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Form 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-13203
Amendment Number 1
LNB Bancorp, Inc.
(Exact name of the registrant as specified in its charter)
Ohio 34-1406303
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
457 Broadway, Lorain, Ohio 44052 - 1769
(Address of principal executive offices) (Zip Code)
(440) 244 - 6000
Registrant's telephone number, including area code
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at August 1, 1999: 4,122,775 shares
Class of Common Stock: $1.00 par value
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The undersigned registrant hereby amends the following items of its
Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-Q for the six months ended June 30, 1999
solely for the purpose of providing further updated "Year 2000 Issue"
information.
PART I FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION &
RESULTS OF OPERATIONS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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: August 31, 1999 By: /s/ Gregory D. Friedman
--------------- -----------------------
Gregory D. Friedman
Senior Vice President,
Chief Operating Officer and
Chief Financial Officer
/s/ Mitchell J. Fallis
-----------------------
Mitchell J. Fallis
Vice President and
Chief Accounting Officer
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FORM 10-Q/A LNB Bancorp, Inc.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets of the Corporation increased $48,724,000 during the first
half of 1999, to $590,470,000. This growth was funded by increases in
savings deposits, certificates of deposit, federal funds purchased and
Federal Home Loan Bank advances.
Federal funds sold and other interest bearing investments increased by
$6,225,000 during the first six months of 1999.
Total securities increased $3,341,000 ending the first half at
$121,860,000. At June 30, 1999 gross unrealized gains (losses) in the
investment portfolio were approximately $62,000 and $(1,947,000),
respectively.
Net loans increased $40,686,000 during the first half to $407,069,000 at
June 30, 1999, for a 11% increase. Consumer and commercial loan growth
was strong accounting for 45% and 44% of total loan growth while mortgage
loans accounted for 11% of total loan growth during the six months ended
June 30, 1999. This loan increase was supported by a spring/summer home
equity loan sale program. This home equity sale program resulted in
new loans totaling over $2 million. The reserve for loan losses ended the
quarter at $3,774,000 supported by a provision for loan losses of
$700,000, recoveries of $118,000 and loan charge-offs of $528,000. The
reserve for loan losses as a percentage of ending loans was .94% and .92%
at December 31, 1998 and June 30, 1999, respectively. Corporate management
believes that the reserve for loan losses as a percentage of ending loans
at June 30, 1999 remains at an appropriate level. The ratio of the
reserve for loan losses to nonperforming assets improved to 764.0% as of
June 30, 1999. Also, Corporate management believes that the current level
of the reserve for loan losses is adequate based upon quantitative
analysis of identified risks and analysis of historical trends, and
probable losses inherent in the loan portfolio at June 30, 1999.
Nonperforming assets at June 30, 1999 totaled $494,000, down from
$1,481,000 at March 31, 1999. The second quarter decrease in
nonperforming assets of $987,000 resulted from loans being brought current
in the amount of $423,000, loans charged-off in the amount of $105,000
liquidations of nonaccrual loans of $231,000, liquidations of other real
estate owned of $424,000 and increases in nonaccrual loans of $196,000.
The level of nonperforming assets decreased $1,006,000 during the first
quarter 1999. The decrease in nonaccrual loans is due to decreases in
nonaccrual principal balances of $168,000 which have been paid off or
brought current, loans charged-off in the amount of $76,000 and
liquidations of nonaccrual loans of $242,000 and increases in nonaccrual
principal balances of $247,000. The decrease in nonaccrual loans in the
first quarter of 1999 was due primarily to four commercial loan customers
and six personal loan customers. The decrease in Other Real Estate Owned
in the amount of $767,000 resulted from liquidation of assets. The level
of nonperforming assets remains at relatively low levels and Corporate
management believes nonperforming assets are well collateralized.
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The table below presents the level of nonperforming assets at the end of
the last four calendar quarters.
Amounts in thousands 06/30/99 03/31/99 12/31/98 09/30/98
-------- -------- -------- --------
Nonperforming Assets:
Nonaccrual $ 285 $ 848 $ 1,087 $ 2,707
Restructured 0 0 0 0
Other Real Estate Owned 209 633 1,400 0
------ ------ ------ ------
Total Nonperforming Assets $ 494 $ 1,481 $ 2,487 $ 2,707
====== ====== ====== ======
Reserve for possible
loan losses to total
nonperforming assets 764.0% 235.2% 140.1% 172.7%
====== ====== ====== ======
Accruing loans past due
90 days $ 494 $ 479 $ 213 $ 295
====== ====== ====== ======
Potential problem loans are those loans identified on management's watch
list in which Management has some doubt as to the borrower's ability to
comply with the present repayment terms and loans which Management is
actively monitoring due to changes in the borrower's financial condition.
At June 30, 1999, potential problem loans totaled $3,199,000, an increase
of $258,000 from the December 31, 1998 balance.
The Corporation's credit policies are reviewed and modified on an ongoing
basis in order to remain suitable for the management of credit risk within
the loan portfolio as conditions change. At June 30, 1999 there are no
significant concentrations of credit in the loan portfolio.
