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LNBB > SEC Filings for LNBB > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for LNB BANCORP INC


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following commentary presents a discussion and analysis of the Corporation's financial condition and results of operations by its management ("Management"). This Management's Discussion and Analysis ("MD&A") section discusses the financial condition and results of operations of the Corporation for the three months ended March 31, 2013. This MD&A should be read in conjunction with the financial information contained in the Corporation's Form 10-K for the fiscal year ended December 31, 2012 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 reader's understanding of the accompanying tables and charts, the consolidated financial statements, notes to the financial statements and financial statistics appearing elsewhere in the report. Where applicable, this discussion also reflects Management's insights as to known events and trends that have or may reasonably be expected to have a material effect on the Corporation's operations and financial condition. Summary (Dollars in thousands, except per share data) The Corporation 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 for the first three months ended 2013 was $1,113 and net income available to common shareholders was $856, or $0.10 per diluted common share. Net income for the first quarter 2012 was $1,505 and net income available to common shareholders was $1,186, or $0.15 per diluted common share. Results were impacted by a one-time Supplemental Executive Retirement Plan (SERP) after-tax charge of $455 during the quarter. Excluding this one-time expense, net income available to common shareholders would have been $1.31 million for the first quarter 2013 compared to $1.19 million for the first quarter in 2012. Net interest income on a fully taxable equivalent (FTE) basis for the first quarter of 2013 was $8,860, a 9.7% decrease, compared to $9,810 for the first quarter of 2012. The net interest margin FTE, determined by dividing tax equivalent net interest income by average assets for the first quarter 2013 was 3.23% compared to 3.61% for the first quarter of 2012.
The provision for loan losses was $1,350 for the quarter ended March 31, 2013 compared to $1,900 for March 31, 2012. See page 40 "Provision and Allowance for Loan Losses" for further details.
Noninterest income, which is traditionally weak in the first quarter, totaled $3,332 compared to $2,875 for the first quarter of 2012. Year over year total fees and other income have remained constant at $2.5 million. Gain on the sale of securities at March 31, 2013 was $178 compared to no sales of securities at March 31, 2012. Gain on the sale of loans, which includes both mortgage and indirect loan sales, was $656 for the quarter, compared to $347 for the first quarter of 2012, an increase of 90%. This increase is primarily due to $591 of gain on the sale of mortgages, which is up 130% compared to $256 for first quarter of 2012. This increase is attributable to strong demand during the quarter for mortgage lending, both refinancing and new purchase loans. Noninterest expense was $9.28 million for the first quarter of 2013 compared with $8.54 million for the first quarter of 2012, an increase of 8.6%. Excluding the one-time expense for SERP compensation of $690 (pre-tax), noninterest expenses would have been essentially flat compared to the first quarter of 2012.The efficiency ratio, which is the measure of cost to generate revenue, increased from 67.38% in the first quarter of 2012 to 76.12% in the first quarter of 2013.
During the first quarter of 2013, loan demand increased slightly as total portfolio loans ended the quarter at $889,931, a 0.84% increase compared to $882,548 at December 31, 2012. Total assets for the first quarter 2013 ended at $1,231,183 compared to $1,178,254 at the end of 2012. Total deposits grew to $1,049,176 at the end of the first quarter of 2013, up from $999,592 at December 31, 2012.
The Corporation continued its efforts to reduce the level of problem loans and their associated costs. The Corporation's non-performing loans totaled $28,514, at March 31, 2013, or 3.20% of total loans, a slight increase from $27,796, or 3.15% of total loans, at December 31, 2012, but decreased from $36,870, or 4.28%, from the year ago quarter.
The allowance for possible loan losses was $17,806 at March 31, 2013 compared to $17,637 at December 31, 2012, remaining a constant 2.00% of total loans compared to 2.00% at December 31, 2012. Annualized net charge-offs to average loans for the quarter ending March 31, 2013 was 0.54% compared to 0.79% at December 31, 2012 and 0.87% at March 31, 2012.


