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)
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34-1406303
(I.R.S. Employer
Identification No.)
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457 Broadway, Lorain, Ohio
(Address of principal
executive offices)
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44052-1769
(Zip
Code)
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(440) 244-6000
(Registrants telephone
number, including area code)
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Shares
Par Value $1.00 Per Share
Preferred Share Purchase Rights
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The NASDAQ Stock Market
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Securities Registered Pursuant to Section 12(g) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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None
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None
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the common shares held by
non-affiliates of the registrant at June 30, 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
Corporations 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 (ATMs) in Lorain, Erie, Cuyahoga and
Summit counties in the Ohio communities of Lorain, Elyria,
Amherst, Avon, Avon Lake, LaGrange, North Ridgeville, Oberlin,
Olmsted Township, Vermilion, Westlake and Hudson, as well as a
business development office in Cuyahoga County.
Services
Commercial Lending. The Banks commercial
lending activities consist of commercial and industrial loans,
commercial real estate loans, construction and equipment loans,
letters of credit, revolving lines of credit, Small Business
Administration loans and government guaranteed loans. The
Banks wholly-owned subsidiary, North Coast Community
Development Corporation, offers commercial loans with preferred
interest rates on projects that meet the standards for the
federal governments New Markets Tax Credit Program.
Residential, Installment and Personal
Lending. The Banks residential mortgage
lending activities consist of loans originated for portfolio or
to be sold in the secondary markets, for the purchase of
personal residences. The Banks installment lending
activities consist of traditional forms of financing for
automobile and personal loans, indirect automobile loans, second
mortgages, and home equity lines of credit. The Bank provides
indirect lending services to new and used automobile dealerships
throughout Ohio, Kentucky, Indiana, Tennessee and Georgia. This
program allows the Bank to generate high quality short term
assets to place in its own portfolio or to sell to several
investor banks
Deposit Services. The Banks deposit
services include traditional transaction and time deposit
accounts as well as cash management services for corporate and
municipal customers. The Bank may supplement local deposit
generation with time deposits generated through a broker
relationship. Deposits of the Bank are insured by the Bank
Insurance Fund administered by the Federal Deposit Insurance
Corporation (the FDIC).
Other Services. Other bank services offered
include safe deposit boxes, night depository, U.S. savings
bonds, travelers checks, money orders, cashiers checks,
ATMs, debit cards, wire transfer, electronic funds
transfers, foreign drafts, foreign currency, electronic banking
by phone or through the internet, lockbox and other services
tailored for both individuals and businesses.
Competition
and Market Information
The Corporation competes primarily with 17 other financial
institutions with operations in Lorain County, Ohio, which have
Lorain County-based deposits ranging in size from approximately
$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 Banks 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 Corporations 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 Banks 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 Banks officers. It competes against
smaller local banks by providing more convenient distribution
channels and a wider array of products. The Bank endeavors to
provide informed and courteous personal services. The
Corporations management team (Management)
believes that the Bank is well positioned to compete
successfully in its market area. Competition among financial
institutions is based largely upon interest rates offered on
deposit accounts, interest rates charged on loans, the relative
level of service charges, the quality and scope of the services
rendered, the convenience of the banking centers and, in the
case of loans to commercial borrowers, relative lending limits.
Management believes that the commitment of the Bank to provide
quality personal service and its local community involvement
give the Bank a competitive advantage over other financial
institutions operating in its markets.
Supervision
and Regulation
The Corporation is subject to the supervision and examination of
the Board of Governors of the Federal Reserve System (the
Federal Reserve Board). The BHC Act requires prior
approval of the Federal Reserve Board before acquiring or
holding more than a 5% voting interest in any bank. It also
restricts interstate banking activities.
The Bank is subject to extensive regulation, supervision and
examination by applicable federal banking agencies, including
the Office of the Comptroller of the Currency (the
OCC) and the Federal Reserve Board. Because domestic
deposits in the Bank are insured (up to applicable limits) and
certain deposits of the Bank and debt obligations of the Bank
are temporarily guaranteed (up to applicable limits) by the
FDIC, the FDIC also has certain regulatory and supervisory
authority over the Bank under the Federal Deposit Insurance Act
(the FDIA).
Regulatory
Capital Standards and Related Matters
Bank holding companies are required to comply with the Federal
Reserve Boards risk-based capital guidelines. The FDIC and
the OCC have adopted risk-based capital ratio guidelines to
which depository institutions under their respective
supervision, such as the Bank, are subject. The guidelines
establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in
risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified
off-balance sheet commitments to four risk-weighted categories,
with higher levels of capital being required for the categories
perceived as representing greater risk. The Corporation and the
Bank met all risk-based capital requirements of the Federal
Reserve Board, FDIC and OCC as of December 31, 2009.
Both federal and state law extensively regulate various aspects
of the banking business, such as reserve requirements,
truth-in-lending
and
truth-in-savings
disclosures, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations.
The Corporation and the Bank are subject to the Federal Reserve
Act, which restricts financial transactions between banks and
affiliated companies. The statute limits credit transactions
between banks, affiliated companies and its executive officers
and its affiliates. The statute prescribes terms and conditions
for bank affiliate transactions deemed to be consistent with
safe and sound banking practices, and restricts the types of
collateral security permitted in connection with a banks
extension of credit to an affiliate. Additionally, all
transactions with an
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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 Corporations participation in the CPP, see
Item 7, Managements 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 Banks domestic deposits are insured up to
applicable limits by the FDIC. Accordingly, the Bank is subject
to deposit insurance premium assessments by the FDIC.
FICO Assessments. Since 1997, all FDIC-insured
depository institutions have been required through assessments
collected by the FDIC to service the annual interest on
30-year
noncallable bonds issued by the Financing Corporation
(FICO) in the late 1980s to fund losses incurred by
the former Federal Savings and Loan Insurance Corporation. FICO
assessments are separate from and in addition to deposit
insurance assessments, are adjusted quarterly and, unlike
deposit insurance assessments, are assessed uniformly without
regard to an institutions risk category.
Conservatorship and Receivership of
Institutions. If any insured depository
institution becomes insolvent and the FDIC is appointed its
conservator or receiver, the FDIC may, under federal law,
disaffirm or repudiate any contract to which such institution is
a party, if the FDIC determines that performance of the contract
would be burdensome, and that disaffirmance or repudiation of
the contract would promote the orderly administration of the
institutions affairs. Such disaffirmance or repudiation
would result in a claim by its holder against the receivership
or conservatorship. The amount paid upon such claim would depend
upon, among other factors, the amount of receivership assets
available for the payment of such claim and its priority
relative to the priority of others. In addition, the FDIC as
conservator or receiver may enforce most contracts entered into
by the institution notwithstanding any provision providing for
termination, default, acceleration, or exercise of rights upon
or solely by reason of insolvency of the institution,
appointment of a conservator or receiver for the institution, or
exercise of rights or powers by a conservator or receiver for
the institution. The FDIC as conservator or receiver also may
transfer any asset or liability of the institution without
obtaining any approval or consent of the institutions
shareholders or creditors.
Depositor Preference. The FDIA provides that,
in the event of the liquidation or other resolution of an
insured depository institution, the claims of its depositors
(including claims by the FDIC as subrogee of insured depositors)
and certain claims for administrative expenses of the FDIC as
receiver would be afforded a priority over other general
unsecured claims against such an institution. If an insured
depository institution fails, insured and uninsured depositors
along with the FDIC will be placed ahead of unsecured,
nondeposit creditors, including a parent holding company and
subordinated creditors, in order of priority of payment.
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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 institutions
capital level. This framework and the authority it confers on
the federal banking agencies supplement other existing authority
vested in such agencies to initiate supervisory actions to
address capital deficiencies. Moreover, other provisions of law
and regulation employ regulatory capital level designations the
same as or similar to those established by the prompt corrective
action provisions both in imposing certain restrictions and
limitations and in conferring certain economic and other
benefits upon institutions. These include restrictions on
brokered deposits, limits on exposure to interbank liabilities,
determination of risk-based FDIC deposit insurance premium
assessments, and action upon regulatory applications.
USA
PATRIOT Act
The Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001
(the USA PATRIOT Act) and the federal regulations
issued pursuant to it substantially broaden previously existing
anti-money laundering law and regulation, increase compliance,
due diligence and reporting obligations for financial
institutions, create new crimes and penalties, and require the
federal banking agencies, in reviewing merger and other
acquisition transactions, to consider the effectiveness of the
parties in combating money laundering activities.
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 is
www.4LNB.com. Copies of the annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are made available through this website or directly through
the Securities and Exchange Commission (the SEC)
website which is www.sec.gov.
Forward-Looking
Statements
This
Form 10-K
contains forward-looking statements within the meaning of the
Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. Terms such as will,
should, plan, intend,
expect, continue, believe,
anticipate and seek, as well as similar
comments, are forward-looking in nature. Actual results and
events may differ materially from those expressed or anticipated
as a result of risks and uncertainties which include but are not
limited to:
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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 Corporations 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 Corporations ability to return capital
to shareholders and dilution of the Corporations common
shares that may result from the terms of the CPP, pursuant to
which the Corporation issued securities to the
U.S. Treasury;
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limitations on the Corporations ability to pay dividends;
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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 Corporations ability to engage in
routine funding transactions as a result of the actions and
commercial soundness of other financial institutions;
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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 Corporations 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 Corporations
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 attracting
and/or
retaining key executives
and/or
relationship managers at compensation levels necessary to
maintain a competitive market position;
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changes occurring in business conditions and inflation;
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changes in technology;
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changes in trade, monetary, fiscal and tax policies;
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changes in the securities markets, in particular, continued
disruption in the fixed income markets and adverse capital
market conditions;
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continued disruption in the housing markets and related
conditions in the financial markets; and
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changes in general economic conditions and competition in the
geographic and business areas in which the Corporation conducts
its operations, particularly in light of the recent
consolidation of competing financial institutions; as well as
the risks and uncertainties described from time to time in the
Corporations reports as filed with the SEC.
