | | 2,500 | | | | 14,500 | |
| Strike Price | | $ | 16.50 | | | $ | 19.17 | | | $ | 19.10 | | | $ | 16.00 | | | $ | 15.35 | | | $ | 14.47 | | | $ | 14.47 | | | $ | 5.46 | | | $ | 19.00 | |
| Number of Options Vested | | | 2,500 | | | | 30,000 | | | | 30,000 | | | | 20,000 | | | | 13,334 | | | | 16,666 | | | | 10,165 | | | | — | | | | 14,500 | |
| Assumptions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Risk free interest rate | | | 4.50 | % | | | 3.92 | % | | | 3.66 | % | | | 4.73 | % | | | 4.72 | % | | | 2.94 | % | | | 2.94 | % | | | 2.27 | % | | | 1.42 | % |
| Dividend yield | | | 4.36 | % | | | 3.76 | % | | | 3.77 | % | | | 4.50 | % | | | 4.69 | % | | | 4.98 | % | | | 4.98 | % | | | 6.68 | % | | | 6.86 | % |
| Volatility | | | 18.48 | % | | | 17.30 | % | | | 17.66 | % | | | 16.52 | % | | | 15.33 | % | | | 15.68 | % | | | 15.68 | % | | | 22.97 | % | | | 25.19 | % |
| Expected Life — years | | | 5 | | | | 6 | | | | 6 | | | | 7 | | | | 6 | | | | 6 | | | | 6 | | | | 6 | | | | 4 | |
For options granted in 2009, 2008, and 2007, the weighted average grant date fair value was $0.46, $1.13, and $1.94, respectively.
66
The activity in stock options outstanding for the three years ended December 31, 2009 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | Weighted Average
| | | | | | Weighted Average
| | | | | | Weighted Average
| |
| | | | | | Exercise
| | | | | | Exercise
| | | | | | Exercise
| |
| | | Options | | | Price Per Share | | | Options | | | Price Per Share | | | Options | | | Price Per Share | |
| |
| Outstanding at beginning of year | | | 203,500 | | | $ | 16.18 | | | | 112,500 | | | $ | 17.57 | | | | 62,500 | | | $ | 19.03 | |
| Granted | | | 2,500 | | | | 5.46 | | | | 99,500 | | | | 14.47 | | | | 50,000 | | | | 15.74 | |
| Forfeited or expired | | | (8,000 | ) | | | 14.47 | | | | (8,500 | ) | | | 14.47 | | | | — | | | | — | |
| Exercised | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Stock dividend or split | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at end of year | | | 198,000 | | | $ | 16.12 | | | | 203,500 | | | $ | 16.18 | | | | 112,500 | | | $ | 17.57 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Exerciseable at end of year | | | 122,665 | | | $ | 17.14 | | | | 69,167 | | | $ | 18.23 | | | | 32,500 | | | $ | 18.94 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
A summary of the status of the Corporation’s nonvested shares as of December 31, 2009, and changes during the year ended December 31, 2009, is presented below:
| | | | | | | | | |
| | | | | Weighted Average
|
| | | | | Exercise Price
|
| | | Nonvested Shares | | Per Share |
| |
| Nonvested at January 1, 2009 | | | 134,333 | | | $ | 15.13 | |
| Granted | | | 2,500 | | | | 5.46 | |
| Vested | | | 53,498 | | | | 15.73 | |
| Forfeited | | | 8,000 | | | | 14.47 | |
| Nonvested at December 31, 2009 | | | 75,335 | | | | 14.45 | |
As of December 31, 2009 there was $17 of total unrecognized compensation cost related to nonvested options. That cost is expected to be recognized over a weighted-average period of two years.
The Lorain National Bank Employee Stock Ownership Plan (ESOP) was a non-contributory plan that was in effect for 2007. This plan was merged into The Lorain National Bank 401(k) Plan effective January 1, 2008. The plan covered substantially all employees. Contributions by the Bank to the ESOP were discretionary and subject to approval by the Board of Directors. Contributions were expensed in the year in which they are approved. No contributions were made to this plan in 2007. Under the terms of the ESOP agreement, the Corporation’s common stock was to be the Plan’s primary investment.
