Attached files
file | filename |
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EX-32.2 - EX-32.2 - LNB BANCORP INC | l42235exv32w2.htm |
EX-31.1 - EX-31.1 - LNB BANCORP INC | l42235exv31w1.htm |
EX-32.1 - EX-32.1 - LNB BANCORP INC | l42235exv32w1.htm |
EX-31.2 - EX-31.2 - LNB BANCORP INC | l42235exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-13203
LNB Bancorp, Inc.
(Exact name of the registrant as specified on its charter)
Ohio | 34-1406303 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
457 Broadway, Lorain, Ohio | 44052-1769 | |
(Address of principal executive offices) | (Zip Code) |
(440) 244-6000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 (§232.405 of this chapter) 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 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):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of common shares of the registrant outstanding on May 2, 2011 was 7,884,749.
LNB Bancorp, Inc.
Table of Contents
Table of Contents
2
Table of Contents
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets
March 31, 2011 | December 31, 2010 | |||||||
(unaudited) | ||||||||
(Dollars in thousands except share amounts) | ||||||||
ASSETS |
||||||||
Cash and due from banks (Note 3) |
$ | 19,243 | $ | 17,370 | ||||
Federal funds sold and short-term investments |
45,150 | 30,850 | ||||||
Cash and cash equivalents |
64,393 | 48,220 | ||||||
Interest-bearing deposits in
other banks |
348 | 348 | ||||||
Securities available for sale, at fair value (Note 5) |
235,563 | 221,725 | ||||||
Restricted stock |
5,741 | 5,741 | ||||||
Loans held for sale |
5,261 | 5,105 | ||||||
Loans: (Note 6) |
||||||||
Portfolio loans |
810,629 | 812,579 | ||||||
Allowance for loan
losses (Note 6) |
(17,315 | ) | (16,136 | ) | ||||
Net loans |
793,314 | 796,443 | ||||||
Bank premises and equipment, net |
9,353 | 9,645 | ||||||
Other real estate owned |
3,348 | 3,119 | ||||||
Bank owned life insurance |
17,320 | 17,146 | ||||||
Goodwill, net (Note 4) |
21,582 | 21,582 | ||||||
Intangible assets, net (Note 4) |
835 | 868 | ||||||
Accrued interest receivable |
3,788 | 3,519 | ||||||
Other assets |
14,532 | 19,076 | ||||||
Total Assets |
$ | 1,175,378 | $ | 1,152,537 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Deposits (Note 7) |
||||||||
Demand and other
noninterest-bearing |
$ | 119,704 | $ | 115,476 | ||||
Savings, money market and interest-bearing demand |
348,412 | 318,434 | ||||||
Certificates of deposit |
532,983 | 544,616 | ||||||
Total deposits |
1,001,099 | 978,526 | ||||||
Short-term borrowings (Note 8) |
580 | 932 | ||||||
Federal Home Loan Bank advances (Note 9) |
42,500 | 42,501 | ||||||
Junior subordinated debentures
(Note 10) |
16,238 | 16,238 | ||||||
Accrued interest payable |
1,450 | 1,434 | ||||||
Accrued taxes, expenses and other liabilities |
3,462 | 3,442 | ||||||
Total Liabilities |
1,065,329 | 1,043,073 | ||||||
Shareholders Equity |
||||||||
Preferred stock, Series A Voting, no par value, authorized 150,000
shares, none issued at March 31, 2011 and
December 31, 2010. |
| | ||||||
Preferred stock, Series B, no par value, $1,000 liquidation value,
25,223 shares
authorized and issued at March 31, 2011 and December 31, 2010. |
25,223 | 25,223 | ||||||
Discount on Series B
preferred stock |
(112 | ) | (116 | ) | ||||
Warrant to purchase common
stock |
146 | 146 | ||||||
Common stock, par value $1 per share, authorized 15,000,000 shares,
issued 8,212,943 shares at March 31, 2011 and 8,172,943 at December 31, 2010.
|
8,213 | 8,173 | ||||||
Additional paid-in capital |
39,459 | 39,455 | ||||||
Retained earnings |
41,400 | 40,668 | ||||||
Accumulated other comprehensive income |
1,812 | 2,007 | ||||||
Treasury shares at cost, 328,194 shares at March 31, 2011
and at December 31,
2010 |
(6,092 | ) | (6,092 | ) | ||||
Total Shareholders Equity |
110,049 | 109,464 | ||||||
Total Liabilities and
Shareholders Equity |
$ | 1,175,378 | $ | 1,152,537 | ||||
See accompanying notes to consolidated financial statements.
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Table of Contents
Consolidated Statements of Income (unaudited)
Three Months Ended | ||||||||
March 31, 2011 | March 31, 2010 | |||||||
(Dollars in thousands except share | and per share amounts) | |||||||
Interest and Dividend Income |
||||||||
Loans |
$ | 10,516 | $ | 10,792 | ||||
Securities: |
||||||||
U.S. Government agencies and
corporations |
1,477 | 2,136 | ||||||
State and political subdivisions |
256 | 246 | ||||||
Trading securities |
| 49 | ||||||
Other debt and equity securities |
72 | 61 | ||||||
Federal funds sold and short-term
investments |
14 | 9 | ||||||
Total interest and dividend income |
12,335 | 13,293 | ||||||
Interest Expense |
||||||||
Deposits |
2,283 | 2,980 | ||||||
Federal Home Loan Bank advances |
266 | 318 | ||||||
Short-term borrowings |
1 | 1 | ||||||
Junior subordinated debentures |
171 | 215 | ||||||
Total interest expense |
2,721 | 3,514 | ||||||
Net Interest Income |
9,614 | 9,779 | ||||||
Provision for Loan Losses (Note 6) |
2,100 | 2,109 | ||||||
Net interest income after
provision for loan losses |
7,514 | 7,670 | ||||||
Noninterest Income |
||||||||
Investment and trust services |
403 | 445 | ||||||
Deposit service charges |
916 | 939 | ||||||
Other service charges and fees |
906 | 794 | ||||||
Income from bank owned life insurance |
174 | 171 | ||||||
Other income |
79 | 93 | ||||||
Total fees and other income |
2,478 | 2,442 | ||||||
Securities gains, net |
412 | 38 | ||||||
Gains on sale of loans |
179 | 192 | ||||||
Gains (losses) on sale of other
assets, net |
2 | (21 | ) | |||||
Total noninterest income |
3,071 | 2,651 | ||||||
Noninterest Expense |
||||||||
Salaries and employee benefits |
4,091 | 3,918 | ||||||
Furniture and equipment |
680 | 933 | ||||||
Net occupancy |
612 | 615 | ||||||
Outside services |
486 | 553 | ||||||
Marketing and public relations |
271 | 246 | ||||||
Supplies, postage and freight |
272 | 342 | ||||||
Telecommunications |
215 | 212 | ||||||
Ohio franchise tax |
298 | 281 | ||||||
FDIC assessments |
574 | 528 | ||||||
Other real estate owned |
590 | 81 | ||||||
Electronic banking expenses |
209 | 184 | ||||||
Loan and collection expense |
442 | 323 | ||||||
Other expense |
449 | 477 | ||||||
Total noninterest expense |
9,189 | 8,693 | ||||||
Income before income tax expense |
1,396 | 1,628 | ||||||
Income tax expense |
266 | 297 | ||||||
Net Income |
$ | 1,130 | $ | 1,331 | ||||
Dividends and accretion on preferred
stock |
319 | 319 | ||||||
Net Income Available to Common
Shareholders |
$ | 811 | $ | 1,012 | ||||
Net Income Per Common Share (Note 2) |
||||||||
Basic |
$ | 0.10 | $ | 0.14 | ||||
Diluted |
0.10 | 0.14 | ||||||
Dividends declared |
0.01 | 0.01 | ||||||
Average Common Shares Outstanding |
||||||||
Basic |
7,871,416 | 7,322,662 | ||||||
Diluted |
7,871,432 | 7,322,662 |
See accompanying notes to consolidated financial statements
4
Table of Contents
Consolidated Statements of Shareholders Equity (unaudited)
Preferred | Accumulated | |||||||||||||||||||||||||||||||
Stock | Warrant to | Additional | Other | |||||||||||||||||||||||||||||
(Net of | Purchase | Common | Paid-In | Retained | Comprehensive | Treasury | ||||||||||||||||||||||||||
Discount) | Common Stock | Stock | Capital | Earnings | Income (Loss) | Stock | Total | |||||||||||||||||||||||||
(Dollars in thousands except share and per share amounts) | ||||||||||||||||||||||||||||||||
Balance, January 1, 2010 |
$ | 25,092 | $ | 146 | $ | 7,624 | $ | 37,862 | $ | 36,883 | $ | 2,626 | $ | (6,092 | ) | $ | 104,141 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net Income |
1,331 | 1,331 | ||||||||||||||||||||||||||||||
Other comprehensive
income, net of tax: |
||||||||||||||||||||||||||||||||
Change in unrealized
gains and losses on
securities |
285 | 285 | ||||||||||||||||||||||||||||||
Total comprehensive
income |
1,616 | |||||||||||||||||||||||||||||||
Share-based compensation |
13 | 13 | ||||||||||||||||||||||||||||||
Restricted shares granted
(67,498 shares) |
67 | (67 | ) | | ||||||||||||||||||||||||||||
Preferred dividends and
accretion of discount |
4 | (319 | ) | (315 | ) | |||||||||||||||||||||||||||
Common dividends declared,
$.01 per share |
(74 | ) | (74 | ) | ||||||||||||||||||||||||||||
Balance, March 31, 2010 |
$ | 25,096 | $ | 146 | $ | 7,691 | $ | 37,808 | $ | 37,821 | $ | 2,911 | $ | (6,092 | ) | $ | 105,381 | |||||||||||||||
Balance, January 1, 2011 |
$ | 25,107 | $ | 146 | $ | 8,173 | $ | 39,455 | $ | 40,668 | $ | 2,007 | $ | (6,092 | ) | $ | 109,464 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net Income |
1,130 | 1,130 | ||||||||||||||||||||||||||||||
Other comprehensive
income, net of tax: |
||||||||||||||||||||||||||||||||
Change in unrealized
gains and losses on
securities |
(195 | ) | (195 | ) | ||||||||||||||||||||||||||||
Total comprehensive
income |
935 | |||||||||||||||||||||||||||||||
Share-based compensation |
44 | 44 | ||||||||||||||||||||||||||||||
Restricted shares granted
(40,000 shares) |
40 | (40 | ) | - | ||||||||||||||||||||||||||||
Preferred dividends and
accretion of discount |
4 | (319 | ) | (315 | ) | |||||||||||||||||||||||||||
Common dividends declared,
$.01 per share |
(79 | ) | (79 | ) | ||||||||||||||||||||||||||||
Balance, March 31, 2011 |
$ | 25,111 | $ | 146 | $ | 8,213 | $ | 39,459 | $ | 41,400 | $ | 1,812 | $ | (6,092 | ) | $ | 110,049 | |||||||||||||||
See accompanying notes to consolidated financial statements
5
Table of Contents
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended | ||||||||
March 31, 2011 | March 31, 2010 | |||||||
(Dollars in thousands) | ||||||||
Operating Activities |
||||||||
Net income |
$ | 1,130 | $ | 1,331 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
2,100 | 2,109 | ||||||
Depreciation and amortization |
310 | 383 | ||||||
Amortization of premiums and discounts |
337 | 407 | ||||||
Amortization of intangibles |
33 | 34 | ||||||
Amortization of loan servicing rights |
63 | 73 | ||||||
Amortization of deferred loan fees |
(98 | ) | (36 | ) | ||||
Federal deferred income tax expense (benefit) |
958 | (430 | ) | |||||
Securities gains, net |
(412 | ) | (38 | ) | ||||
Share-based compensation expense |
44 | 13 | ||||||
Loans originated for sale |
(21,859 | ) | (24,150 | ) | ||||
Proceeds from sales of loan originations |
20,468 | 24,434 | ||||||
Net gain from loan sales |
(179 | ) | (192 | ) | ||||
Net (gain) loss on sale of other assets |
(2 | ) | 21 | |||||
Net decrease (increase) in accrued interest receivable and other assets |
2,357 | (71 | ) | |||||
Net increase in accrued interest payable, taxes and other liabilities |
36 | 264 | ||||||
Net cash provided by operating activities |
5,286 | 4,152 | ||||||
Investing Activities |
||||||||
Proceeds
from sales of available-for-sale securities |
15,499 | 4,170 | ||||||
Proceeds from maturities and calls of available-for-sale securities |
11,202 | 20,381 | ||||||
Purchase of available-for-sale securities |
(40,761 | ) | (25,010 | ) | ||||
Change in interest-bearing deposits in other banks |
| (1 | ) | |||||
Proceeds from sale of trading securities |
| 7,774 | ||||||
Net decrease in loans made to customers |
2,184 | 8,620 | ||||||
Proceeds from the sale of other real estate owned |
954 | 47 | ||||||
Purchase of bank premises and equipment |
(18 | ) | (60 | ) | ||||
Net cash used in and provided by investing activities |
(10,940 | ) | 15,921 | |||||
Financing Activities |
||||||||
Net increase (decrease) in demand and other noninterest-bearing |
4,228 | (6,609 | ) | |||||
Net increase (decrease) in savings, money market and interest-bearing demand |
29,978 | (334 | ) | |||||
Net increase (decrease) in certificates of deposit |
(11,633 | ) | 14,562 | |||||
Net increase (decrease) in short-term borrowings |
(350 | ) | 132 | |||||
Proceeds from Federal Home Loan Bank advances |
15,000 | 30,000 | ||||||
Payment of Federal Home Loan Bank advances |
(15,003 | ) | (30,001 | ) | ||||
Dividends paid |
(393 | ) | (389 | ) | ||||
Net cash provided by financing activities |
21,827 | 7,361 | ||||||
Net increase in cash and cash equivalents |
16,173 | 27,434 | ||||||
Cash and cash equivalents, January 1 |
48,220 | 26,933 | ||||||
Cash and cash equivalents, March 31 |
$ | 64,393 | $ | 54,367 | ||||
Supplemental cash flow information |
||||||||
Interest paid |
$ | 2,705 | $ | 3,638 | ||||
Income taxes paid |
| | ||||||
Transfer of loans to other real estate owned |
1,563 | 310 |
See accompanying notes to consolidated financial statements
6
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
(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.
