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LNBB > SEC Filings for LNBB > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for LNB BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LNB BANCORP INC


5-Aug-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 six months ended June 30, 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 second quarter 2013 was $1,823 and net income available to common shareholders was $1,706, or $0.18 per diluted common share. Net income for the first six months ended 2013 was $2,936 and net income available to common shareholders was $2,562, or $0.29 per diluted common share. Net interest income on a fully taxable equivalent (FTE) basis for the second quarter of 2013 was $9,170, a 9.2% decrease, compared to $10,095 for the second quarter of 2012. The net interest margin FTE, determined by dividing tax equivalent net interest income by average assets, for the second quarter 2013 was 3.20% compared to 3.61% for the second quarter of 2012.
The provision for loan losses was $1,050 for the quarter ended June 30, 2013 compared to $1,667 for June 30, 2012. See Note 6: Loans and Allowance for Loan Losses for further details.
Noninterest income was $3,072 for the second quarter of 2013 compared to $2,543 for the prior-year second quarter. This 20.8% increase was driven primarily by growth in mortgage and indirect auto lending businesses. Noninterest income for the first six months of 2013 was $6,404, up $986, or 18%, from the same six month period in 2012.
Noninterest expense of $8,622 for the second quarter of 2013, decreased $425, or 4.7%, compared to $9,047, for the same period one year ago. The decrease in noninterest expense was mainly attributable to a decrease of $450, or 55.0%, in other expense, which is due to one-time system conversion charges incurred in 2012.
During the second quarter of 2013, loan demand increased slightly as total portfolio loans ended the quarter at $882,896, a 0.04% increase compared to $882,548 at December 31, 2012. Total assets for the second quarter 2013 ended at $1,218,246 compared to $1,178,254 at December 31, 2012, an increase of $39,992, or 3.4%. Total deposits grew to $1,039,279 at June 30, 2013, an increase of 4.0%, 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 $26,605 at June 30, 2013, or 3.01% of total loans, a decrease from $27,796, or 3.15% of total loans, at December 31, 2012, and a decrease from $34,993, or 4.03%, from the 2012 second quarter.
The allowance for possible loan losses was $17,815 at June 30, 2013 compared to $17,637 at December 31, 2012, and 2.02% of total loans compared to 2.00% at December 31, 2012. Annualized net charge-offs to average loans for the quarter ending June 30, 2013 was 0.47% compared to 0.79% at December 31, 2012 and 0.69% at June 30, 2012.


Table of Contents

Results of Operations (Dollars in thousands except per share data)
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 June 30, 2013 and 2012.

                                                             Three Months Ended June 30,
                                                     2013                                   2012
                                        Average                                Average
                                        Balance       Interest     Rate        Balance       Interest     Rate
                                                               (Dollars in thousands)
Assets:
U.S. Govt agencies and corporations  $   192,368     $    937      1.95 %   $   194,781     $  1,281      2.64 %
State and political subdivisions          33,276          424      5.11          31,695          417      5.29
Federal funds sold and short-term
investments                               28,372            9      0.13          20,821           10      0.18
Restricted stock                           5,741           68      4.77           5,741           69      4.85
Commercial loans                         489,367        5,567      4.56         486,061        6,001      4.97
Residential real estate loans             51,621          711      5.52          53,945          721      5.38
Home equity lines of credit              106,705        1,024      3.85         108,071        1,111      4.13
Installment loans                        240,419        1,996      3.33         221,803        2,397      4.35
Total Earning Assets                 $ 1,147,869     $ 10,736      3.75 %   $ 1,122,918     $ 12,007      4.30 %
Allowance for loan loss                  (17,934 )                              (17,491 )
Cash and due from banks                   37,834                                 35,062
Bank owned life insurance                 18,848                                 18,092
Other assets                              47,077                                 47,716
Total Assets                         $ 1,233,694                            $ 1,206,297
Liabilities and Shareholders'
Equity:
Consumer time deposits               $   440,463     $  1,031      0.94 %   $   427,491     $  1,298      1.22 %
Public time deposits                      72,195          129      0.71          72,387          100      0.55
Savings deposits                         123,753           11      0.03         110,654           29      0.11
Money market accounts                    108,903           44      0.16         108,104           49      0.18
Interest-bearing demand                  169,338           21      0.05         167,287           51      0.12
Short-term borrowings                      1,698            1      0.19             903            -      0.22
FHLB advances                             46,583          156      1.35          47,494          212      1.79
Trust preferred securities                16,327          174      4.27          16,327          173      4.27
Total Interest-Bearing Liabilities   $   979,260     $  1,567      0.64 %   $   950,647     $  1,912      0.81 %
Noninterest-bearing deposits             139,300                                136,506
Other liabilities                          4,515                                  3,863
Shareholders' Equity                     110,619                                115,281
Total Liabilities and Shareholders'
Equity                               $ 1,233,694                            $ 1,206,297
Net interest Income (FTE)                            $  9,169      3.20 %                   $ 10,095      3.61 %
Taxable Equivalent Adjustment                            (160 )   (0.06 )                       (161 )   (0.06 )
Net Interest Income Per Financial
Statements                                           $  9,009                               $  9,933
Net Yield on Earning Assets                                        3.15 %                                 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


