1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-13203
LNB Bancorp, Inc.
(Exact name of the registrant as specified in its charter)
Ohio 34-1406303
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
457 Broadway, Lorain, Ohio 44052 - 1769
(Address of principal executive offices) (Zip Code)
(440) 244 - 6000
Registrant's telephone number, including area code
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at November 13, 2002: 4,401,032 shares
Class of Common Stock: $1.00 par value
2 LNB Bancorp, Inc.
Quarterly Report on Form 10-Q
Quarter Ended September 30, 2002
Part I - Financial Information
Item 1 - Financial Statements
Interim financial information required by Regulation 210.10-01 of
Regulation S-X is included in this Form 10-Q as referenced below:
Page
Number(s)
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Income 6
Condensed Consolidated Statements 10
of Cash Flows
Notes to the Condensed Consolidated Financial
Statements 12
Item 2 - Management's Discussion and Analysis 18
of Financial Condition and Results of
Operations
Item 3 - Quantitative and Qualitative Disclosures 28
About Market Risk
Item 4 - Controls and Procedures 28
Part II - Other Information
Item 1 - Legal Proceedings 29
Item 2 - Changes in Securities 29
Item 3 - Defaults upon Senior Securities 29
Item 4 - Submission of matters to a Vote of 29
Security Holders
3
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8-K 29
Signatures 30
Certifications 31
Exhibit Index 35
4
FORM 10-Q LNB BANCORP, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SEPTEMBER 30, DECEMBER 31,
CONDENSED CONSOLIDATED BALANCE SHEETS 2002 2001
------------- -------------
(Unaudited)
ASSETS:
Cash and due from banks $ 24,230,000 $ 28,017,000
Federal funds sold and short-term
Investments 3,480,000 3,488,000
Securities:
Available for sale, at fair value 139,669,000 117,628,000
Held to maturity, at cost (fair value
$12,165,000 and $17,485,000, respectively) 11,842,000 17,191,000
Federal Home Loan Bank and Federal Reserve
Bank and other equity stock, at cost 3,699,000 3,582,000
------------- -------------
Total Securities 155,210,000 138,401,000
------------- -------------
Loans:
Portfolio loans 493,017,000 465,029,000
Loans available for sale 8,432,000 12,459,000
------------- -------------
Total loans 501,449,000 477,488,000
Reserve for loan losses (6,557,000) (5,890,000)
------------- -------------
Net loans 494,892,000 471,598,000
------------- -------------
Bank owned life insurance 11,717,000 1,026,000
Bank premises and equipment, net 10,757,000 10,520,000
Intangible assets 3,188,000 3,470,000
Accrued interest receivable 3,326,000 3,796,000
Other assets 4,397,000 4,087,000
Foreclosed assets 57,000 123,000
------------- -------------
TOTAL ASSETS $711,254,000 $664,526,000
============= =============
STATEMENT CONTINUED ON NEXT PAGE
5
STATEMENT CONTINUED FROM PREVIOUS PAGE
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand and other noninterest-bearing
deposits $ 87,174,000 $ 87,488,000
Savings, Market Access and passbook
accounts 273,837,000 253,506,000
Certificates of deposit 206,587,000 177,273,000
------------- -------------
Total deposits 567,598,000 518,267,000
------------- -------------
Securities sold under repurchase agreements
and other short-term borrowings 25,579,000 48,170,000
Federal Home Loan Bank advances, short-term 22,545,000 10,750,000
Federal Home Loan Bank advances, long-term 23,830,000 19,595,000
Accrued interest payable 1,056,000 1,131,000
Accrued taxes, expenses and
other liabilities 4,953,000 4,475,000
------------- -------------
TOTAL LIABILITIES 645,561,000 602,388,000
------------- -------------
SHAREHOLDER'S EQUITY:
Preferred stock, no par value: Shares
authorized 1,000,000, and shares
outstanding, none
Common stock $1.00 par: Shares authorized
15,000,000, Shares issued 4,501,032 and
4,417,558, respectively and Shares
outstanding 4,401,032 and 4,317,558
respectively 4,501,000 4,418,000
Additional capital 28,315,000 26,238,000
Retained earnings 34,353,000 33,125,000
Accumulated other comprehensive income 1,424,000 1,257,000
Treasury Stock at cost, 100,000 shares (2,900,000) (2,900,000)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 65,693,000 62,138,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $711,254,000 $664,526,000
============= =============
See notes to unaudited condensed consolidated financial statements.
6
FORM 10-Q LNB BANCORP, INC.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NINE MONTHS ENDED
CONDENSED CONSOLIDATED STATEMENTS SEPTEMBER 30,
OF INCOME (UNAUDITED) -------------------------
2002 2001
INTEREST INCOME: ------------ ------------
Interest and fees on loans:
Taxable $25,672,000 $28,619,000
Tax-exempt -0- 5,000
Interest and dividends on securities:
U.S. Government agencies and corporations 3,090,000 4,467,000
U.S. Treasury securities 7,000 74,000
U.S. Government CMO's 1,467,000 387,000
States and political subdivisions 427,000 312,000
Other debt and equity securities 340,000 300,000
Interest on Federal funds sold and other
interest-bearing instruments 75,000 126,000
------------ ------------
TOTAL INTEREST INCOME 31,078,000 34,290,000
------------ ------------
INTEREST EXPENSE:
Interest on Deposits:
Time certificates of $100,000 and over 1,011,000 1,986,000
Other deposits 6,666,000 9,636,000
Interest on securities sold under repurchase
agreements and other short-term borrowings 364,000 942,000
Interest on Federal Home Loan Bank advances 1,312,000 965,000
------------ ------------
TOTAL INTEREST EXPENSE 9,353,000 13,529,000
------------ ------------
NET INTEREST INCOME 21,725,000 20,761,000
Provision for loan losses 1,725,000 1,350,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 20,000,000 19,411,000
------------ ------------
NONINTEREST INCOME:
Investment and Trust Services Division income 1,485,000 1,723,000
Service charges on deposit accounts 3,016,000 2,558,000
Other service charges, exchanges and fees 2,468,000 2,297,000
Gain on sale of securities and loans 656,000 285,000
Other operating income 248,000 100,000
------------ ------------
TOTAL NONINTEREST INCOME 7,873,000 6,963,000
STATEMENT CONTINUED ON NEXT PAGE
7
STATEMENT CONTINUED FROM PREVIOUS PAGE
NONINTERST EXPENSES:
Salaries and employee benefits 8,470,000 8,144,000
Net occupancy expense of premises 1,113,000 1,143,000
Furniture and equipment expenses 1,628,000 1,573,000
Supplies and postage 769,000 775,000
Ohio franchise tax 385,000 486,000
Card related expenses 992,000 943,000
Other operating expenses 4,704,000 3,721,000
------------ ------------
TOTAL NONINTEREST EXPENSES 18,061,000 16,785,000
------------ ------------
INCOME BEFORE INCOME TAXES 9,812,000 9,589,000
INCOME TAXES 3,137,000 3,235,000
------------ ------------
NET INCOME $ 6,675,000 $ 6,354,000
============ ============
PER SHARE DATA:
BASIC EARNINGS PER SHARE $ 1.52 $ 1.45
====== ======
DILUTED EARNINGS PER SHARE $ 1.52 $ 1.45
====== ======
DIVIDENDS DECLARED PER SHARE $ .75 $ .73
====== ======
See notes to unaudited condensed consolidated financial statements.