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As a competitor in the banking and financial services
industries, the Corporation and its business, operations and
financial condition are subject to various risks and
uncertainties. You should carefully consider the risks and
uncertainties described below, together with all of the other
information in this annual report on
Form 10-K
and in the Corporations other filings with the SEC, before
making any investment decision with respect to the
Corporations securities. In particular, you should
consider the discussion contained in Item 7 of this annual
report on
Form 10-K,
which contains Managements Discussion and Analysis of
Financial Condition and Results of Operations.
5
The risks and uncertainties described below may not be the only
ones the Corporation faces. Additional risks and uncertainties
not presently known by the Corporation or that the Corporation
currently deems immaterial may also affect the
Corporations business. If any of these known or unknown
risks or uncertainties actually occur or develop, the
Corporations business, financial condition, results of
operations and future growth prospects could change. Under those
circumstances, the trading prices of the Corporations
securities could decline, and you could lose all or part of your
investment.
Current
market developments may adversely affect the Corporations
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 Corporations 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
Corporations 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 Corporations
deposits has increased significantly due to liquidity concerns
at many of these same institutions. Stock prices of bank holding
companies, like the Corporations, have been negatively
affected by the current conditions of the financial markets, as
has the Corporations 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
Corporations business operations, including the
Corporations ability to originate or sell loans, and
adversely impact the Corporations 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
Corporations 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 Corporations
ability to access capital and on the Corporations
business, financial condition and results of operations.
The
soundness of other financial institutions could adversely affect
the Corporation.
The Corporations ability to engage in routine funding
transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading,
clearing, counterparty or other relationships. The Corporation
has exposure to many different industries and counterparties,
and it routinely executes transactions with counterparties in
the financial industry. As a result, defaults by, or even rumors
or questions about, one or more financial services institutions,
or the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or
defaults by the Corporation or by other institutions. Many of
these transactions expose the Corporation to credit risk in the
event of default of the Corporations counterparty or
client. In addition, the Corporations credit risk may be
exacerbated when the collateral held by it cannot be realized
upon or is liquidated at prices not sufficient to recover the
full amount of the loan or derivative exposure due the
Corporation. There is no assurance that any such losses would
not materially and adversely affect the Corporations
results of operations.
Certain
industries, including the financial services industry, are
disproportionately affected by certain economic indicators such
as unemployment and real estate asset values. Should the
improvement of these economic indicators lag the improvement of
the overall economy, the Corporation could be adversely
affected.
Should the stabilization of the U.S. economy lead to a
general economic recovery, the improvement of certain economic
indicators, such as unemployment and real estate asset values
and rents, may nevertheless continue to lag behind the overall
economy. These economic indicators typically affect certain
industries, such as real estate and financial services, more
significantly. Furthermore, financial services companies with a
substantial lending business are dependent upon the ability of
their borrowers to make debt service payments on loans. Should
unemployment or real estate asset values fail to recover for an
extended period of time, the Corporations results of
operations could be negatively affected.
Strong
competition may reduce the Corporations ability to
generate loans and deposits in its market.
The Corporation competes in a consolidating industry.
Increasingly, the Corporations competition is large
regional companies which have the capital resources to
substantially impact such things as loan and deposit pricing,
delivery channels and products. This may allow those companies
to offer what may be perceived in the market as better products
and better convenience relative to smaller competitors like the
Corporation, which could impact the Corporations ability
to grow its assets and earnings.
Changes
in interest rates could adversely affect the Corporations
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 Corporations revenue may be adversely
impacted. Interest rate changes also impact customer preferences
for the Corporations products. Changing interest rates can
lead to unpredictable cash flow with respect to both assets and
liabilities, which can negatively impact net interest income.
7
The
Corporations 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 Corporations 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
Corporations 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 Corporations business. The
Federal Reserve Board can change the discount rate, which
impacts the composition of the Corporations 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 Corporations participation in the
CPP.
The Corporation accepted an investment by the U.S. Treasury
under the CPP. The Stock Purchase Agreement the Corporation
entered into with the U.S. Treasury provides that the
U.S. Treasury may unilaterally amend the agreement to the
extent required to comply with any changes after the execution
in applicable federal statutes. As a result of this provision,
the U.S. Treasury and the Congress may impose additional
requirements or restrictions on the Corporation and the Bank in
respect of reporting, compliance, corporate governance,
executive or employee compensation, dividend payments, stock
repurchases, lending or other business practices, capital
requirements or other matters. The Corporation may be required
to expend additional resources in order to comply with these
requirements. Such additional requirements could impair the
Corporations ability to compete with institutions that are
not subject to the restrictions because they did not accept an
investment from the U.S. Treasury. To the extent that
additional restrictions or limitations on employee compensation
are imposed, such as those contained in ARRA and the regulations
issued thereunder in June 2009, the Corporation may be less
competitive in attracting and retaining successful incentive
compensation based lenders and customer relations personnel, or
senior executive officers.
Additionally, the ability of Congress to utilize the amendment
provisions to effect political or public relations goals could
result in the Corporation being subjected to additional burdens
as a result of public perceptions of issues relating to the
largest banks, and which are not applicable to community
oriented institutions such as the Corporation. The Corporation
may be disadvantaged as a result of these uncertainties.
The
Corporation may be adversely impacted by weakness in the local
economies it serves.
The Corporations business activities are geographically
concentrated in Northeast Ohio and, in particular, Lorain
County, Ohio, where commercial activity has deteriorated at a
greater rate than in other parts of Ohio and in the national
economy. This has led to and may lead to further unexpected
deterioration in loan quality, slower asset and deposit growth,
which may adversely affect the Corporations operating
results.
The
Corporations earnings and reputation may be adversely
affected if credit risk is not properly managed. Originating and
underwriting loans is critical to the success of the
Corporation.
This activity exposes the Corporation to credit risk, which is
the risk of losing principal and interest income because the
borrower cannot repay the loan in full. The Corporation depends
on collateral in underwriting loans, and the value of this
collateral is impacted by interest rates and economic conditions.
The Corporations earnings may be adversely affected if
management does not understand and properly manage loan
concentrations. The Corporations commercial loan portfolio
is concentrated in commercial real estate. This includes
significant commercial and residential development customers.
This means that the Corporations credit risk profile is
dependent upon, not only the general economic conditions in the
market,
8
but also the health of the local real estate market. Certain of
these loans are not fully amortized over the loan period, but
have a balloon payment due at maturity. The borrowers
ability to make a balloon payment typically will depend on being
able to refinance the loan or to sell the underlying collateral.
This factor, combined with others, including the
Corporations geographic concentration, can lead to
unexpected credit deterioration and higher provisions for loan
losses.
The
Corporation is subject to liquidity risk.
Market conditions or other events could negatively affect the
level or cost of funding, affecting the Corporations
ongoing ability to accommodate liability maturities and deposit
withdrawals, meet contractual obligations, and fund asset growth
and new business transactions at a reasonable cost, in a timely
manner and without adverse consequences. Although management has
implemented strategies to maintain sufficient sources of funding
to accommodate planned as well as unanticipated changes in
assets and liabilities under both normal and adverse conditions,
any substantial, unexpected
and/or
prolonged change in the level or cost of liquidity could
adversely affect the Corporations business, financial
condition and results of operations.
If the
Corporations technology and systems are damaged, its
ability to service customers, comply with regulation and grow
assets and liabilities may be adversely impacted.
The Corporation is dependent on the proper functioning of its
hardware, software and communications. Security breaches,
terrorist events, and natural disasters can all have a material
impact on the Corporations ability to maintain accurate
records which is critical to the Corporations operations.
The
Corporation is subject to risk from the failure of third party
vendors.
The Corporation relies on other companies to provide components
of the Corporations business infrastructure. Third party
vendors provide certain components of the Corporations
business infrastructure, such the Banks processing and
electronic banking systems, item processing and Internet
connections. While the Corporation has selected these third
party vendors carefully, it does not control their actions. Any
problems caused by these third parities not providing the
Corporation their services for any reason or their performing
their services poorly, could adversely affect the
Corporations ability to deliver products and services to
the Corporations operations directly through interference
with communications, including the interruption or loss of the
Corporations websites, which could adversely affect the
Corporations business, financial condition and results of
operations.
Changes
in accounting standards could materially impact the
Corporations financial statements.
The Financial Accounting Standards Board (FASB) may change the
financial accounting and reporting standards that govern the
preparation of the Corporations financial statements.
These changes can be difficult to predict and can materially
impact how the Corporation records and reports it financial
condition and results of operations.
The
Corporation may not be able to attract and retain skilled
people.