Table of Contents

Three Months Ended June 30, 2013 versus Three Months Ended June 30, 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 74.6% of the Corporation's revenues for the three months ended June 30, 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 $9,009 for the second quarter of 2013 compared to $9,933 during the same quarter of 2012. Adjusting for tax-exempt income, net interest income FTE for the second quarter of 2013 and 2012 was $9,169 and $10,095, respectively. The net interest margin FTE, determined by dividing tax equivalent net interest income by average earning assets, was 3.20% for the three months ended June 30, 2013 compared to 3.61% for the three months ended June 30, 2012. Average earning assets for the second quarter of 2013 were $1,147,869, an increase of $24,951, or 2.2%, compared to $1,122,918 for the second quarter of last year. The yield on average loans during the second quarter of 2013 was 4.20%, which was 53 basis points lower than the yield on average loans during the second quarter of 2012 of 4.73%. Interest income from securities was $1,361 (FTE) for the three months ended June 30, 2013, compared to $1,698 during the second quarter of 2012. The yield on average securities was 2.4% and 3.0% 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 0.64% during the second quarter of 2013 compared to 0.81% during the same period in 2012. This decrease is primarily due to the low sustained interest rate environment.
Noninterest-bearing accounts were $139,300, an increase of 2.1% compared to $136,506 the same period a year ago. Total average interest-bearing liabilities of $979,260 for the quarter ended June 30, 2013 increased $28,613, or 3.0%, compared to June 30, 2012. The average cost of trust preferred securities was 4.27% for the second quarter of 2013, which was the same as in the second quarter of 2012. One half of the Corporation's outstanding trust preferred securities accrued dividends at a fixed rate of 6.64% and the other half accrued dividends at LIBOR plus 1.48% which was 1.75% as of June 30, 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 June 30, 2013 and June 30, 2012. The table is presented on a fully tax-equivalent basis.


Table of Contents

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

                                                                 Three Months Ended June 30,
                                                       Increase (Decrease) in Interest Income/Expense
                                                                      in 2013 over 2012
                                                         Volume                 Rate            Total
                                                                   (Dollars in thousands)
U.S. Govt agencies and corporations                 $        (12 )         $       (332 )    $     (344 )
State and political subdivisions                              20                    (13 )             7
Federal funds sold and short-term investments                  2                     (3 )            (1 )
Restricted stock                                               -                     (1 )            (1 )
Commercial loans                                              38                   (472 )          (434 )
Residential real estate loans                                (32 )                   22             (10 )
Home equity lines of credit                                  (13 )                  (74 )           (87 )
Installment loans                                            155                   (556 )          (401 )
Total Interest Income                                        158                 (1,429 )        (1,271 )
Consumer time deposits                                        30                   (297 )          (267 )
Public time deposits                                         (27 )                   56              29
Savings deposits                                               1                    (19 )           (18 )
Money market accounts                                          -                     (5 )            (5 )
Interest-bearing demand                                        -                    (30 )           (30 )
Short-term borrowings                                          -                      1               1
FHLB advances                                                 (3 )                  (53 )           (56 )
Trust preferred securities                                     -                      1               1
Total Interest Expense                                         1                   (346 )          (345 )
Net Interest Income (FTE)                           $        157           $     (1,083 )    $     (926 )