8
FORM 10-Q LNB BANCORP, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THREE MONTHS ENDED
CONDENSED CONSOLIDATED STATEMENTS SEPTEMBER 30,
OF INCOME (UNAUDITED) --------------------------
2002 2001
INTEREST INCOME ------------ ------------
Interest and fees on loans - Taxable $ 8,645,000 $ 9,212,000
Interest and dividends on securities:
U.S. Government agencies and corporations 986,000 1,255,000
U.S. Treasury securities -0- 17,000
U.S. Government CMO's 511,000 311,000
States and political subdivisions 152,000 132,000
Other debt and equity securities 98,000 116,000
Interest on Federal funds sold and other
interest-bearing instruments 23,000 38,000
------------ ------------
TOTAL INTEREST INCOME 10,415,000 11,081,000
------------ ------------
INTEREST EXPENSE:
Interest on Deposits:
Time certificates of $100,000 and over 382,000 552,000
Other deposits 2,119,000 3,030,000
Interest on securities sold under repurchase
agreements and other short-term borrowings 120,000 306,000
Interest on Federal Home Loan Bank advances 451,000 306,000
------------ ------------
TOTAL INTEREST EXPENSE 3,072,000 4,194,000
------------ ------------
NET INTEREST INCOME 7,343,000 6,887,000
Provision for loan losses 600,000 450,000
NET INTEREST INCOME AFTER PROVISION ------------ ------------
FOR LOAN LOSSES 6,743,000 6,437,000
------------ ------------
NONINTEREST INCOME:
Investment and Trust Services Division income 442,000 562,000
Service charges on deposit accounts 1,106,000 923,000
Other service charges, exchanges and fees 873,000 839,000
Gain on sale of securities and loans 71,000 188,000
Other operating income 76,000 25,000
------------ ------------
TOTAL NONINTEREST INCOME 2,568,000 2,537,000
STATEMENT CONTINUED ON NEXT PAGE
9
STATEMENT CONTINUED FROM PREVIOUS PAGE
NONINTEREST EXPENSES:
Salaries and employee benefits 2,708,000 2,788,000
Net occupancy expense of premises 368,000 365,000
Furniture and equipment expenses 540,000 528,000
Supplies and postage 236,000 232,000
Ohio franchise tax 157,000 162,000
Card related expenses 344,000 346,000
Other operating expenses 1,592,000 1,216,000
------------ ------------
TOTAL NONINTEREST EXPENSES 5,945,000 5,637,000
------------ ------------
INCOME BEFORE INCOME TAXES 3,366,000 3,337,000
INCOME TAXES 1,033,000 1,144,000
------------ ------------
NET INCOME $ 2,333,000 $ 2,193,000
============ ============
PER SHARE DATA:
BASIC EARNINGS PER SHARE $ .53 $ .50
====== ======
DILUTED EARNINGS PER SHARE $ .53 $ .50
====== ======
DIVIDENDS DECLARED PER SHARE $ .25 $ .25
====== ======
See notes to unaudited condensed consolidated financial statements.
