10-Q 1 lnb10q302.txt LNB BANCORP, INC. 3RD QURATER 10-Q 1 Form 10-Q 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 September 30, 2002 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 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 November 13, 2002: 4,401,032 shares Class of Common Stock: $1.00 par value 2 LNB Bancorp, Inc. Quarterly Report on Form 10-Q Quarter Ended September 30, 2002 Part I - Financial Information Item 1 - Financial Statements Interim financial information required by Regulation 210.10-01 of Regulation S-X is included in this Form 10-Q as referenced below: Page Number(s) Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Income 6 Condensed Consolidated Statements 10 of Cash Flows Notes to the Condensed Consolidated Financial Statements 12 Item 2 - Management's Discussion and Analysis 18 of Financial Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures 28 About Market Risk Item 4 - Controls and Procedures 28 Part II - Other Information Item 1 - Legal Proceedings 29 Item 2 - Changes in Securities 29 Item 3 - Defaults upon Senior Securities 29 Item 4 - Submission of matters to a Vote of 29 Security Holders 3 Item 5 - Other Information 29 Item 6 - Exhibits and Reports on Form 8-K 29 Signatures 30 Certifications 31 Exhibit Index 35 4 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SEPTEMBER 30, DECEMBER 31, CONDENSED CONSOLIDATED BALANCE SHEETS 2002 2001 ------------- ------------- (Unaudited) ASSETS: Cash and due from banks $ 24,230,000 $ 28,017,000 Federal funds sold and short-term Investments 3,480,000 3,488,000 Securities: Available for sale, at fair value 139,669,000 117,628,000 Held to maturity, at cost (fair value $12,165,000 and $17,485,000, respectively) 11,842,000 17,191,000 Federal Home Loan Bank and Federal Reserve Bank and other equity stock, at cost 3,699,000 3,582,000 ------------- ------------- Total Securities 155,210,000 138,401,000 ------------- ------------- Loans: Portfolio loans 493,017,000 465,029,000 Loans available for sale 8,432,000 12,459,000 ------------- ------------- Total loans 501,449,000 477,488,000 Reserve for loan losses (6,557,000) (5,890,000) ------------- ------------- Net loans 494,892,000 471,598,000 ------------- ------------- Bank owned life insurance 11,717,000 1,026,000 Bank premises and equipment, net 10,757,000 10,520,000 Intangible assets 3,188,000 3,470,000 Accrued interest receivable 3,326,000 3,796,000 Other assets 4,397,000 4,087,000 Foreclosed assets 57,000 123,000 ------------- ------------- TOTAL ASSETS $711,254,000 $664,526,000 ============= ============= STATEMENT CONTINUED ON NEXT PAGE 5 STATEMENT CONTINUED FROM PREVIOUS PAGE LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Demand and other noninterest-bearing deposits $ 87,174,000 $ 87,488,000 Savings, Market Access and passbook accounts 273,837,000 253,506,000 Certificates of deposit 206,587,000 177,273,000 ------------- ------------- Total deposits 567,598,000 518,267,000 ------------- ------------- Securities sold under repurchase agreements and other short-term borrowings 25,579,000 48,170,000 Federal Home Loan Bank advances, short-term 22,545,000 10,750,000 Federal Home Loan Bank advances, long-term 23,830,000 19,595,000 Accrued interest payable 1,056,000 1,131,000 Accrued taxes, expenses and other liabilities 4,953,000 4,475,000 ------------- ------------- TOTAL LIABILITIES 645,561,000 602,388,000 ------------- ------------- SHAREHOLDER'S EQUITY: Preferred stock, no par value: Shares authorized 1,000,000, and shares outstanding, none Common stock $1.00 par: Shares authorized 15,000,000, Shares issued 4,501,032 and 4,417,558, respectively and Shares outstanding 4,401,032 and 4,317,558 respectively 4,501,000 4,418,000 Additional capital 28,315,000 26,238,000 Retained earnings 34,353,000 33,125,000 Accumulated other comprehensive income 1,424,000 1,257,000 Treasury Stock at cost, 100,000 shares (2,900,000) (2,900,000) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 65,693,000 62,138,000 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $711,254,000 $664,526,000 ============= ============= See notes to unaudited condensed consolidated financial statements. 6 FORM 10-Q LNB BANCORP, INC. PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NINE MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS SEPTEMBER 30, OF INCOME (UNAUDITED) ------------------------- 2002 2001 INTEREST INCOME: ------------ ------------ Interest and fees on loans: Taxable $25,672,000 $28,619,000 Tax-exempt -0- 5,000 Interest and dividends on securities: U.S. Government agencies and corporations 3,090,000 4,467,000 U.S. Treasury securities 7,000 74,000 U.S. Government CMO's 1,467,000 387,000 States and political subdivisions 427,000 312,000 Other debt and equity securities 340,000 300,000 Interest on Federal funds sold and other interest-bearing instruments 75,000 126,000 ------------ ------------ TOTAL INTEREST INCOME 31,078,000 34,290,000 ------------ ------------ INTEREST EXPENSE: Interest on Deposits: Time certificates of $100,000 and over 1,011,000 1,986,000 Other deposits 6,666,000 9,636,000 Interest on securities sold under repurchase agreements and other short-term borrowings 364,000 942,000 Interest on Federal Home Loan Bank advances 1,312,000 965,000 ------------ ------------ TOTAL INTEREST