Net interest income (FTE) for the second quarter 2013 and 2012 was $9,169 and $10,095, respectively. Interest income (FTE) for the second quarter of 2013 decreased $926 in comparison to the same period in 2012. This decrease is primarily attributable to a decrease of $1,083 due to rate, offset by a $157 increase due to volume. Interest income on securities of U.S. Government agencies and corporations decreased $344, of which $332 is attributable to rate and $12 is attributable to volume. 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 $434. This decrease is primarily attributable to the low interest rate environment, with a decrease in rate of $472, which was offset by an increase in volume of $38. Interest income on installment loans decreased $401, with a decrease in rate of $556, which was offset by an increase in volume of $155. The decrease was the result of the continued lower interest rate environment and the competitive nature of indirect lending.
The $267 decrease in consumer time deposits was due primarily to lower market interest rates as existing accounts continued to renew at favorable lower market interest rates. Total interest expense decreased $345, with the decrease being attributable to a $346 decrease due to rate offset by an increase due to volume of $1. Overall, the total decrease of $926 net interest income (FTE) was mainly attributable to a decrease in rate of $1,083 offset by an increase in volume of $157, which is the difference between interest income and interest expense.


Table of Contents

Table 3: Condensed Consolidated Average Balance Sheets Interest, Rate, and Rate/ Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis.
Table 3 presents the condensed consolidated average balance sheets for the six months ended June 30, 2013 and 2012.

                                                              Six Months Ended June 30,
                                                     2013                                   2012
                                        Average                                Average
                                        Balance       Interest     Rate        Balance       Interest     Rate
                                                               (Dollars in thousands)
Assets:
U.S. Govt agencies and corporations  $   184,465     $  1,792      1.96 %   $   192,850     $  2,541      2.65 %
State and political subdivisions          32,742          838      5.16          31,804          828      5.23
Federal funds sold and short-term
investments                               17,860           16      0.18          14,751           19      0.18
Restricted stock                           5,741          138      4.86           5,741          141      4.94
Commercial loans                         490,341       10,990      4.52         480,782       11,857      4.96
Residential real estate loans             53,182        1,363      5.17          54,266        1,442      5.35
Home equity lines of credit              107,182        2,040      3.84         107,692        2,158      4.03
Installment loans                        239,163        3,989      3.36         220,382        4,851      4.43
Total Earning Assets                 $ 1,130,676     $ 21,166      3.77 %   $ 1,108,268     $ 23,837      4.33 %
Allowance for loan loss                  (17,849 )                              (17,330 )
Cash and due from banks                   36,388                                 34,351
Bank owned life insurance                 18,765                                 18,009
Other assets                              46,787                                 48,078
Total Assets                         $ 1,214,767                            $ 1,191,376
Liabilities and Shareholders'
Equity:
Consumer time deposits               $   438,800     $  2,078      0.95 %   $   422,970     $  2,694      1.28 %
Public time deposits                      64,944          244      0.76          78,581          199      0.51
Savings deposits                         122,140           27      0.04         107,672           62      0.12
Money market accounts                    107,144           86      0.16         106,500          103      0.19
Interest-bearing demand                  164,000           50      0.06         161,791          100      0.12
Short-term borrowings                      1,607            1      0.10             724            -      0.13
FHLB advances                             46,557          311      1.35          47,276          427      1.82
Trust preferred securities                16,320          340      4.20          16,326          349      4.31
Total Interest-Bearing Liabilities   $   961,512     $  3,137      0.66 %   $   941,840     $  3,934      0.84 %
Noninterest-bearing deposits             138,534                                130,619
Other liabilities                          4,203                                  4,199
Shareholders' Equity                     110,518                                114,718
Total Liabilities and Shareholders'
Equity                               $ 1,214,767                            $ 1,191,376
Net interest Income (FTE)                            $ 18,029      3.22 %                   $ 19,903      3.61 %
Taxable Equivalent Adjustment                            (316 )   (0.06 )                       (316 )   (0.06 )
Net Interest Income Per Financial
Statements                                           $ 17,713                               $ 19,588
Net Yield on Earning Assets                                        3.16 %                                 3.55 %