10
FORM 10-Q LNB BANCORP, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NINE MONTHS ENDED
CONDENSED CONSOLIDATED STATEMENTS SEPTEMBER 30,
OF CASH FLOWS (UNAUDITED) -------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES: ------------ ------------
Interest received $31,848,000 $35,351,000
Other income received 7,202,000 6,526,000
Interest paid (9,428,000) (13,919,000)
Cash paid for salaries and
employee benefits (8,145,000) (8,637,000)
Net occupancy expense of premises paid (885,000) (888,000)
Furniture and equipment expenses paid (691,000) (540,000)
Cash paid for supplies and postage (769,000) (775,000)
Cash paid for other operating expenses (5,476,000) (3,974,000)
Federal income taxes paid (3,382,000) (3,135,000)
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,274,000 10,009,000
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
held to maturity 5,859,000 28,854,000
Proceeds from sales and maturities of
Securities available for sale 66,611,000 44,990,000
Purchase of securities held to maturity (640,000) (938,000)
Purchase of securities available
for sale (88,828,000) (75,616,000)
Net (increase) in loans made to customers (24,828,000) (20,907,000)
Purchases of bank premises and equipment
and intangible assets (1,402,000) (668,000)
Proceeds from sales of bank premises and
equipment 47,000 13,000
Purchases of BOLI (10,413,000) -0-
Proceeds from liquidation of other
foreclosed assets 152,000 98,000
Purchases of other foreclosed assets (86,000) -0-
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (53,528,000) (24,174,000)
------------ -----------
STATEMENT CONTINUED ON NEXT PAGE
11
STATEMENT CONTINUED FROM PREVIOUS PAGE
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and other
noninterest-bearing deposits (314,000) 618,000
Net increase in savings and
passbook deposits 20,331,000 21,183,000
Net increase in certificates of deposit 29,314,000 1,307,000
Net increase(decrease) in securities sold
under repurchase agreements and other
short-term borrowings (22,591,000) 824,000
Proceeds from Federal Home Loan
Bank advances 35,830,000 11,000,000
Payment on Federal Home Loan Bank advances (19,800,000) (14,000,000)
Proceeds from exercise of stock options 33,000 3,000
Dividends paid (3,344,000) (3,263,000)
NET CASH PROVIDED BY FINANCING ------------ -----------
ACTIVITIES 39,459,000 17,672,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,795,000) 3,507,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 31,505,000 25,136,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $27,710,000 $28,643,000
============ ============
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
NET INCOME $6,675,000 $6,354,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of investments & loans 624,000 285,000
Depreciation and amortization 1,165,000 1,288,000
Amortization of intangible assets 283,000 283,000
Amortization of deferred loan fees
and costs, net (191,000) 102,000
Provision for loan losses 1,725,000 1,350,000
Increase in CSV - BOLI (278,000) -0-
Decrease in accrued interest receivable 470,000 1,302,000
(Increase) in other assets (111,000) (545,000)
Increase (Decrease) in accrued interest
payable (75,000) (390,000)
Increase in accrued taxes,
expenses and other liabilities (245,000) 100,000
Other, net 232,000 (120,000)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $10,274,000 $10,009,000
============ ============
See notes to unaudited condensed consolidated financial statements.
12
Form 10-Q LNB Bancorp, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTRODUCTION
The following areas of discussion pertain to the unaudited condensed
consolidated balance sheets of LNB Bancorp, Inc. (The Parent Company)
and its wholly-owned subsidiaries, Lorain National Bank (The Bank), and
Charleston Insurance Agency, Inc., and a 49% interest in Charleston Title
Agency, LLC., at September 30, 2002, compared to December 31, 2001 and the
related unaudited condensed consolidated statements of income for the three
and nine months ended September 30, 2002 and the related unaudited condensed
consolidated statements of cash flows for the nine months ended September 30,
2002 compared to the same periods in 2001. The term "the Corporation" refers
to LNB Bancorp, Inc. and its wholly-owned subsidiaries. It is the intent of
this discussion to provide the reader with a more thorough understanding of
the unaudited condensed consolidated financial statements and should be read
in conjunction with the Corporation's December 31, 2001 Annual Report to
Shareholders.
LNB Bancorp, Inc. is not aware of any trends, events, or uncertainties that
might have a material effect on the soundness of operations; neither is LNB
Bancorp, Inc. aware of any proposed recommendations by regulatory
authorities which would have a similar effect if implemented.
BASIS OF PRESENTATION
The unaudited condensed consolidated balance sheet as of September 30, 2002,
the unaudited condensed consolidated statements of income for the three and
nine months ended September 30, 2002 and 2001 and the unaudited condensed
consolidated statements of cash flows for the nine months ended September 30,
2002 and 2001 are prepared in accordance with accounting principles generally
accepted in the United States of America. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. The above mentioned statements reflect all
adjustments which are, in the opinion of Management, necessary for a fair
presentation of the financial position and the results of operations for the
interim periods presented. All adjustments are normal and recurring in
nature.
The consolidated balance sheet at December 31, 2001 has been taken from the
audited financial statements and condensed. It is suggested that these
13
unaudited condensed consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in the Corporation's
December 31, 2001 Annual Report to Shareholders.
The results of operations for the three months and nine months ended
September 30, 2002 are not necessarily indicative of the operating results
for the full year.
RESERVE FOR LOAN LOSSES
Because some loans may not be repaid in full, a reserve for loan losses is
recorded. This reserve is increased by provisions charged to earnings and is
reduced by loan charge-offs, net of recoveries. Estimating the risk of loss
on any loan is necessarily subjective. Accordingly, the reserve is
maintained by Management at a level considered adequate to cover loan losses
that are currently anticipated based on Management's evaluation of several
key factors including information about specific borrower situations, their
financial position and collateral values, current economic conditions,
changes in the mix and levels of the various types of loans, past charge-off
experience and other pertinent information. The reserve for loan losses is
based on estimates using currently available information, and ultimate losses
may vary from current estimates due to changes in circumstances. These
estimates are reviewed periodically and, as adjustments become necessary,
they are reported in earnings in the periods in which they become known.
While Management may periodically allocate portions of the reserve for
specific problem situations, the entire reserve is available for any charge-
offs that may occur. Charge-offs are made against the reserve for loan
losses when Management concludes that it is probable that all or a portion of
a loan is uncollectible. After a loan is charged-off, collection efforts
continue and future recoveries may occur.
A loan is considered impaired, based on current information and events, if it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the
present value of the expected future cash flows discounted at the loan's
initial effective interest rate, except that all collateral-dependent loans
are measured for impairment based on the fair value of the collateral. If
the loan valuation is less than the recorded value of the loan, an impairment
reserve is established for the difference. The impairment reserve is
established by either an allocation of the reserve for loan losses or by a
provision for loan losses, depending upon the adequacy of the reserve for
loan losses.
RECLASSIFICATIONS
Certain 2001 amounts have been reclassified to conform to the 2002
presentation.