EXPENSE 9,353,000 13,529,000 ------------ ------------ NET INTEREST INCOME 21,725,000 20,761,000 Provision for loan losses 1,725,000 1,350,000 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,000,000 19,411,000 ------------ ------------ NONINTEREST INCOME: Investment and Trust Services Division income 1,485,000 1,723,000 Service charges on deposit accounts 3,016,000 2,558,000 Other service charges, exchanges and fees 2,468,000 2,297,000 Gain on sale of securities and loans 656,000 285,000 Other operating income 248,000 100,000 ------------ ------------ TOTAL NONINTEREST INCOME 7,873,000 6,963,000 STATEMENT CONTINUED ON NEXT PAGE 7 STATEMENT CONTINUED FROM PREVIOUS PAGE NONINTERST EXPENSES: Salaries and employee benefits 8,470,000 8,144,000 Net occupancy expense of premises 1,113,000 1,143,000 Furniture and equipment expenses 1,628,000 1,573,000 Supplies and postage 769,000 775,000 Ohio franchise tax 385,000 486,000 Card related expenses 992,000 943,000 Other operating expenses 4,704,000 3,721,000 ------------ ------------ TOTAL NONINTEREST EXPENSES 18,061,000 16,785,000 ------------ ------------ INCOME BEFORE INCOME TAXES 9,812,000 9,589,000 INCOME TAXES 3,137,000 3,235,000 ------------ ------------ NET INCOME $ 6,675,000 $ 6,354,000 ============ ============ PER SHARE DATA: BASIC EARNINGS PER SHARE $ 1.52 $ 1.45 ====== ====== DILUTED EARNINGS PER SHARE $ 1.52 $ 1.45 ====== ====== DIVIDENDS DECLARED PER SHARE $ .75 $ .73 ====== ====== See notes to unaudited condensed consolidated financial statements. 8 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THREE MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS SEPTEMBER 30, OF INCOME (UNAUDITED) -------------------------- 2002 2001 INTEREST INCOME ------------ ------------ Interest and fees on loans - Taxable $ 8,645,000 $ 9,212,000 Interest and dividends on securities: U.S. Government agencies and corporations 986,000 1,255,000 U.S. Treasury securities -0- 17,000 U.S. Government CMO's 511,000 311,000 States and political subdivisions 152,000 132,000 Other debt and equity securities 98,000 116,000 Interest on Federal funds sold and other interest-bearing instruments 23,000 38,000 ------------ ------------ TOTAL INTEREST INCOME 10,415,000 11,081,000 ------------ ------------ INTEREST EXPENSE: Interest on Deposits: Time certificates of $100,000 and over 382,000 552,000 Other deposits 2,119,000 3,030,000 Interest on securities sold under repurchase agreements and other short-term borrowings 120,000 306,000 Interest on Federal Home Loan Bank advances 451,000 306,000 ------------ ------------ TOTAL INTEREST EXPENSE 3,072,000 4,194,000 ------------ ------------ NET INTEREST INCOME 7,343,000 6,887,000 Provision for loan losses 600,000 450,000 NET INTEREST INCOME AFTER PROVISION ------------ ------------ FOR LOAN LOSSES 6,743,000 6,437,000 ------------ ------------ NONINTEREST INCOME: Investment and Trust Services Division income 442,000 562,000 Service charges on deposit accounts 1,106,000 923,000 Other service charges, exchanges and fees 873,000 839,000 Gain on sale of securities and loans 71,000 188,000 Other operating income 76,000 25,000 ------------ ------------ TOTAL NONINTEREST INCOME 2,568,000 2,537,000 STATEMENT CONTINUED ON NEXT PAGE 9 STATEMENT CONTINUED FROM PREVIOUS PAGE NONINTEREST EXPENSES: Salaries and employee benefits 2,708,000 2,788,000 Net occupancy expense of premises 368,000 365,000 Furniture and equipment expenses 540,000 528,000 Supplies and postage 236,000 232,000 Ohio franchise tax 157,000 162,000 Card related expenses 344,000 346,000 Other operating expenses 1,592,000 1,216,000 ------------ ------------ TOTAL NONINTEREST EXPENSES 5,945,000 5,637,000 ------------ ------------ INCOME BEFORE INCOME TAXES 3,366,000 3,337,000 INCOME TAXES 1,033,000 1,144,000 ------------ ------------ NET INCOME $ 2,333,000 $ 2,193,000 ============ ============ PER SHARE DATA: BASIC EARNINGS PER SHARE $ .53 $ .50 ====== ====== DILUTED EARNINGS PER SHARE $ .53 $ .50 ====== ====== DIVIDENDS DECLARED PER SHARE $ .25 $ .25 ====== ====== See notes to unaudited condensed consolidated financial statements. 10 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NINE MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS SEPTEMBER 30, OF CASH FLOWS (UNAUDITED) ------------------------- 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: ------------ ------------ Interest received $31,848,000 $35,351,000 Other income received 7,202,000 6,526,000 Interest paid (9,428,000) (13,919,000) Cash paid for salaries and employee benefits (8,145,000) (8,637,000) Net occupancy expense of premises paid (885,000) (888,000) Furniture and equipment expenses paid (691,000) (540,000) Cash paid for supplies and postage (769,000) (775,000) Cash paid for other operating expenses (5,476,000) (3,974,000) Federal income taxes paid (3,382,000) (3,135,000) ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,274,000 10,009,000 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities held to maturity 5,859,000 28,854,000 Proceeds from sales and maturities of Securities available for sale 66,611,000 44,990,000 Purchase of securities held to maturity (640,000) (938,000) Purchase of securities available for sale (88,828,000) (75,616,000) Net (increase) in loans made to customers (24,828,000) (20,907,000) Purchases