The Corporations success depends, in large part, on its
ability to attract and retain key people. Competition for the
best people in most activities in which the Corporation is
engaged can be intense, and the Corporation may not be able to
retain or hire the people it wants
and/or
needs. In order to attract and retain qualified employees, the
Corporation must compensate its employees at market levels. If
the Corporation is unable to continue to attract and retain
qualified employees, or do so at rates necessary to maintain its
competitive position, the Corporations performance,
including its competitive position, could suffer, and, in turn,
adversely affect the Corporations business, financial
condition and results of operations.
9
TARP
and ARRA impose certain executive compensation and corporate
governance requirements that may adversely affect the
Corporation, including the Corporations ability to recruit
and retain qualified employees.
The purchase agreement the Corporation entered into in
connection with the Corporations participation in the CPP
required the Corporation to adopt the U.S. Treasurys
standards for executive compensation and corporate governance
while the U.S. Treasury holds the equity issued by the
Corporation pursuant to the CPP. These standards generally apply
to the Corporations Chief Executive Officer, Chief
Financial Officer and the next three most highly compensated
senior executive officers. The standards include:
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ensuring that incentive compensation for senior executives does
not encourage unnecessary and excessive risks that threaten the
value of financial institutions;
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required clawbacks of any bonus or incentive compensation paid
to a senior executive based on statements of earnings, gains or
other criteria that are later proven to be materially inaccurate;
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prohibitions on making golden parachute payments to senior
executives; and
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an agreement not to deduct for tax purposes executive
compensation in excess of $500,0000 for each senior executive.
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ARRA imposed further limitations on compensation while the
U.S. Treasury holds equity issued by the Corporation
pursuant to TARP:
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a prohibition on making any golden parachute payment to a senior
executive officer or any of the Corporations next five
most highly compensated employees;
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a prohibition on any compensation plan that would encourage
manipulation of the Corporations reported earnings to
enhance the compensation of any of the Corporations
employees; and
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a prohibition on the payment or accrual of any bonus, retention
award or incentive compensation to the Corporations five
highest paid executives except for long-term restricted stock
with a value not greater than one-third of the total amount of
annual compensation of the employee receiving the stock.
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The U.S. Treasury released an interim final rule on TARP
standards for compensation and corporate governance on
June 10, 2009, which implemented and further expanded the
limitations and restrictions imposed on executive compensation
and corporate governance by the CPP and ARRA. The rules clarify
prohibitions on bonus payments, provide guidance on the use of
restricted stock units, expand restrictions on golden parachute
payments, mandate enforcement of clawback provisions unless
unreasonable to do so, outline the steps compensation committees
must take when evaluating risks posed by compensations
arrangements, and require the adoption and disclosure of a
luxury expenditure policy, among other things. New requirements
under the rules include enhanced disclosure of perquisites and
the use of compensation consultants, and prohibitions on tax
gross-up
payments.
These provisions and any future rules issued by the
U.S. Treasury could adversely affect the Corporations
ability to attract and retain management capable and motivated
sufficiently to manage and operate the Corporations
business through difficult economic and market conditions. If
the Corporation is unable to attract and retain qualified
employees to manage and operate the Corporations business,
it could negatively affect the Corporations business,
financial conditions and results of operations.
The
Corporations issuance of securities to the U.S. Treasury
may limit the Corporations ability to return capital to
its shareholders and is dilutive to the Corporations
common shares. If the Corporation is unable to redeem such
preferred shares, the dividend rate increases substantially
after five years.
In connection with the Corporations sale of
$25.2 million of its Series B Preferred Stock to the
U.S. Treasury in conjunction with the CPP, the Corporation
also issued a warrant to purchase 561,343 of its common shares
at an exercise price of $6.74. The number of shares was
determined based upon the requirements of the CPP, and was
calculated based on the average market price of the
Corporations common shares for the 20 trading days
preceding approval of the Corporations issuance (which was
also the basis for the exercise price of $6.74). The terms of
the
10
transaction with the U.S. Treasury include limitations on
the Corporations ability to pay dividends and repurchase
its common shares. For three years after the issuance or until
the U.S. Treasury no longer holds any Series B
Preferred Stock, the Corporation will not be able to increase
its dividends above the level of its quarterly dividend declared
during the third quarter of 2008 ($0.09 per common share on a
quarterly basis) nor repurchase any of its common shares or
preferred stock without, among other things, U.S. Treasury
approval or the availability of certain limited exceptions,
e.g., purchases in connection with the Corporations
benefit plans. Furthermore, as long as the Series B
Preferred Stock issued to the U.S. Treasury is outstanding,
dividend payments and repurchases or redemptions relating to
certain equity securities, including the Corporations
common shares, are prohibited until all accrued and unpaid
dividends are paid on such preferred stock, subject to certain
limited exceptions. These restrictions combined with the
dilutive impact of the warrant may have an adverse effect on the
market price of the Corporations Common Shares, and, as a
result, they could adversely affect the Corporations
business, financial condition and results of operations.
Unless the Corporation is able to redeem the Series B
Preferred Stock during the first five years, the dividend
payments on this capital will increase substantially at that
point, from 5% ($1.26 million annually) to 9%
($2.27 million annually). Depending on market conditions at
the time, this increase in dividends could significantly impact
the Corporations liquidity, and as a result, adversely
affect the Corporations business, financial condition and
results of operations.
The
Corporations ability to pay dividends is subject to
limitations.
Holders of the Corporations common shares are only
entitled to receive such dividends as the Board of Directors may
declare out of funds legally available for such payments.
Furthermore, the Corporations common shareholders are
subject to the prior dividend rights of holders of its preferred
stock.
In September 2009, the Corporation reduced its quarterly
dividend on its common shares to $0.01 per share and does not
expect to increase the quarterly dividend above $0.01 for the
foreseeable future. The Corporation could determine to eliminate
its common shares dividend altogether. Furthermore, as long as
the Series B Preferred Stock is outstanding, dividend
payments and repurchases or redemptions relating to certain
equity securities, including the Corporations common
shares, are prohibited until all accrued and unpaid dividends
are paid on such preferred stock, subject to certain limited
exceptions. This could adversely affect the market price of the
Corporations common shares. Also, the Corporation is a
bank holding company and its ability to declare and pay
dividends is dependent on certain federal regulatory
considerations, including the guidelines of the Federal Reserve
Board regarding capital adequacy and dividends.
In addition, the terms of the Corporations outstanding
trust preferred securities prohibit it from declaring or paying
any dividends or distributions on its capital stock, including
its common shares, if an event of default has occurred and is
continuing under the applicable indenture or if the Corporation
has given notice of its election to defer interest payments but
the related deferral period has not yet commenced or a deferral
period is continuing.
Additional
capital may not be available to the Corporation if and when it
is needed.
The Corporation and the Bank are subject to capital-based
regulatory requirements. The ability of the Corporation and the
Bank to meet capital requirements is dependent upon a number of
factors, including results of operations, level of nonperforming
assets, interest rate risk, future economic conditions, future
changes in regulatory and accounting policies and capital
requirements, and the ability to raise additional capital if and
when it is needed. Certain circumstances, such as a reduction of
capital due to losses from nonperforming assets or otherwise,
could cause the Corporation or the Bank to become unable to meet
applicable regulatory capital requirements, which may materially
and adversely affect the Corporations financial condition,
liquidity and results of operations. In such an event,
additional capital may be required to meet requirements. The
Corporations ability to raise additional capital, if
needed, will depend on conditions in the capital markets at that
time which are outside its control, and on the
Corporations financial performance. Accordingly,
additional capital, if needed, may not be available on terms
acceptable to the Corporation. Furthermore, if any such
additional capital is raised through the offering of equity
securities, it may dilute the holdings of the Corporations
existing shareholders or reduce the market price of the
Corporations common shares, or both.
11
If the
Corporation is required to write down goodwill recorded in
connection with its acquisitions, the Corporations
profitability would be negatively impacted.
Applicable accounting standards require the Corporation to use
the purchase method of accounting for all business combinations.
Under purchase accounting, if the purchase price of an acquired
company exceeds the fair value of the acquired companys
net assets, the excess is carried on the acquirers balance
sheet as goodwill. At December 31, 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 Corporations financial condition and
results of operations.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
The Corporations offices are located at the
Corporations Main Banking Center, 457 Broadway, Lorain,
Ohio, 44052. The Corporation owns the land and buildings
occupied by 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:
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Main Banking Center & Corporate Offices
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457 Broadway, Lorain
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Vermilion
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4455 East Liberty Avenue, Vermilion
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Amherst
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1175 Cleveland Avenue, Amherst
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Lake Avenue
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42935 North Ridge Road, Elyria Township
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Avon
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2100 Center Road, Avon
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Avon Lake
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32960 Walker Road, Avon Lake
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Pearl Avenue
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2850 Pearl Avenue, Lorain
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Oberlin
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24 East College Street, Oberlin
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Ely Square
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124 Middle Avenue, Elyria
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Cleveland Street
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801 Cleveland Street, Elyria
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Oberlin Avenue
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3660 Oberlin Avenue, Lorain
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Olmsted Township
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27095 Bagley Road, Olmsted Township
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Kendal at Oberlin
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600 Kendal Drive, Oberlin
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The Renaissance
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26376 John Road, Olmsted Township
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Chestnut Commons
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105 Chestnut Commons Drive, Elyria
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North Ridgeville
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34085 Center Ridge Road, North Ridgeville
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Village of LaGrange
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546 North Center Street, LaGrange
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Westlake Village
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28550 Westlake Village Drive, Westlake
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Wesleyan Village
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807 West Avenue, Elyria
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Morgan Bank
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178 West Streetsboro Street, Hudson
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Avon Pointe Loan Center
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36711 American Way, Avon
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Cuyahoga Loan Center
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2 Summit Park Drive, Independence
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Operations
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2130 West Park Drive, Lorain
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Maintenance
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2140 West Park Drive, Lorain
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Purchasing
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2150 West Park Drive, Lorain
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Training Center
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521 Broadway, Lorain
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Main Office Drive Up
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200 West 6th Street, Lorain
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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.