14
2. EARNINGS PER SHARE
Earnings per share is calculated as follows:
For the 9 Months ended September 30, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Income $6,675,000
Basic EPS
Income available to
common shareholders $6,675,000 4,401,032 $1.52
Effect of Dilutive Securities
Incentive Stock Options -0- 3,352 -0-
---------- --------- -----
Diluted EPS
Income available to common
shareholders + assumed
conversions $6,675,000 4,404,384 $1.52
========== ========= =====
For the 9 Months ended September 30, 2001
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Income $6,354,000
Basic EPS
Income available to
common shareholders $6,354,000 4,381,285 $1.45
Effect of Dilutive Securities
Incentive Stock Options -0- 4,160 -0-
---------- --------- -----
Diluted EPS
Income available to common
shareholders + assumed
conversions $6,354,000 4,385,445 $1.45
========== ========= =====
15
For the 3 Months ended September 30, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Income $2,333,000
Basic EPS
Income available to
common shareholders $2,333,000 4,401,032 $ .53
Effect of Dilutive Securities
Incentive Stock Options -0- 5,322 -0-
---------- --------- -----
Diluted EPS
Income available to common
shareholders + assumed
conversions $2,333,000 4,406,354 $ .53
========== ========= =====
For the 3 Months ended September 30, 2001
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net Income $2,193,000
Basic EPS
Income available to
common shareholders $2,193,000 4,381,401 $ .50
Effect of Dilutive Securities
Incentive Stock Options -0- 4,050 -0-
---------- --------- -----
Diluted EPS
Income available to common
shareholders + assumed
conversions $2,193,000 4,385,451 $ .50
========== ========= =====
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3. COMPREHENSIVE INCOME
The Corporation's comprehensive income for the nine months ended
September 30, 2002 and 2001 are as follows:
For the nine months ended September 30,
2002 2001
--------------------------------
Net income $6,675,000 $6,354,000
Other comprehensive income:
Change in unrealized gain on
securities available for sale,
net of tax of $88,000 and
$848,000 170,000 1,647,000
----------- -----------
Comprehensive Income $6,845,000 $8,001,000
=========== ===========
Disclosure of Reclassification Amount
Unrealized holding gains arising
during the period,
net of tax $ 566,000 $1,812,000
Less reclassification adjustment
for gains included in net income,
net of tax of $204,000 and
$85,000 396,000 165,000
----------- ------------
Change in unrealized gain on
securities available for sale,
net of tax $ 170,000 $1,647,000
=========== ============
The Corporation's comprehensive income for the three months ended
September 30, 2002 and 2001 are as follows:
For the three months ended September 30
2002 2001
------------------------------------
Net income $2,333,000 $2,193,000
Other comprehensive income:
Change in unrealized gain on
securities available for sale,
net of tax of $150,000 and
$424,000 292,000 822,000
----------- -----------
Comprehensive Income $2,625,000 $3,015,000
=========== ===========
17
Disclosure of Reclassification Amount
Unrealized holding gains arising
during the period,
net of tax $ 332,000 $ 934,000
Less reclassification adjustment
for gains included in net income,
net of tax of $20,000 and
$58,000 40,000 112,000
----------- ------------
Change in unrealized gain on
securities available for sale,
net of tax $ 292,000 $ 822,000
=========== ============
4. CRITICAL ACCOUNTING POLICIES
The Corporation maintains critical accounting policies for reserve for loan
losses, classification and evaluation of securities and a deferred tax asset
valuation allowance. Refer to notes 1, 5, 7 and 12 of Notes to Consolidated
Financial Statements of the 2001 Annual Report to Shareholders for the year
ended December 31, 2001 for additional information incorporated by reference.
5. INTANGIBLE ASSETS
The Corporation accounts for intangible assets under the provisions of
Statement of Financial Accounting Standard No. 72 "Accounting for Certain
Acquisitions of Banking or Thrift Institutions". The following intangible
assets and related amortization arising from a 1997 branch acquisition and
included in the accompanying condensed consolidated financial statements
are summarized as follows at September 30, 2002 and December 31, 2001 net of
accumulated amortization:
9/30/02 12/31/01
--------------------------
Goodwill $2,629,000 $2,827,000
Core deposit intangible 559,000 643,000
--------------------------
Total intangible assets $3,188,000 $3,470,000
==========================
Amortization expense for intangible assets totaled $292,000 and $283,000 for
the nine months ended September 30, 2002 and 2001, respectively. For further
discussion of intangible assets refer to PART I, ITEM 2, IMPACTS OF
ACCOUNTING AND REGULATORY PRONOUNCEMENTS, under paragraph discussing FASB
Statement No. 147.
18
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the
Securities Exchange Act of 1934. Forward-looking statements which are based
on various assumptions (some of which are beyond the Corporation's control),
may be identified by reference to a future period or periods, or by the use
of forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations of those
terms, or the negative of these terms. Actual results could differ
materially from those set forth in forward-looking statements, due to a
variety of factors, including, but not limited to, those related to the
economic environment, particularly in the market areas in which the company
operates, competitive products and pricing, fiscal and monetary policies of
the U.S. Government, changes in government regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management, asset/liability management, the financial
and securities markets and the availability of and costs associated with
sources of liquidity.
The Corporation does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
Total assets of the Corporation increased $46,728,000 during the first nine
months of 2002, to $711,254,000. This growth was funded by increases in
savings, certificates of deposit, High Performance Checking and Market Access
deposit accounts.
Total earning assets increased 6.6% to $660,139,000 at September 30, 2002
from December 31, 2001. The ratio of earning assets to total assets
decreased from 93.21% at December 31, 2001 to 92.81% at September 30, 2002.
The loan to deposit ratio has decreased from 92.13% at 2001 year-end to
88.35% at September 30, 2002. Federal funds sold and short-term investments
decreased by $8,000 during the first nine months of 2002.
Total securities increased $16,809,000 ending the third quarter at
$155,210,000. At September 30, 2002 gross unrealized gains and (losses) in
the investment securities portfolio were approximately $2,584,000 and
($74,000), respectively. The increase in the fair value of the securities
portfolio is due to decreases in market interest rates during 2002.
19
Net loans grew by $23,294,000 during the first nine months to $494,892,000 at
September 30, 2002 for a 4.9% growth rate. This increase was a result of
good loan demand in our market. Commercial and consumer loan growth was
particularly strong, showing nine month increases of $29,831,000 and
$8,207,000, respectively. Mortgage loans decreased by $14,074,000 during the
first nine months of 2002. The consumer loan portfolio has increased because
of increases in quality indirect automobile credits and home equity lines of
credit while mortgages decreased due to refinancing.