of bank premises and equipment and intangible assets (1,402,000) (668,000) Proceeds from sales of bank premises and equipment 47,000 13,000 Purchases of BOLI (10,413,000) -0- Proceeds from liquidation of other foreclosed assets 152,000 98,000 Purchases of other foreclosed assets (86,000) -0- ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES (53,528,000) (24,174,000) ------------ ----------- STATEMENT CONTINUED ON NEXT PAGE 11 STATEMENT CONTINUED FROM PREVIOUS PAGE CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and other noninterest-bearing deposits (314,000) 618,000 Net increase in savings and passbook deposits 20,331,000 21,183,000 Net increase in certificates of deposit 29,314,000 1,307,000 Net increase(decrease) in securities sold under repurchase agreements and other short-term borrowings (22,591,000) 824,000 Proceeds from Federal Home Loan Bank advances 35,830,000 11,000,000 Payment on Federal Home Loan Bank advances (19,800,000) (14,000,000) Proceeds from exercise of stock options 33,000 3,000 Dividends paid (3,344,000) (3,263,000) NET CASH PROVIDED BY FINANCING ------------ ----------- ACTIVITIES 39,459,000 17,672,000 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,795,000) 3,507,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 31,505,000 25,136,000 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $27,710,000 $28,643,000 ============ ============ RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $6,675,000 $6,354,000 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of investments & loans 624,000 285,000 Depreciation and amortization 1,165,000 1,288,000 Amortization of intangible assets 283,000 283,000 Amortization of deferred loan fees and costs, net (191,000) 102,000 Provision for loan losses 1,725,000 1,350,000 Increase in CSV - BOLI (278,000) -0- Decrease in accrued interest receivable 470,000 1,302,000 (Increase) in other assets (111,000) (545,000) Increase (Decrease) in accrued interest payable (75,000) (390,000) Increase in accrued taxes, expenses and other liabilities (245,000) 100,000 Other, net 232,000 (120,000) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $10,274,000 $10,009,000 ============ ============ See notes to unaudited condensed consolidated financial statements. 12 Form 10-Q LNB Bancorp, Inc. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTRODUCTION The following areas of discussion pertain to the unaudited condensed consolidated balance sheets of LNB Bancorp, Inc. (The Parent Company) and its wholly-owned subsidiaries, Lorain National Bank (The Bank), and Charleston Insurance Agency, Inc., and a 49% interest in Charleston Title Agency, LLC., at September 30, 2002, compared to December 31, 2001 and the related unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2002 and the related unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2002 compared to the same periods in 2001. The term "the Corporation" refers to LNB Bancorp, Inc. and its wholly-owned subsidiaries. It is the intent of this discussion to provide the reader with a more thorough understanding of the unaudited condensed consolidated financial statements and should be read in conjunction with the Corporation's December 31, 2001 Annual Report to Shareholders. LNB Bancorp, Inc. is not aware of any trends, events, or uncertainties that might have a material effect on the soundness of operations; neither is LNB Bancorp, Inc. aware of any proposed recommendations by regulatory authorities which would have a similar effect if implemented. BASIS OF PRESENTATION The unaudited condensed consolidated balance sheet as of September 30, 2002, the unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2002 and 2001 and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001 are prepared in accordance with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The above mentioned statements reflect all adjustments which are, in the opinion of Management, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. All adjustments are normal and recurring in nature. The consolidated balance sheet at December 31, 2001 has been taken from the audited financial statements and condensed. It is suggested that these 13 unaudited condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Corporation's December 31, 2001 Annual Report to Shareholders. The results of operations for the three months and nine months ended September 30, 2002 are not necessarily indicative of the operating results for the full year. RESERVE FOR LOAN LOSSES Because some loans may not be repaid in full, a reserve for loan losses is recorded. This reserve is increased by provisions charged to earnings and is reduced by loan charge-offs, net of recoveries. Estimating the risk of loss on any loan is necessarily subjective. Accordingly, the reserve is maintained by Management at a level considered adequate to cover loan losses that are currently anticipated based on Management's evaluation of several key factors including information about specific borrower situations, their financial position and collateral values, current economic conditions, changes in the mix and levels of the various types of loans, past charge-off experience and other pertinent information. The reserve for loan losses is based on estimates using currently available information, and ultimate losses may vary from current estimates due to changes in circumstances. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. While Management may periodically allocate portions of the reserve for specific problem situations, the entire reserve is available for any charge- offs that may occur. Charge-offs are made against the reserve for loan losses when Management concludes that it is probable that all or a portion of a loan is uncollectible. After a loan is charged-off, collection efforts continue and future recoveries may occur. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of the expected future cash flows discounted at the loan's initial effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. If the loan valuation is less than the recorded value of the loan, an impairment reserve is established for the difference. The impairment reserve is established by either an allocation of the reserve for loan losses or by a provision for loan losses, depending upon the adequacy of the reserve for loan losses. RECLASSIFICATIONS Certain 2001 amounts have been reclassified to conform to the 2002 presentation. 14 2. EARNINGS PER SHARE Earnings per share is calculated as follows: For the 9 Months ended September 30, 2002 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $6,675,000 Basic EPS Income available to common shareholders $6,675,000 4,401,032 $1.52 Effect of Dilutive Securities Incentive Stock Options -0- 3,352 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $6,675,000 4,404,384 $1.52 ========== ========= ===== For the 9 Months ended September 30, 2001 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $6,354,000 Basic EPS Income available to common shareholders $6,354,000 4,381,285 $1.45 Effect of Dilutive Securities Incentive Stock Options -0- 4,160 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $6,354,000 4,385,445 $1.45 ========== ========= ===== 15 For the 3 Months ended September 30, 2002 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $2,333,000 Basic EPS Income available to common shareholders $2,333,000 4,401,032 $ .53 Effect of Dilutive Securities Incentive Stock Options -0- 5,322 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $2,333,000 4,406,354 $ .53 ========== ========= ===== For the 3 Months ended September 30, 2001 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $2,193,000 Basic EPS Income available to common shareholders $2,193,000 4,381,401 $ .50 Effect of Dilutive Securities Incentive Stock Options -0- 4,050 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $2,193,000 4,385,451 $ .50 ========== ========= ===== 16 3. COMPREHENSIVE INCOME The Corporation's comprehensive income for the nine months ended September 30, 2002 and 2001 are as follows: For the nine months ended September 30, 2002 2001 -------------------------------- Net income $6,675,000 $6,354,000 Other comprehensive income: Change in unrealized gain on securities available for sale, net of tax of $88,000 and $848,000 170,000 1,647,000 ----------- ----------- Comprehensive Income $6,845,000 $8,001,000 =========== =========== Disclosure of Reclassification Amount Unrealized holding gains arising during the period, net of tax $ 566,000 $1,812,000 Less reclassification adjustment for gains included in net income, net of tax of $204,000 and $85,000 396,000 165,000 ----------- ------------ Change in unrealized gain on securities available for sale, net of tax $ 170,000 $1,647,000 =========== ============ The Corporation's comprehensive income for the three months ended September 30, 2002 and 2001 are as follows: For the three months ended September 30 2002 2001 ------------------------------------ Net income $2,333,000 $2,193,000 Other comprehensive income: Change in unrealized gain on securities available for sale, net of tax of $150,000 and $424,000 292,000 822,000 ----------- ----------- Comprehensive Income $2,625,000 $3,015,000 =========== =========== 17 Disclosure of Reclassification Amount Unrealized holding gains arising during the period, net of tax $ 332,000 $ 934,000 Less reclassification adjustment for gains included in net income, net of tax of $20,000 and $58,000 40,000 112,000 ----------- ------------ Change in unrealized gain on securities available for sale, net of tax $ 292,000 $ 822,000 =========== ============ 4. CRITICAL ACCOUNTING POLICIES The Corporation maintains critical accounting policies for reserve for loan losses, classification and evaluation of securities and a deferred tax asset valuation allowance. Refer to notes 1, 5, 7 and 12 of Notes to Consolidated Financial Statements of the 2001 Annual Report to Shareholders for the year ended December 31, 2001 for additional information incorporated by reference. 5. INTANGIBLE ASSETS The Corporation accounts for intangible assets under the provisions of Statement of Financial Accounting Standard No. 72 "Accounting for Certain Acquisitions of Banking or Thrift Institutions". The following intangible assets and related amortization arising from a 1997 branch acquisition and included in the accompanying condensed consolidated financial statements are summarized as follows at September 30, 2002 and December 31, 2001 net of accumulated amortization: 9/30/02 12/31/01 -------------------------- Goodwill $2,629,000 $2,827,000 Core deposit intangible 559,000 643,000 -------------------------- Total intangible assets $3,188,000 $3,470,000 ========================== Amortization expense for intangible assets totaled $292,000 and $283,000 for the nine months ended September 30, 2002 and 2001, respectively. For further discussion of intangible assets refer to PART I, ITEM 2, IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS, under paragraph discussing FASB Statement No. 147. 