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Item 3.
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Legal
Proceedings
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On April 18, 2008, the Corporation and Richard M. Osborne
and certain other parties entered into a settlement agreement
(the Settlement Agreement) to settle certain
contested matters relating to the Corporations 2008 annual
meeting of shareholders. Under the Settlement Agreement, among
other things, Mr. Osborne agreed not to seek representation
on the Corporations Board of Directors or to solicit
proxies with respect to the voting of the Corporations
common shares for a period of at least 18 months after
April 18, 2008. In proxy materials filed with the SEC on
March 20, 2009, Mr. Osborne indicated his intent to
solicit proxies in favor of the election of two nominees for
election as directors at the Corporations 2009 annual
meeting of shareholders. On March 24, 2009, the Corporation
filed a complaint against Mr. Osborne for a declaratory
judgment and preliminary and permanent injunctive relief in the
United States District Court for the Northern District of Ohio,
Eastern Division, to restrain Mr. Osborne from
(a) engaging in any solicitation of proxies or consents,
(b) seeking to advise, encourage or influence any person or
entity with respect to the voting of any voting securities of
the Corporation, (c) initiating, proposing or otherwise
soliciting shareholders of the Corporation for the approval of
shareholder proposals, (d) entering into any discussions,
negotiations, agreements, arrangements or understanding with any
third party with respect to any of the foregoing and
(e) disseminating his proposed proxy materials to
shareholders of the Corporation. The Corporation also sought an
order from the Court temporarily restraining Mr. Osborne
from engaging in any of the foregoing activities. On
March 28, 2009, the Court issued an order granting the
Corporations motion for a temporary restraining order. On
April 3, 2009, the Court issued an order granting the
Corporations motion for a preliminary injunction
restraining Mr. Osborne from engaging in any of the
foregoing activities. On February 15, 2010,
Mr. Osborne filed a motion to dissolve the preliminary
injunction, which the Corporation 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 Corporations claims has
been set to commence on June 14, 2010.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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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 to
Form 10-K,
General Instruction G(3), the following information on
Executive Officers is included as an additional item in this
Part I:
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Positions and
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Offices
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Held with
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Executive
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Name
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Age
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Principal Occupation For Past Five Years
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LNB Bancorp, Inc.
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Officer Since
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Daniel E. Klimas
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51
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President and Chief Executive Officer, LNB Bancorp, Inc.,
February 2005 to present. President, Northern Ohio Region,
Huntington Bank from 2001 to February 2005.
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President and Chief Executive Officer
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2005
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Gary J. Elek
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58
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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.
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Chief Financial Officer and Principal Accounting Officer
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2009
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13
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Positions and
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Offices
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Held with
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Executive
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Name
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Age
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Principal Occupation For Past Five Years
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LNB Bancorp, Inc.
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Officer Since
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David S. Harnett
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58
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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.
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Senior Vice President and Chief Credit Officer
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2007
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Kevin Nelson
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46
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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.
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Senior Vice President
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2009
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Frank A. Soltis
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57
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Senior Vice President, LNB Bancorp, Inc., July 2005 to present.
Senior Vice President, Lakeland Financial Corporation, 1997 to
2005.
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Senior Vice President
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2005
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Mary E. Miles
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51
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Senior Vice President, LNB Bancorp, Inc., April 2005 to present.
President, Miles Consulting, Inc. from 2001 to 2005.
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Senior Vice President
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2005
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John Simacek
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57
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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.
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Senior Vice President
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2009
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Robert F. Heinrich
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56
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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.
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Senior Vice President, Corporate Secretary and Director of Risk
Management
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2009
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Craig B. Bertea
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56
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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.
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Senior Vice President
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2009
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14
PART II
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Item 5.
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Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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Market Information; Equity Holders;
Dividends. LNB Bancorp, Inc. common shares, par
value $1.00 per share, are traded on The NASDAQ Stock
Market®
under the ticker symbol LNBB. The prices below
represent the high and low sales prices reported on The NASDAQ
Stock Market for each specified period. All prices reflect
inter-dealer prices without markup, markdown or commission and
may not necessarily represent actual transactions.
LNB Bancorp, Inc. has paid a cash dividend to shareholders each
year since becoming a holding company in 1984. At present, the
Corporation expects to pay cash dividends to shareholders in an
amount equal to $0.01 per share if approved by the Board of
Directors. The Corporation could decide to eliminate its common
share dividend altogether. Furthermore, the terms of the
Corporations sale of $25.2 million of its
Series B Preferred Stock to the U.S. Treasury in
conjunction with the CPP include limitations on the
Corporations ability to pay dividends. For three years
after the issuance or until the U.S. Treasury no longer
holds any Series B Preferred Stock, the Corporation will
not be able to increase its dividends above the level of its
quarterly dividend declared during the third quarter of 2008
($0.09 per common share on a quarterly basis) without, among
other things, U.S. Treasury approval. In addition, as long
as the Series B Preferred Stock issued to the
U.S. Treasury is outstanding, dividend payments and
repurchases or redemptions relating to certain equity
securities, including the Corporations common shares, are
prohibited until all accrued and unpaid dividends are paid on
such preferred stock, subject to certain limited exceptions.
The common shares of LNB Bancorp, Inc. are usually listed in
publications as LNB Bancorp. LNB Bancorp Inc.s
common stock CUSIP is 502100100.
As of March 1, 2010, LNB Bancorp, Inc. had
1,905 shareholders of record and a closing price of $4.47.
Prospective shareholders may contact the Corporations
Investor Relations Department at
(440) 244-7317
for more information.
Common
Stock Trading Ranges and Cash Dividends Declared
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2009
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Cash
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Dividends
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Declared
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High
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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 &
Poors 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
Corporations stock option and employee benefit plans. The
share repurchase program provides that share repurchases are to
be made primarily on the open market from
time-to-time
until the 5 percent maximum is repurchased or the earlier
termination of the repurchase program by the Board of Directors,
at the discretion of management based upon market, business,
legal and other factors. However, the terms of the
Corporations 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 Corporations ability to repurchase its
common shares. For three years after the issuance or until the
U.S. Treasury no longer holds any Series B Preferred
Stock, the Corporation will not be able to repurchase any of its
common shares or preferred stock without, among other things,
U.S. Treasury approval or the availability of certain
limited exceptions, e.g., purchases in connection with the
Corporations benefit plans. Furthermore, as long as the
Series B Preferred Stock issued to the U.S. Treasury
is outstanding, repurchases or redemptions relating to certain
equity securities, including the Corporations common
shares, are prohibited until all accrued and unpaid dividends
are paid on such preferred stock, subject to certain limited
exceptions. As of December 31, 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.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following commentary presents a discussion and analysis of
the Corporations financial condition and results of
operations by 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
readers understanding of the accompanying tables and
charts, the consolidated financial statements, notes to the
financial statements and financial statistics appearing
elsewhere in the report. Where applicable, this discussion also
reflects Managements insights of known events and trends
that have or may reasonably be expected to have a material
effect on the Corporations operations and financial
condition.
Summary
(Dollars
in thousands except per share data)
The Corporations 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 Corporations
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 Corporations 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 Corporations ability to meet its liquidity needs and
fund profitable asset growth, it is a significant measure of the
success of the Corporations business plan. As measured by
the FDIC at June 30, 2009, the Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations 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
Corporations 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 its
available-for-sale
securities prior to call or maturity in order to reinvest the
proceeds in other securities before any further interest rate
cuts reduced the yield on securities available for purchase.
Gains on the sale of
available-for-sale
securities and
mark-to-market
adjustments of trading securities were $690 during 2009,
including $154 in unrealized gain on trading securities.
25
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 Corporations 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 Corporations 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 Corporations securities portfolio
at December 31, 2009 and December 31, 2008 is
presented in Note 5 to the Consolidated Financial
Statements contained within this
Form 10-K.
The Corporation continues to employ the securities portfolio to
manage the Corporations interest rate risk and liquidity
needs.
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 Banks 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 this
Form 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 of
lines-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 a
loan-to-value
ratio of 80% or private mortgage insurance for
loan-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
Managements periodic analysis of the allowance for loan
losses may dictate portions of the allowance be allocated to
specific problem loans, the entire amount is available for any
loan charge-offs that may occur. Table 10 presents the detailed
activity in the allowance for loan losses and related charge-off
activity for the five years ended 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
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 this
Form 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 this
Form 10-K.
The securities were issued in two $10 million tranches, one
of which pays dividends at a fixed rate of 6.64% per annum and
the other of which pays dividends at LIBOR plus 1.48% per annum.