The accompanying unaudited consolidated financial statements were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include information or footnote disclosures
necessary for a complete presentation of financial position, results of operations and cash flows
in conformity with accounting principles generally accepted in the United States of America (US
GAAP). Accordingly, these financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of the Corporation included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2010. However, all
adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial statements have been included. The
results of operations for the three month period ended March 31, 2011, are not necessarily
indicative of the results which may be expected for the entire year.
Use of Estimates
LNB Bancorp Inc. prepares its financial statements in conformity with generally accepted accounting
principles (GAAP), which requires the Corporations management (Management) to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and revenues and
expenses during the reporting period. Actual results could differ from those estimates. Areas
involving the use of Managements estimates and assumptions include the allowance for loan losses,
the valuation of goodwill, the realization of deferred tax assets, fair values of certain
securities, mortgage servicing rights, net periodic pension expense, and accrued pension costs
recognized in the Corporations consolidated financial statements. Estimates that are more
susceptible to change in the near term include the allowance for loan losses and the fair value of
certain assets and liabilities.
Segment Information
The Corporations activities are considered to be a single industry segment for financial reporting
purposes. LNB Bancorp, Inc. is a financial holding company engaged in the business of commercial
and retail banking, investment management and trust services, title insurance, and insurance with
operations conducted through its main office and banking centers located throughout Lorain, Erie,
Cuyahoga, and Summit counties of Ohio. This market provides the source for substantially all of the
Banks deposit and loan and trust activities. The majority of the Banks income is derived from a
diverse base of commercial, mortgage and retail lending activities and investments.
Statement of Cash Flows
For purposes of reporting in the Consolidated Statements of Cash Flows, cash and cash equivalents
include currency on hand, amounts due from banks, Federal funds sold, and securities purchased
under resale agreements. Generally, Federal funds sold and securities purchased under resale
agreements are for one day periods.
Securities
Securities that are bought and held for the sole purpose of being sold in the near term are deemed
trading securities with any related unrealized gains and losses reported in earnings. As of March
31, 2011 and December 31, 2010, the Corporation did not hold any trading securities. Securities
that the Corporation has a positive intent and ability to hold to maturity are classified as held
to maturity. As of March 31, 2011 and December 31, 2010, LNB Bancorp, Inc. did not hold any
securities classified as held to maturity. Securities that are not classified as trading or held to
maturity are classified as available for sale. Securities classified as available for sale are
carried at their fair value with unrealized gains and losses, net of tax, included as a component
of accumulated other comprehensive income. Interest and dividends on securities, including
amortization of premiums and accretion of discounts using the effective interest method over the
period to maturity or call, are included in interest income.
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis,
and more frequently when economic or market conditions warrant such an evaluation. When evaluating
investment securities,
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consideration is given to the length of time and the extent to which the
fair value has been less than cost, the financial condition and near-term prospects of the issuer,
whether the market decline was affected by
macroeconomic conditions and whether the Corporation has the intent to sell the debt security or
more likely than not will be required to sell the debt security before its anticipated recovery. In
analyzing an issuers financial condition, the Corporation may consider whether the securities are
issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether
downgrades by bond rating agencies have occurred, and the results of reviews of the issuers
financial condition. The assessment of whether an other-than-temporary decline exists involves a
high degree of subjectivity and judgment and is based on the information available to management at
a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Corporation
intends to sell the security or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis. If the Corporation decides to sell or it is more
likely than not that it will be required to sell the security before recovery of its amortized cost
basis, the OTTI will be recognized in earnings equal to the entire difference between the
investments amortized cost basis and its fair value at the balance sheet date. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of
the investment. If a security is determined to be other-than-temporarily impaired, but the
Corporation does not intend to sell the security, only the credit portion of the estimated loss is
recognized in earnings, with the other portion of the loss recognized in other comprehensive
income.
Restricted Stock
The Bank is a member of the Federal Home Loan Bank (FHLB) system. Members are required to own a
certain amount of stock based on the level of borrowings and other factors, and may invest in
additional amounts. The Bank is also a member of and owns stock in the Federal Reserve Bank. The
Corporation also owns stock in Bankers Bancshares Inc., an institution that provides correspondent
banking services to community banks. Stock in these institutions is classified as restricted stock
and is recorded at redemption value which approximates fair value. The Corporation periodically
evaluates the restricted stock for impairment based on ultimate recovery of par value. Both cash
and stock dividends are reported as income.
Loans Held For Sale
Held for sale loans are carried at the lower of amortized cost or estimated fair value, determined
on an aggregate basis for each type of loan. Net unrealized losses are recognized by charges to
income. Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in the
noninterest income section of the consolidated statement of income.
Loans
Loans are reported at the principal amount outstanding, net of unearned income and premiums and
discounts. Loans acquired through business combinations are valued at fair market value on or near
the date of acquisition. The difference between the principal amount outstanding and the fair
market valuation is amortized over the aggregate average life of each class of loan. Unearned
income includes deferred fees, net of deferred direct incremental loan origination costs. Unearned
income is amortized to interest income, over the contractual life of the loan, using the interest
method. Deferred direct loan origination fees and costs are amortized to interest income, over the
contractual life of the loan, using the interest method.
Loans are generally placed on nonaccrual status when they are 90 days past due for interest or
principal or when the full and timely collection of interest or principal becomes uncertain. When a
loan has been placed on nonaccrual status, the accrued and unpaid interest receivable is reversed
against interest income. Placement of an account on nonaccrual status includes a reversal of all
previously accrued but uncollected interest against interest income. When doubt exists as to the
collectability of the principal portion of the loan, payments received must be applied to principal
to the extent necessary to eliminate such doubt.
While in nonaccrual status, some or all of the cash interest payments may be treated as interest
income on a cash basis as long as the remaining principal (after charge-off of identified losses,
if any) is deemed to be fully collectible. The determination as to the ultimate collectability
must be supported by a current, well-documented credit evaluation of the borrowers financial
condition and prospects for repayment, including consideration of the borrowers historical
repayment performance and other relevant factors. 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 of principal and interest 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
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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 loans and individual borrowers, sensitivity analysis and expected loss models, value of
underlying collateral, and observations of internal loan review staff or banking regulators.
The provision for loan losses is determined based on Managements evaluation of the loan portfolio
and the adequacy of the allowance for loan losses under current economic conditions and such other
factors which, in Managements judgment, deserve current recognition. Additional
information can be found in Note 6 (Loans and Allowance for Loan Losses).
Servicing
Servicing assets are recognized as separate assets when rights are acquired through sale of
financial assets. Capitalized servicing rights are reported in other assets and are amortized into
noninterest income in proportion to, and over the period of, the estimated future net servicing
income of the underlying financial assets. Servicing assets are evaluated for impairment on a
quarterly basis based upon the fair value of the rights as compared to amortized cost. Impairment
is determined by stratifying rights by predominant characteristics, such as interest rates and
terms. Fair value is determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions. Impairment is
recognized through a valuation allowance for an individual stratum, to the extent that fair value
is less than the capitalized amount for the stratum.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed generally on the straight-line method over the estimated
useful lives of the assets. Upon the sale or other disposition of assets, the cost and related
accumulated depreciation are retired and the resulting gain or loss is recognized. Maintenance and
repairs are charged to expense as incurred, while renewals and improvements are capitalized.
Software costs related to externally developed systems are capitalized at cost less accumulated
amortization. Amortization is computed on the straight-line method over the estimated useful life.
Goodwill and Core Deposit Intangibles
Intangible assets arise from acquisitions and include goodwill and core deposit intangibles.
Goodwill is the excess of purchase price over the fair value of identified net assets in
acquisitions. Core deposit intangibles represent the value of depositor relationships purchased.
Goodwill is tested at least annually for impairment or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The Corporation tests for goodwill
impairment annually as of November 30th of each year. Core deposit intangible assets
are amortized using the straight-line method over ten years and are subject to annual impairment
testing.
Other Real Estate Owned
Other real estate (ORE) is comprised of property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure, and loans classified as in-substance foreclosure.
Other real estate owned is recorded at the lower of the recorded investment in the loan at the time
of acquisition or the fair value of the underlying property collateral, less estimated selling
costs. Any write-down in the carrying value of a property at the time of acquisition is charged to
the allowance for loan losses. Any subsequent write-downs to reflect current fair market value, as
well as gains and losses on disposition and revenues and expenses incurred in maintaining such
properties, are treated as period costs. Other real estate owned also includes bank premises
formerly but no longer used for banking. Banking premises are transferred at the lower of carrying
value or estimated fair value, less estimated selling costs.
9
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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 post-retirement
periods. Based on the present value of expected future cash flows, the liability is recognized
based on the substantive agreement with the employee.
Investment and Trust Services Assets and Income
Property held by the Corporation in fiduciary or agency capacity for its customers is not included
in the Corporations financial statements as such items are not assets of the Corporation. Income
from the Investment and Trust Services Division is reported on an accrual basis.
Income Taxes
The Corporation and its wholly-owned subsidiary file an annual consolidated Federal income tax
return. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be removed or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded when necessary to reduce deferred tax assets to
amounts which are deemed more likely than not to be realized.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income includes unrealized gains and losses on securities available for sale and changes in the
funded status of the pension plan, which are also recognized as separate components of
shareholders equity.
Unrealized gains on the Corporations available-for-sale securities (after applicable income tax
expense) totaling $3,284 and $3,479 at March 31, 2011 and December 31, 2010, respectively, and the
minimum pension liability adjustment (after applicable income tax benefit) totaling $1,472 for both
March 31, 2011 and December 31, 2010, and are included in accumulated other comprehensive income.
Preferred Stock
The Corporation is authorized to issue up to 1,000,000 shares of Voting Preferred Stock, no par
value. As of March 31, 2011 and December 31, 2010, 25,223 shares of the Corporations Fixed Rate
Cumulative Perpetual Preferred Stock, Series B (Series B preferred stock) have been issued. 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. 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 Capital Purchase Program, the Corporation also issued a warrant to purchase
561,343 of its common shares at an exercise price of $6.74.
On October 25, 2010, the Corporation amended its Articles of Incorporation to reduce the number of
authorized Series A Voting Preferred Shares from 750,000 to 150,000. As of March 31,
2011, the Corporation had authorized 150,000 Series A Voting Preferred Shares. No Series A Voting
Preferred Shares have been issued.
New Accounting Pronouncements
ASC Topic 310: Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses. On April 5, 2011, the FASB issued a final standard to assist creditors in
determining whether a modification of the terms of a receivable meets the definition of a troubled
debt restructuring (TDR). The final standard, Accounting Standards Update (ASU) No. 2011-02,
Receivables (Topic 310): A Creditors Determination of Whether a Restructuring Is a Troubled Debt
Restructuring, was issued as a result of stakeholders questioning whether additional guidance or
clarification was needed to assist creditors with determining whether a modification is a TDR. The
final standard does not change the long-standing guidance that a restructuring of a debt
constitutes a TDR if the creditor for economic or legal reasons related to the debtors financial
difficulties grants a concession to the debtor that it would not otherwise consider. In other
words, the creditor must conclude that both the restructuring constitutes a concession, and the
debtor is experiencing financial difficulties. The new guidance will be effective for interim and
annual periods beginning on or after June 15, 2011, and should be applied retrospectively to
restructurings occurring on or after the beginning of the fiscal year of adoption. The adoption of
this standard is
10
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not expected to have a material impact on the Corporations financial statements. See Note 6,
Allowance for Loan Losses, for additional information.
ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About
Fair Value Measurements. In January 2010, FASB issued ASU 2010-06 which requires new disclosures
regarding significant transfers in and out of Level 1 and 2 fair value measurements and the reasons
for the transfers. This ASU also requires that a reporting entity should present separately
information about purchases, sales, issuances and settlements, on a gross basis rather than a net
basis for activity in Level 3 fair value measurements using significant unobservable inputs. It
also clarifies existing disclosures on the level of disaggregation, in that the reporting entity
needs to use judgment in determining the appropriate classes of assets and liabilities, and that a
reporting entity should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and 3.
The new disclosures and clarifications of existing disclosures for ASC 820 became effective for
interim and annual reporting periods beginning after December 15, 2010, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. See Note 13, Estimated Fair Value of
Financial Instruments, for additional information.
Reclassification
Certain amounts appearing in the prior years financial statements have been reclassified to
conform to the current periods financial statements.
(2) Earnings Per Share
Basic earnings 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:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands except per share amounts) | ||||||||
Weighted average shares outstanding used in Basic
Earnings per Common Share |
7,871,416 | 7,322,662 | ||||||
Dilutive effect of incentive stock options and
warrants |
16 | | ||||||
Weighted average shares outstanding used in
Diluted Earnings Per Common Share |
7,871,432 | 7,322,662 | ||||||
Net Income |
$ | 1,130 | $ | 1,331 | ||||
Dividends and accretion on preferred stock |
319 | 319 | ||||||
Income Available to Common Shareholders |
$ | 811 | $ | 1,012 | ||||
Basic Earnings Per Common Share |
$ | 0.10 | $ | 0.14 | ||||
Diluted Earnings Per Common Share |
$ | 0.10 | $ | 0.14 | ||||
Options for 197,000 common shares and common stock warrants for 561,343 shares were considered in
computing diluted earnings per common share for the three month period ended March 31, 2011. As of
March 31, 2011, stock options of 2,500 were considered dilutive and the remaining stock options and
the stock warrants were antidilutive. Stock options for 198,000 common shares and common stock
warrants of 561,343 were considered in computing diluted earnings per common share for the three
month period ended March 31, 2010. All stock options and warrants were antidilutive as of March
31, 2010.
(3) Cash and Due from Banks
Federal Reserve Board regulations require the Bank to maintain reserve balances on deposits with
the Federal Reserve Bank of Cleveland. The required ending reserve balance was $1,811 on March 31,
2011 and $1,195 on December 31, 2010.
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(4) Goodwill and Intangible Assets
The Corporation has goodwill of $21,582 primarily from an acquisition completed in 2007. The
Corporation assesses goodwill for impairment annually and more frequently in certain circumstances.
Goodwill is assessed using the Bank as the reporting unit. The Corporation considers several
methodologies in determining the fair value of the reporting unit, including the discounted
estimated future net cash flows, price to tangible book value, and core deposit premium values.
Primary reliance is placed on the discounted estimated future net cash flow approach. The key
assumptions used to determine the fair value of the Corporation subsidiary include: (a) cash flow
period of 5 years; (b) capitalization rate of 10.0%; and (c) a discount rate of 13.0%, which is
based on the Corporations average cost of capital adjusted for the risk associated with its
operations. A variance in these assumptions could have a significant effect on the determination
of goodwill impairment. The Corporation cannot predict the occurrences of certain future events
that might adversely affect the reported value of goodwill. Such events include, but are not
limited to, strategic decisions in response to economic and competitive conditions, the effect of
the economic environment on the Corporations customer base or a material negative change in the
relationship with significant customers.