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Table 1: Condensed Consolidated Average Balance Sheets Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis.
Table 1 presents the condensed consolidated average balance sheets for the three months ended March 31, 2013 and 2012.

                                                            Three Months Ended March 31,
                                                     2013                                   2012
                                        Average                                Average
                                        Balance       Interest     Rate        Balance       Interest     Rate
                                                               (Dollars in thousands)
Assets:
U.S. Govt agencies and
corporations                         $   175,589     $    841      1.94 %   $   190,919     $  1,261      2.66 %
State and political subdivisions          32,202          415      5.22          31,913          411      5.17
Federal funds sold and short-term
investments                                7,230           20      1.13           8,681            9      0.40
Restricted stock                           6,627           70      4.26           5,741           72      5.04
Commercial loans                         491,326        5,423      4.48         475,502        5,856      4.95
Residential real estate loans             54,761          652      4.83          54,588          721      5.32
Home equity lines of credit              107,664        1,016      3.83         107,313        1,047      3.92
Installment loans                        237,893        1,993      3.40         218,961        2,455      4.51
Total Earning Assets                 $ 1,113,292     $ 10,430      3.80 %   $ 1,093,618     $ 11,832      4.35 %
Allowance for loan loss                  (17,762 )                              (17,169 )
Cash and due from banks                   34,926                                 33,641
Bank owned life insurance                 18,680                                 17,926
Other assets                              46,494                                 48,438
Total Assets                         $ 1,195,630                            $ 1,176,454
Liabilities and Shareholders'
Equity:
Consumer time deposits               $   437,118     $  1,047      0.97 %   $   418,450     $  1,396      1.34 %
Public time deposits                      57,612          115      0.81          84,775           99      0.47
Savings deposits                         120,510           16      0.05         104,690           33      0.13
Money market accounts                    105,365           43      0.17         104,896           54      0.21
Interest-bearing demand                  158,603           28      0.07         156,296           49      0.13
Short-term borrowings                      1,514            1      0.10             545            -      0.15
FHLB advances                             46,531          154      1.35          47,057          215      1.84
Trust preferred securities                16,313          166      4.13          16,325          176      4.34
Total Interest-Bearing Liabilities   $   943,566     $  1,570      0.68 %   $   933,034     $  2,022      0.87 %
Noninterest-bearing deposits             137,760                                124,732
Other liabilities                          3,888                                  4,532
Shareholders' Equity                     110,416                                114,156
Total Liabilities and Shareholders'
Equity                               $ 1,195,630                            $ 1,176,454
Net interest Income (FTE)                            $  8,860      3.23 %                   $  9,810      3.61 %
Taxable Equivalent Adjustment                            (157 )   (0.06 )                       (155 )   (0.05 )
Net Interest Income Per Financial
Statements                                           $  8,704                               $  9,655
Net Yield on Earning Assets                                        3.17 %                                 3.55 %

Note: Interest income on tax-exempt securities and loans has been adjusted to a fully-taxable equivalent basis. Nonaccrual loans have been included in the average balances