Table of Contents

Six Months Ended June 30, 2013 versus Six Months Ended June 30, 2012 Net Interest Income Comparison
Net interest income accounted for 73% of the Corporation's revenues for the six months ended June 30, 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, before provision for loan losses, was $17,713 for the first half of 2013 compared to $19,588 during the same period of 2012. Adjusting for tax-exempt income, net interest income FTE, for the first half of 2013 and 2012 was $18,029 and $19,903, respectively. The net interest margin FTE, determined by dividing tax equivalent net interest income by average earning assets, was 3.22% for the six months ended June 30, 2013 compared to 3.61% for the six months ended June 30, 2012. This decrease is mainly attributable to the lower interest rate environment which continued to apply downward pressure on the Corporation's yield on its investment portfolio and, as a result, negatively impacted the net interest margin.
Average earning assets for the first half of 2013 were $1,130,676. This was an increase of $22,408, or 2.0%, compared to the same period last year. Due in part to the extended period of lower market interest rates that was continued through the first half of 2013, the yield on average earning assets was 3.77% in the first half of 2013 compared to 4.33% for the same period last year. The yield on average loans during the first half of 2013 was 4.17%. This was 56 basis points lower than that of the first half of 2012 at 4.73%. Interest income from securities was $2,630 (FTE) for the six months ended June 30, 2013, compared to $3,369 during the first half of 2012. The yield on average securities was 2.44% and 3.02% for these periods, respectively.
The cost of interest-bearing liabilities was 0.66% during the first half of 2013 compared to 0.84% during the same period in 2012. Total average interest-bearing liabilities as of June 30, 2013 increased $19,671, or 2.0%. The average cost of trust preferred securities was 4.20% for the first half of 2013, compared to 4.31% for the first half of 2012.
Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. Table 4 is an analysis of the changes in interest income and expense between the six months ended June 30, 2013 and June 30, 2012. The table is presented on a fully tax-equivalent basis.


Table of Contents

Table 4: Rate/Volume Analysis of Net Interest Income (FTE)

                                                                     Six Months Ended June 30,
                                                          Increase (Decrease) in Interest Income/Expense
                                                                         in 2013 over 2012
                                                         Volume                Rate                 Total
                                                                      (Dollars in thousands)
U.S. Govt agencies and corporations                 $         (81 )     $          (668 )     $          (749 )
State and political subdivisions                               24                   (14 )                  10
Federal funds sold and short-term investments                   3                    (6 )                  (3 )
Restricted stock                                                -                    (3 )                  (3 )
Commercial loans                                              214                (1,081 )                (867 )
Residential real estate loans                                 (28 )                 (51 )                 (79 )
Home equity lines of credit                                   (10 )                (108 )                (118 )
Installment loans                                             313                (1,175 )                (862 )
Total Interest Income                                         435                (3,106 )              (2,671 )
Consumer time deposits                                         75                  (691 )                (616 )
Public time deposits                                          (51 )                  96                    45
Savings deposits                                                1                   (18 )                 (17 )
Money market accounts                                           3                   (38 )                 (35 )
Interest-bearing demand                                         1                   (51 )                 (50 )
Short-term borrowings                                           -                     1                     1
FHLB advances                                                  (5 )                (111 )                (116 )
Trust preferred securities                                      -                    (9 )                  (9 )
Total Interest Expense                                         24                  (821 )                (797 )
Net Interest Income (FTE)                           $         411       $        (2,285 )     $        (1,874 )

Net interest income (FTE) for the first half 2013 and 2012 was $18,029 and $19,903, respectively. Interest income (FTE) for the first half of 2013 decreased $2,671 in comparison to the same period in 2012. This decrease is attributable to a $3,106 decrease due to rate offset by an increase of $435 due to volume. For the same period, interest expense decreased $797, with the decrease being primarily attributable to a $821 decrease due to rate offset by an increase due to volume of $24. Overall, the total decrease in net interest income (FTE) of $1,874 was mainly attributable to a decrease in volume of $2,285 offset by an increase of $411 due to rate.


  Table of Contents

Noninterest Income
Table 5: Details of Noninterest Income

                                         Three Months Ended June 30,          Six Months Ended June 30,
                                           2013               2012             2013               2012
                                           (Dollars in thousands)              (Dollars in thousands)
Investment and trust services         $        440       $        425     $        815       $        815
Deposit service charges                        869                929            1,685              1,864
Other service charges and fees                 808                804            1,639              1,552
. . .
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