The reserve for loan losses ended the quarter at $6,557,000. Activity for
the nine months ended September 30, 2002 included provision for loan losses
of $1,725,000, recoveries of $300,000 and loan charge-offs of $1,358,000.
The Corporation recorded a higher level of loan loss provision during the
first nine months of 2002 versus the comparable year-ago period, attributable
to the impact on credit quality caused by the softening economy, changes in
loan mix and management's desire to increase the ratio of the reserve for
loan losses to total loans outstanding. The reserve for loan losses as a
percentage of ending loans increased .08% from 1.23% at December 31, 2001 to
1.31% at September 30, 2002. Corporate management believes that the reserve
for loan losses as a percentage of loans at September 30, 2002 remains at an
appropriate level. The ratio of the reserve for loan losses to nonperforming
assets remained at an adequate level even though decreasing to 287.8% at
September 30, 2002, from 409.3% at December 30, 2001. Also, Corporate
management believes that the current level of the reserve for loan losses is
adequate based upon quantitative analysis of identified risks and analysis of
historical trends, and probable losses inherent in the loan portfolio at
September 30, 2002.
Nonperforming assets at September 30, 2002 totaled $2,278,000, up from
$1,817,000 at June 30, 2002. The third quarter increase in nonperforming
assets of $461,000 resulted from loans being paid off or brought current in
the amount of $359,000, loans charged-off in the amount of $61,000,
liquidation of non-accrual loans of $116,000, decreases in other foreclosed
assets of $111,000 and increases in nonaccrual loans of $1,108,000. The
increase in nonaccrual loans in the third quarter of 2002 was due primarily
to five commercial loan customers, twenty one consumer loan customers and
seven mortgage loan customers.
The level of nonperforming assets increased by $839,000 during the first nine
months of 2002. This increase is the result of an increase in non-accrual
loans of $906,000 offset by a decrease in other foreclosed assets in the
amount of $67,000. The decrease in other foreclosed assets results from the
liquidation of assets. The increase in nonaccrual loans is due to decreases
in nonaccrual principal balances of $1,091,000 which have been paid off and
brought current, loans charged-off in the amount of $133,000, liquidation of
non-accrual loans of $303,000 and increases in nonaccrual principal balances
of $2,433,000. The increase in nonaccrual loans in the first nine months
of 2002 was due primarily to twelve commercial loan customers, seven mortgage
loan customers and several personal loans, particularly in the indirect
20
automobile loan category. Management does not believe that this increase in
non-accrual loans is indicative of a failing local economy and that this
change did not result from any change in underwriting standards.
The level of nonperforming assets at September 30, 2002 remains at relatively
low levels and Corporate management believes nonperforming assets are well
collateralized. The table below presents the level of nonperforming assets
at the end of the last four calendar quarters.
Amounts in thousands 09/30/02 06/30/02 03/31/02 12/31/01
-------- -------- -------- --------
Nonperforming Assets:
Nonaccrual $2,222 $1,650 $1,413 $1,316
Restructured 0 0 0 0
Other Foreclosed Assets 56 167 141 123
-------- -------- -------- --------
Total Nonperforming Assets $2,278 $1,817 $1,554 $1,439
======== ======== ======== ========
Reserve for loan losses
to total nonperforming
assets 287.8% 337.9% 247.7% 409.3%
======== ======== ======== ========
Accruing loans past due 90 days $ 48 $ 327 $ 151 $ 149
======== ======== ======== ========
Potential problem loans are those loans identified on Management's watch list
in which Management has some doubt as to the borrower's ability to comply
with the present repayment terms and loans which Management is actively
monitoring due to changes in the borrower's financial condition. At September
30, 2002, potential problem loans totaled $13,541,000, an increase of
$4,962,000 from the December 31, 2001 balance of $8,579,000. The increase in
potential problem loans during 2002 is primarily due to the addition of four
large commercial credits that have weakened due to the depressed economic
conditions on the steel industry.
The Corporation's credit policies are reviewed and modified on an ongoing
basis in order to remain suitable for the management of credit risk within
the loan portfolio as conditions change. At September 30, 2002, there are no
significant concentrations of credit in the loan portfolio.
The Corporation had outstanding loan and credit commitments to make loans
totaling $124,802,000 and $95,893,000 at September 30, 2002 and December
31, 2001, respectively. The increase in outstanding loan commitments results
in part from an increase in the unused portion of home equity lines of
credits from a home equity loan promotion in the second and third quarters
of 2002. Mortgage and commercial construction loan demand increased in the
second and third quarters of 2002 as seasonal weather conditions improved and
the construction season moved forward. Consumer loan demand increased during
2002 as demand for home improvements and automobile loans increased.
21
Bank Owned Life Insurance increased by $10,691,000 from December 31, 2001.
The increase was mainly due to the Bank purchase of $10,413,000 of Bank Owned
Life Insurance (BOLI) to fund future employee benefit costs plus increases in
the cash surrender value of the life insurance of $278,000.
Total deposits increased $49,331,000 during the first nine months to
$567,598,000. Noninterest-bearing deposits decreased to $87,174,000, at
September 30, 2002 for a decrease of $314,000, while interest-bearing
deposits climbed to $480,424,000 for an increase of $49,645,000. Federal
funds purchased and securities sold under agreements to repurchase decreased
$3,591,000 during the first nine months of 2002 due to decreases in federal
funds purchased. Due to the volatility of customer repurchase agreements,
most funds generated by repurchase activity enter the Corporation's earning
assets as short-term investments
LIQUIDITY
Liquidity measures a corporation's ability to generate cash or otherwise
obtain funds at reasonable prices to fund commitments to borrowers as well as
the demand of depositors and debt holders. Principal internal sources of
liquidity for the Corporation and the Bank are cash and cash equivalents,
Federal funds sold, and the maturity structures of investment securities and
portfolio loans. Securities and loans available for sale provide another
source of liquidity through the cash flows of these interest-bearing assets
as they mature or are sold.