Core deposit intangibles are amortized over their estimated useful life of 10 years. A summary of
core deposit intangible assets follows:
March 31, 2011 | December 31, 2010 | |||||||
(Dollars in thousands) | ||||||||
Core deposit intangibles |
$ | 1,367 | $ | 1,367 | ||||
Less: accumulated amortization |
532 | 499 | ||||||
Carrying value of core deposit intangibles |
$ | 835 | $ | 868 | ||||
(5) Securities
The amortized cost, gross unrealized gains and losses and fair values of securities available for
sale at March 31, 2011 and December 31, 2010 is as follows:
At March 31, 2011 | ||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Securities available for sale: |
||||||||||||||||
U.S. Government agencies and corporations |
$ | 58,885 | $ | 132 | $ | (546 | ) | $ | 58,471 | |||||||
Mortgage backed securities |
106,219 | 3,890 | (51 | ) | 110,058 | |||||||||||
Collateralized mortgage obligations |
40,845 | 1,054 | | 41,899 | ||||||||||||
State and political subdivisions |
24,639 | 702 | (206 | ) | 25,135 | |||||||||||
Total securities available for sale |
$ | 230,588 | $ | 5,778 | $ | (803 | ) | $ | 235,563 | |||||||
At December 31, 2010 | ||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Securities available for sale: |
||||||||||||||||
U.S. Government agencies and corporations |
$ | 56,239 | $ | 511 | $ | (682 | ) | $ | 56,068 | |||||||
Mortgage backed securities |
91,793 | 4,128 | (30 | ) | 95,891 | |||||||||||
Collateralized mortgage obligations |
44,297 | 1,249 | (27 | ) | 45,519 | |||||||||||
State and political subdivisions |
24,125 | 522 | (400 | ) | 24,247 | |||||||||||
Total securities available for sale |
$ | 216,454 | $ | 6,410 | $ | (1,139 | ) | $ | 221,725 | |||||||
The carrying value of securities pledged to secure trust deposits, public deposits, line of credit,
and for other purposes required by law amounted to $140,238 and $152,079 at March 31, 2011 and
December 31, 2010 respectively.
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The amortized cost and fair value of the debt securities portfolio are shown by expected maturity.
Expected maturities may differ from contractual maturities if issuers have the right to call or
prepay obligations with or
without call or prepayment penalties. U.S. Government agencies and corporations include callable
and bullet agency issues and agency-backed mortgage backed securities. Mortgage backed securities
are not due at a single maturity date and are shown separately.
At March 31, 2011 | ||||||||
(Dollars in thousands) | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Securities available for sale: |
||||||||
Due in one year or less |
$ | | $ | | ||||
Due from one year to five years |
36,129 | 36,000 | ||||||
Due from five years to ten years |
18,264 | 18,822 | ||||||
Due after ten years |
29,131 | 28,784 | ||||||
Mortgage backed securities and
Collateralized Mortgage Obligations |
147,064 | 151,957 | ||||||
Total |
$ | 230,588 | $ | 235,563 | ||||
Realized gains and losses related to securities available-for-sale at March 31, 2011 and 2010 is as
follows:
March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Gross realized gains |
$ | 412 | $ | 138 | ||||
Gross realized losses |
| (100 | ) | |||||
Net securities gains |
$ | 412 | $ | 38 | ||||
Proceeds from the sale of available
for sale securities |
$ | 15,499 | $ | 4,170 | ||||
The securities portfolio contained $6,000 and $6,721 in non-rated securities of state and political
subdivisions at March 31, 2011 and December 31, 2010, respectively. Based upon yield, term to
maturity and market risk, the fair value of these securities was estimated to be $6,114 and $6,784
at March 31, 2011 and December 31, 2010, respectively. Management reviewed these non-rated
securities and has determined that there was no other than temporary impairment to their value at
March 31, 2011 and December 31, 2010.
The following is a summary of securities that had unrealized losses at March 31, 2011 and December
31, 2010. The information is presented for securities that have been in an unrealized loss position
for less than 12 months and for more than 12 months. At March 31, 2011 there were 28 securities
with unrealized losses totaling $803 and at December 31, 2010, the Corporation held 33 securities
with unrealized losses totaling $1,139. 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 and the intent to hold these
securities until their value recovers.
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At March 31, 2011 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
U.S. Government agencies and corporations |
$ | 38,278 | $ | (546 | ) | $ | | $ | | $ | 38,278 | $ | (546 | ) | ||||||||||
Mortgage backed securities |
6,395 | (51 | ) | | | 6,395 | (51 | ) | ||||||||||||||||
State and political subdivisions |
1,942 | (206 | ) | | | 1,942 | (206 | ) | ||||||||||||||||
Total |
$ | 46,615 | $ | (803 | ) | $ | | $ | | $ | 46,615 | $ | (803 | ) | ||||||||||
At December 31, 2010 | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
U.S. Government agencies and corporations |
$ | 29,352 | $ | (682 | ) | $ | | $ | | $ | 29,352 | $ | (682 | ) | ||||||||||
Mortgage backed securities |
14,617 | (30 | ) | | | 14,617 | (30 | ) | ||||||||||||||||
Collateralized mortgage obligations |
10,027 | (27 | ) | | | 10,027 | (27 | ) | ||||||||||||||||
State and political subdivisions |
1,633 | (400 | ) | | | 1,633 | (400 | ) | ||||||||||||||||
Total |
$ | 55,629 | $ | (1,139 | ) | $ | | $ | | $ | 55,629 | $ | (1,139 | ) | ||||||||||
(6) Loans 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. While Managements
periodic analysis of the allowance for loan losses may dictate portions of the allowance be
allocated to specific problem loans, the entire amount is available for any loan charge-offs that
may occur. Loan losses are charged off against the allowance when Management believes that the
full collectability of the loan is unlikely. Recoveries of amounts previously charged-off are
credited to the allowance.
The allowance is comprised of a general allowance and a specific allowance for identified problem
loans. The general allowance is determined by applying estimated loss factors to the credit
exposures from outstanding loans. The methodology applies to the Corporations total loan
portfolio including the performing portion of commercial and commercial real estate loans, real
estate, and all types of other loans. The loss factors are applied accordingly on a portfolio
basis. Loss factors are based on the Corporations historical loss experience and are reviewed for
appropriateness on a quarterly basis, along with other factors affecting the collectability of the
loan portfolio. These other factors include but are not limited to: changes in lending policies
and procedures, including underwriting standards and collection, charge-off and recovery practices;
changes in national and local economic and business conditions, including the condition of various
market segments; changes in the nature and volume of the portfolio; changes in the experience,
ability, and depth of lending management and staff; changes in the volume and severity of past due
and classified loans, the volume of nonaccrual loans, troubled debt restructurings and other loan
modifications; the existence and effect of any concentrations of credit, and changes in the level
of such concentrations; and the effect of external factors, such as legal and regulatory
requirements, on the level of estimated credit losses in the Corporations current portfolio.
Specific allowances are established for all impaired loans when Management has determined that, due
to identified significant conditions, it is probable that a loss will be incurred.
Activity in the Loan balances and the allowance for loan losses by segment at March 31, 2011 and
December 31, 2010 are summarized as follows:
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Home | ||||||||||||||||||||||||||||
Commercial | Equity | |||||||||||||||||||||||||||
March 31, 2011 | Commercial | Real Estate | Residential | Loans | Indirect | Consumer | Total | |||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||
Balance, beginning of year |
$ | 1,317 | $ | 11,127 | $ | 805 | $ | 1,512 | $ | 471 | $ | 904 | $ | 16,136 | ||||||||||||||
Losses charged off |
| (230 | ) | (273 | ) | (345 | ) | (195 | ) | (69 | ) | (1,112 | ) | |||||||||||||||
Recoveries |
31 | 102 | 4 | 1 | 25 | 28 | 191 | |||||||||||||||||||||
Provision charged to expense |
(197 | ) | 1,004 | 390 | 772 | 601 | (470 | ) | 2,100 | |||||||||||||||||||
Balance, end of period |
$ | 1,151 | $ | 12,003 | $ | 926 | $ | 1,940 | $ | 902 | $ | 393 | $ | 17,315 | ||||||||||||||
Ending allowance balance
attributable to loans: |
||||||||||||||||||||||||||||
Individually evaluated for
impairment |
$ | 199 | $ | 7,508 | $ | 26 | $ | | $ | | $ | | $ | 7,733 | ||||||||||||||
Collectively evaluated for
impairment |
952 | 4,495 | 900 | 1,940 | 902 | 393 | 9,582 | |||||||||||||||||||||
Total ending allowance balance |
$ | 1,151 | $ | 12,003 | $ | 926 | $ | 1,940 | $ | 902 | $ | 393 | $ | 17,315 | ||||||||||||||
Loans: |
||||||||||||||||||||||||||||
Individually evaluated for
impairment |
$ | 1,027 | $ | 38,850 | $ | 2,561 | $ | | $ | | $ | | $ | 42,438 | ||||||||||||||
Collectively evaluated for
impairment |
65,597 | 340,358 | 67,604 | 131,119 | 150,196 | 13,317 | 768,191 | |||||||||||||||||||||
Total ending loans balance |
$ | 66,624 | $ | 379,208 | $ | 70,165 | $ | 131,119 | $ | 150,196 | $ | 13,317 | $ | 810,629 | ||||||||||||||
Home | ||||||||||||||||||||||||||||
Commercial | Equity | |||||||||||||||||||||||||||
December 31, 2010 | Commercial | Real Estate | Residential | Loans | Indirect | Consumer | Total | |||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||
Balance, beginning of year |
$ | 862 | $ | 14,390 | $ | 528 | $ | 1,591 | $ | 622 | $ | 799 | $ | 18,792 | ||||||||||||||
Losses charged off |
(1,507 | ) | (8,508 | ) | (1,491 | ) | (1,091 | ) | (573 | ) | (455 | ) | (13,625 | ) | ||||||||||||||
Recoveries |
157 | 87 | 30 | 39 | 138 | 293 | 744 | |||||||||||||||||||||
Provision charged to expense |
1,805 | 5,158 | 1,738 | 973 | 284 | 267 | 10,225 | |||||||||||||||||||||
Balance, end of year |
$ | 1,317 | $ | 11,127 | $ | 805 | $ | 1,512 | $ | 471 | $ | 904 | $ | 16,136 | ||||||||||||||
Ending allowance balance
attributable to loans: |
||||||||||||||||||||||||||||
Individually evaluated for
impairment |
$ | 206 | $ | 6,865 | $ | 46 | $ | | $ | | $ | | $ | 7,117 | ||||||||||||||
Collectively evaluated for
impairment |
1,111 | 4,262 | 759 | 1,512 | 471 | 904 | 9,019 | |||||||||||||||||||||
Total ending allowance balance |
$ | 1,317 | $ | 11,127 | $ | 805 | $ | 1,512 | $ | 471 | $ | 904 | $ | 16,136 | ||||||||||||||
Loans: |
||||||||||||||||||||||||||||
Individually evaluated for
impairment |
$ | 1,333 | $ | 38,853 | $ | 4,482 | $ | | $ | | $ | | $ | 44,668 | ||||||||||||||
Collectively evaluated for
impairment |
64,329 | 336,950 | 70,203 | 132,536 | 150,031 | 13,862 | 767,911 | |||||||||||||||||||||
Total ending loans balance |
$ | 65,662 | $ | 375,803 | $ | 74,685 | $ | 132,536 | $ | 150,031 | $ | 13,862 | $ | 812,579 | ||||||||||||||
Activity in the allowance for loan losses for the three month period ended March 31, 2010 is
summarized as follows:
March 31, 2010 | ||||
(Dollars in thousands) | ||||
Balance at the beginning of period |
$ | 18,792 | ||
Provision for loan losses |
2,109 | |||
Loans charged-off |
(1,851 | ) | ||
Recoveries on loans previously charged-off |
133 | |||
Balance at the end of the period |
$ | 19,183 | ||
Delinquencies
Delinquencies are a sign of weakness in credit quality. Lending staff at the Corporation monitor
the financial performance and delinquency of borrowers in their portfolios. Lenders are responsible
for managing delinquencies by following up with their borrowers and making arrangement for
payments. The Corporation determines if a commercial or commercial real estate loan is delinquent
based on the number of days past due according to the contractual terms of the note. For
residential, home equity and consumer loans, the Corporation considers the
borrower delinquent if they are in arrears two or more monthly payments. The following sequence is
followed in managing delinquent accounts:
15-30 days past due- a collection notice is sent reminding the customer of past due status
and the urgency of bringing the account current.
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45 days past due- a default letter is sent declaring the loan in default and advising the customer that legal action
will be necessary if the account is not brought current immediately.
60 days past due- an attorney letter accelerating the loan is sent advising the borrower
that legal proceedings to collect the debt will begin immediately.