The Bank adopted The Lorain National Bank 401(k) Plan (the Plan) effective January 1, 2001. This Plan amended and restated the previous plan — The Lorain National Bank Stock Purchase Plan. 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 2009, 2008 or 2007.
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 employee’s contribution, limited to the first six percent of an employee’s 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 Bank’s matching contributions are expensed in the year in which the associated participant contributions are made and totaled $370, $374, and $296, in 2009, 2008 and 2007, respectively.
67
| |
| (20) | 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 Bank’s 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 customer’s credit worthiness on acase-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on Management’s 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, 2009 and 2008 follows:
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | (Dollars in thousands) | |
| |
| Commitments to extend credit | | $ | 68,770 | | | $ | 76,199 | |
| Home equity lines of credit | | | 75,791 | | | | 81,416 | |
| Standby letters of credit | | | 8,616 | | | | 9,313 | |
| | | | | | | | | |
Total | | $ | 153,177 | | | $ | 166,928 | |
| | | | | | | | | |
The nature of the Corporation’s 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 Corporation’s financial position, results of operation or liquidity.
| |
| (21) | 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 Corporation’s 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 quoted market prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments. |
| |
| | • | 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. |
68
| | |
| | • | 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, 2009 and 2008. |
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 existingon-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 property, plant, and equipment and deferred tax liabilities. In addition, it is not practicable for the Corporation to estimate the tax ramifications related to the realization of the unrealized gains and losses and they have not been reflected in any of the estimates of fair value. The impact of these tax ramifications can have a significant effect on estimates of fair value. The estimated fair values of the Corporation’s financial instruments at December 31, 2009 and 2008 are summarized as follows:
| | | | | | | | | | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | |
| | | 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 | | $ | 27,292 | | | $ | 27,292 | | | $ | 37,275 | | | $ | 37,275 | |
| Securities | | | 255,482 | | | | 255,482 | | | | 234,313 | | | | 234,313 | |
| Portfolio loans, net | | | 784,405 | | | | 786,154 | | | | 791,899 | | | | 821,200 | |
| Loans held for sale | | | 3,783 | | | | 3,783 | | | | 3,580 | | | | 3,580 | |
| Accrued interest receivable | | | 4,072 | | | | 4,072 | | | | 4,290 | | | | 4,290 | |
69
| | | | | | | | | | | | | | | | | |
| | | At December 31, | |
| | | 2009 | | | 2008 | |
| | | Carrying
| | | Estimated Fair
| | | Carrying
| | | Estimated Fair
| |
| | | Value | | | Value | | | Value | | | Value | |
| | | (Dollars in thousands) | |
| |
Financial liabilities | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | |
| Demand, savings and money market | | $ | 423,550 | | | $ | 423,550 | | | $ | 386,673 | | | $ | 386,673 | |
| Certificates of deposit | | | 547,883 | | | | 555,302 | | | | 534,502 | | | | 546,497 | |
| | | | | | | | | | | | | | | | | |
| Total deposits | | | 971,433 | | | | 978,852 | | | | 921,175 | | | | 933,170 | |
| | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | 1,457 | | | | 1,457 | | | | 22,928 | | | | 22,928 | |
| Federal Home Loan Bank advances | | | 42,505 | | | | 43,708 | | | | 53,357 | | | | 54,647 | |
| Junior subordinated debentures | | | 20,620 | | | | 18,489 | | | | 20,620 | | | | 21,492 | |
| Accrued interest payable | | | 2,074 | | | | 2,074 | | | | 3,813 | | | | 3,813 | |
The fair value of financial assets and liabilities 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:
| | |
| | • | 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. |
The following table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008, and the valuation techniques used by the Corporation to determine those fair values.