The Corporation continues to maintain a relatively high liquid position in
order to take advantage of interest rate fluctuations. As of September 30,
2002, short-term security investments with maturities of one year or less
totaled $16,285,000 which represented 10.5% of total securities. Adding cash
and due from banks of $24,230,000 and Federal Funds sold and other interest
bearing instruments of $3,480,000, total liquid assets represented 6.2% of
total assets. The Corporation's subsidiary bank has established short-term
lines of credit at correspondent banks, the Federal Home Loan Bank, and the
Federal Reserve Bank of Cleveland in the amounts of $24,000,000, $40,000,000
and $32,686,000, respectively, with credit available in the amounts of
$19,000,000, $40,000,000 and $32,686,000, respectively. Additional sources
of liquidity at September 30, 2002 could be provided by available unused
Federal Home Loan Bank long-term advances of $22,348,000 collateralized by
qualified mortgages.
CAPITAL RESOURCES
LNB Bancorp, Inc. continues to maintain a strong capital position. Total
shareholders' equity reached an all time high of $65,693,000, at September
30, 2002, an increase of $3,555,000, or 5.7% from December 31, 2001. The
increase resulted primarily from $6,675,000 of net income generated from the
first nine months of operations less a cash dividend payable to shareholders
of $3,279,000. The change in interest rates experienced in the first three
22
quarters of 2002 has caused an increase in the fair value of available for
sale securities which resulted in an increase in shareholders' equity within
accumulated other comprehensive income of $167,000 for the nine months
ended September 30, 2002. As of September 30, 2002, LNB Bancorp, Inc.
held 100,000 shares of common stock as treasury stock at a cost of
$2,900,000.
The Corporation continues to monitor growth to stay within the constraints
established by the regulatory authorities. Under Federal banking
regulations, an institution is deemed to be well-capitalized if it has a
Risk-based Tier 1 capital ratio of 6.00 percent or greater, a Risk-based
Total capital ratio of 10.00 percent or greater and a Leverage ratio of 5.00
percent or greater. The Corporation's Risk-based capital and Leverage ratios
along with the ratios required to be adequately capitalized have exceeded the
ratios for a well-capitalized financial institution for all periods
presented. The Corporation's capital and leverage ratios as of September
30, 2002 and December 31, 2001 follow together with those ratios required for
the Corporation to be considered adequately capitalized .
September 30, December 31,
2002 2001
------ ------
Tier I capital ratio 11.58% 11.95%
Required Tier I capital ratio 4.00% 4.00%
Total capital ratio 12.83% 13.17%
Required total capital ratio 8.00% 8.00%
Leverage ratio 8.98% 9.08%
Required leverage ratio 3.00% 4.00%
The Corporation regularly evaluates acquisition opportunities and conducts
due diligence activities in connection with possible acquisitions in markets
near or within the Corporation's current geographic market. As a result,
acquisition discussions and, in some cases negotiations, take place and
future acquisitions could occur. Corporate management believes that it's
current capital resources are sufficient to support any foreseeable
acquisition activity.
RESULTS OF OPERATIONS
Earnings for 2002 were higher than a year ago because of higher net interest
income and noninterest income, offset in part by a higher loan loss provision
and operating expenses.
Increases in net interest income were fueled by increases in commercial and
consumer loans combined with growth and decreases in rates paid on interest
bearing liabilities. The increases in noninterest income resulted primarily
from increases in fees and service charges and increases of gains on sales
of loans and investments. Increases in noninterest expenses resulted from
increases in salaries and employee benefits, marketing expenses and outside
23
services. The softening of the economy and its related impact on credit plus
the increase in the loan growth resulted in the recording of higher levels
of loan loss provision in the first nine months of 2002, compared with the
same period in 2001.
The net interest margin for the nine months ended September 30, 2002
decreased 15 basis points to 4.56% compared to 4.71% for the same period one
year ago. The net interest margin for the third quarter of 2002 was 4.54%
compared to 4.56% for the third quarter of 2001.
Interest and fees on loans was $25,672,000 for the first nine months of 2002
for a decrease of $2,952,000 when compared to the first nine months of 2001.
Decreased loan income resulted from the net of increases in the loan
portfolio of $30,692,000 and decreases in interest rates. Interest and
dividends on securities was $5,331,000 for the first nine months of 2002 for
a decrease of $209,000 over the same period in 2001. Decreased security
income results from increases in the volume of securities and from decreases
in yields on those securities. Interest and dividends on securities
represented 17.2% of total interest income at September 30, 2002 compared to
16.2% at September 30, 2001. Interest on Federal funds sold and short-term
investments was $75,000 at September 30, 2002 compared to $126,000 at
September 30, 2001. The decrease resulted from decreases in the average
balances invested in these forms of financial instruments plus decreases in
interest rates.
Total interest expense decreased by $4,176,000 when compared to the first
nine months of 2001. The interest expense decrease resulted from a decrease
in interest expense on deposits of $3,945,000 and repurchase agreement
interest of $578,000, offset by increases in Federal Home Loan Bank advances
of $347,000. Also, total interest expense for the first nine months of 2002
was impacted by a net increase in interest bearing deposits of $49,645,000,
and by decreases in interest rates paid on savings, Checkinvest, Market
Access, certificate of deposit accounts, Federal Home Loan Bank advances and
repurchase agreements when compared to the first nine months of 2001.
Total noninterest income increased by $910,000 when compared to the first
nine months of 2001. This increase resulted from increases in service
charges of $458,000 and other charges, exchanges and fees of $171,000, offset
by decreases in income from investment and trust services of $238,000. The
increase in service charges is due, in part, to reevaluating the assessment
of transaction account charges plus increases in the volume of
accounts. The Corporation reported gains on sale of investments and loans of
$656,000. Other operating income increased by $148,000 from increased
revenue from Charleston Insurance Agency, Inc. and Charleston Title Agency,
LLC.
The Corporation continuously monitors noninterest expenses for greater
profitability. The entire staff is geared to improving productivity at all
levels. Noninterest expense for the nine months ended September 30, 2002 was
24
$18,061,000, 7.6% above the first nine months of 2001. This increase was due
primarily to increases in salaries and benefits, furniture and equipment
expense, card related expenses, outside services and marketing expenses.