Management monitors delinquencies and potential problem loans on a recurring basis. At March 31, 2011
there was $38,831 in total past due loans or 4.79% of total loans compared to $36,316 or 4.48% of
total loans at December 31, 2010. A table showing total loan delinquencies as of March 31, 2011 and
December 31, 2010 by loan segment is as follows:
Age Analysis of Past Due Loans
as of March 31, 2011
as of March 31, 2011
Recorded | ||||||||||||||||||||||||||||
30-59 Days | 60-89 Days | Greater than | Investment > | |||||||||||||||||||||||||
(Dollars in thousands) | Past Due | Past Due | 90 Days | Total Past Due | Current | Total Loans | 90 Days and Accruing | |||||||||||||||||||||
Commercial |
$ | 41 | $ | 484 | $ | 805 | $ | 1,330 | $ | 65,294 | $ | 66,624 | $ | | ||||||||||||||
Commercial Real Estate |
3,973 | 2,474 | 19,688 | 26,135 | 353,073 | 379,208 | | |||||||||||||||||||||
Residential |
910 | 1,154 | 6,025 | 8,089 | 62,076 | 70,165 | 331 | |||||||||||||||||||||
Home Equity Loans |
1,222 | 50 | 923 | 2,195 | 128,924 | 131,119 | | |||||||||||||||||||||
Indirect |
519 | 114 | 115 | 748 | 149,448 | 150,196 | ||||||||||||||||||||||
Consumer |
310 | 6 | 18 | 334 | 12,983 | 13,317 | | |||||||||||||||||||||
Total |
$ | 6,975 | $ | 4,282 | $ | 27,574 | $ | 38,831 | $ | 771,798 | $ | 810,629 | $ | 331 | ||||||||||||||
Age Analysis of Past Due Loans
as of December 31, 2010
as of December 31, 2010
Recorded | ||||||||||||||||||||||||||||
30-59 Days | 60-89 Days | Greater than | Investment > | |||||||||||||||||||||||||
(Dollars in thousands) | Past Due | Past Due | 90 Days | Total Past Due | Current | Total Loans | 90 Days and Accruing | |||||||||||||||||||||
Commercial |
$ | 31 | $ | 211 | $ | 793 | $ | 1,035 | $ | 64,627 | $ | 65,662 | $ | | ||||||||||||||
Commercial Real Estate |
1,906 | 856 | 19,970 | 22,732 | 353,071 | 375,803 | | |||||||||||||||||||||
Residential |
1,018 | 1,284 | 7,172 | 9,474 | 65,211 | 74,685 | | |||||||||||||||||||||
Home Equity Loans |
776 | 235 | 1,130 | 2,141 | 130,395 | 132,536 | | |||||||||||||||||||||
Indirect |
612 | 123 | 112 | 847 | 149,184 | 150,031 | ||||||||||||||||||||||
Consumer |
61 | | 26 | 87 | 13,775 | 13,862 | | |||||||||||||||||||||
Total |
$ | 4,404 | $ | 2,709 | $ | 29,203 | $ | 36,316 | $ | 776,263 | $ | 812,579 | $ | | ||||||||||||||
Impaired Loans
A loan is considered impaired when it is probable that not all principal and interest amounts
will be collected according to the loan contract. Residential mortgage, installment and other
consumer loans are evaluated collectively for impairment. Individual commercial loans are evaluated
for impairment. Impaired loans are written
down by the establishment of a specific allowance where necessary. Information regarding
impaired loans as of March 31, 2011 and December 31, 2010 is as follows:
16
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Recorded | Unpaid Principal | Related | Average Recorded | Interest Income | ||||||||||||||||
At March 31, 2011 | Investment | Balance | Allowance | Balance | Recognized | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial |
$ | 259 | $ | 259 | $ | | $ | 534 | $ | | ||||||||||
Commercial Real Estate |
6,934 | 9,098 | | 4,755 | 195 | |||||||||||||||
Residential |
2,185 | 2,366 | | 2,187 | 3 | |||||||||||||||
Home Equity Loans |
| | | | | |||||||||||||||
Indirect |
| | | | | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
With allowance recorded: |
||||||||||||||||||||
Commercial |
768 | 1,416 | 199 | 662 | | |||||||||||||||
Commercial Real Estate |
31,916 | 36,175 | 7,508 | 29,602 | 13 | |||||||||||||||
Residential |
376 | 376 | 26 | 377 | | |||||||||||||||
Home Equity Loans |
| | | | | |||||||||||||||
Indirect |
| | | | | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Total |
$ | 42,438 | $ | 49,690 | $ | 7,733 | $ | 38,117 | $ | 211 | ||||||||||
Recorded | Unpaid Principal | Related | Average Recorded | Interest Income | ||||||||||||||||
At December 31, 2010 | Investment | Balance | Allowance | Balance | Recognized | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial |
$ | 549 | $ | 549 | $ | | $ | 600 | $ | 16 | ||||||||||
Commercial Real Estate |
6,393 | 10,367 | | 8,643 | 133 | |||||||||||||||
Residential |
4,031 | 3,432 | | 2,666 | | |||||||||||||||
Home Equity Loans |
| | | | | |||||||||||||||
Indirect |
| | | | | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
With allowance recorded: |
||||||||||||||||||||
Commercial |
784 | 1,432 | 206 | 1,143 | | |||||||||||||||
Commercial Real Estate |
32,460 | 35,483 | 6,865 | 29,946 | 6 | |||||||||||||||
Residential |
451 | 1,416 | 46 | 102 | | |||||||||||||||
Home Equity Loans |
| | | | | |||||||||||||||
Indirect |
| | | | | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Total |
$ | 44,668 | $ | 52,679 | $ | 7,117 | $ | 43,100 | $ | 155 | ||||||||||
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Nonaccrual loans at March 31, 2011 were $37,808, compared to $41,831 at December 31, 2010.
Loans On NonAccrual Status
March 31, 2011 | December 31,2010 | |||||||
(Dollars in thousands) | ||||||||
Commercial |
$ | 1,288 | $ | 1,333 | ||||
Commercial Real Estate |
24,904 | 25,941 | ||||||
Residential |
8,417 | 11,052 | ||||||
Home Equity Loans |
2,213 | 2,372 | ||||||
Indirect |
664 | 667 | ||||||
Consumer |
322 | 466 | ||||||
Total Nonaccrual Loans |
$ | 37,808 | $ | 41,831 | ||||
Percentage of nonaccrual loans to portfolio loans |
4.66 | % | 5.15 | % | ||||
Percentage of nonaccrual loans to total assets |
3.22 | % | 3.63 | % |
Troubled Debt Restructuring
A restructuring of a debt constitutes a troubled debt restructuring if the creditor for
economic or legal reasons related to the debtors financial difficulties grants a concession to the
debtor that it would not otherwise consider. That concession either stems from an agreement between
the creditor and the debtor or is imposed by law or a court. The Corporation adheres to ASC 310-40,
Troubled Debt Restructurings by Creditors, to determine whether a troubled debt structuring applies
in a particular instance. As of March 31, 2011, the Corporation had two loans that were classified
as troubled debt restructurings which totaled $1,027. As of December 31, 2010, the Corporation had
one loan that was classified as a troubled debt restructuring in the amount of $636. The loans
have made timely payments of principal and interest per the modified agreement throughout 2011.
Credit Risk Grading
Sound credit systems, practices and procedures such as credit risk grading systems; effective
credit review and examination processes; effective loan monitoring, problem identification, and
resolution processes; and a conservative loss recognition process and charge-off policy are
integral to Managements proper assessment of the adequacy of the allowance. Many factors are
considered when grades are assigned to individual loans such as current and historic delinquency,
financial statements of the borrower, current net realizable value of collateral and the general
economic environment and specific economic trends affecting the portfolio. Commercial, commercial
real estate and residential construction loans are assigned internal credit risk grades. The
loans internal credit risk grade is reviewed on at least an annual basis and more frequently if
needed based on specific borrower circumstances. Credit quality indicators used in Managements
periodic analysis of the adequacy of the allowance include the Corporations internal credit risk
grades which are described below and are included in the table below for March 31, 2011 and
December 31, 2010:
| Grades 1 -5: defined as Pass credits loans which are protected by the borrowers current net worth and paying capacity or by the value of the underlying collateral. Pass credits are current or have not displayed a significant past due history. | ||
| Grade 6: defined as Special Mention credits loans where a potential weakness or risk exists, which could cause a more serious problem if not monitored. Loans listed for special mention generally demonstrate a history of repeated delinquencies, which may indicate a deterioration of the repayment abilities of the borrower. | ||
| Grade 7: defined as Substandard credits loans that have a well-defined weakness based on objective evidence and is characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. | ||
| Grade 8: defined as Doubtful credits loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable. | ||
| Grade 9: defined as Loss credits loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. |
For residential, home equity, indirect and consumer loan segments, the Corporation monitors credit
quality using a combination of the delinquency status of the loan and/or the Corporations internal
credit risk grades as indicated above.
18
Table of Contents
The following table presents the recorded investment of commercial, commercial real estate and
residential construction loans by internal credit risk grade and the recorded investment in
residential, home equity, indirect and consumer loans based on delinquency status as of March 31,
2011 and December 31, 2010:
Commercial Real | Home Equity | ||||||||||||||||||||||||||||
Commercial | Estate | Residential* | Loans | Indirect | Consumer | Total | |||||||||||||||||||||||
Commercial Credit Exposure | March 31, 2011 | ||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||
Loans graded by internal credit risk grade: |
|||||||||||||||||||||||||||||
Grade 1 - Minimal |
$ | 3,166 | $ | | $ | | $ | | $ | | $ | | $ | 3,166 | |||||||||||||||
Grade 2 - Modest |
| | | | | | | ||||||||||||||||||||||
Grade 3 - Better than average |
155 | 2,970 | | | | | 3,125 | ||||||||||||||||||||||
Grade 4 - Average |
8,206 | 53,347 | 264 | | | | 61,817 | ||||||||||||||||||||||
Grade 5 - Acceptable |
51,125 | 255,418 | 4,054 | | | | 310,597 | ||||||||||||||||||||||
Total Pass Credits |
62,652 | 311,735 | 4,318 | | | | 378,705 | ||||||||||||||||||||||
Grade 6 - Special mention |
2,273 | 16,178 | 367 | | | | 18,818 | ||||||||||||||||||||||
Grade 7 - Substandard |
1,699 | 51,295 | 2,291 | | | | 55,285 | ||||||||||||||||||||||
Grade 8 - Doubtful |
| | | | | | | ||||||||||||||||||||||
Grade 9 - Loss |
| | | | | | | ||||||||||||||||||||||
Total loans internally credit risk graded |
66,624 | 379,208 | 6,976 | | | | 452,808 | ||||||||||||||||||||||
Loans not monitored by internal risk grade: |
|||||||||||||||||||||||||||||
Current loans not internally risk graded |
| | 56,593 | 128,924 | 149,448 | 12,983 | 347,948 | ||||||||||||||||||||||
30-59 days past due loans not internally risk graded |
| | 910 | 1,222 | 519 | 310 | 2,961 | ||||||||||||||||||||||
60-89 days past due loans not internally risk graded |
| | 491 | 50 | 114 | 6 | 661 | ||||||||||||||||||||||
90+ days past due loans not internally risk graded |
| | 5,195 | 923 | 115 | 18 | 6,251 | ||||||||||||||||||||||
Total loans not internally credit risk graded |
| | 63,189 | 131,119 | 150,196 | 13,317 | 357,821 | ||||||||||||||||||||||
Total loans internally and not internally credit risk graded |
$ | 66,624 | $ | 379,208 | $ | 70,165 | $ | 131,119 | $ | 150,196 | $ | 13,317 | $ | 810,629 | |||||||||||||||
Commercial Real | Home Equity | |||||||||||||||||||||||||||
Commercial | Estate | Residential* | Loans | Indirect | Consumer | Total | ||||||||||||||||||||||
Commercial Credit Exposure | December 31, 2010 | |||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Loans graded by internal credit risk grade: |
||||||||||||||||||||||||||||
Grade 1 - Minimal |
$ | 3,124 | $ | | $ | | $ | | $ | | $ | | $ | 3,124 | ||||||||||||||
Grade 2 - Modest |
| | | | | | | |||||||||||||||||||||
Grade 3 - Better than average |
162 | 3,055 | | | | | 3,217 | |||||||||||||||||||||
Grade 4 - Average |
8,343 | 59,651 | 267 | | | | 68,261 | |||||||||||||||||||||
Grade 5 - Acceptable |
49,727 | 246,475 | 5,733 | | | | 301,935 | |||||||||||||||||||||
Total Pass Credits |
61,356 | 309,181 | 6,000 | | | | 376,537 | |||||||||||||||||||||
Grade 6 - Special mention |
2,599 | 13,807 | 170 | | | | 16,576 | |||||||||||||||||||||
Grade 7 - Substandard |
1,707 | 52,815 | 2,516 | | | | 57,038 | |||||||||||||||||||||
Grade 8 - Doubtful |
| | | | | | | |||||||||||||||||||||
Grade 9 - Loss |
| | | | | | | |||||||||||||||||||||
Total loans internally credit risk graded |
65,662 | 375,803 | 8,686 | | | | 450,151 | |||||||||||||||||||||
Loans not monitored by internal risk grade: |
||||||||||||||||||||||||||||
Current loans not internally risk graded |
| | 57,389 | 130,395 | 149,184 | 13,775 | 350,743 | |||||||||||||||||||||
30-59 days past due loans not internally risk graded |
| | 1,018 | 776 | 612 | 61 | 2,467 | |||||||||||||||||||||
60-89 days past due loans not internally risk graded |
| | 1,032 | 235 | 123 | | 1,390 | |||||||||||||||||||||
90+ days past due loans not internally risk graded |
| | 6,560 | 1,130 | 112 | 26 | 7,828 | |||||||||||||||||||||
Total loans not internally credit risk graded |
| | 65,999 | 132,536 | 150,031 | 13,862 | 362,428 | |||||||||||||||||||||
Total loans internally and not internally credit risk graded |
$ | 65,662 | $ | 375,803 | $ | 74,685 | $ | 132,536 | $ | 150,031 | $ | 13,862 | $ | 812,579 | ||||||||||||||
* | Residential loans include conventional 1-4 family residential property loans and conventional 1-4 family residential property loans used to finance the cost of construction when upon completion of construction the loan converts into a permanent mortgage. |
The Corporation adheres to underwriting standards consistent with its Loan Policy for indirect and
consumer loans. Final approval of a consumer credit depends on the repayment ability of the
borrower. Repayment ability generally requires the determination of the borrowers capacity to
meet current and proposed debt service requirements. A borrowers repayment ability is monitored
based on delinquency, generally for time periods of 30 to 59 days past due, 60 to 89 days past due
and greater than 90 days past due. This information is provided in the above delinquent loan
table. Additionally, a good indicator of repayment ability is a borrowers credit history. A
borrowers credit history is evaluated though the use of credit reports and/or an automated
underwriting system. A borrowers credit score is an indication of a persons creditworthiness
that is used to access the likelihood that a borrower will repay their debts. A credit score is
generally based upon a persons past credit history and is a number between 300 and 850 the
higher the number, the more creditworthy the person is deemed to be.
19
Table of Contents
Below is a table that shows the weighted average credit scores for residential, home
equity, indirect and consumer loans for the three and twelve months ended March 31, 2011 and December 31,
2010.
Consumer Credit Score Migration | March 31, 2011 | December 31, 2010 | ||||||
Total residential |
703 | 701 | ||||||
Total home equity loans |
750 | 750 | ||||||
Total loans to individuals |
725 | 728 | ||||||
Total indirect |
766 | 771 | ||||||
Total revolving lines |
713 | 713 |
(7) Deposits |
Deposit balances at March 31, 2011 and December 31, 2010 are summarized as follows:
March 31, 2011 | December 31, 2010 | |||||||
(Dollars in thousands) | ||||||||
Demand and other noninterest-bearing |
$ | 119,704 | $ | 115,476 | ||||
Interest checking |
150,671 | 134,375 | ||||||
Savings |
95,984 | 91,882 | ||||||
Money market accounts |
101,757 | 92,177 | ||||||
Consumer time deposits |
471,728 | 464,860 | ||||||
Public time deposits |
61,255 | 79,756 | ||||||
Total deposits |
$ | 1,001,099 | $ | 978,526 | ||||
The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to
$232,520 and $240,127 at March 31, 2011 and December 31, 2010, respectively.