| | | | | | | | | | | | | | | | | |
| | | Fair Value as of
| | | Quoted Prices in Active
| | | Significant Other
| | | Significant
| |
| | | December 31,
| | | Markets for Identical Assets
| | | Observable Inputs
| | | Unobservable Inputs
| |
Description | | 2009 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | (Dollars in thousands) | |
| |
| Trading Securities | | $ | 8,445 | | | $ | — | | | $ | 8,445 | | | $ | — | |
| Available for Sale Securities | | | 247,037 | | | | — | | | | 247,037 | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 255,482 | | | $ | — | | | $ | 255,482 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Fair Value as of
| | | Quoted Prices in Active
| | | Significant Other
| | | Significant
| |
| | | December 31,
| | | Markets for Identical Assets
| | | Observable Inputs
| | | Unobservable Inputs
| |
Description | | 2008 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | (Dollars in thousands) | |
| |
| Trading Securities | | $ | 11,261 | | | $ | — | | | $ | 11,261 | | | $ | — | |
| Available for Sale Securities | | | 223,052 | | | | — | | | | 223,052 | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 234,313 | | | $ | — | | | $ | 234,313 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
Gains of $386 and $108 were included under security gains in earnings for the year ended December 31, 2009 and 2008, respectively for assets held and measured at fair value as of December 31, 2009 and 2008.
70
The Corporation has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At December 31, 2009 and 2008, such assets consist primarily of impaired loans. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.
Impaired loans accounted for under ASC310-10-45 valued using Level 3 inputs consist of non-homogeneous loans that are considered impaired. Impaired loans valued using Level 3 inputs totaled $27,054 at December 31, 2009. The Corporation estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). Impairment charges recorded to the income statement for impaired loans were $4,015 and $2,020 for the years ended December 31, 2009 and December 31, 2008, respectively.
| |
| (22) | Quarterly Financial Data (Unaudited) |
Quarterly Financial Data (Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 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 | |
71
| | | | | | | | | | | | | | | | | | | | | |
| | | First | | Second | | Third | | Fourth | | Full Year |
| | | (Dollars in thousands, except per share amount) |
| |
2008 | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | $ | 15,114 | | | $ | 14,443 | | | $ | 14,385 | | | $ | 14,386 | | | $ | 58,328 | |
| Total interest expense | | | 7,594 | | | | 6,304 | | | | 6,156 | | | | 6,135 | | | | 26,189 | |
| Net Interest income | | | 7,520 | | | | 8,139 | | | | 8,229 | | | | 8,251 | | | | 32,139 | |
| Provision for loan losses | | | 474 | | | | 4,664 | | | | 471 | | | | 1,200 | | | | 6,809 | |
| Net interest income after provision for loan losses | | | 7,046 | | | | 3,475 | | | | 7,758 | | | | 7,051 | | | | 25,330 | |
| Noninterest income | | | 3,334 | | | | 3,154 | | | | 3,158 | | | | 2,813 | | | | 12,459 | |
| Noninterest expense | | | 8,522 | | | | 8,840 | | | | 8,498 | | | | 8,421 | | | | 34,281 | |
| Income tax expense (benefit) | | | 411 | | | | (1,076 | ) | | | 595 | | | | 182 | | | | 112 | |
| Net Income (Loss) | | | 1,447 | | | | (1,135 | ) | | | 1,823 | | | | 1,261 | | | | 3,396 | |
| Preferred Stock Dividend and Accretion | | | — | | | | — | | | | — | | | | 91 | | | | 91 | |
| Net Income (Loss) Available to Common Shareholders | | | 1,447 | | | | (1,135 | ) | | | 1,823 | | | | 1,170 | | | | 3,305 | |
| Basic earnings (loss) per common share | | | 0.20 | | | | (0.16 | ) | | | 0.25 | | | | 0.16 | | | | 0.45 | |
| Diluted earnings (loss) per common share | | | 0.20 | | | | (0.16 | ) | | | 0.25 | | | | 0.16 | | | | 0.45 | |
| Dividends declared per common share | | | 0.18 | | | | 0.18 | | | | 0.09 | | | | 0.09 | | | | 0.54 | |
72
| |
| 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 Corporation’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s 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 Corporation’s 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 inRules 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934) as of December 31, 2009, pursuant to the evaluation of these controls and procedures required byRule 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 onForm 10-K that the Corporation’s disclosure controls and procedures were effective as of December 31, 2009.