The Corporation had outstanding loan and credit commitments to make loans
totaling $98,525,000 and $76,927,000 at June 30, 1999 and December 31,
1998, respectively. The increase in outstanding loan commitments results
in part from an increase in the unused portion of home equity lines of
credits from a home equity loan sale program in the second quarter of
1999. Mortgage and commercial construction loan demand increased in the
second quarter of 1999 as seasonal weather conditions improved and the
construction season began. Consumer loan demand increased in the second
quarter as demand for home improvement and automobile loans increased.
Total deposits increased $20,329,000 during the first half to
$464,177,000. Noninterest-bearing deposits decreased to $82,760,000, at
June 30, 1999 for a decrease of $2,798,000, while interest-bearing
deposits climbed to $381,417,000 for an increase of $23,127,000.
Federal funds purchased and securities sold under agreements to repurchase
increased $15,383,000 during the first half. Due to the volatility of
customer repurchase agreements, most funds generated by repurchase
activity enter the Corporation's earning assets as short-term investments.
LIQUIDITY
Liquidity measures a corporation's ability to generate cash or otherwise
obtain funds at reasonable prices to fund commitments to borrowers as well
as the demand of depositors and debt holders. Principal internal sources
of liquidity for the Corporation and the Bank are cash and cash
equivalents, Federal funds sold, and the maturity structures of investment
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securities and portfolio loans. Securities and loans available for sale
provide another source of liquidity through the cash flows of these
interest-bearing assets as they mature or are sold.
The Corporation continues to maintain a relatively high liquid position in
order to take advantage of interest rate fluctuations. As of June 30,
1999, short-term security investments with maturities of one year or less
totalled $17,329,000, which represented 14.2% of total securities. Adding
cash and due from banks of $25,427,000, and Federal Funds sold and other
interest bearing instruments of $12,849,000, total liquid assets
represented 9.4% of total assets.
CAPITAL RESOURCES
LNB Bancorp, Inc. continues to maintain a strong capital position. Total
shareholders' equity increased to $49,627,000, at June 30, 1999. The
increase resulted primarily from $3,796,000 of net income generated from
the first half of operations less a cash dividend declared to shareholders
of $1,814,000. The slight increase in interest rates experienced in the
first half of 1999 has caused a decrease in the overall market value of
available for sale securities which resulted in a decrease in
shareholders' equity of $1,018,000 for the six months ended June 30, 1999.
As of June 30, 1999, the LNB Bancorp, Inc. held 100,000 shares of common
stock as treasury stock. LNB Bancorp, Inc. purchased 2,004 of these
shares in the first quarter of 1998 and 97,996 shares in 1997 for a total
cost of $2,900,000.
The Corporation continues to monitor growth to stay within the constraints
established by the regulatory authorities. Under Federal banking
regulations, an institution is deemed to be well-capitalized if it has a
Risk-based Tier 1 capital ratio of 6.00 percent or greater, a Risk-based
Total capital ratio of 10.00 percent or greater and a Leverage ratio of
5.00 percent or greater. The Corporation's Risk-based capital and
Leverage ratios along with the ratios required to be adequately
capitalized have exceeded the ratios for a well-capitalized financial
institution for all periods presented above. The Corporation's capital
and leverage ratios as of June 30, 1999 and 1998 follow together with
those ratios required for the Corporation to be considered adequately
capitalized.
June 30,
---------------------
1999 1998
------ ------
Tier I capital ratio 11.64% 13.19%
Required Tier I capital ratio 4.00% 4.00%
Total capital ratio 12.61% 14.44%
Required total capital ratio 8.00% 8.00%
Leverage ratio 8.21% 8.47%
Required leverage ratio 3.00% 3.00%
The Corporation regularly evaluates acquisition opportunities and conducts
due diligence activities in connection with possible acquisition in
markets near or within the Corporation's current geographic market. As a
result, acquisition discussions and, in some cases, take place and future
acquisitions could occur. Corporate management believes that it's current
capital resources are sufficient to support any foreseeable acquisition
activity.
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RESULTS OF OPERATIONS
Interest and fees on loans for the first half of 1999 increased $1,648,000
when compared to the first half of 1998. Increased loan income was the
result of the impact of increases in the loan portfolio of $40,686,000
offset slightly by decreases in interest rates. Interest and dividends on
securities was $3,529,000 for the first half of 1999 for a decrease of
$83,000 over the same period in 1998. Interest and dividends on
securities represented 17.6% of total interest income at June 30, 1999
compared to 19.5% at June 30, 1998. Interest on Federal funds sold and
other interest bearing instruments was $85,000 at June 30, 1999 compared
to $94,000 at June 30, 1998. The decrease resulted from lower interest
rates plus a decrease in the average balance invested in these forms of
financial instruments.
Total interest expense increased by $464,000 when compared to the first
half of 1998. The interest expense increase was fueled by an increase in
interest expense from Federal Home Loan Bank advances of $552,000, offset
by decreases in deposit account interest of $64,000. Total interest
expense for the first half of 1999 was impacted by decreases in interest
rates paid on savings accounts and certificate of deposit accounts when
compared to the first half of 1998.