The maturity distribution of certificates of deposit as of March 31, 2011 follows:
Within | After 12 months but | After 36 months but | ||||||||||||||||||
12 months | within 36 months | within 60 months | After 5 years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Consumer time deposits |
$ | 341,497 | $ | 98,337 | $ | 31,894 | $ | | $ | 471,728 | ||||||||||
Public time deposits |
54,511 | 4,234 | 2,010 | 500 | 61,255 | |||||||||||||||
Total time deposits |
$ | 396,008 | $ | 102,571 | $ | 33,904 | $ | 500 | $ | 532,983 | ||||||||||
(8) Short-Term Borrowings
The Corporation 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 March 31,
2011, the Bank had pledged approximately $88,651 in qualifying home equity lines of credit,
resulting in an available line of credit of approximately $44,325. No
amounts were outstanding at March 31, 2011 or December 31, 2010. The Corporation also has a $4,000
line of credit with an unaffiliated financial institution. The balance of this line of credit was
$0 as of March 31, 2011 and December 31, 2010.
Short-term borrowings include securities sold under repurchase agreements and Federal funds
purchased from correspondent banks. Securities sold under repurchase agreements at March 31, 2011
and December 31, 2010 were $580 and $932, respectively. The interest rate paid on these borrowings
was 0.25% at March 31, 2011 and 0.25% at December 31, 2010. No Federal Funds were purchased as of
March 31, 2011 and December 31, 2010.
(9) Federal Home Loan Bank Advances
Federal Home Loan Bank advances amounted to $42,500 and $42,501 at March 31, 2011 and December 31,
2010, respectively. All advances are bullet maturities with no call features. At March 31, 2011,
collateral pledged for FHLB advances consisted of qualified real estate mortgage loans and
investment securities of $56,063 and $26,695, respectively. The maximum borrowing capacity of the
Bank at March 31, 2011 was $48,819 with unused collateral borrowing capacity of $4,782. The Bank
maintains a $40,000 cash management line of credit (CMA) with the FHLB.
20
Table of Contents
Maturities of FHLB advances outstanding at March 31, 2011 and December 31, 2010 are as follows.
March 31, 2011 | December 31, 2010 | |||||||
(Dollars in thousands) | ||||||||
Maturities January 2011 through
February 2011, with fixed rates
ranging from 3.17% to 3.67% |
$ | | $ | 15,000 | ||||
Maturity March 2012, fixed rate 2.37% |
15,000 | 15,000 | ||||||
Maturities January 2014 though
August 2014, with fixed rates
ranging from 2.06% to 3.55% |
15,037 | 10,040 | ||||||
Maturities January 2015 through July
2015, with fixed rates ranging from
2.00% to 4.76% |
12,463 | 2,461 | ||||||
Total FHLB advances |
$ | 42,500 | $ | 42,501 | ||||
(10) Trust Preferred Securities
In May 2007, LNB Trust I (Trust I) and LNB Trust II (Trust II) each sold $10,000 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 6.64% through June 15, 2017, and then
becomes a floating interest rate (current three-month LIBOR plus 148 basis points). Interest on the
notes is payable quarterly. The interest rates in effect as of the last determination date in 2010
were 1.77% and 6.64% for Trust I and Trust II, respectively. At March 31, 2011 and December 31,
2010, accrued interest payable for Trust I was $6 and $6 and for Trust II was $24 and $30,
respectively.
The subordinated notes are redeemable in whole or in part, without penalty, at the Corporations
option on or after June 15, 2012 and mature on June 15, 2037. The notes are junior in right of
payment to the prior payment in full of all Senior Indebtedness of the Corporation, whether
outstanding at the date of the indenture governing the notes or thereafter incurred. At March 31,
2011, the balance of the subordinated notes payable to Trust I and Trust II were each $8,119.
In August 2010, the Corporation entered into an agreement with certain holders of its currently
non-pooled trust preferred securities to exchange up to $2,125 in principal amount of the
securities issued by Trust I and $2,125 in principal amount of the securities issued by Trust II
for up to 525,000 newly issued shares of the Corporations common stock. The Corporation issued
462,234 shares of common stock at a volume-weighted average price of $4.41 per share in exchange
for the $4,250 in aggregate principal amount of tendered Trust I and Trust II trust preferred
securities and recorded a gain on extinguishment of debt of $2,210.
(11) Commitments, Credit Risk, and Contingencies
In the normal course of business, the Bank enters into commitments that involve 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 evaluation of the
applicants credit. Collateral held is
21
Table of Contents
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. Payments under 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 March 31, 2011 follows:
Amount | ||||
(Dollars in thousands) | ||||
Commitments to extend credit |
$ | 71,895 | ||
Home equity lines of credit |
77,492 | |||
Standby letters of credit |
8,407 | |||
Total |
$ | 157,794 | ||
(12) 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. | ||
| 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 the balance sheet date, 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 March 31, 2011 and December 31, 2010. |
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.
22
Table of Contents
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, goodwill 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 March 31, 2011 and December
31, 2010 are summarized as follows:
March 31, 2011 | December 31, 2010 | |||||||||||||||
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 |
$ | 64,741 | $ | 64,741 | $ | 48,568 | $ | 48,568 | ||||||||
Securities |
235,563 | 235,563 | 221,725 | 221,725 | ||||||||||||
Portfolio loans, net |
793,314 | 789,590 | 796,443 | 801,585 | ||||||||||||
Loans held for sale |
5,261 | 5,261 | 5,105 | 5,105 | ||||||||||||
Accrued interest receivable |
3,788 | 3,788 | 3,519 | 3,519 | ||||||||||||
Financial liabilities |
||||||||||||||||
Deposits: |
||||||||||||||||
Demand, savings and money market |
468,116 | 468,116 | 433,910 | 433,910 | ||||||||||||
Certificates of deposit |
532,983 | 539,788 | 544,616 | 551,832 | ||||||||||||
Total deposits |
1,001,099 | 1,007,904 | 978,526 | 985,742 | ||||||||||||
Short-term borrowings |
580 | 580 | 932 | 932 | ||||||||||||
Federal Home Loan Bank advances |
42,500 | 43,746 | 42,501 | 43,613 | ||||||||||||
Junior subordinated debentures |
16,238 | 15,646 | 16,238 | 15,746 | ||||||||||||
Accrued interest payable |
1,450 | 1,450 | 1,434 | 1,434 |
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.
In instances where inputs used to measure fair value fall into different levels in the above fair
value hierarchy, fair value measurements in their entirety are categorized based on the lowest
level input that is significant to the valuation. The Corporations assessment of the significance
of particular inputs to these fair value measurements requires judgment and considers factors
specific to each asset or liability.
The following information pertains to assets measured by fair value on a recurring basis (in
thousands):
23
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Significant | ||||||||||||||||
Quoted Prices in | Other | |||||||||||||||
Active Markets | Observable | Significant | ||||||||||||||
Fair Value as of | for Identical | Inputs | Unobservable Inputs | |||||||||||||
Description | March 31, 2011 | Assets (Level 1) | (Level 2) | (Level 3) | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Securities available for sale: |
||||||||||||||||
U.S. Government agencies and corporations |
$ | 58,471 | $ | | $ | 58,471 | $ | | ||||||||
Mortgage backed securities |
110,058 | | 110,058 | | ||||||||||||
Collateralized mortgage obligations |
41,899 | | 41,899 | | ||||||||||||
State and political subdivisions |
25,135 | | 25,135 | | ||||||||||||
Total |
$ | 235,563 | $ | | $ | 235,563 | $ | | ||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Fair Value as of | Active Markets | Observable | Unobservable | |||||||||||||
December 31, | for Identical | Inputs | Inputs | |||||||||||||
Description | 2010 | Assets (Level 1) | (Level 2) | (Level 3) | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Trading Securities |
$ | | $ | | $ | | ||||||||||
Securities available for sale: |
||||||||||||||||
U.S. Government agencies and corporations |
56,068 | | 56,068 | | ||||||||||||
Mortgage backed securities |
95,891 | | 95,891 | | ||||||||||||
Collateralized mortgage obligations |
45,519 | | 45,519 | | ||||||||||||
State and political subdivisions |
24,247 | | 24,247 | | ||||||||||||
Total |
$ | 221,725 | $ | | $ | 221,725 | $ | | ||||||||
There were no transfers between Levels 1 and 2 of the fair value hierarchy during the quarter ended
March 31, 2011 and year the ended December 31, 2010. For the available for sale securities, the
Corporation obtains fair value measurements from an independent third party service and or from
independent brokers.
The following table presents the balances of assets and liabilities measured at fair value on a
nonrecurring basis at March 31, 2011 and December 31, 2010:
Internal | ||||||||||||||||
Models | Internal | |||||||||||||||
Quoted | with | Models with | ||||||||||||||
Market | Significant | Significant | ||||||||||||||
Prices in | Observable | Unobservable | ||||||||||||||
Active | Market | Market | ||||||||||||||
Markets | Parameters | Parameters | ||||||||||||||
March 31, 2011 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Impaired and nonaccrual loans |
$ | | $ | | $ | 42,438 | $ | 42,438 | ||||||||
Other real estate |
| | 3,348 | 3,348 | ||||||||||||
Mortgage servicing rights |
| | 891 | 891 | ||||||||||||
Total assets at fair value on a nonrecurring basis |
$ | | $ | | $ | 46,677 | $ | 46,677 | ||||||||
Internal | ||||||||||||||||
Models | Internal | |||||||||||||||
Quoted | with | Models with | ||||||||||||||
Market | Significant | Significant | ||||||||||||||
Prices in | Observable | Unobservable | ||||||||||||||
Active | Market | Market | ||||||||||||||
Markets | Parameters | Parameters | ||||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Impaired and nonaccrual loans |
$ | | $ | | $ | 44,668 | $ | 44,668 | ||||||||
Other real estate |
| | 3,119 | 3,119 | ||||||||||||
Mortgage servicing rights |
| | 758 | 758 | ||||||||||||
Total assets at fair value on a nonrecurring basis |
$ | | $ | | $ | 48,545 | $ | 48,545 | ||||||||
The Corporation has assets that, under certain conditions, are subject to measurement at fair value
on a non-recurring basis. The fair value of collateral-dependent impaired loans and other real
estate owned is determined through the use of an independent third-party appraisal (Level 3 input),
once a loan is identified as impaired or the Corporation takes ownership of a property. The
Corporation maintains a disciplined approach of obtaining updated independent third-party
appraisals relating to such loans or property on at least an annual basis, at which time the
24
Table of Contents
determination of fair value is updated as necessary to reflect the appraisal. In addition,
management reviews the fair value of those collateral-dependent impaired loans in amounts that it
considers to be material ($250,000 or greater) on a monthly basis and makes necessary adjustments
to the fair value based on individual facts and circumstances, which review may include obtaining
new third-party appraisals.
Mortgage Servicing Rights (MSR). The Corporation carries its mortgage servicing rights at lower of
cost or fair value, and therefore, can be subject to fair value measurements on a nonrecurring
basis. Since sales of mortgage servicing rights occur in private transactions and the precise terms
and conditions of the sales are typically not readily available (Level 3), there is a limited
market to refer to in determining the fair value of mortgage servicing rights. As such the
Corporation utilizes a third party vendor to perform a valuation on the mortgage servicing rights
to estimate the fair value. The Corporation reviews the estimated fair values and assumptions used
by the third party in the on a quarterly basis.
Impaired and Nonaccrual Loans. Impaired loans valued using Level 3 inputs consist of
non-homogeneous loans that are considered impaired. The Corporation estimates the fair value of
these loans based on the estimated realizable values of available collateral, which is typically
based on current independent third-party appraisals.
Other Real Estate Owned. Other real estate owned (OREO) is measured and reported at fair value
when the current book value exceeds the estimated fair value of the property. Managements
determination of the fair value for these loans uses a market approach representing the estimated
net proceeds to be received from the sale of the property based on observable market prices and
market value provided by independent, licensed or certified appraisers (Level 3 Inputs).
(13) Share-Based Compensation
A broad-based stock option incentive plan, the 2006 Stock Incentive Plan, was adopted by the
Corporations shareholders on April 18, 2006. Awards granted under this Plan as of March 31, 2011
were stock options granted in 2007, 2008 and 2009 and long-term restricted shares issued in 2010
and 2011. In addition, the Corporation has nonqualified stock option agreements outside of the
2006 Stock Incentive Plan. Grants under the nonqualified stock option agreements have been made
from 2005 to 2007.
Stock Options
The expense recorded for stock options was $0 and $6 for the first quarter of March 31, 2011 and
March 31, 2010, respectively. The maximum option term is ten years and the options generally vest
over three years as follows: one-third after one year from the grant date, two-thirds after two
years and completely after three years.
Options outstanding at March 31, 2011 were as follows:
Outstanding | Exercisable | |||||||||||||||
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Remaining | Weighted | |||||||||||||||
Contractual | Average | |||||||||||||||
Number | Life (Years) | Number | Exercise Price | |||||||||||||
Range of Exercise Prices |
||||||||||||||||
$5.34-$5.34 |
2,500 | 8.13 | 833 | $ | 5.34 | |||||||||||
$14.47-$15.34 |
82,000 | 6.85 | 82,000 | 14.47 | ||||||||||||
$15.35-$16.50 |
52,500 | 5.96 | 52,500 | 15.78 | ||||||||||||
$16.51-$19.10 |
30,000 | 4.84 | 30,000 | 19.10 | ||||||||||||
$19.11-$19.17 |
30,000 | 3.84 | 30,000 | 19.17 | ||||||||||||
Outstanding at end of period |
197,000 | 5.87 | 195,333 | $ | 16.22 | |||||||||||
A summary of the status of stock options at March 31, 2011 and March 31, 2010 and changes during
the three months then ended is presented in the table below:
25
Table of Contents
2011 | 2010 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Exercise | |||||||||||||||
Price per | Price per | |||||||||||||||
Options | Share | Options | Share | |||||||||||||
Outstanding at beginning of period |
197,000 | $ | 16.12 | 198,000 | $ | 16.12 | ||||||||||
Granted |
| | | | ||||||||||||
Forfeited or expired |
| | | | ||||||||||||
Exercised |
| | | | ||||||||||||
Stock dividend or split |
| | | | ||||||||||||
Outstanding at end of period |
197,000 | $ | 16.12 | 198,000 | $ | 16.12 | ||||||||||
Exercisable at end of period |
195,333 | $ | 16.22 | 161,163 | $ | 16.60 | ||||||||||
There were no options exercised during the first quarter of 2011 therefore the total intrinsic
value of options exercised was $0. The total intrinsic value of all options outstanding for the
first quarter of 2011 was $0.