| |
| 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 Corporation’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Corporation’s 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 Corporation’s internal control over financial reporting as of December 31, 2009 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, 2009, the Corporation’s internal control over financial reporting was effective.
| |
| 3. | Changes in Internal Control over Financial Reporting |
No change in the Corporation’s internal control over financial reporting occurred during the fiscal quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
| |
| Item 9B. | Other Information |
None.
73
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 thisForm 10-K. Other information required to be included in this Item 10 is incorporated by reference herein from the information about the Corporation’s 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 Corporation’s 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 Corporation’s Proxy Statement for the 2010 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 Corporation’s Proxy Statement for the 2010 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 Corporation’s Proxy Statement for the 2010 Annual Meeting of Shareholders to be filed with the SEC. The following table shows information about the Corporation’s common shares that may be issued upon the exercise of options, warrants and rights under all of the Corporation’s equity compensation plans as of December 31, 2009:
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 | | | | 494,500 | (2) |
| Equity compensation plans not approved by security holders(3) | | | 92,500 | | | $ | 18.05 | | | | | |
| | | | | | | | | | | | | |
| Total | | | 198,000 | | | $ | 16.11 | | | | 494,500 | |
| | | | | | | | | | | | | |
| | |
| (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 vest in 10,000 share increments on the first, second and third anniversaries of the |
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| | |
| | 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 Corporation’s Proxy Statement for the 2010 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 Corporation’s Proxy Statement for the 2010 Annual Meeting of Shareholders to be filed with the SEC.
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PART IV
| |
| Item 15. | Exhibits, Financial Statement Schedules |
(a) The following Consolidated Financial Statements and related Notes to Consolidated Financial Statements, together with the report of Independent Registered Public Accounting Firm dated March 5,2010 appear on pages 40 through 72 of this annual report onForm 10-K:
(1) Financial Statements
(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.
(3) Exhibits
Reference is made to the Exhibit Index which is found on page 77 of thisForm 10-K.
(b) The exhibits referenced on the following Exhibit Index are filed as part of this report.
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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 Corporation’sForm 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 Corporation’sForm 8-K filed on December 17, 2008. |
| 3(c) | | LNB Bancorp, Inc. Amended Code of Regulations. Incorporated by reference herein from Appendix A to the Corporation’s Definitive Proxy Statement on Schedule 14A filed March 16, 2007. |
| 4(a) | | Rights Agreement between LNB Bancorp, Inc. and Registrar and Transfer Corporation dated October 24, 2000. Incorporated by reference herein from Exhibit 10(r) of the Corporation’sForm 10-K for the fiscal year ended December 31, 2005. |
| 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 10-Q for the fiscal quarter ended June 30, 2007. |
| 4(f) | | Form of Warrant for Purchase of Shares of Common Stock. Incorporated by reference herein from Exhibit 4.1 of the Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’s quarterly report onForm 10-Q for the quarter ended September 30, 2005. |
| 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 10-K for the year ended December 31, 2003. |
77
| | | |
S-K
| | |
Reference
| | |
Number | | Exhibit |
| |
| 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 Corporation’s annual report onForm 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 Corporation’s quarterly report onForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 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 Corporation’sForm 8-K filed on December 18, 2009. |