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Results of Operations (Dollars in thousands except per share data) Three Months Ended March 31, 2013 versus Three Months Ended March 31, 2012 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 Corporation's principal source of revenue, accounting for 72% of the Corporation's revenues for the three months ended March 31, 2013. 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 Corporation's actual effective tax rate. The net interest margin is net interest income as a percentage of average earning assets.
Net interest income was $8,704 for the first quarter of 2013 compared to $9,655 during the same quarter of 2012. Adjusting for tax-exempt income, net interest income FTE for the first quarter of 2013 and 2012 was $8,860 and $9,810 respectively. The net interest margin FTE, determined by dividing tax equivalent net interest income by average earning assets, was 3.23% for the three months ended March 31, 2013 compared to 3.61% for the three months ended March 31, 2012.
Average earning assets for the first quarter of 2013 were $1,113,292, an increase of $19,674, or 1.8%, compared to $1,093,618 for the first quarter of last year. The yield on average loans during the first quarter of 2013 was 4.13%, which was 58 basis points lower than the yield on average loans during the first quarter of 2012 of 4.71%. Interest income from securities was $1,256 (FTE) for the three months ended March 31, 2013, compared to $1,672 during the first quarter of 2012. The yield on average securities was 2.45% and 3.02% for these periods, respectively. An increase in pre-payments in the mortgage backed securities portfolio was the primary cause for the decrease noted in yield. The cost of interest-bearing liabilities was 0.68% during the first quarter of 2013 compared to 0.87% during the same period in 2012. This decrease is primarily due to an improved deposit mix with noninterest-bearing accounts of $137,760, an increase of 10.4% when compared to the same period a year ago. Total average interest-bearing liabilities of $943,566 for the quarter ended March 31, 2013 increased $10,532, or 1.13%, compared to March 31, 2012. The average cost of trust preferred securities was 4.13% for the first quarter of 2013, compared to 4.34% for the first quarter of 2012. One half of the Corporation's outstanding trust preferred securities accrues dividends at a fixed rate of 6.64% and the other half accrues dividends at LIBOR plus 1.48% which was 1.76% as of March 31, 2013.
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, 2013 and March 31, 2012. The table is presented on a fully tax-equivalent basis.


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Table 2: Rate/Volume Analysis of Net Interest Income (FTE)

                                                      Three Months Ended March 31,
                                                    Increase (Decrease) in Interest
                                                   Income/Expense in 2013 over 2012
                                                 Volume             Rate          Total
                                                         (Dollars in thousands)
U.S. Govt agencies and corporations           $     (73 )       $      (347 )   $  (420 )
State and political subdivisions                      5                  (1 )         4
Federal funds sold and short-term investments        (5 )                16          11
Restricted stock                                     10                 (12 )        (2 )
Commercial loans                                    175                (608 )      (433 )
Residential real estate loans                         2                 (71 )       (69 )
Home equity lines of credit                           3                 (34 )       (31 )
Installment loans                                   159                (621 )      (462 )
Total Interest Income                               276              (1,678 )    (1,402 )
Consumer time deposits                               45                (394 )      (349 )
Public time deposits                                (54 )                70          16
Savings deposits                                      2                 (19 )       (17 )
Money market accounts                                 -                 (11 )       (11 )
Interest-bearing demand                               -                 (21 )       (21 )
Short-term borrowings                                 1                   -           1
FHLB advances                                        (2 )               (59 )       (61 )
Trust preferred securities                            -                 (10 )       (10 )
Total Interest Expense                               (8 )              (444 )      (452 )
Net Interest Income (FTE)                     $     284         $    (1,234 )   $  (950 )

Net interest income (FTE) for the first quarter 2013 and 2012 was $8,860 and $9,810, respectively. Interest income (FTE) for the first quarter of 2013 decreased $1,402 in comparison to the same period in 2012. This decrease is primarily attributable to a decrease of $1,678 due to rate, offset by a $276 increase due to volume. Interest income on securities of U.S. Government agencies and corporations decreased $420, of which $347 is attributable to rate. Lower market interest rates have increased the number of agency securities being called. In addition, federal programs promoting the refinance of residential mortgages have increased paydowns on mortgage-backed securities, resulting in a decrease in yield and the reinvestment of funds at lower market interest rates. Interest income on commercial loans decreased $433. This decrease is primarily attributed to the low interest rate environment, with a decrease in rate of $608, which was offset by an increase in volume of $175. The $69 decrease in interest income on real estate mortgage loans was primarily attributable to a decline in average loan balances as a result of refinancing experienced in the portfolio and the Corporation's practice of selling new mortgage production into the secondary market, in particular 15 year fixed rate mortgages. Given the continued lower interest rate environment and the competitive nature of indirect lending, installment loans accounted for $621 of the change in interest due to rate, offset by an increase in volume of $159.
The $349 decrease in consumer time deposits was due primarily to lower market interest rates as existing accounts continue to renew at favorable lower market interest rates. Total interest expense decreased $452, with the decrease being attributable to a $444 decrease due to rate and a decrease due to volume of $8. Overall, the total decrease of $950 net interest income (FTE) was mainly attributable to a decrease in rate of $1,234 offset by an increase in volume of $284 which is the difference between interest income and interest expense.