A summary of the status of nonvested stock options at March 31, 2011 is presented in the table
below:
Weighted | ||||||||
Average | ||||||||
Nonvested | Exercise Price | |||||||
Shares | per share | |||||||
Nonvested at January 1, 2011 |
29,004 | $ | 13.95 | |||||
Granted |
| | ||||||
Vested |
27,337 | 14.47 | ||||||
Forfeited or expired |
| | ||||||
Nonvested at March 31, 2011 |
1,667 | 5.34 |
Restricted Shares
During the first quarter of 2011, the Corporation issued 40,000 shares of long-term restricted
stock at the current market price of the Corporations stock on the date of grant which was $5.28
per share. In 2010 the Corporation issued 86,852 shares of long-term restricted stock at a
weighted average price of $4.42 per share. Shares of long-term restricted stock generally vest in
two equal installments on the second and third anniversaries of the date of grant, or upon the
earlier death or disability of the recipient or a qualified change of control of the Corporation.
The expense recorded for long-term restricted stock for the three months ended March 31, 2011 and
2010 was $44 and $7, respectively.
The market price of the Corporations common shares at the date of grant is used to estimate the
fair value of restricted stock awards. A summary of the status of restricted shares at March 31,
2011 is presented in the table below:
Weighted | ||||||||
Nonvested | Average Grant | |||||||
Shares | Date Fair Value | |||||||
Nonvested at January 1, 2011 |
86,852 | $ | 4.42 | |||||
Granted |
40,000 | 5.28 | ||||||
Vested |
22,500 | 4.35 | ||||||
Forfeited or expired |
| | ||||||
Nonvested at March 31, 2011 |
104,352 | 4.76 |
26
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Stock Appreciation Rights (SAR)
In 2006, the Corporation issued an aggregate of 30,000 stock appreciation rights (SAR) at $19.00
per share, 15,500 of which have expired due to employee terminations. The SAR vest over three
years as follows: one-third after one year from the grant date, two-thirds after two years and
completely after three years. Any unexercised portion of the SAR shall expire at the end of the
stated term which is decided at the date of grant and shall not exceed ten years. The SAR issued
in 2006 will expire in January 2016. The expense recorded for SAR for the first quarter of 2011
and 2010 was $0.
27
Table of Contents
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following commentary presents a discussion and analysis of the Corporations financial
condition and results of operations by its management (Management). This Managements Discussion
and Analysis (MD&A) section discusses the financial condition and results of operations of the
Corporation for the three months ended March 31, 2011. This MD&A should be read in conjunction with
the financial information contained in the Corporations Form 10-K for the fiscal year ended
December 31, 2010 and in the accompanying consolidated financial statements and notes contained in
this Form 10-Q. 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 as to known events and trends that have or may
reasonably be expected to have a material effect on the Corporations operations and financial
condition.
Summary
The Corporation is a bank holding company headquartered in Lorain, Ohio, deriving substantially all
of its revenue from the Bank. The Corporation provides a range of products and services to
commercial customers and the community, and currently operates 20 banking centers throughout
Lorain, Erie, Cuyahoga and Summit counties in Ohio.
Net income was $1,130 for the first quarter of 2011. Net income available to common shareholders
was $811 or $0.10 per diluted common share. This compares to net income available to common
shareholders of $1,012 or $0.14 per diluted common share for the first quarter of 2010. Earnings
per diluted common share for 2011 reflect the issuance of common shares in exchange for a portion
of the Corporations outstanding trust preferred securities. Total revenues, which include net
interest income and noninterest income, increased 2.05% for the first quarter of 2011 compared to
the same period of 2010.
For the first quarter 2011, net interest income totaled $9,614 compared to $9,779 for the first
quarter of 2010. Net interest income on a fully taxable equivalent (FTE) basis for the first
quarter of 2011 was $9,739, a 1.67% decrease compared with $9,904 for the first quarter of 2010.
Net interest income decreased $165 compared to one year ago mainly due to a decline in the security
portfolio which resulted in an overall decrease of 6 basis points in the net interest margin (FTE)
for the first quarter 2011 to 3.63%, from 3.69% one year ago.
The provision for loan losses was $2,100 for the quarter ended March 31, 2011 compared to $2,109
for March 31, 2010.
Noninterest income which is traditionally weak in the first quarter totaled $3,071 compared to
$2,651 for the first quarter of 2010. While the first quarter included a gain on the sale of
securities totaling $412, other fees which include ATM fees and merchant/debit card fees showed
improvement year over year. Trust income, gain on the sale of mortgage loans and service charges
on deposits were down from a year ago, the latter being negatively impacted by new federal
regulations regarding certain bank overdraft fees and charges. Noninterest expense was $9,189 for
the first quarter of 2011, compared to $8,693 for the first quarter of 2010, an increase of $496,
or 5.71%. The efficiency ratio, which is the measure of cost to generate revenue, increased from
69.24% in the first quarter of 2010 to 71.73% in the first quarter of 2011.
Noninterest expense was $9,189 for the first quarter of 2011, compared to $8,693 for the first
quarter of 2010. The increase was driven by a $509 increase in other real estate owned expenses
which primarily resulted from the further write-down in the valuation of properties obtained
through loan foreclosure proceedings given the current residential and commercial real estate
markets, along with higher legal and loan expenses associated with resolving problem loans.
Excluding these costs, other noninterest expenses declined from the same period one year ago.
During the first quarter of 2011, loan demand remained relatively weak as total portfolio loans
ended the quarter at $810,629, a 2.28% increase compared to $812,579 at December 31, 2010. Total
assets for the first quarter ended at $1,175,378 compared to $1,152,537 at the end of 2010. Total
deposits grew to $1,001,099 at the end of the first quarter of 2011, up from $978,526 at December
31, 2010. The growth in deposits came in the form of core deposits which improved liquidity while
reducing costs.
In addition to the effect of the overall economy and the level of unemployment, a significant
factor impacting asset quality has been the lower market valuation of the underlying collateral,
primarily in construction and development
28
Table of Contents
and commercial real estate loans and the need to provide
additional allowances due to these lower valuations. Given the current economic conditions, the
Corporation continues to work through asset quality challenges.The
Corporations non-performing loans totaled $37,808, or 4.66 percent of total loans, an improvement
from $41,830, or 5.15 percent, at December 31, 2010.
The allowance for possible loan losses was $17,315 at March 31, 2011 compared to $16,136 at
December 31, 2010 equaling 2.14 percent of total loans compared to 1.99 percent at December 31,
2010. Annualized net charge-offs to average loans for the quarter ending March 31, 2011 was 0.46%
compared to 2.48% at December 31, 2010.
29
Table of Contents
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 average balance sheets for the three months ended March 31, 2011 and
2010. Rates are computed on a tax equivalent basis and nonaccrual loans are included in the average
loan balances.
Three Months Ended March 31, | ||||||||||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
U.S. Govt agencies and corporations |
$ | 199,582 | $ | 1,477 | 3.00 | % | $ | 227,600 | $ | 2,185 | 3.89 | % | ||||||||||||
State and political subdivisions |
24,410 | 369 | 6.13 | 23,178 | 355 | 6.22 | ||||||||||||||||||
Federal funds sold and short-term
investments |
43,312 | 14 | 0.13 | 32,687 | 9 | 0.11 | ||||||||||||||||||
Restricted stock |
5,741 | 72 | 5.09 | 5,532 | 61 | 4.47 | ||||||||||||||||||
Commercial loans |
448,182 | 5,837 | 5.28 | 447,470 | 6,041 | 5.48 | ||||||||||||||||||
Real estate mortgage loans |
64,662 | 914 | 5.73 | 76,764 | 1,032 | 5.45 | ||||||||||||||||||
Home equity lines of credit |
109,354 | 1,067 | 3.96 | 108,697 | 1,069 | 3.99 | ||||||||||||||||||
Installment loans |
193,837 | 2,710 | 5.67 | 166,165 | 2,666 | 6.51 | ||||||||||||||||||
Total Earning Assets |
$ | 1,089,080 | $ | 12,460 | 4.64 | % | $ | 1,088,093 | $ | 13,418 | 5.00 | % | ||||||||||||
Allowance for loan loss |
(16,477 | ) | (19,150 | ) | ||||||||||||||||||||
Cash and due from banks |
17,132 | 18,242 | ||||||||||||||||||||||
Bank owned life insurance |
17,206 | 16,495 | ||||||||||||||||||||||
Other assets |
53,910 | 56,775 | ||||||||||||||||||||||
Total Assets |
$ | 1,160,851 | $ | 1,160,455 | ||||||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||
Consumer time deposits |
$ | 468,893 | $ | 2,012 | 1.74 | % | $ | 478,344 | $ | 2,624 | 2.23 | % | ||||||||||||
Public time deposits |
66,688 | 76 | 0.46 | 84,851 | 171 | 0.82 | ||||||||||||||||||
Money market accounts |
97,954 | 85 | 0.35 | 86,946 | 78 | 0.36 | ||||||||||||||||||
Savings deposits |
93,064 | 38 | 0.17 | 83,142 | 40 | 0.19 | ||||||||||||||||||
Interest-bearing demand |
143,797 | 71 | 0.20 | 135,110 | 67 | 0.20 | ||||||||||||||||||
Short-term borrowings |
905 | 1 | 0.25 | 1,597 | 1 | 0.23 | ||||||||||||||||||
FHLB advances |
42,500 | 267 | 2.54 | 44,192 | 318 | 2.91 | ||||||||||||||||||
Trust preferred securities |
16,321 | 171 | 4.24 | 20,727 | 215 | 4.21 | ||||||||||||||||||
Total Interest-Bearing Liabilities |
$ | 930,122 | $ | 2,721 | 1.19 | % | $ | 934,909 | $ | 3,514 | 1.52 | % | ||||||||||||
Noninterest-bearing deposits |
116,062 | 111,250 | ||||||||||||||||||||||
Other liabilities |
4,589 | 9,270 | ||||||||||||||||||||||
Shareholders Equity |
110,078 | 105,026 | ||||||||||||||||||||||
Total Liabilities and
Shareholders Equity |
$ | 1,160,851 | $ | 1,160,455 | ||||||||||||||||||||
Net interest Income (FTE) |
$ | 9,739 | 3.63 | % | $ | 9,904 | 3.69 | % | ||||||||||||||||
Taxable Equivalent Adjustment |
(125 | ) | (0.05 | ) | (125 | ) | (0.05 | ) | ||||||||||||||||
Net Interest Income Per
Financial Statements |
$ | 9,614 | $ | 9,779 | ||||||||||||||||||||
Net Yield on Earning Assets |
3.58 | % | 3.64 | % | ||||||||||||||||||||
30
Table of Contents
Results of Operations
Three Months Ended March 31, 2011 versus Three Months Ended March 31, 2010 Net Interest Income
Comparison
Net interest income is the difference between interest income earned on interest-earning assets and
the interest expense paid on interest-bearing liabilities. Net interest income is the Corporations
principal source of revenue, accounting for 75.79% of the Corporations revenues for the three
months ended March 31, 2011. The amount of net interest income is affected by changes in the volume
and mix of earning assets and interest-bearing liabilities, the level of rates earned or paid on
those assets and liabilities and the amount of loan fees earned. The Corporation reviews net
interest income on a fully taxable equivalent (FTE) 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. The net
interest margin is net interest income as a percentage of average earning assets.
Net interest income, before provision for loan losses, was $9,614 for the first quarter of 2011
compared to $9,779 during the same quarter of 2010. Adjusting for tax-exempt income, net interest
income FTE, before provision for loan losses, for the first quarter of 2011 and 2010 was $9,739 and
$9,904, respectively. The net interest margin FTE, determined by dividing tax equivalent net
interest income by average earning assets, was 3.63% for the three months ended March 31, 2011
compared to 3.69% for the three months ended March 31, 2010.
Average earning assets for the first quarter of 2011 were $1,089,080. This was a slight increase of
$987, or .091% compared to the same quarter last year. The prolonged period of lower market
interest rates impacted the yield on average earning assets, which resulted in 4.64% in the first
quarter of 2011 compared to 5.00% for the same period a year ago. The yield on average loans during
the first quarter of 2011 was 5.23%, which was 26 basis points lower than the yield on average
loans during the first quarter of 2011 at 5.49%. Interest income from securities was $1,846 (FTE)
for the three months ended March 31, 2011, compared to $2,540 during the first quarter of 2010. The
yield on average securities was 3.34% and 4.12% for these periods, respectively.
The cost of interest-bearing liabilities was 1.19% during the first quarter of 2011 compared to
1.52% during the same period in 2010. Total average interest-bearing liabilities for the quarter
ended March 31, 2011 slightly decreased $4,787, or 0.51%, compared to March 31, 2010. This decrease
is due to an improved deposit mix with noninterest bearing accounts of $116,062 increasing by 4.33%
when compared to a year ago. Average core deposits for the quarter ended March 31, 2011 increased
$6,815, or 0.70%, compared to the same period of 2010. The average cost of trust preferred
securities was 4.24% for the first quarter of 2011, compared to 4.21% for the first quarter of
2010. One half of the outstanding trust preferred securities pays dividends at a fixed rate of
6.64% and the other half pays dividends at LIBOR plus 1.48%.
Net interest income may also be analyzed by comparing the volume and rate components of
interest income and interest expense. Table 2 is an analysis of the changes in interest income and
expense between the quarters ended March 31, 2011 and March 31, 2010. The table is presented on a
fully tax-equivalent basis.