| 10(u)* | | 2008 Management Incentive Plan for Key Executives, as restated. Incorporated by reference herein from Exhibit 10(ee) of the Corporation’sForm 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 Corporation’s Form 10-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 Corporation’sForm 10-Q for the fiscal quarter ended June 30, 2007. |
| 10(x)* | | Change in Control Supplemental Executive Compensation Agreement between LNB Bancorp, Inc. and David S. Harnett, dated August 8, 2007. Incorporated by reference herein from Exhibit 10.1 of the Corporation’sForm 10-Q for the fiscal quarter ended September 30, 2007. |
| 10(y)* | | LNB Bancorp, Inc. 2007 Chief Executive Officer Long Term Incentive Plan. Incorporated by reference herein from Exhibit 10.1 of the Corporation’sForm 8-K filed January 15, 2008. |
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| | | |
S-K
| | |
Reference
| | |
Number | | Exhibit |
| |
| 10(z)* | | 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 Corporation’sForm 8-K filed February 6, 2008. |
| 10(aa) | | 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 Corporation’sForm 8-K filed on December 17, 2008. |
| 10(bb)* | | 2009 Management Incentive Plan for Key Executives, as restated. Incorporated by reference herein from Exhibit 10.1 of the Corporation’sForm 8-K filed on November 10, 2009. |
| 10(cc)* | | Form of Restricted Stock Agreement under the LNB Bancorp, Inc. 2006 Stock Incentive Plan. Incorporated by reference herein from Exhibit 10.1 of the Corporation’sForm 8-K filed February 25, 2010. |
| 21.1 | | Subsidiaries of LNB Bancorp, Inc. |
| 23.1 | | Consent of Plante & Moran, PLLC. |
| 31.1 | | Certification of the Chief Executive Officer Pursuant toRule 13a-14(a)/15-d-14(a), dated March 12, 2010 for LNB Bancorp, Inc.’s annual report onForm 10-K for the year ended December 31, 2009. |
| 31.2 | | Certification of the Chief Financial Officer Pursuant toRule 13a-14(a)/15-d-14(a), dated March 12, 2010 for LNB Bancorp, Inc.’s annual report onForm 10-K for the year ended December 31, 2009. |
| 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, dated March 12, 2010 for LNB Bancorp, Inc.’s annual report onForm 10-K for the year ended December 31, 2009. |
| 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, dated March 12, 2010 for LNB Bancorp, Inc.’s annual report onForm 10-K for the year ended December 31, 2009. |
| 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, dated March 12, 2010. |
| 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, dated March 12, 2010. |
| | |
| * | | Management contract, compensatory plan or arrangement |
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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 12, 2010
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 in the capacities and on the dates indicated:
| | | | | |
| | | | | |
| | Director | | |
| | | | | |
/s/ Robert M. Campana Robert M. Campana | | Director | | March 12, 2010 |
| | | | | |
/s/ Terry D. Goode Terry D. Goode | | Director | | March 12, 2010 |
| | | | | |
/s/ James F. Kidd James F. Kidd | | Vice Chairman and Director | | March 12, 2010 |
| | | | | |
/s/ J. Martin Erbaugh J. Martin Erbaugh | | Director | | March 12, 2010 |
| | | | | |
| | Director | | |
| | | | | |
/s/ Jeffrey F. Riddell Jeffrey F. Riddell | | Director | | March 12, 2010 |
| | | | | |
/s/ John W. Schaeffer, M.D. John W. Schaeffer, M.D. | | Director | | March 12, 2010 |
| | | | | |
/s/ Lee C. Howley Lee C. Howley | | Director | | March 12, 2010 |
| | | | | |
/s/ Donald F. Zwilling Donald F. Zwilling | | Director | | March 12, 2010 |
| | | | | |
/s/ James R. Herrick James R. Herrick | | Chairman and Director | | March 12, 2010 |
| | | | | |
/s/ Thomas P. Perciak Thomas P. Perciak | | Director | | March 12, 2010 |
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| | | | | |
| | | | | |
/s/ Daniel G. Merkel Daniel G. Merkel | | Director | | March 12, 2010 |
| | | | | |
/s/ Daniel E. Klimas Daniel E. Klimas | | President and Chief Executive Officer and Director
(Principal Executive Officer) | | March 12, 2010 |
| | | | | |
/s/ Gary J. Elek Gary J. Elek | | Chief Financial Officer
(Principal Financial and Accounting Officer) | | March 12, 2010 |
81