18 PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions (some of which are beyond the Corporation's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations of those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements, due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. The Corporation does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. FINANCIAL CONDITION Total assets of the Corporation increased $46,728,000 during the first nine months of 2002, to $711,254,000. This growth was funded by increases in savings, certificates of deposit, High Performance Checking and Market Access deposit accounts. Total earning assets increased 6.6% to $660,139,000 at September 30, 2002 from December 31, 2001. The ratio of earning assets to total assets decreased from 93.21% at December 31, 2001 to 92.81% at September 30, 2002. The loan to deposit ratio has decreased from 92.13% at 2001 year-end to 88.35% at September 30, 2002. Federal funds sold and short-term investments decreased by $8,000 during the first nine months of 2002. Total securities increased $16,809,000 ending the third quarter at $155,210,000. At September 30, 2002 gross unrealized gains and (losses) in the investment securities portfolio were approximately $2,584,000 and ($74,000), respectively. The increase in the fair value of the securities portfolio is due to decreases in market interest rates during 2002. 19 Net loans grew by $23,294,000 during the first nine months to $494,892,000 at September 30, 2002 for a 4.9% growth rate. This increase was a result of good loan demand in our market. Commercial and consumer loan growth was particularly strong, showing nine month increases of $29,831,000 and $8,207,000, respectively. Mortgage loans decreased by $14,074,000 during the first nine months of 2002. The consumer loan portfolio has increased because of increases in quality indirect automobile credits and home equity lines of credit while mortgages decreased due to refinancing. The reserve for loan losses ended the quarter at $6,557,000. Activity for the nine months ended September 30, 2002 included provision for loan losses of $1,725,000, recoveries of $300,000 and loan charge-offs of $1,358,000. The Corporation recorded a higher level of loan loss provision during the first nine months of 2002 versus the comparable year-ago period, attributable to the impact on credit quality caused by the softening economy, changes in loan mix and management's desire to increase the ratio of the reserve for loan losses to total loans outstanding. The reserve for loan losses as a percentage of ending loans increased .08% from 1.23% at December 31, 2001 to 1.31% at September 30, 2002. Corporate management believes that the reserve for loan losses as a percentage of loans at September 30, 2002 remains at an appropriate level. The ratio of the reserve for loan losses to nonperforming assets remained at an adequate level even though decreasing to 287.8% at September 30, 2002, from 409.3% at December 30, 2001. 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 September 30, 2002. Nonperforming assets at September 30, 2002 totaled $2,278,000, up from $1,817,000 at June 30, 2002. The third quarter increase in nonperforming assets of $461,000 resulted from loans being paid off or brought current in the amount of $359,000, loans charged-off in the amount of $61,000, liquidation of non-accrual loans of $116,000, decreases in other foreclosed assets of $111,000 and increases in nonaccrual loans of $1,108,000. The increase in nonaccrual loans in the third quarter of 2002 was due primarily to five commercial loan customers, twenty one consumer loan customers and seven mortgage loan customers. The level of nonperforming assets increased by $839,000 during the first nine months of 2002. This increase is the result of an increase in non-accrual loans of $906,000 offset by a decrease in other foreclosed assets in the amount of $67,000. The decrease in other foreclosed assets results from the liquidation of assets. The increase in nonaccrual loans is due to decreases in nonaccrual principal balances of $1,091,000 which have been paid off and brought current, loans charged-off in the amount of $133,000, liquidation of non-accrual loans of $303,000 and increases in nonaccrual principal balances of $2,433,000. The increase in nonaccrual loans in the first nine months of 2002 was due primarily to twelve commercial loan customers, seven mortgage loan customers and several personal loans, particularly in the indirect 20 automobile loan category. Management does not believe that this increase in non-accrual loans is indicative of a failing local economy and that this change did not result from any change in underwriting standards. The level of nonperforming assets at September 30, 2002 remains at relatively low levels and Corporate management believes nonperforming assets are well