31
Table of Contents
Table 2: Rate/Volume Analysis of Net Interest Income (FTE)
Three Months Ended March 31, | ||||||||||||
Increase (Decrease) in Interest Income/Expense | ||||||||||||
in 2011 over 2010 | ||||||||||||
Volume | Rate | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
U.S. Govt agencies and corporations |
$ | (207 | ) | $ | (501 | ) | $ | (708 | ) | |||
State and political subdivisions |
19 | (5 | ) | 14 | ||||||||
Federal funds sold and short-term investments |
3 | 2 | 5 | |||||||||
Restricted stock |
3 | 8 | 11 | |||||||||
Commercial loans |
9 | (213 | ) | (204 | ) | |||||||
Real estate mortgage loans |
(171 | ) | 53 | (118 | ) | |||||||
Home equity lines of credit |
6 | (8 | ) | (2 | ) | |||||||
Installment loans |
387 | (343 | ) | 44 | ||||||||
Total Interest Income |
49 | (1,007 | ) | (958 | ) | |||||||
Consumer time deposits |
(41 | ) | (571 | ) | (612 | ) | ||||||
Public time deposits |
(21 | ) | (74 | ) | (95 | ) | ||||||
Money market accounts |
10 | (3 | ) | 7 | ||||||||
Savings deposits |
4 | (6 | ) | (2 | ) | |||||||
Interest bearing demand |
4 | | 4 | |||||||||
Short-term borrowings |
| | | |||||||||
FHLB advances |
(11 | ) | (40 | ) | (51 | ) | ||||||
Trust preferred securities |
(46 | ) | 2 | (44 | ) | |||||||
Total Interest Expense |
(101 | ) | (692 | ) | (793 | ) | ||||||
Net Interest Income (FTE) |
$ | 150 | $ | (315 | ) | $ | (165 | ) | ||||
Net interest income (FTE) for the first quarter 2011 and 2010 was $9,739 and $9,904, respectively.
Interest income (FTE) for the first quarter of 2011 decreased $958 in comparison to the same period
in 2010. This decrease is attributable to a $1,007 decrease due to rate and an increase of $49 due
to volume. Interest income on securities of U.S. Government agencies and corporations decreased
$708, mainly as a result of the reinvestment of funds in shorter-term U.S. Government agencies and
seasoned mortgage-backed securities which have less extension risk given the current interest rate
environment. Interest income on commercial loans decreased $204, primarily due to lower market
interest rates. The $118 decrease in interest income on real estate mortgage loans was primarily
attributable to the refinancing in the existing seasoned mortgage portfolio given the low interest
rate environment and the Corporations practice of selling new mortgage production into the
secondary market. The $612 and $95 decreases in consumer time deposits and public time deposits,
respectively, were due primarily to lower market interest rates. Total interest expense decreased
$793, with the decrease being attributable to a $692 decrease due to rate and a decrease due to
volume of $101. Overall, the total decline in net interest income (FTE) of $165 was mainly
attributable to an increase in volume of $150 offset by a $315 reduction due to rate which is the
difference between interest income and interest expense.
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Noninterest Income
Table 3: Details on Noninterest Income
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Investment and trust services |
$ | 403 | $ | 445 | ||||
Deposit service charges |
916 | 939 | ||||||
Electronic banking fees |
906 | 794 | ||||||
Income from bank owned life insurance |
174 | 171 | ||||||
Other income |
79 | 93 | ||||||
Total fees and other income |
2,478 | 2,442 | ||||||
Gain on sale of securities |
412 | 38 | ||||||
Gain on sale of loans |
179 | 192 | ||||||
Gains (losses) on sale of other assets |
2 | (21 | ) | |||||
Total noninterest income |
$ | 3,071 | $ | 2,651 | ||||
Three Months Ended March 31, 2011 versus Three Months Ended March 31, 2010 Noninterest Income
Comparison
Total fees and other income for the three months ended March 31, 2011 was $2,478, an increase of
$36, or 1.47%, over the same period 2010. Income earned on investment and trust services declined
$42 compared to the prior period as a result of the discontinuation of the Corporations brokerage
division which occurred during the third quarter of 2010. Deposit service charges decreased by $23
when compared to a year ago and will continue to be impacted by the economic environment and new
regulations regarding overdrafts. Electronic banking fees increased by $112 when compared to a year
ago.
Total net gains recorded during the first quarter of 2011 increased $384 over the first quarter of
2010. This increase was mainly attributable to the $412 gain on sale of securities. Gains on the
sale of loans decreased $13 primarily as a result of the lower volume of mortgage loan sales during
the first quarter. During the first quarter of 2011, a total of $9,722 of mortgage loans were sold
in the secondary market compared to $13,532 for first quarter 2010, a decrease of 28.16%.
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Noninterest Expense
Table 4: Details on Noninterest Expense
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Salaries and employee benefits |
$ | 4,091 | $ | 3,918 | ||||
Furniture and equipment |
680 | 933 | ||||||
Net occupancy |
612 | 615 | ||||||
Outside services |
486 | 553 | ||||||
Marketing and public relations |
271 | 246 | ||||||
Supplies, postage and freight |
272 | 342 | ||||||
Telecommunications |
215 | 212 | ||||||
Ohio Franchise tax |
298 | 281 | ||||||
FDIC Assessments |
574 | 528 | ||||||
Other real estate owned |
590 | 81 | ||||||
Electronic banking expenses |
209 | 184 | ||||||
Loan and Collection Expense |
442 | 323 | ||||||
Other expense |
449 | 477 | ||||||
Total noninterest expense |
$ | 9,189 | $ | 8,693 | ||||
Three Months Ended March 31, 2011 versus Three Months Ended March 31, 2010 Noninterest Expense
Comparison
Noninterest expense for the first quarter of 2011 increased $496, or 5.71%, compared to the same
period of 2010. Other real estate costs increased $509 for the first quarter of 2011 compared to
2010, mainly due to higher costs associated with foreclosure proceedings and valuation allowances
recorded for these properties. Loan and collection expense increased $119 when compared to the
prior period. This is mainly attributable to the Corporations expanded efforts related to workouts
of its problem loans. Offsetting these increases was a decline in furniture and equipment expense,
which decreased $253 compared to the same period last year, mainly as a result of the consolidation
of data servicing centers during the first quarter of 2010.
Income taxes
Three Months Ended March 31, 2011 versus Three Months Ended March 31, 2010 Income Taxes Comparison
The Corporation recognized income tax expense of $266 and $297 for the first quarter of 2011 and
2010, respectively. Included in net income for the three months ended March 31, 2011 was $413 of
nontaxable income, including $142 related to life insurance policies and $271 of tax-exempt
investment and loan interest income. The new market tax credit generated by North Coast Community
Development Corporation, 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. After
considering the tax-exempt income and relatively small nondeductible expenses, income subject to
tax is significantly less than income before income tax expense.
Financial Condition
Overview
The Corporations assets at March 31, 2011 were $1,175,378 compared to $1,152,537 at December 31,
2010. This is an increase of $22,841, or 1.98%. Total securities increased $13,838, or 6.24%,
compared to December 31, 2010, mainly as a result of the Corporations purchase of U.S. Government
agency securities and U.S. agency mortgage backed securities. Portfolio loans decreased $1,950, or
0.24%, from December 31, 2010. Total deposits at March 31, 2011 were $1,001,099 compared to
$978,526 at December 31, 2010. The growth in deposits came in the form of core deposits which
generally tends to improve liquidity while reducing costs.
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Securities
The composition of the Corporations securities portfolio at March 31, 2011 and December 31, 2010
is presented in Note 5 to the Consolidated Financial Statements contained within this Form 10-Q.
The Corporation continues to employ its securities portfolio to manage interest rate risk and to
manage its liquidity needs. Currently, the portfolio is comprised of 97.62% available for sale
securities and 2.38% restricted stock. Available for sale securities are comprised of 24.82% U.S.
Government agencies, 46.72% U.S. agency mortgage backed securities, 17.79% U.S. agency
collateralized mortgage obligations and 10.67% municipal securities. At March 31, 2011 the
available for sale securities had a net temporary unrealized gain of $4,975, representing 2.16% of
the total amortized cost of the Banks available for sale securities.
Loans
The detail of loan balances are presented in Note 6 to the Consolidated Financial Statements
contained within this Form 10-Q. Table 5 provides detail by loan segment.
Table 5: Details on Loan Balances
March 31, 2011 | December 31, 2010 | |||||||
(Dollars in thousands) | ||||||||
Commercial real estate |
$ | 379,208 | $ | 375,803 | ||||
Commercial |
66,624 | 65,662 | ||||||
Real estate mortgage |
70,165 | 74,685 | ||||||
Home equity |
131,119 | 132,536 | ||||||
Indirect |
150,196 | 150,031 | ||||||
Consumer |
13,317 | 13,862 | ||||||
Total Loans |
810,629 | 812,579 | ||||||
Allowance for loan losses |
(17,315 | ) | (16,136 | ) | ||||
Net Loans |
$ | 793,314 | $ | 796,443 | ||||
As the availability of quality loan opportunities remain weak throughout the financial industry,
the Corporation managed to marginally increase its commercial real estate and commercial loan
portfolios during the first quarter of 2011. Commercial real estate loans increased by $3,405, or
0.91%, compared to December 31, 2010 and commercial loans increased by $962, or 1.46%, compared to
December 31, 2010. The decline of $4,520 in real estate mortgages is mainly attributable to
refinancing in the existing seasoned mortgage portfolio given the low interest rate environment and
the Corporations practice of selling new mortgage production into the secondary market. Home
equity loans declined $1,417 or 1.07%, compared to December 31, 2010 and indirect and consumer
loans did not change significantly compared to December 31, 2010.
Total portfolio loans at March 31, 2011 were $810,629. This is a decrease of $1,950 from December
31, 2010. At March 31, 2011, commercial and commercial real estate loans represented 55.00% of
total portfolio loans. Real estate mortgages and home equity loans comprise 8.56% and 16.18% of
total portfolio loans, respectively. Indirect and consumer loans were 20.17% of total portfolio
loans. Consumer loans are made to borrowers on both secured and unsecured terms, depending on the
maturity and nature of the loan.
Loans held for sale, and not included in portfolio loans, were $5,261 at March 31, 2011. Mortgage
loans held for sale accounted for the majority of the loans held for sale. The Corporation has a
practice of retaining the servicing rights on loans that are sold.
Expected cash flow and interest rate information for loans is presented in the following table:
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Table 6: Cash Flow and Interest Rate Information for Loans:
March 31, 2011 | ||||
Due in one year or less |
$ | 249,998 | ||
Due after one year but within five years |
286,872 | |||
Due after five years |
273,759 | |||
Totals |
$ | 810,629 | ||
Due after one year with a predetermined fixed interest rate |
$ | 220,919 | ||
Due after one year with a floating interest rate |
339,712 | |||
Totals |
$ | 560,631 | ||
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 and appropriate to cover probable credit losses inherent in the Corporations 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, trends in delinquency, 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 7 presents the
detailed activity in the allowance for loan losses and related charge-off activity for the three
month periods ended March 31, 2011 and 2010.
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Table 7: Analysis of Allowance for Loan Losses
Three Months Ended | ||||||||
March 31, 2011 | March 31, 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance at beginning of period |
$ | 16,136 | $ | 18,792 | ||||
Charge-offs: |
||||||||
Commercial real estate |
230 | 1,018 | ||||||
Commercial & industrial |
| 40 | ||||||
Real estate mortgage |
273 | | ||||||
Home equity lines of credit |
345 | 429 | ||||||
Indirect installment |
195 | 265 | ||||||
Direct Installment |
33 | 49 | ||||||
Overdrafts |
36 | 50 | ||||||
Total charge-offs |
1,112 | 1,851 | ||||||
Recoveries: |
||||||||
Commercial real estate |
102 | 1 | ||||||
Commercial & industrial |
31 | 1 | ||||||
Real estate mortgage |
4 | 1 | ||||||
Home equity lines of credit |
1 | | ||||||
Indirect installment |
25 | 103 | ||||||
Direct Installment |
9 | 6 | ||||||
Overdrafts |
19 | 21 | ||||||
Total Recoveries |
191 | 133 | ||||||
Net Charge-offs |
921 | 1,718 | ||||||
Provision for loan losses |
2,100 | 2,109 | ||||||
Balance at end of period |
$ | 17,315 | $ | 19,183 | ||||
Loans outstanding at end of period |
$ | 810,629 | $ | 792,585 | ||||
Allowance for loan losses as a
percent of loans outstanding at the
end of the period |
2.14 | % | 2.42 | % | ||||
Average Loans Outstanding |
$ | 810,971 | $ | 796,040 | ||||
Annualized ratio to average loans: |
||||||||
Net Charge-offs |
0.46 | % | 0.88 | % | ||||
Provision for loan losses |
1.05 | % | 1.07 | % |
Due to the overall economic conditions and increasing levels of problem loans experienced industry
wide, primarily commercial and commercial real estate loans, the Corporation created a dedicated
loan workout group early in the fourth quarter of 2009 staffed with new hires with workout
experience. During 2010, as the group became familiar with the problem loans, a segment of
commercial and commercial real estate loans which had previously been identified as having higher
risk factors in accordance with ASC 450 (FAS 5) was designated as impaired in accordance with ASC
310-10-35 (FAS 114). In addition, the Corporation improved the timeliness of recognizing
liquidation as the primary source of repayment of the problem loans. These loans were then
charged-down to their net realizable values, less costs to sell, in accordance with ASC 310-10-35
(FAS 114). As a result, the Corporation experienced an increase in charge-offs in 2010, primarily
with respect to commercial and commercial real estate loans, which in turn reduced the level of
specific reserves provided for these loans under ASC 310-10-35 (FAS 114).
During the same period and in response to increasing levels of problem loans experienced by the
Corporation, the level of the portion of the Corporations allowance for loan losses allocated to
loans having high risk factors in accordance with ASC 450 (FAS 5) increased.
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The allowance for loan losses at March 31, 2011 was $17,315, or 2.14%, of outstanding loans,
compared to $19,183, or 2.42%, of portfolio loans at March 31, 2010 and $16,136, or 1.99%, of
outstanding loans at December 31, 2010. The allowance for loan losses was 45.80% and 44.71% of
nonperforming loans at March 31, 2011 and March 31, 2010, respectively.
The provision for loan losses for the quarter ended March 31, 2011 was $2,100 compared to provision
for loan losses of $2,109 one year ago. Net charge-offs for the three months ended March 31, 2011
were $921, compared to $1,718 for the three months ended March 31, 2010. Annualized net charge-offs
as a percent of average loans for the first quarter of 2011 was 0.46% compared to 0.88% for the
same period in 2010. The provision for loan losses for the three month period ended March 31, 2011
was, in the opinion of Management, adequate when balancing the charge-off levels with the level of
nonperforming loans, the level of potential problem loans and delinquency. The resulting allowance
for loan losses is, in the opinion of Management, sufficient given its analysis of the information
available about the portfolio at March 31, 2011. The Corporation continues to aggressively address
potential problem loans, and underwriting standards continue to be adjusted in response to trends
and asset review findings.