Total other income increased by $558,000 when compared to the first half
of 1998. This increase resulted from increases in income from fiduciary
fees of $48,000, increases in service charges of $232,000, increases in
other service charges, exchanges and fees of $84,000 and a non-recurring
increase on gain on sale of building of $158,000.
The Corporation continuously monitors noninterest expenses for greater
profitability. The entire staff is geared to improving productivity at
all levels. Noninterest expense for the six months ended June 30, 1999
was $10,306,000, 8.6% above the first six months of 1998. This increase
was due primarily to certain loan collection expenses incurred in the
first half of 1999, increases in salaries and benefits, increases in
credit card and merchant expenses plus the operating expenses of one
additional branch office which was placed in service in June of 1998.
The effective tax rate increased slightly from 33.9% during the first half
of 1998 to 34.0% during the first half of 1999. The increase in the
effective tax rate is due primarily to the decreases in tax exempt
interest income to total interest income. Net income was $3,796,000 and
$3,432,000 for the six months ended June 30, 1999 and 1998, respectively.
Net income per basic and diluted share was $.92 and $.83 for the six
months ended June 30, 1999 and 1998, respectively.
YEAR 2000 ISSUE
Several of the Corporation's and Bank's regulators including the
Securities and Exchange Commission, Federal Reserve Board, and the Office
of the Comptroller of Currency have issued guidance relative to the
management and disclosures for year 2000 issues. A discussion of the year
2000 issue as it relates to the Corporation, the Bank and their customers,
suppliers and vendors follows.
The Corporation has formed a strategic task force to perform a
comprehensive review of its computer systems to identify the systems that
could be affected by the "Year 2000" issue and has developed an
implementation plan to resolve the issue. The Year 2000 problem is the
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result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Corporation's programs
that have time sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000.
The Corporation expects to incur internal staff costs, consulting, and
other expenses to identify, correct or reprogram, and test the systems for
the year 2000 compliance issue. The Corporation estimates that compliance
costs for the year 2000 issue through 1999 will not exceed $250,000. The
Corporation does not expect that year 2000 compliance costs to be expensed
over the next year to have a material effect on the financial position,
liquidity or results of operations.
Financial institutions may experience increases in problem loans and
credit losses in the event that borrowers fail to properly respond to the
"Year 2000" issue. Cost of funds may become greater, if customers react
to publicity about this issue by withdrawing deposits. Accordingly, the
Corporation has formed an internal task force to assess potential problems
relating to credit, liquidity, and third party risk, and where
appropriate, develop contingency plans. This task force has conducted a
survey of significant credit and deposit relationships to determine their
"Year 2000" readiness and to evaluate the potential of credit and
liquidity risk to the Corporation. Also, the "Year 2000" issue creates
risk for the Corporation from unforeseen problems in its own computer
systems and from third parties' with whom the Corporation deals on
financial transactions. Such failures of the Corporation, and/or third
parties' computer systems could have a material impact on the
Corporation's ability to conduct its business, and especially to process
and account for the transfer of funds electronically.
The Corporation set June 1999 as the date it should be substantially
compliant with the Year 2000 readiness process. As of that date, the
Corporation had successfully completed upgrades, testing and validation of
its internal mission critical systems. The Corporation has and will
continue to work extensively in the area of consumer awareness and
customer risk assessment. Furthermore, the Corporation continues to work
with regulatory agencies and other third party providers to ensure Year
2000 compliance. Also, the Corporation completed its liquidity plan and
designed its Year 2000 contingency plan. With the extensive testing, work
and planning that has gone into the Y2K project, the Corporation is
confident that there should be no interruption in service relating to Year
2000 issues. Although the Corporation successfully completed its Year
2000 readiness on schedule in June, the Corporation will continue to work
on the Year 2000 project through the remainder of 1999 and into the Year
2000. For the remainder of 1999, customer confidence and employee
awareness issues will be extremely important as well as testing and
validating contingency plans. Year 2000 preparedness will continue to be
a top priority through the remainder of 1999 and into 2000.
Based upon successful testing of mission critical hardware and software,
the Corporation does not anticipate that it will have to rely on a
contingency plan relating to these areas. However, the Corporation has
developed a contingency plan that would cover the failure of mission
critical hardware and software. The contingency plan also covers Y2K
failure(s) that might result from a failure(s) outside of the control of
the Corporation; such as a utility company failure. The Corporation's
contingency plan for Y2K failure of its core processing systems will be to
handle and process customer transactions manually until the system failure
is corrected. In the most reasonably likely worst case scenario where any
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of the Corporation's mission critical systems, either internal or
external, would fail, the Corporation will be operating in a manual mode.
In preparation for the unlikely event of the most reasonably likely worst
case scenario, the Corporation is in the process of planning and training
all of its' employees and will have all customer records backed up to
ensure the accuracy of our customer records.
IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS
Corporate management is not aware of any 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.