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 Corporations 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 Corporations
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 Corporations 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 Corporations 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
Corporations stock option and employee benefit plans. The
share repurchase program provides that share repurchases are to
be made primarily on the open market from
time-to-time
until the 5 percent maximum is repurchased or the earlier
termination of the repurchase program by the Board of Directors,
at the discretion of Management based upon market, business,
legal and other factors. At December 31, 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 Corporations sale of $25,223 of its
Series B Preferred Stock to the U.S. Treasury in
conjunction with the CPP include limitations on the
Corporations ability to repurchase its common shares. For
three years after the issuance or (if earlier) until the
U.S. Treasury no longer holds any Series B Preferred
Stock, the Corporation is prohibited from repurchasing any of
its common shares or preferred stock without, among other
things, U.S. Treasury approval, or subject to the
availability of certain limited exceptions, such as purchases in
connection with the Corporations benefit plans.
Furthermore, as long as the Series B Preferred Stock issued
to the U.S. Treasury is outstanding, repurchases or
redemptions relating to certain equity securities, including the
Corporations common shares, are prohibited until all
accrued and unpaid dividends are paid on such preferred stock,
subject to certain limited exceptions.
The Federal Reserve Board has established risk-based capital
guidelines that must be observed by financial holding companies
and banks. The Corporation has consistently maintained the
regulatory capital ratios of the Corporation and its bank
subsidiary, The Lorain National Bank, above
well-capitalized levels. For further information on
capital ratios see Notes 1 and 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 Corporations consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America. The Corporation
follows general practices within the banking industry and
application of these principles requires the Management to make
assumptions, estimates and 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.
33
The most significant accounting policies followed by the
Corporation are presented in Note 1 to the Consolidated
Financial Statements. These policies are fundamental to the
understanding of results of operation and financial conditions.
The accounting policies considered to be critical by Management
are as follows:
|
|
|
|
|
Allowance for loan losses
|
The allowance for loan losses is an amount that Management
believes will be adequate to absorb probable credit losses
inherent in the loan portfolio taking into consideration such
factors as past loss experience, changes in the nature and
volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans and current economic
conditions that affect the borrowers ability to pay.
Determination of the allowance is subjective in nature. Loan
losses are charged off against the allowance when Management
believes that the full collectability of the loan is unlikely.
Recoveries of amounts previously charged-off are credited to the
allowance.
A loan is considered impaired when it is probable that not all
principal and interest amounts will be collected according to
the loan contract. Residential mortgage, installment and other
consumer loans are evaluated collectively for impairment.
Individual commercial loans exceeding size thresholds
established by Management are evaluated for impairment. Impaired
loans are written down by the establishment of a specific
allowance where necessary. The fair value of all loans currently
evaluated for impairment is collateral-dependent and therefore
the fair value is determined by the fair value of the underlying
collateral.
The Corporation maintains the allowance for loan losses at a
level adequate to absorb Managements estimate of probable
credit losses inherent in the loan portfolio. The allowance is
comprised of a general allowance, a specific allowance for
identified problem loans and an unallocated allowance
representing estimations pursuant to either Statement of
Financial Accounting Standards ASC 450, Accounting for
Contingencies, or ASC
310-10-45,
Accounting by Creditors for Impairment of a Loan.
The general allowance is determined by applying estimated loss
factors to the credit exposures from outstanding loans. For
commercial and commercial real estate loans, 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
Corporations historical loss experience and are reviewed
for appropriateness on a quarterly basis, along with other
factors affecting the collectability of the loan portfolio.
Specific allowances are established for all 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 Managements evaluation of
existing conditions that are not included in the allocated
allowance determinations. These conditions are reviewed
quarterly by Management and include general economic conditions,
credit quality trends and internal loan review and regulatory
examination findings.
Management believes that it uses the best information available
to determine the adequacy of the allowance for loan losses.
However, future adjustments to the allowance may be necessary
and the results of operations could be significantly and
adversely affected if circumstances differ substantially from
the assumptions used in making the determinations.
The Corporations income tax expense and related current
and deferred tax assets and liabilities are presented as
prescribed in ASC 740, Accounting for Income Taxes.
The accounting requires the periodic review and adjustment of
tax assets and liabilities based on many assumptions. These
assumptions include predictions as to the Corporations
future profitability, as well as potential changes in tax laws
that could impact the deductibility of 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.
34
The goodwill impairment test is a two-step process that requires
Management to make judgments in determining what assumptions to
use in the calculation. The first step in impairment testing is
to estimate the fair value based on valuation techniques
including a discounted cash flow model with revenue and profit
forecasts and comparing those estimated fair values with the
carrying values, which includes the allocated goodwill. If the
carrying value exceeds its fair value, goodwill impairment may
be indicated and a second step is performed to compute the
amount of the impairment by determining an implied fair
value of goodwill. The determination of an implied
fair value of goodwill requires the Corporation to
allocate fair value to the assets and liabilities. Any
unallocated fair value represents the implied fair
value of goodwill, which is compared to its corresponding
carrying value. An impairment loss would be recognized as a
charge to earnings to the extent the carrying amount of the
goodwill exceeds the implied fair value of the goodwill. See
Note 4 (Goodwill and Intangible Assets) for further detail.
New
Accounting Pronouncements
Management is not aware of any proposed regulations or current
recommendations by the Financial Accounting Standards Board or
by regulatory authorities, which, if they were implemented,
would have a material effect on the liquidity, capital
resources, or operations of the Corporation.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
RISK
ELEMENTS
Risk management is an essential aspect in operating a financial
services company successfully and effectively. The most
prominent risk exposures, for a financial services company, are
credit, operational, interest rate, market and liquidity risk.
Credit risk involves the risk of uncollectible interest and
principal balance on a loan when it is due. Fraud, legal and
compliance issues, processing errors, technology and the related
disaster recovery and breaches in business continuation and
internal controls are types of operational risks. Changes in
interest rates affecting net interest income are considered
interest rate risks. Market risk is the risk that a financial
institutions earnings and capital or its ability to meet
its business objectives are adversely affected by movements in
market rates or prices. Such movements include fluctuations in
interest rates, foreign exchange rates, equity prices that
affect the changes in value of
available-for-sale
securities, credit spreads and commodity prices. The inability
to fund obligations due to investors, borrowers or depositors is
liquidity risk. For the Corporation, the dominant risks are
market, credit and liquidity risk.
Credit
Risk Management
Uniform underwriting criteria, ongoing risk monitoring and
review processes, and well-defined, centralized credit policies
dictate the management of credit risk for the Corporation. As
such, credit risk is managed through the Banks allowance
for loan loss policy which requires the loan officer, lending
officers and the loan review committee to manage loan quality.
The Corporations credit policies are reviewed and modified
on an ongoing basis in order to remain suitable for the
management of credit risks within the loan portfolio as
conditions change. The Corporation uses a loan rating system to
properly classify and assess the credit quality of individual
commercial loan transactions. The loan rating system is used to
determine the adequacy of the allowance for loan losses for
financial reporting purposes and to assist in the determination
of the frequency of review for credit exposures.
During 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 Banks business activity is with
customers located within the Banks 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.
35
Nonperforming
Assets
Total nonperforming assets consist of nonperforming loans, loans
which have been restructured and other foreclosed assets. As
such, a loan is considered nonperforming if it is 90 days
past due
and/or in
Managements estimation the collection of interest on the
loan is doubtful. Nonperforming loans no longer accrue interest
and are accounted for on a cash basis. The classification of
restructured loans involves the deterioration of a
borrowers financial ability leading to original terms
being favorably modified or either principal or interest being
forgiven.
Table 13 sets forth nonperforming assets for the five years
ended December 31, 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. Total
30-90 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 Banks liquidity was within its policy limits.
36
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 institutions prime
rate. Table 14 highlights the liquidity position of the Bank and
the Corporation including total borrowing capacity and current
unused capacity for each borrowing arrangement at
December 31, 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 Corporations primary ongoing
needs for liquidity are the payment of the quarterly shareholder
dividend if declared and miscellaneous expenses related to the
regulatory and reporting requirements of a publicly traded
corporation. The holding companys main source of operating
liquidity is the dividend that it receives from the Bank.
Dividends from the Bank are 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
from
time-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 and
earnings-at-risk
simulation of net interest income over the one year planning
cycle and the longer term strategic horizon in order to provide
a stable and steadily increasing flow of net interest income.
The difference between a financial institutions interest
rate sensitive assets and interest rate sensitive liabilities is
referred to as the interest rate gap. An institution that has
more interest rate sensitive assets than interest rate sensitive
liabilities in a given period is said to be asset sensitive or
has a positive gap. This means that if interest rates rise a
corporations net interest income may rise and if interest
rates fall its net interest income may decline. If interest
sensitive liabilities exceed interest sensitive assets then the
opposite impact on net interest income may occur. The usefulness
of the gap measure is limited. It is important to know the gross
dollars of assets and liabilities that may re-price in various
time horizons, but without knowing the frequency and basis of
the potential rate changes the predictive power of the gap
measure is limited.