Deposits
Table 8: Deposits and Borrowings
Average Balances Outstanding | Average Rates Paid | |||||||||||||||
For the three months ended | ||||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2011 | December 31, 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Demand deposits |
$ | 116,062 | $ | 112,810 | 0.00 | % | 0.00 | % | ||||||||
Interest checking |
143,797 | 141,974 | 0.20 | 0.17 | % | |||||||||||
Savings deposits |
93,064 | 89,982 | 0.17 | 0.17 | % | |||||||||||
Money Market Accounts |
97,954 | 93,502 | 0.35 | 0.41 | % | |||||||||||
Consumer time deposits |
468,893 | 464,924 | 1.74 | 1.81 | % | |||||||||||
Public time deposits |
66,688 | 80,990 | 0.46 | 0.54 | % | |||||||||||
Total Deposits |
986,458 | 984,182 | 0.94 | 0.98 | % | |||||||||||
Short-term borrowings |
905 | 1,852 | 0.25 | 0.25 | % | |||||||||||
FHLB borrowings |
42,500 | 42,501 | 2.54 | 2.98 | % | |||||||||||
Junior subordinated
debentures |
16,321 | 16,322 | 4.24 | 3.18 | % | |||||||||||
Total borrowings |
59,726 | 60,675 | 2.97 | 2.95 | % | |||||||||||
Total funding |
$ | 1,046,184 | $ | 1,044,857 | 1.19 | % | 1.23 | % | ||||||||
Average deposits for the three months ended March 31, 2011 were $986,458 compared to average
deposits of $984,182 for the three months ended December 31, 2010. Average public time deposits
decreased $14,302 over the three month period between December 31, 2010 and March 31, 2011
primarily as a result of lower market interest rates during the first quarter of 2011. Deposit
accounts and the generation of deposit accounts continue to be the primary source of funds for the
Corporation. As indicated in the table above, growth in transaction core deposits has reduced the
Corporations reliance on public certificate of deposit accounts and has maintained the net
interest margin. The Corporation offers various deposit products to both retail and business
customers. The Corporation also has available 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.
Substantially all of the Banks deposits are insured up to applicable limits by the FDIC.
Accordingly, the Bank is subject to deposit insurance premium assessments by the FDIC. On July 21,
2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) into law. The Dodd-Frank Act established a minimum designated reserve ratio (DRR)
of 1.35 percent of estimated insured deposits, mandates the
FDIC adopt a restoration plan should the fund balance fall below 1.35 percent, and provide
dividends to the industry should the fund balance exceed 1.50 percent.
The following table summarizes total consumer and public time deposits greater than or equal to
$100,000 as of March 31, 2011 by remaining maturity:
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Table 9: Consumer and Public Time Deposits Greater Than $100,000
March 31, 2011 | ||||
(Dollars in thousands) | ||||
Less than 3 months |
$ | 39,015 | ||
3 to 6 months |
52,946 | |||
6 to 12 months |
91,526 | |||
Over 12 months |
49,033 | |||
Total |
$ | 232,520 | ||
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. As of March 31, 2011, the Corporation had $580 of short-term borrowings.
There were no federal funds purchased at March 31, 2011. Long-term borrowings for the Corporation
consist of Federal Home Loan Bank advances of $42,500 and junior subordinated debentures of
$16,238. Federal Home Loan Bank advances were $42,501 at December 31, 2010. Maturities of long-term
Federal Home Loan Bank advances are presented in Note 9 to the Consolidated Financial Statements
contained within this Form 10-Q.
During the second quarter of 2007, the Corporation completed a private offering of trust preferred
securities, as described in Note 10 to the Consolidated Financial Statements contained within this
Form 10-Q. 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.
During the third quarter of 2010, the Corporation exchanged and retired $4,250 principal amount of
its non-pooled trust preferred securities for approximately 462,000 newly issued shares of the
Corporations common stock.
Regulatory Capital
The Corporation continues to maintain an appropriate capital position. Total shareholders equity
was $110,049 at March 31, 2011. This is an increase of 0.53% over December 31, 2010. For the three
months ended March 31, 2011, total shareholders equity was increased by net income of $1,130 as
well as $44 for share-based compensation. Factors decreasing shareholders equity were a $195
decrease in accumulated other comprehensive gain resulting from a decrease in the fair value of
available for sale securities, cash dividends payable to common shareholders in the amount of $79
and cash dividends payable to preferred shareholders in the amount of $315. The Corporation held
328,194 shares of common stock as treasury stock at March 31, 2011, at a cost of $6,092.
The Corporation and the Bank continue to monitor balance sheet growth in an effort to stay within
the guidelines established by applicable regulatory authorities. At March 31, 2011 and December 31,
2010, the Corporation and Bank maintained capital ratios consistent with current guidelines to be
deemed well-capitalized under Federal banking regulations.
On July 28, 2005, the Corporation announced a share repurchase program of up to 5 percent, or
approximately 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 $25,223
of its Series B Preferred Stock to the U.S. Treasury in December 2008 in conjunction with the TARP
Capital Purchase Program include limitations on the Corporations ability to repurchase its common
shares. For three years after the issuance or until the U.S. Treasury no longer holds any Series B
Preferred Stock, the Corporation 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 March 31, 2011, the Corporation had repurchased
an aggregate of 202,500 shares under this program.
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Forward-Looking Statements
This Form 10-Q 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:
| increases in interest rates or further weakening economic conditions that could constrain borrowers ability to repay outstanding loans or diminish the value of the collateral securing those loans; | ||
| asset price deterioration, which has had and may continue to have a negative effect on the valuation of certain asset categories represented on the Corporations balance sheet; | ||
| general economic conditions, either nationally or regionally (especially in northeastern Ohio), becoming less favorable than expected resulting in, among other things, further deterioration in credit quality of assets; | ||
| significant increases in competitive pressure in the banking and financial services industries; | ||
| changes in the interest rate environment which could reduce anticipated or actual margins; | ||
| changes in political conditions or the legislative or regulatory environment, including new or heightened legal standards and regulatory requirements, practices or expectations, which may impede profitability or affect the Corporations financial condition (such as, for example, the Dodd-Frank Wall Street reform and Consumer Protection Act and rules and regulations that may be promulgated under the Act); | ||
| persisting volatility and limited credit availability in the financial markets, particularly if limitations on the Corporations ability to raise funding to the extent required by banking regulators or otherwise; initiatives undertaken by the U.S. government do not have the intended effect on the financial markets; | ||
| 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 Capital Purchase Program (CPP), pursuant to which the Corporation issued securities to the United States Department of the Treasury (the U.S. Treasury); | ||
| limitations on the Corporations ability to pay dividends; | ||
| 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; | ||
| increases in deposit insurance premiums or assessments imposed on the Corporation by the FDIC; | ||
| difficulty attracting and/or retaining key executives and/or relationship managers at compensation levels necessary to maintain a competitive market position; | ||
| changes occurring in business conditions and inflation; | ||
| changes in technology; | ||
| changes in trade, monetary, fiscal and tax policies; | ||
| changes in the securities markets, in particular, continued disruption in the fixed income markets and adverse capital market conditions; | ||
| continued disruption in the housing markets and related conditions in the financial markets; and | ||
| 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 Securities and Exchange Commission. |
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 Management to
make assumptions, estimates and judgments that affect the
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financial statements and accompanying
notes. These assumptions, estimates and judgments are based on information available as of the date
of the financial statements.
The most significant accounting policies followed by the Corporation are presented in Note 1 to the
Consolidated Financial Statements contained within this Form 10-Q. These policies are fundamental
to the understanding of results of operation and financial conditions.
The accounting policies considered by Management to be critical 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.
Income Taxes
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.
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Goodwill
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.
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ITEM 3. 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 regulatory reporting purposes and to assist in the determination of the frequency of
review for credit exposures.
Nonperforming Assets
Total nonperforming assets consist of nonperforming loans and other foreclosed assets. 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 ratio of nonperforming loans to total loans decreased from 5.15%
at December 31, 2010 to 4.66% at March 31, 2011. This is the result of managements continued focus
on asset quality. Nonperforming loans at March 31, 2011 were $37,808 as compared to $41,830 at
December 31, 2010, a decrease of $4,022. Of this total, commercial real estate loans were $24,904
or 65.87% of total nonperforming loans compared to $25,941 or 62.01% of total nonperforming loans
at December 31, 2010. These loans are primarily secured by real estate and, in some cases, by SBA
guarantees, and have either been charged-down to their realizable value or a specific reserve has
been established for any collateral short-fall. All nonperforming loans are being actively managed.
Other foreclosed assets were $3,348 as of March 31, 2011 compared to $3,119 at December 31, 2010.
The $3,348 is comprised of $2,603 in 1-4 family residential properties and $745 in non-farm
non-residential properties. This compares to $1,935 in 1-4 family residential properties and $1,184
in non-farm non-residential properties as of December 31, 2010.
Table 10 sets forth nonperforming assets at March 31, 2011 and December 31, 2010.
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Table 10: Nonperforming Assets
March 31, 2011 | December 31, 2010 | |||||||
(Dollars in thousands) | ||||||||
Commercial loans |
$ | 26,192 | $ | 28,613 | ||||
Real estate mortgage |
8,417 | 8,853 | ||||||
Home equity lines of credit |
2,213 | 2,398 | ||||||
Installment loans |
986 | 1,967 | ||||||
Total nonperforming loans |
37,808 | 41,831 | ||||||
Other foreclosed assets |
3,348 | 3,119 | ||||||
Total nonperforming assets |
$ | 41,156 | $ | 44,950 | ||||
Loans 90 days past due accruing interest |
$ | 331 | $ | | ||||
Total nonperforming loans to total portfolio loans |
4.66 | % | 5.15 | % | ||||
Allowance for loan losses to nonperforming assets |
42.07 | % | 35.90 | % | ||||
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 net interest income at risk simulation and
economic value of equity simulation. A net interest income -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 net interest income
at risk simulation can help identify product and pricing decisions that can be made currently to
assure stable net interest income performance in the future. Using a rolling 12 month forecast, at
March 31, 2011, 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 $638, or 1.65%, and in a -200 basis point shock, net interest income
would decrease $2,329, or 6.02%. 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 at Risk (EVE) is the difference between the present value of all asset
cash flows and the present value of all liability cash flows. EVE at risk is an estimate of the
banks capital at risk to adverse changes in interest rates and represents the structural mismatch
between the rate sensitivity of the assets versus the liabilities. It is a comprehensive measure
for assessing and managing the banks interest rate risk exposure. At March 31, 2011, this analysis
indicated that a +200 basis point change in rates would reduce the value of the Corporations
equity by 14.40% while a -200 basis point change in rates would increase the value of the
Corporations equity by 6.10%.
Liquidity Risk Management
Liquidity risk is the possibility of the Corporation being unable to meet current and future
financial obligations in a timely manner. Liquidity is managed to ensure stable, reliable and
cost-effective sources of funds to satisfy demand
for credit, deposit withdrawals and investment opportunities. The Corporation relies on a large,
stable core deposit base and a diversified base of wholesale funding sources to manage liquidity
risk.
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The Corporations primary source of liquidity is its core deposit base, raised though its retail
branch system, along with unencumbered, or unpledged, investment securities. The Corporation also
has available unused wholesale sources of liquidity, including advances from the Federal Home Loan
Bank of Cincinnati, borrowings through the discount window at the Federal Reserve Bank of Cleveland
and access to certificates of deposit issued through brokers. Liquidity is also provided by
unencumbered, or unpledged, investment securities that totaled $102,142 at March 31, 2011.
ITEM 4. 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 the Corporations 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 March 31, 2011, 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, the Chief Executive Officer along with the Chief Financial Officer
concluded that the Corporations disclosure controls and procedures as of March 31, 2011 were: (1)
designed to ensure that material information relating to the Corporation and its subsidiaries is
made known to the Chief Executive Officer and Chief Financial Officer by others within the
entities, and (2) effective, in that they provide reasonable assurance that information required to
be disclosed by the Corporation in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms. No change in the Corporations internal control over financial reporting (as defined in
Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the fiscal quarter ended
March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the
Corporations internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On April 18, 2008, the Corporation and Richard M. Osborne and certain other parties entered into a
settlement agreement (the Settlement Agreement) to settle certain contested matters relating to
the 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, 2010, Mr.
Osborne indicated his intent to solicit proxies in favor of the election of two nominees for
election as directors at the Corporations 2010 annual meeting of shareholders. On March 24, 2010,
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, 2010, the
Court issued an order granting the Corporations motion for a temporary restraining order. On April
3, 2010, the Court issued an order granting the Corporations motion for a preliminary injunction
restraining Mr. Osborne from engaging in any of the foregoing activities. On February 15, 2010, Mr.
Osborne filed a motion to dissolve the preliminary injunction, which the Corporation opposed. On
March 23, 2010, the Court denied Mr. Osbornes motion to dissolve the preliminary injunction.
Prior to the Courts decision, on March 19, 2010, Mr. Osborne filed a motion for summary judgment
and the Corporation filed a motion for partial summary judgment. On April 14, 2010, Mr. Osborne
filed an interlocutory appeal of the denial of his motion to dissolve the preliminary injunction
with the Sixth Circuit Court of Appeals. Proceedings in the District Court have been stayed pending
resolution of Mr. Osbornes appeal by the Sixth Circuit Court of Appeals. The case has been fully
briefed and the parties are awaiting a decision from the Sixth Circuit Court of Appeals regarding
the continuing preliminary injunction. Once the Sixth Circuit makes its decision, the case will be
remanded to the District Court for dispositive motions and, if necessary, a trial on the merits.
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Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the
risk factors disclosed in Item 1A of the Corporations Annual Report on Form 10-K for the fiscal
year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
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 $25,223 of its
series B preferred stock to the U.S. Treasury in December 2008 in conjunction with the TARP Capital
Purchase Program include limitations on the Corporations ability to repurchase its common shares.
For three years after the issuance or until the U.S. Treasury no longer holds any series B
preferred stock, the Corporation 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 March 31, 2011, the Corporation had repurchased
an aggregate of 202,500 shares under this program.
Item 6. Exhibits.
(a) | The exhibits to this Form 10-Q are referenced in the Exhibit Index attached hereto. |
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SIGNATURES
Pursuant to the requirements 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: May 12, 2011 | /s/ Gary J. Elek | |||
Gary J. Elek | ||||
Chief Financial Officer (Duly Authorized Officer, and Principal Financial and Accounting Officer) |
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Exhibit Index
Exhibit No. | Exhibit | |||
31.1 | Chief Executive Officer Rule 13a -14(a)/15d -14(a) Certification. |
|||
31.2 | Chief Financial Officer Rule 13a -14(a)/15d -14(a) Certification. |
|||
32.1 | Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
48