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Noninterest Income
Table 3: Details of Noninterest Income

Three Months Ended March 31, 2013 2012
(Dollars in thousands)
Investment and trust services $ 375 $ 390 Deposit service charges 816 935 Other service charges and fees 831 748 Income from bank owned life insurance 168 165 Other income 321 342 Total fees and other income 2,511 2,580 Securities gains, net 178 - Gain on sale of loans 656 347 Loss on sale of other assets, net (13 ) (52 ) Total noninterest income $ 3,332 $ 2,875

Three Months Ended March 31, 2013 versus Three Months Ended March 31, 2012 Noninterest Income Comparison
Total fees and other income for the three months ended March 31, 2013 was $2,511 a slight decrease of $69, or 2.7%, over the same period of 2012. Income earned on investment and trust services declined $15 compared to the prior period. Deposit service charges decreased $119 due primarily to new regulations regarding overdrafts. Other income decreased $21 over the same period of 2012. A gain on sale of securities was recorded in the first quarter of 2013 of $178 compared to no sales of securities in the first quarter of 2012. Gain on the sale of loans was $656 for the first quarter of 2013, compared to $347 for the first quarter of 2012, an increase of 90%. This increase is primarily due to $591 of gain on the sale of mortgages, which is up 130% compared to $256 for first quarter of 2012. The Corporation continued to see strong demand for mortgage lending, both refinancing and new purchase loans. Sales of bank owned property resulted in a loss of $13 during the first three months of 2013 compared to a loss of $52 for the first three months of 2012.


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Noninterest Expense
Table 4: Details on Noninterest Expense

                                      Three Months Ended March 31,
                                            2013                   2012
                                         (Dollars in thousands)
Salaries and employee benefits $         5,027                   $ 4,111
Furniture and equipment                    949                     1,070
Net occupancy                              588                       579
Professional fees                          490                       495
Marketing and public relations             289                       247
Supplies, postage and freight              307                       243
Telecommunications                         162                       173
Ohio franchise tax                         308                       316
FDIC assessments                           242                       392
Other real estate owned                     77                       132
Other charge-offs and losses                 -                         -
Loan and collection expense                388                       349
Other expense                              454                       437
Total noninterest expense      $         9,281                   $ 8,544

Three Months Ended March 31, 2013 versus Three Months Ended March 31, 2012 Noninterest Expense Comparison
Noninterest expense for the first quarter of 2013 increased $737, or 8.6%, compared to the same period of 2012. The increase in noninterest expense was mainly attributable to an increase of $916 in Salary and employee benefits, which included a one-time Supplemental Executive Retirement Plan (SERP) expense of $690 during the quarter. The increase in Salary and employee benefits was offset by decreases of $150 and $121 in FDIC assessments and Furniture and equipment, respectively.

Income taxes
Three Months Ended March 31, 2013 versus Three Months Ended March 31, 2012 Income Taxes Comparison
The Corporation recognized income tax expense of $292 and $581 for the first quarter of 2013 and 2012, respectively. The Corporation's effective tax rate decreased to 20.1% for March 31, 2013 from 27.9% for March 31, 2012. The Corporation utilizes a new market tax credit that is based on a schedule of eligible qualified investments and contributes to a lower effective tax rate in comparison to the Corporation's Federal statutory tax rate of 34%. This tax credit is set to expire within the next couple years. Included in net income for the three months ended March 31, 2013 and March 31, 2012 was $485 and $472 of nontaxable income, comprised of $135 and $134 related to life insurance policies and $349 and $338 of tax-exempt investment and loan interest income, respectively. After considering the tax-exempt income and relatively small nondeductible expenses, income subject to tax for the quarter was significantly less than income before income tax expense.