Two more useful tools in managing market risk are
earnings-at-risk
simulation and economic value of equity simulation. An
earnings-at-risk
analysis is a modeling approach that combines the repricing
information from gap analysis, with forecasts of balance sheet
growth and changes in future interest rates. The result of this
simulation provides management with a range of possible net
interest margin outcomes. Trends that are identified in
earnings-at-risk
simulation can help identify product and pricing decisions that
can be made currently to assure
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 Corporations 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 Corporations 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 Corporations equity by 17.7% while a -200 basis
point change in rates would increase the value of the
Corporations 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
Corporations 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 Corporations 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 companys 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 companys
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
companys 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 of
available-for-sale
securities
|
|
|
38,141
|
|
|
|
77,069
|
|
|
|
|
|
Proceeds from maturities of
available-for-sale
securities
|
|
|
69,307
|
|
|
|
37,728
|
|
|
|
40,042
|
|
Purchase of
available-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
Corporations 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 of
other-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 Corporations 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
transferors 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 Corporations
financial statements.
ASC Topic 810, Consolidation. In November
2009, an amendment to the accounting standards for consolidation
was issued. The new guidance amends the criteria for determining
the primary beneficiary of, and the entity
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
Corporations 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
Managements estimates and assumptions include the
allowance for loan losses, the valuation of goodwill, the
realization of deferred tax assets, fair values of certain
securities, net periodic pension expense, and accrued pension
costs recognized in the Corporations consolidated
financial statements. Estimates that are more susceptible to
change in the near term include the allowance for loan losses
and the fair value of certain securities.
Segment
Information
The Corporations activities are considered to be a single
industry segment for financial reporting purposes. LNB Bancorp,
Inc. is a financial holding company engaged in the business of
commercial and retail banking, investment management and trust
services, title insurance, and insurance with operations
conducted through its main office and banking centers located
throughout Lorain, eastern Erie, western Cuyahoga, and Summit
counties of Ohio. This market provides the source for
substantially all of the Banks deposit and loan and trust
activities. The majority of the Banks income is derived
from a diverse base of commercial, mortgage and retail lending
activities and investments.
Statement
of Cash Flows
For purposes of reporting in the Consolidated Statements of Cash
Flows, cash and cash equivalents include currency on hand,
amounts due from banks, Federal funds sold, and securities
purchased under resale agreements. Generally, Federal funds sold
and securities purchased under resale agreements are for one day
periods.
Securities
Securities that are bought and held for the sole purpose of
being sold in the near term are deemed trading securities with
any related unrealized gains and losses reported in earnings.
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 a
case-by-case
basis. If a loan is impaired, a portion of the allowance may be
allocated so that the loan is reported, net, at the present
value of estimated future cash flows using the loans
existing rate or at the fair value of collateral if repayment is
expected solely from the collateral.
Allowance
for Loan Losses
The allowance for loan losses is Managements estimate of
credit losses inherent in the loan portfolio at the balance
sheet date. Managements determination of the allowance,
and the resulting provision, is based on judgments and
assumptions, including general economic conditions, loan
portfolio composition, loan loss experience, Managements
evaluation of credit risk relating to pools of 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
Managements evaluation of the loan portfolio and the
adequacy of the allowance for loan losses under current economic
conditions and such other factors which, in Managements
judgment, deserve current recognition.
Servicing
Servicing assets are recognized as separate assets when rights
are acquired through sale of financial assets. Capitalized
servicing rights are reported in other assets and are amortized
into noninterest income in proportion to, and over the period
of, the estimated future net servicing income of the underlying
financial assets. Servicing assets are evaluated for impairment
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 Standards ASC 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 Forces ASC
715-60,
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 Issue
06-4 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 Corporations
financial statements as such items are not assets of the
Corporation. Income from the Investment and Trust Services
Division is reported on an accrual basis.
Income
Taxes
The Corporation and its wholly-owned subsidiary file 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 Corporations
available-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 Corporations average
cost of capital adjusted for the risk associated with its
operations. A variance in these assumptions could have a
significant effect on the determination of goodwill impairment.
The Corporation cannot predict the occurrences of certain future
events that might adversely affect the reported value of
goodwill. Such events include, but are not limited to, strategic
decisions in response to economic and competitive conditions,
the effect of the economic environment on the Corporations
customer base or a material negative change in the relationship
with significant customers.
Based on the Corporations goodwill impairment analysis,
the fair value of the reporting unit exceeded its carrying value
by an estimated 10%; therefore, no impairment charge was
recognized as of December 31, 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 Corporations actual
amortization expense in any given period may be significantly
different from the estimated amounts depending upon the addition
of new intangible assets, changes in underlying deposits and
market conditions.
Core
Deposits Intangibles
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
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 securities
available-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
Corporations obligations under the transaction documents,
taken together, have the effect of providing a full guarantee by
the Corporation, on a subordinated basis, of the payment
obligation of the Trusts.
The subordinated notes mature in 2037. Trust I bears a
floating interest rate (current three-month LIBOR plus
148 basis points). Trust II bears a fixed rate of 6.6%
through June 15, 2017, and then becomes a floating interest
rate (current three-month LIBOR plus 148 basis points).
Interest on the notes is payable quarterly.
The subordinated notes are redeemable in whole or in part,
without penalty, at the Corporations option on or after
June 15, 2012 and mature on June 15, 2037. The notes
are junior in right of payment to the prior payment in full of
all Senior Indebtedness of the Corporation, whether outstanding
at the date of this Indenture or thereafter incurred. 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
Corporations Series B Preferred Stock were issued and
outstanding.
The Corporation issued 25,223 shares of Series B
Preferred Stock to the U.S. Treasury in a transaction
exempt from the registration requirements of the Securities Act.
The issued and outstanding shares of Series B Preferred
Stock were validly issued, have been fully paid and are
nonassessable. Holders of shares of Series B Preferred
Stock 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 a
360-day year
consisting of twelve
30-day
months. Dividends payable with respect to the Series B
Preferred Stock are payable to holders of record of shares of
Series B Preferred Stock on the date that is 15 calendar
days immediately preceding the applicable dividend payment date
or such other record date as the board of directors or any duly
authorized committee of the board determines, so long as such
record date is not more than 60 nor less than 10 days prior
to the applicable dividend payment date.
If the Corporation determines not to pay any dividend or a full
dividend with respect to the Series B Preferred Stock, the
Corporation is required to provide written notice to the holders
of shares of Series B Preferred Stock prior to the
applicable dividend payment date.
The Corporation is subject to various regulatory policies and
requirements relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory
minimums. The Board of Governors of the Federal Reserve System,
or the Federal Reserve Board, is authorized to determine, under
certain circumstances relating to the financial condition of a
bank holding company, such as us, that the payment of dividends
would be an unsafe or unsound practice and to prohibit payment
thereof. In addition, we are subject to Ohio state laws relating
to the payment of dividends.
Common
Stock
The Corporation is authorized to issue up to 15,000,000 common
stock shares. Common shares 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 Corporations sale of
$25.2 million of its Series B Preferred
59
Stock to the U.S. Treasury in conjunction with the CPP
include limitations on the Corporations ability to
repurchase its common shares. For three years after the issuance
or until the U.S. Treasury no longer holds any
Series B Preferred Stock, the Corporation is prohibited
from repurchasing any of its common shares or preferred stock
without, among other things, U.S. Treasury approval,
subject to the availability of certain limited exceptions, such
as purchases in connection with the Corporations benefit
plans. Furthermore, as long as the Series B Preferred Stock
issued to the U.S. Treasury is outstanding, repurchases or
redemptions relating to certain equity securities, including the
Corporations common shares, are prohibited until all
accrued and unpaid dividends are paid on such preferred stock,
subject to certain limited exceptions.
Shareholder
Rights Plan
On October 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 Corporations common shares, at 50% of market value.
This would dilute the potential acquirers 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
Corporations Common Shares. Each Unit of the new Preferred
Shares has terms designed to make it the economic equivalent of
one Common share.
LNBB
Direct Stock Purchase and Dividend Reinvestment Plan
The Board of Directors adopted the LNBB Direct Stock Purchase
and Dividend Reinvestment Plan (the Plan) effective June 2001,
replacing the former LNB Bancorp, Inc. Dividend Reinvestment
Plan. The Plan authorized the sale of 500,000 shares of the
Corporations common shares to shareholders who choose to
invest all or a portion of their cash dividends plus additional
cash payments for the Corporations common stock. The
Corporation did not issue shares pursuant to the Plan in 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 Corporations
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 Corporations sale of $25.2 million
of its Series B Preferred Stock to the U.S. Treasury
in conjunction with the CPP include limitations on the
Corporations ability to pay dividends. For three years
after the issuance or until the U.S. Treasury no longer
holds any Series B Preferred Stock, the Corporation will
not be able to increase its dividends above the level of its
quarterly dividend declared during the third quarter of 2008
($0.09 per common share on a quarterly basis) without, among
other things, U.S. Treasury approval. 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 Corporations common shares, are
prohibited until all accrued and unpaid dividends are paid on
such preferred stock, subject to certain limited exceptions.
The Corporation and the Bank are subject to risk-based capital
guidelines issued by the Board of Governors of the Federal
Reserve Board and the Office of Comptroller of Currency. These
guidelines are used to evaluate capital adequacy and include
required minimums as discussed below. The Corporation and the
Bank are subject to the FDIC Improvement Act. The FDIC
Improvement Act established five capital categories ranging from
well capitalized to critically
undercapitalized. These five capital categories are used
by the Federal Deposit Insurance Corporation to determine prompt
corrective action and an institutions semi-annual FDIC
deposit insurance premium assessments.