The effective tax rate declined to 32.0% from 33.7% during the first
nine months of 2002 and 2001, respectively. The rate decrease is due
primarily to the increase in investments in tax exempt securities and
increases in tax exempt income to total interest income. Net income was
$6,675,000 and $6,354,000 for the nine months ended September 30, 2002 and
2001, respectively. Net income per basic and diluted share was $1.52 and
$1.45 for the nine months ended September 2002 and 2001, respectively.
THIRD QUARTER INFORMATION
Interest and fees on loans for the third quarter of 2002 decreased $567,000
when compared to the third quarter of 2001. Decreased loan income resulted
from the impact of increases in the average loan portfolio balance for the
third quarter of 2002 as compared to the third quarter of 2001 offset by
decreases in interest rates. Interest and dividends on securities was
$1,747,000 for the third quarter of 2002 for a decrease of $84,000 over the
same period in 2001. Decreased investment income resulted from the impact of
increases in the average investment portfolio balance for the third quarter
of 2002 as compared to the third quarter of 2001, offset by decreases in
interest rates for 2002 compared with 2001. Interest on Federal funds sold
and short-term investments was $23,000 and $38,000 for the third quarter of
2002 and 2001, respectively.
Total interest expense for the third quarter of 2002 decreased by $1,122,000
when compared to the third quarter of 2001. The interest expense decrease
resulted from decreases in deposit account interest of $1,081,000 and a
decrease in interest expense from repurchase agreements and other short-term
borrowings of $186,000, offset by increases in interest expense from Federal
Home Loan Bank advances of $145,000. Also, total interest expense for the
third quarter of 2002 was impacted by decreases in interest rates paid on
savings accounts, checkinvest, market access accounts, certificate of deposit
accounts, Federal Home Loan Bank advances and repurchase agreements when
compared to the third quarter of 2001.
Total noninterest income increased by $31,000 when compared to the third
quarter of 2001. This increase resulted from increases in service charges of
$183,000, increases in other service charges, and exchanges and fees of
$34,000, increases in other operating income of $51,000 offset by decreases
in income from Investment and Trust Services Division income of $120,000 and
gains on sales of investments and securities of $117,000.
Noninterest expense for the three months ended September 30, 2002 was
$5,945,000, 5.5% above the same period in 2001. This increase was due
primarily to increases in salaries and employee benefits, outside services
and marketing expenses.
25
IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS
Corporate management is not aware of any current recommendations by the
Financial Accounting Standards Board (FASB) or by regulatory authorities
which, if they were implemented, would have a material effect on the
liquidity, capital resources or operations of the Corporation. However, the
potential impact of certain accounting and regulatory pronouncements warrant
further discussion.
In July 2001 the FASB issued Statement No. 142, "Accounting for Goodwill and
Other Intangible Assets." Statement of Financial Accounting Standards (SFAS)
No. 142 eliminates amortization of goodwill associated with business
combinations completed after June 30, 2001. Effective January 1, 2002, all
goodwill amortization expenses ceased and goodwill will be assessed (at least
annually) for impairment at the reporting unit level by applying a fair-
value-based test. SFAS No. 142 also provides additional guidance on acquired
core deposit intangible requiring separate disclosure and amortization with
impairment testing at least annually. SFAS No. 142 replaces the requirement
to amortize intangible assets with indefinite lives and goodwill with a
requirement for an impairment test. Statement 142 also requires an
evaluation of intangible assets and their useful lives and a transitional
impairment test for goodwill and certain intangible assets. After
transition, the impairment tests will be performed annually. LNB Bancorp,
Inc. adopted SFAS No. 142 as of January 1, 2002 and reports Branch Goodwill
and Core Deposit intangibles separately. The Corporation has determined that
the provisions of SFAS No. 142 will have no effect on our financial position,
results of operations or liquidity.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Statement
143 is effective for fiscal years beginning after June 15, 2002. The
Corporation has reviewed the provisions of Statement 143, and believes that
upon adoption, it did not have a material impact on its financial position,
results of operations or liquidity.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
impairment or disposal of long-lived assets." SFAS No. 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The SFAS No. 144 provides a single accounting model for long-lived assets to
be disposed of. New criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the effects of
disposal of a segment of a business. The provisions of SFAS No. 144 were
effective for the Corporation January 1, 2002 and did not have a material
impact on our financial position, results of operations or liquidity.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64. Amendment of FASB Statement No. 13 and
26
Technical Corrections." SFAS No. 145 rescinds FASB No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and FASB Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds FASB Statement No. 44, "Accounting for Intangible
Assets of Motor Carriers" and amends FASB Statement No. 13, "Accounting for
leases" which was written to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections. The
provisions of this statement related to the recission of Statement No. 4
shall be for fiscal years beginning after May 15, 2002 and as it relates to
Statement No. 13 shall be effective for transactions occurring after May 15,
2002. All other provisions of FASB No. 145 shall be effective for financial
statements issued on or after May 15, 2002. The Corporation has reviewed the
provisions of Statement No. 145 and believes that it will not have a material
impact on its financial position, results of operation or cash flows.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 provides guidance on the accounting
for the acquisition of a financial institution and applies to all
acquisitions except those between two or more mutual enterprises. SFAS No.
147 reflects the following conclusions reached by the Board:
The excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable assets acquired in a business combination
represents goodwill that should be accounted for under FASB Statement No.
142, "Goodwill and Other Intangible Assets." Thus, the specialized
accounting guidance in paragraph 5 of FASB Statement No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions, will not apply after
September 30, 2002. If certain criteria in Statement 147 are met, the amount
of the unidentifiable asset will be reclassified to goodwill upon the
adoption of that Statement.
Financial institutions meeting conditions outlined in Statement 147 will be
required to restate financial statements issued subsequent to the initial
adoption of SFAS No. 147. The objective of that restatement requirement is
to present the balance sheet and income statement as if the amount accounted
for under Statement 72 as an unidentifiable intangible asset had been
reclassified to goodwill as of the date Statement 142 was initially applied.