collateralized. The table below presents the level of nonperforming assets at the end of the last four calendar quarters. Amounts in thousands 09/30/02 06/30/02 03/31/02 12/31/01 -------- -------- -------- -------- Nonperforming Assets: Nonaccrual $2,222 $1,650 $1,413 $1,316 Restructured 0 0 0 0 Other Foreclosed Assets 56 167 141 123 -------- -------- -------- -------- Total Nonperforming Assets $2,278 $1,817 $1,554 $1,439 ======== ======== ======== ======== Reserve for loan losses to total nonperforming assets 287.8% 337.9% 247.7% 409.3% ======== ======== ======== ======== Accruing loans past due 90 days $ 48 $ 327 $ 151 $ 149 ======== ======== ======== ======== 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 September 30, 2002, potential problem loans totaled $13,541,000, an increase of $4,962,000 from the December 31, 2001 balance of $8,579,000. The increase in potential problem loans during 2002 is primarily due to the addition of four large commercial credits that have weakened due to the depressed economic conditions on the steel industry. 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 September 30, 2002, there are no significant concentrations of credit in the loan portfolio. The Corporation had outstanding loan and credit commitments to make loans totaling $124,802,000 and $95,893,000 at September 30, 2002 and December 31, 2001, 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 promotion in the second and third quarters of 2002. Mortgage and commercial construction loan demand increased in the second and third quarters of 2002 as seasonal weather conditions improved and the construction season moved forward. Consumer loan demand increased during 2002 as demand for home improvements and automobile loans increased. 21 Bank Owned Life Insurance increased by $10,691,000 from December 31, 2001. The increase was mainly due to the Bank purchase of $10,413,000 of Bank Owned Life Insurance (BOLI) to fund future employee benefit costs plus increases in the cash surrender value of the life insurance of $278,000. Total deposits increased $49,331,000 during the first nine months to $567,598,000. Noninterest-bearing deposits decreased to $87,174,000, at September 30, 2002 for a decrease of $314,000, while interest-bearing deposits climbed to $480,424,000 for an increase of $49,645,000. Federal funds purchased and securities sold under agreements to repurchase decreased $3,591,000 during the first nine months of 2002 due to decreases in federal funds purchased. 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 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 September 30, 2002, short-term security investments with maturities of one year or less totaled $16,285,000 which represented 10.5% of total securities. Adding cash and due from banks of $24,230,000 and Federal Funds sold and other interest bearing instruments of $3,480,000, total liquid assets represented 6.2% of total assets. The Corporation's subsidiary bank has established short-term lines of credit at correspondent banks, the Federal Home Loan Bank, and the Federal Reserve Bank of Cleveland in the amounts of $24,000,000, $40,000,000 and $32,686,000, respectively, with credit available in the amounts of $19,000,000, $40,000,000 and $32,686,000, respectively. Additional sources of liquidity at September 30, 2002 could be provided by available unused Federal Home Loan Bank long-term advances of $22,348,000 collateralized by qualified mortgages. CAPITAL RESOURCES LNB Bancorp, Inc. continues to maintain a strong capital position. Total shareholders' equity reached an all time high of $65,693,000, at September 30, 2002, an increase of $3,555,000, or 5.7% from December 31, 2001. The increase resulted primarily from $6,675,000 of net income generated from the first nine months of operations less a cash dividend payable to shareholders of $3,279,000. The change in interest rates experienced in the first three 22 quarters of 2002 has caused an increase in the fair value of available for sale securities which resulted in an increase in shareholders' equity within accumulated other comprehensive income of $167,000 for the nine months ended September 30, 2002. As of September 30, 2002, LNB Bancorp, Inc. held 100,000 shares of common stock as treasury stock at a 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. The Corporation's capital and leverage ratios as of September 30, 2002 and December 31, 2001 follow together with those ratios required for the Corporation to be considered adequately capitalized . September 30, December 31, 2002 2001 ------ ------ Tier I capital ratio 11.58% 11.95% Required Tier I capital ratio 4.00% 4.00% Total capital ratio 12.83% 13.17% Required total capital ratio 8.00% 8.00% Leverage ratio 8.98% 9.08% Required leverage ratio 3.00% 4.00% The Corporation regularly evaluates acquisition opportunities and conducts due diligence activities in connection with possible acquisitions in markets near or within the Corporation's current geographic market. As a result, acquisition discussions and, in some cases negotiations, take place and future acquisitions could occur. Corporate management believes that it's current capital resources are sufficient to support any foreseeable acquisition activity. RESULTS OF OPERATIONS Earnings for 2002 were higher