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 Currencys most recent notification categorized the
Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions
or events since that notification that Management believes have
changed the Banks category. Analysis of the
Corporations and the Banks Regulatory Capital and
Regulatory Capital Requirements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
(17)
|
Retirement
Pension Plan
|
The Banks non-contributory defined benefit pension plan
(the Plan) covers substantially all of its employees. In
general, benefits are based on years of service and the
employees level of compensation. The Banks funding
policy is to contribute annually an actuarially determined
amount to cover current service cost plus amortization of prior
service costs. Effective December 31, 2002, the benefits
under the Plan were frozen and no additional benefits are
accrued under the Plan after December 31, 2002.
The net periodic pension costs charged to expense amounted to
$199 in 2009, $(16) in 2008 and $(15) in 2007. The following
table sets forth the defined benefit pension plans Change
in Projected Benefit Obligation, Change in Plan Assets and
Funded Status, including the Prepaid Asset or Accrued Liability
for the years ended December 31, 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
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 Moodys Aaa and Aa
corporate bond yields as of each plan year-end to determine the
appropriate discount rate to calculate the year-end benefit plan
obligation and the following years net periodic pension
cost.
Plan
Assets
The Banks Retirement Pension Plans weighted-average
assets allocations at December 31, 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.
65
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 Corporations
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 SARs and $79 for stock options. Expense
recorded during 2008 and 2007 was $0 and $0 for SARs and
$78 and $79 for stock options, respectively. The number of
options or SARs and the exercise prices for these
nonqualified incentive options or SARs 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
|
|
|
SARs
|
|
|
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 Corporations 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 Corporations common
stock was to be the Plans 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 employees contribution,
limited to the first six percent of an employees wage.
Effective January 1, 2008, the Plan changed to a
safe-harbor status with a 3% non-elective contribution for all
employees. The Plan uses the contributions of the Corporation to
purchase LNB Bancorp, Inc. common stock. Effective
January 1, 2001, the Plan permits the investment of plan
assets, contributed by employees as well as the Corporation,
among different funds.
The Banks matching contributions are expensed in the year
in which the associated participant contributions are made and
totaled $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 Banks exposure to credit
loss in the event of nonperformance by the other party to the
commitment is represented by the contractual amount of the
commitment. The Bank uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Interest rate risk on commitments to extend credit results from
the possibility that interest rates may have moved unfavorably
from the position of the Bank since the time the commitment was
made.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates of 30 to 120 days or other termination
clauses and may require payment of a fee. Since some of the
commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
The Bank evaluates each customers credit worthiness on a
case-by-case
basis. The amount of collateral obtained by the Bank upon
extension of credit is based on Managements credit
evaluation of the applicant. Collateral held is generally
single-family residential real estate and commercial real
estate. Substantially all of the obligations to extend credit
are variable rate. Standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to
a third party. Standby letters of credit generally are
contingent upon the failure of the customer to perform according
to the terms of the underlying contract with the third party.
A summary of the contractual amount of commitments at
December 31, 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 Corporations business may result in
litigation. Management, after reviewing with counsel all actions
and proceedings pending against or involving LNB Bancorp, Inc.
and subsidiaries, considers that the aggregate liability or
loss, if any, resulting from them will not be material to the
Corporations financial position, results of operation or
liquidity.
|
|
(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 Corporations
financial instruments.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate that value:
|
|
|
|
|
The carrying value of Cash and due from banks, Federal funds
sold, short-term investments, interest bearing deposits in other
banks and accrued interest receivable and other financial assets
is a reasonable estimate of fair value due to the short-term
nature of the asset.
|
|
|
|
The fair value of investment securities is based on 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 existing
on-and-off
balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial
instruments. For example, the Bank has a substantial Investment
and Trust Services Division that contributes net fee income
annually. The Investment and Trust Services Division is not
considered a financial instrument and its value has not been
incorporated into the fair value estimates. Other significant
assets and liabilities that are not considered financial
instruments include 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
Corporations 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
Corporations 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 ASC
310-10-45
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
managements 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 Corporations Exchange Act reports is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to the
Corporations management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
The Corporations management carried out an evaluation,
under the supervision and with the participation of the Chief
Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of LNB Bancorp,
Inc.s disclosure controls and procedures (as such term is
defined in
Rules 13a-15(e)
and
15d-15(e)
promulgated under the Securities Exchange Act of 1934) as
of December 31, 2009, pursuant to the evaluation of these
controls and procedures required by
Rule 13a-15
of the Securities Exchange Act of 1934.
Based upon that evaluation, management concluded as of the end
of the period covered by this Annual Report on
Form 10-K
that the Corporations disclosure controls and procedures
were effective as of December 31, 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 Corporations Chief Executive Officer
and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of the Corporations financial statements for
external reporting purposes in accordance with
U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
LNB Bancorp, Inc.s management assessed the effectiveness
of the Corporations internal control over financial
reporting as of December 31, 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 Corporations internal
control over financial reporting was effective.
|
|
3.
|
Changes
in Internal Control over Financial Reporting
|
No change in the Corporations internal control over
financial reporting occurred during the fiscal quarter ended
December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, the Corporations
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 this
Form 10-K.
Other information required to be included in this Item 10
is incorporated by reference herein from the information about
the Corporations directors provided in the section
captioned PROPOSAL 1 Election of
Directors, the information provided in the section
captioned Section 16(a) Beneficial Ownership
Reporting Compliance, and the information about the
Corporations Audit and Finance Committee, audit committee
financial expert and procedures for recommending nominees to the
Board of Directors and Corporate Governance provided in the
sections captioned Committees of the Board and
Corporate Governance in the Corporations Proxy
Statement for the 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 Corporations 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 Corporations Proxy Statement
for the 2010 Annual Meeting of Shareholders to be filed with the
SEC. The following table shows information about the
Corporations common shares that may be issued upon the
exercise of options, warrants and rights under all of the
Corporations equity compensation plans as of
December 31, 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 |
74
|
|
|
|
|
date of grant. Frank A. Soltis was granted an option to purchase
2,500 shares on June 27, 2005 which vested on the
first year anniversary of the date of grant. Each option may be
exercised for a term of 10 years from the date the option
vests, subject to earlier termination in the event of death,
disability or other termination of the employment of the option
holder. The option holder has up to 12 months following
termination of employment due to death or disability to exercise
the options. The options terminate three months after
termination of employment for reasons other than death,
disability or termination for cause, and immediately upon
termination of employment if for cause. The exercise price and
number of shares covered by the option are to be adjusted to
reflect any share dividend, share split, merger or other
recapitalization of the common shares of the Corporation. The
options are not transferable other than by will or state
inheritance laws. Exercise prices for these options are equal to
fair market value of the common shares at the date of grant. The
stock option for 30,000 shares awarded to Mr. Klimas
on February 1, 2005 has an exercise price of $19.17 per
share, the stock option for 30,000 shares awarded to
Mr. Klimas on February 1, 2006 has an exercise price
of $19.10 per share, the stock option for 30,000 shares
awarded to Mr. Klimas on February 1, 2007 has an
exercise price of $16.00 per share and the stock option for
2,500 shares awarded to Mr. Soltis has an exercise
price of $16.50 per share. The options expire 10 years from
the date of grant. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required to be included in this Item 13 is
incorporated by reference from the information provided in
section captioned Certain Transactions in the
Corporations Proxy Statement for the 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 Corporations Proxy Statement for the 2010 Annual
Meeting of Shareholders to be filed with the SEC.
75
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 on
Form 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 this
Form 10-K.
(b) The exhibits referenced on the following
Exhibit Index are filed as part of this report.
76
Exhibit Index
|
|
|
S-K
|
|
|
Reference
|
|
|
Number
|
|
Exhibit
|
|
3(a)
|
|
LNB Bancorp, Inc. Second Amended Articles of Incorporation.
Incorporated by reference herein from Exhibit 3(a) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
|
3(b)
|
|
Certificate of Amendment to the Amended Articles of
Incorporation, filed with the Ohio Secretary of State on
December 11, 2008. Incorporated by reference herein from
Exhibit 3.1 of the Corporations
Form 8-K
filed on December 17, 2008.
|
3(c)
|
|
LNB Bancorp, Inc. Amended Code of Regulations. Incorporated by
reference herein from Appendix A to the Corporations
Definitive Proxy Statement on Schedule 14A filed
March 16, 2007.
|
4(a)
|
|
Rights Agreement between LNB Bancorp, Inc. and Registrar and
Transfer Corporation dated October 24, 2000. Incorporated
by reference herein from Exhibit 10(r) of the
Corporations
Form 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 Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
|
4(c)
|
|
Indenture, dated as of May 9, 2007, by and between LNB
Bancorp, Inc. and Wells Fargo Bank, National Association, as
Trustee, relating to fixed rate Junior Subordinated Debt
Securities Due June 15, 2037. Incorporated by reference
herein from Exhibit 4.2 of the Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
|
4(d)
|
|
Amended and Restated Declaration of Trust of LNB Trust I,
dated as of May 9, 2007. Incorporated by reference herein
from Exhibit 4.3 of the Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
|
4(e)
|
|
Amended and Restated Declaration of Trust of LNB Trust II,
dated as of May 9, 2007. Incorporated by reference herein
from Exhibit 4.4 of the Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
|
4(f)
|
|
Form of Warrant for Purchase of Shares of Common Stock.