(For example, a financial institution that adopted Statement 142 on January
1, 2002, would retroactively reclassify the unidentifiable intangible asset
to goodwill as of that date and restate previously issued income statements
to remove the amortization expenses recognized in 2002.) Those transition
provisions are effective on October 1, 2002.
The Corporation will adopt SFAS No. 147 effective during the fourth quarter
of 2002. Management is currently analyzing the impact of adoption of SFAS
No. 147 on the Corporation.
27
USA PATRIOT ACT
On October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept
And Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). During the first
quarter of 2002, the Financial Crimes Enforcement Network (FinCEN), a bureau
of the Department of the Treasury, issued proposed and interim regulations as
mandated by the USA PATRIOT Act that would: (i) prohibit certain financial
institutions from providing correspondent accounts to foreign shell banks;
(ii) require such financial institutions to take reasonable steps to ensure
that correspondent accounts provided to foreign banks are not being used to
indirectly provide banking services to foreign shell banks; (iii) require
certain financial institutions that provide correspondent accounts to foreign
banks to maintain records of the ownership of such foreign banks and their
agents in the United States; (iv) require the termination of correspondent
accounts of foreign banks that fail to turn over their account records in
response to a lawful request from the Secretary of the Treasury or the
Attorney General. Additionally the USA PATRIOT Act encourages information
sharing among financial institutions and federal law enforcement agencies to
identify, prevent, deter and report money laundering and terrorist activity.
Management does not believe that the USA PATRIOT Act will have a material
impact on the financial position, results of operation or liquidity of the
Corporation.
28
PART I - OTHER INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market indices such as interest rates, foreign exchange
rates and equity prices. The Corporation's principal market risk exposure is
interest rate risk, with no material impact on earnings from changes in
foreign exchange rates or equity prices. There have been no material changes
in the asset and liability mix of the Corporation since December 31, 2001,
which would impact the Corporation's level of market risk.
Interest rate risk is the exposure to changes in market interest rates.
Interest rate sensitivity is the relationship between market interest rates
and net interest income due to the repricing characteristics of assets and
liabilities. The Corporation monitors the interest rate sensitivity of its
on - and - off - balance sheet positions by examining its near-term
sensitivity and its longer term gap position. Corporate management has
determined no significant changes in the Corporation's interest rate risk
profile since December 31, 2001.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Corporation carried
out an evaluation under the supervision and with the participation of the
Corporation's management, including the Corporation's President and Chief
Executive Officer and Executive Vice President, Chief Financial Officer and
Corporate Secretary, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures pursuant to SEC rule 13a-14.
Based upon that evaluation, the President and Chief Executive Officer and
Executive Vice President, Chief Financial Officer and Corporate Secretary
concluded that as of that date, the Corporation's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Corporation (including its consolidated subsidiaries)
required to be included in the Corporation's periodic SEC filings.
There were no significant changes made in the Corporation's internal controls
or in other factors that could significantly affect these internal controls
subsequent to the date of the evaluation performed by the Corporation's
President and Chief Executive Officer and Executive Vice President, Chief
Financial Officer and Corporate Secretary.
29
Part II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
None
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
None
ITEM 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits - The following exhibits are filed as part of this report:
EXHIBIT NO. EXHIBIT
3.1 LNB Bancorp, Inc. Second Amended Articles of
Incorporation (Incorporated by reference to
the quarterly report on Form 10-Q filed on
November 14, 2000.)
3.2 LNB Bancorp, Inc. Amended Code of Regulations.
(Incorporated by reference to the report
on Form 8-K filed on January 4, 2001.)
4. Instruments Defining the Rights of Security
Holders. (See Exhibits 3.1 and 3.2, above)
10.a Lorain National Bank Group Term Carve Out Plan,
dated August 7, 2002.
99.1 Certification pursuant to 18 U.S.C. section 1350,
as enacted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. section 1350,
as enacted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
30
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LNB BANCORP, INC.
(registrant)
Date: November 13, 2002 /s/ Gregory D. Friedman
_________________________
Gregory D. Friedman, CPA
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
Date: November 13, 2002 /s/ Mitchell J. Fallis
_________________________
Mitchell J. Fallis, CPA
Vice President and
Chief Accounting Officer
31
Certifications
I, Gary C. Smith, President and Chief Executive Officer of LNB Bancorp,
Inc., certify that:
1. I, have reviewed this quarterly report on Form 10-Q of LNB Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
32
employees who have a significant role in the registrant's internal control;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date November 13, 2002
______________________
By /s/Gary C. Smith
______________________
Gary C. Smith, President and Chief Executive Officer
33
I, Gregory D. Friedman, Executive Vice President, Chief Financial Officer
and Corporate Secretary of LNB Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of LNB Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control;
and
34
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date November 13, 2002
____________________________
By /s/Gregory D. Friedman
____________________________
Gregory D. Friedman, Executive Vice President, Chief Financial Officer
and Corporate Secretary
35
LNB Bancorp, Inc.
Form 10-Q
Exhibit Index
Pursuant to Item 601 (a) of Regulation S-K
EXHIBIT NO. PAGE DESCRIPTION
3.1 NA LNB Bancorp, Inc. Second Amended Articles of
Incorporation (Incorporated by reference to
the quarterly report on Form 10-Q filed on
November 14, 2000.)
3.2 NA LNB Bancorp, Inc. Amended Code of Regulations.
(Incorporated by reference to the report
on Form 8-K filed on January 4, 2001.)
4. NA Instruments Defining the Rights of Security
Holders. (See Exhibits 3.1 and 3.2, above)
10.a 36 Lorain National Bank Group Term Carve Out Plan,
(the Plan), dated August 7, 2002. The
Compensation Committee of the Corporation's Board
of Directors has designated all executive officers
as eligible to participate in the Plan.
99.1 51 Certification pursuant to 18 U.S.C. section 1350,
as enacted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 52 Certification pursuant to 18 U.S.C. section 1350,
as enacted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.