than a year ago because of higher net interest income and noninterest income, offset in part by a higher loan loss provision and operating expenses. Increases in net interest income were fueled by increases in commercial and consumer loans combined with growth and decreases in rates paid on interest bearing liabilities. The increases in noninterest income resulted primarily from increases in fees and service charges and increases of gains on sales of loans and investments. Increases in noninterest expenses resulted from increases in salaries and employee benefits, marketing expenses and outside 23 services. The softening of the economy and its related impact on credit plus the increase in the loan growth resulted in the recording of higher levels of loan loss provision in the first nine months of 2002, compared with the same period in 2001. The net interest margin for the nine months ended September 30, 2002 decreased 15 basis points to 4.56% compared to 4.71% for the same period one year ago. The net interest margin for the third quarter of 2002 was 4.54% compared to 4.56% for the third quarter of 2001. Interest and fees on loans was $25,672,000 for the first nine months of 2002 for a decrease of $2,952,000 when compared to the first nine months of 2001. Decreased loan income resulted from the net of increases in the loan portfolio of $30,692,000 and decreases in interest rates. Interest and dividends on securities was $5,331,000 for the first nine months of 2002 for a decrease of $209,000 over the same period in 2001. Decreased security income results from increases in the volume of securities and from decreases in yields on those securities. Interest and dividends on securities represented 17.2% of total interest income at September 30, 2002 compared to 16.2% at September 30, 2001. Interest on Federal funds sold and short-term investments was $75,000 at September 30, 2002 compared to $126,000 at September 30, 2001. The decrease resulted from decreases in the average balances invested in these forms of financial instruments plus decreases in interest rates. Total interest expense decreased by $4,176,000 when compared to the first nine months of 2001. The interest expense decrease resulted from a decrease in interest expense on deposits of $3,945,000 and repurchase agreement interest of $578,000, offset by increases in Federal Home Loan Bank advances of $347,000. Also, total interest expense for the first nine months of 2002 was impacted by a net increase in interest bearing deposits of $49,645,000, and by decreases in interest rates paid on savings, Checkinvest, Market Access, certificate of deposit accounts, Federal Home Loan Bank advances and repurchase agreements when compared to the first nine months of 2001. Total noninterest income increased by $910,000 when compared to the first nine months of 2001. This increase resulted from increases in service charges of $458,000 and other charges, exchanges and fees of $171,000, offset by decreases in income from investment and trust services of $238,000. The increase in service charges is due, in part, to reevaluating the assessment of transaction account charges plus increases in the volume of accounts. The Corporation reported gains on sale of investments and loans of $656,000. Other operating income increased by $148,000 from increased revenue from Charleston Insurance Agency, Inc. and Charleston Title Agency, LLC. The Corporation continuously monitors noninterest expenses for greater profitability. The entire staff is geared to improving productivity at all levels. Noninterest expense for the nine months ended September 30, 2002 was 24 $18,061,000, 7.6% above the first nine months of 2001. This increase was due primarily to increases in salaries and benefits, furniture and equipment expense, card related expenses, outside services and marketing expenses. The effective tax rate declined to 32.0% from 33.7% during the first nine months of 2002 and 2001, respectively. The rate decrease is due primarily to the increase in investments in tax exempt securities and increases in tax exempt income to total interest income. Net income was $6,675,000 and $6,354,000 for the nine months ended September 30, 2002 and 2001, respectively. Net income per basic and diluted share was $1.52 and $1.45 for the nine months ended September 2002 and 2001, respectively. THIRD QUARTER INFORMATION Interest and fees on loans for the third quarter of 2002 decreased $567,000 when compared to the third quarter of 2001. Decreased loan income resulted from the impact of increases in the average loan portfolio balance for the third quarter of 2002 as compared to the third quarter of 2001 offset by decreases in interest rates. Interest and dividends on securities was $1,747,000 for the third quarter of 2002 for a decrease of $84,000 over the same period in 2001. Decreased investment income resulted from the impact of increases in the average investment portfolio balance for the third quarter of 2002 as compared to the third quarter of 2001, offset by decreases in interest rates for 2002 compared with 2001. Interest on Federal funds sold and short-term investments was $23,000 and $38,000 for the third quarter of 2002 and 2001, respectively. Total interest expense for the third quarter of 2002 decreased by $1,122,000 when compared