Incorporated by reference herein from Exhibit 4.1 of the
Corporations
Form 8-K
filed on December 17, 2008.
|
10(a)*
|
|
Form of Stock Appreciation Rights Agreement. Incorporated by
reference herein from Exhibit 10.1 to the
Corporations
Form 8-K
filed January 25, 2006.
|
10(b)*
|
|
LNB Bancorp, Inc. Stock Appreciation Rights Plan, as restated.
Incorporated by reference herein from Exhibit 10.2 of the
Corporations
Form 8-K
filed on December 18, 2009.
|
10(c)*
|
|
Stock Option Agreement, effective as of June 27, 2005,
between the Corporation and Frank A. Soltis. Incorporated by
reference herein from Exhibit 10.2 to the
Corporations quarterly report on
Form 10-Q
for the quarter ended September 30, 2005.
|
10(d)*
|
|
Employment Agreement by and between Daniel E. Klimas and LNB
Bancorp, Inc. dated January 28, 2005. Incorporated by
reference herein from Exhibit 10(a) to the
Corporations
Form 10-K
for the fiscal year ended December 31, 2004.
|
10(e)*
|
|
Amendment to Employment Agreement by and between Daniel E.
Klimas and LNB Bancorp, Inc, dated as of July 16, 2008.
Incorporated by reference herein from Exhibit 10.1 of the
Corporations
Form 8-K
filed on July 18, 2008.
|
10(f)*
|
|
Amendment to Employment Agreement by and between Daniel E.
Klimas and LNB Bancorp, Inc, dated as of December 12, 2008.
Incorporated by reference herein from Exhibit 10(f) to the
Corporations
Form 10-K
for the fiscal year ended December 31, 2008.
|
10(g)*
|
|
Amendment to Employment Agreement by and between Daniel E.
Klimas and LNB Bancorp, Inc, dated as of December 15, 2009.
Incorporated by reference herein from Exhibit 10.3 of the
Corporations
Form 8-K
filed on December 18, 2009.
|
10(h)
|
|
Amendment to Supplemental Retirement Benefits Agreement by and
between Gary C. Smith and LNB Bancorp, Inc., and The Lorain
National Bank dated October 6, 2003. Incorporated by
reference herein from Exhibit (10a) to the Corporations
Form 10-K
for the year ended December 31, 2003.
|
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 Corporations annual report on
Form 10-K
for the year ended December 31, 2002.
|
10(j)
|
|
Lorain National Bank Group Term Carve Out Plan dated
August 7, 2002. Incorporated by reference herein from
Exhibit 10(a) to the Corporations quarterly report on
Form 10-Q
for the quarter ended September 30, 2002.
|
10(k)
|
|
Restated and Amended Employment Agreement by and between Gary C.
Smith and LNB Bancorp, Inc, and The Lorain National Bank dated
December 22, 2000. Incorporated by reference herein from
Exhibit 10(a) to the Corporations
Form 10-K
for the year ended December 31, 2001.
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10(l)
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Supplemental Retirement Benefits Agreement by and between Gary
C. Smith and LNB Bancorp, Inc, and The Lorain National Bank
dated December 22, 2000. Incorporated by reference herein
from Exhibit 10(n) of the Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
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10(m)
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Amended Supplemental Retirement Agreement by and between Thomas
P. Ryan and LNB Bancorp, Inc. and The Lorain National Bank dated
December 23, 2000. Incorporated by reference herein from
Exhibit 10(o) of the Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
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10(n)
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Amended Supplemental Retirement Agreement by and between Gregory
D. Friedman and LNB Bancorp, Inc. and The Lorain National Bank
dated December 23, 2000. Incorporated by reference herein
from Exhibit 10(p) of the Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
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10(o)*
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Amended Supplemental Retirement Agreement by and between James
F. Kidd and The Lorain National Bank dated June 15, 1999.
Incorporated by reference herein from Exhibit 10(q) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
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10(p)*
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Supplemental Retirement Agreement by and between James F. Kidd
and The Lorain National Bank dated July 30, 1996.
Incorporated by reference herein from Exhibit 10(t) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
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10(q)
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Supplemental Retirement Agreement by and between Thomas P. Ryan
and The Lorain National Bank dated July 30, 1996.
Incorporated by reference herein from Exhibit 10(u) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
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10(r)
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Supplemental Retirement Agreement by and between Gregory D.
Friedman and The Lorain National Bank dated July 30, 1996.
Incorporated by reference herein from Exhibit 10(v) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
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10(s)
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Agreement To Join In The Filing of Consolidated Federal Income
Tax Returns between LNB Bancorp, Inc. and The Lorain National
Bank dated February 27, 2004. Incorporated by reference
herein from Exhibit 10(w) of the Corporations
Form 10-K
for the fiscal year ended December 31, 2005.
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10(t)*
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LNB Bancorp, Inc. 2006 Stock Incentive Plan, as restated.
Incorporated by reference herein from Exhibit 10.1 of the
Corporations
Form 8-K
filed on December 18, 2009.
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10(u)*
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2008 Management Incentive Plan for Key Executives, as restated.
Incorporated by reference herein from Exhibit 10(ee) of the
Corporations
Form 10-K
for the fiscal year ended December 31, 2008.
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10(v)
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Guarantee Agreement, dated as of May 9, 2007, by and
between LNB Bancorp, Inc. and Wells Fargo Bank, National
Association, as Trustee, relating to securities of LNB
Trust I. Incorporated by reference herein from
Exhibit 10. 1 of the Corporations Form 1
0-Q for the
fiscal quarter ended June 30, 2007.
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10(w)
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Guarantee Agreement, dated as of May 9, 2007, by and
between LNB Bancorp, Inc. and Wells Fargo Bank, National
Association, as Trustee, relating to securities of LNB
Trust II. Incorporated by reference herein from
Exhibit 10.2 of the Corporations
Form 10-Q
for the fiscal quarter ended June 30, 2007.
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10(x)*
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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 Corporations
Form 10-Q
for the fiscal quarter ended September 30, 2007.
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10(y)*
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LNB Bancorp, Inc. 2007 Chief Executive Officer Long Term
Incentive Plan. Incorporated by reference herein from
Exhibit 10.1 of the Corporations
Form 8-K
filed January 15, 2008.
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78
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S-K
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Reference
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Number
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Exhibit
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10(z)*
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Form of Nonqualified Stock Option Agreement under the LNB
Bancorp, Inc. 2006 Stock Incentive Plan. Incorporated by
reference herein from Exhibit 10.1 of the
Corporations
Form 8-K
filed February 6, 2008.
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10(aa)
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Letter Agreement, dated December 12, 2008, between the
Corporation and the U.S. Treasury, which includes the Securities
Purchase Agreement Standard Terms attached thereto,
with respect to the issuance and sale of the Series B
Preferred Stock and Warrant. Incorporated by reference herein
from Exhibit 10.1 of the Corporations
Form 8-K
filed on December 17, 2008.
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10(bb)*
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2009 Management Incentive Plan for Key Executives, as restated.
Incorporated by reference herein from Exhibit 10.1 of the
Corporations
Form 8-K
filed on November 10, 2009.
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10(cc)*
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Form of Restricted Stock Agreement under the LNB Bancorp, Inc.
2006 Stock Incentive Plan. Incorporated by reference herein from
Exhibit 10.1 of the Corporations
Form 8-K
filed February 25, 2010.
|
21.1
|
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Subsidiaries of LNB Bancorp, Inc.
|
23.1
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Consent of Plante & Moran, PLLC.
|
31.1
|
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Certification of the Chief Executive Officer Pursuant to
Rule 13a-14(a)/15-d-14(a),
dated March 12, 2010 for LNB Bancorp, Inc.s annual
report on
Form 10-K
for the year ended December 31, 2009.
|
31.2
|
|
Certification of the Chief Financial Officer Pursuant to
Rule 13a-14(a)/15-d-14(a),
dated March 12, 2010 for LNB Bancorp, Inc.s annual
report on
Form 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
on
Form 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
on
Form 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.
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|
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* |
|
Management contract, compensatory plan or arrangement |
79
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:
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Director
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/s/ Robert
M. Campana
Robert
M. Campana
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Director
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March 12, 2010
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/s/ Terry
D. Goode
Terry
D. Goode
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Director
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March 12, 2010
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/s/ James
F. Kidd
James
F. Kidd
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Vice Chairman and Director
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March 12, 2010
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/s/ J.
Martin Erbaugh
J.
Martin Erbaugh
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Director
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March 12, 2010
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Director
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/s/ Jeffrey
F. Riddell
Jeffrey
F. Riddell
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Director
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March 12, 2010
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/s/ John
W. Schaeffer, M.D.
John
W. Schaeffer, M.D.
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Director
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March 12, 2010
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/s/ Lee
C. Howley
Lee
C. Howley
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Director
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March 12, 2010
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/s/ Donald
F. Zwilling
Donald
F. Zwilling
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Director
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March 12, 2010
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/s/ James
R. Herrick
James
R. Herrick
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Chairman and Director
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March 12, 2010
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/s/ Thomas
P. Perciak
Thomas
P. Perciak
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Director
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March 12, 2010
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80
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/s/ Daniel
G. Merkel
Daniel
G. Merkel
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Director
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March 12, 2010
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/s/ Daniel
E. Klimas
Daniel
E. Klimas
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President and Chief Executive Officer and Director
(Principal Executive Officer)
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March 12, 2010
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/s/ Gary
J. Elek
Gary
J. Elek
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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March 12, 2010
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81