Financial Condition
Overview
The Corporation's total assets at March 31, 2013 were $1,231,183 compared to $1,178,254 at December 31, 2012. This was an increase of $52,929, or 4.5%, which is primarily attributable to an increase in securities available for sale and cash and cash equivalents of $19,410, or 9.5%, and $24,295, or 79.2%, from December 31, 2012. Total deposits at March 31, 2013 were $1,049,176 compared to $999,592 at December 31, 2012. The increase in total deposits of $49,584 came in the form of savings, money market and interest-bearing demand and time deposits. Securities
The distribution of the Corporation's securities portfolio at March 31, 2013 and December 31, 2012 is presented in Note 5 to the Consolidated Financial Statements contained within this Form 10-Q. The Corporation continued to employ the


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securities portfolio to manage the Corporation's interest rate risk and liquidity needs. Total securities increased $19,410 or 9.5%, compared to December 31, 2012. As of March 31, 2013 the portfolio was comprised of 97.5% available for sale securities and 2.5% restricted stock. Available for sale securities were comprised of 26.0% U.S. Government agencies, 49.0% U.S. agency mortgage backed securities, 8.6% U.S. collateralized mortgage obligations, 14.4% municipal securities and 2% preferred securities at March 31, 2013. The available for sale securities had a net temporary unrealized gain of $3,733, representing 1.7% of the total amortized cost of the Corporation's available for sale securities.

As with any investment, the yield on an available for sale security depends on the purchase price in relation to the interest rate and the length of time the investor's principal remains outstanding. Mortgage-backed security yields are often quoted in relation to yields on treasury securities with maturities closest to the mortgage security's estimated average life. The estimated yield on a mortgage security reflects its estimated average life based on the assumed prepayment rates for the underlying mortgage loans. If actual prepayment rates are faster or slower than anticipated, the investor holding the mortgage security until maturity may realize a different yield. Due to the sustained low interest rate environment and the flattening of the yield curve, the Corporation focused investment opportunities to short-term duration investments. Primarily due to the continued refinance- heavy market environment, which has contributed to a decrease in yield, the Corporation sold approximately $2,280 mortgage backed securities with elevated prepayment risk for a $178 gain and re-invested the proceeds in higher earning investment securities.
At March 31, 2013, the available for sale securities portfolio had unrealized gains of $4,681 and unrealized losses of $948. The unrealized losses represent 0.4% of the total amortized cost of the Corporation's available for sale securities. At March 31, 2013, the Corporation held no available for sale securities with an unrealized loss position for greater than twelve months. Available for sale securities with an unrealized loss position for less than twelve months totaled $948 at March 31, 2013. The unrealized gains and losses at December 31, 2012 were $5,330 and $338, respectively. See Note 5 to the Consolidated Financial Statements for further detail. 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.
Total portfolio loans at March 31, 2013 were $889,931. This was an increase of $7,383, or 0.8 %, over December 31, 2012. The increase is the primarily result of the Corporation adding several seasoned commercial bankers during 2012. The Corporation believes that its loan portfolio was well-diversified at March 31, 2013. Commercial and commercial real estate loans represented 55.2%, indirect loans represented 22.5%, home equity loans comprised of 13.7%, residential real estate mortgage loans represented 7.2% and consumer loans comprised of 1.4% of total portfolio loans.


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Table 5: Loan Portfolio Distribution

                           March 31, 2013     December 31, 2012     March 31, 2012
                                           (Dollars in thousands)
Commercial real estate    $      415,753     $         414,005     $      410,781
Commercial                        75,909                68,705             73,457
Residential real estate           64,486                64,983             61,012
Home equity loans                121,764               122,830            125,298
Indirect                         199,964               199,924            178,433
Consumer                          12,055                12,101             13,239
Total Loans                      889,931               882,548            862,220
Allowance for loan losses        (17,806 )             (17,637 )          (17,115 )
Net Loans                 $      872,125     $         864,911     $      845,105

Loan Mix Percent
Commercial real estate              46.7 %                46.9 %             47.6 %
Commercial                           8.5 %                 7.8 %              8.5 %
Residential real estate              7.2 %                 7.4 %              7.2 %
Home equity loans                   13.7 %                13.9 %             14.5 %
. . .
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