to the third quarter of 2001. The interest expense decrease resulted from decreases in deposit account interest of $1,081,000 and a decrease in interest expense from repurchase agreements and other short-term borrowings of $186,000, offset by increases in interest expense from Federal Home Loan Bank advances of $145,000. Also, total interest expense for the third quarter of 2002 was impacted by decreases in interest rates paid on savings accounts, checkinvest, market access accounts, certificate of deposit accounts, Federal Home Loan Bank advances and repurchase agreements when compared to the third quarter of 2001. Total noninterest income increased by $31,000 when compared to the third quarter of 2001. This increase resulted from increases in service charges of $183,000, increases in other service charges, and exchanges and fees of $34,000, increases in other operating income of $51,000 offset by decreases in income from Investment and Trust Services Division income of $120,000 and gains on sales of investments and securities of $117,000. Noninterest expense for the three months ended September 30, 2002 was $5,945,000, 5.5% above the same period in 2001. This increase was due primarily to increases in salaries and employee benefits, outside services and marketing expenses. 25 IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS Corporate management is not aware of any current recommendations by the Financial Accounting Standards Board (FASB) or by regulatory authorities which, if they were implemented, would have a material effect on the liquidity, capital resources or operations of the Corporation. However, the potential impact of certain accounting and regulatory pronouncements warrant further discussion. In July 2001 the FASB issued Statement No. 142, "Accounting for Goodwill and Other Intangible Assets." Statement of Financial Accounting Standards (SFAS) No. 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. Effective January 1, 2002, all goodwill amortization expenses ceased and goodwill will be assessed (at least annually) for impairment at the reporting unit level by applying a fair- value-based test. SFAS No. 142 also provides additional guidance on acquired core deposit intangible requiring separate disclosure and amortization with impairment testing at least annually. SFAS No. 142 replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. Statement 142 also requires an evaluation of intangible assets and their useful lives and a transitional impairment test for goodwill and certain intangible assets. After transition, the impairment tests will be performed annually. LNB Bancorp, Inc. adopted SFAS No. 142 as of January 1, 2002 and reports Branch Goodwill and Core Deposit intangibles separately. The Corporation has determined that the provisions of SFAS No. 142 will have no effect on our financial position, results of operations or liquidity. In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement 143 is effective for fiscal years beginning after June 15, 2002. The Corporation has reviewed the provisions of Statement 143, and believes that upon adoption, it did not have a material impact on its financial position, results of operations or liquidity. In August 2001, the FASB issued Statement No. 144, "Accounting for the impairment or disposal of long-lived assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of disposal of a segment of a business. The provisions of SFAS No. 144 were effective for the Corporation January 1, 2002 and did not have a material impact on our financial position, results of operations or liquidity. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64. Amendment of FASB Statement No. 13 and 26 Technical Corrections." SFAS No. 145 rescinds FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers" and amends FASB Statement No. 13, "Accounting for leases" which was written to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections. The provisions of this statement related to the recission of Statement No. 4 shall be for fiscal years beginning after May 15, 2002 and as it relates to Statement No. 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of FASB No. 145 shall be effective for financial statements issued on or after May 15, 2002. The Corporation has reviewed the provisions of Statement No. 145 and believes that it will not have a material impact on its financial position, results of operation or cash flows. In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain Financial Institutions." SFAS No. 147 provides guidance on the accounting for the acquisition of a financial institution and applies to all acquisitions except those between two or more mutual enterprises. SFAS No. 147 reflects the following conclusions reached by the Board: The excess of the fair value of liabilities assumed over the fair value of tangible and identifiable assets acquired in a business combination represents goodwill that should be accounted for under FASB Statement No. 142, "Goodwill and Other Intangible Assets." Thus, the specialized accounting guidance in paragraph 5 of FASB Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions, will not apply after September 30, 2002. If certain criteria in Statement 147 are met, the amount of the unidentifiable asset will be reclassified to goodwill upon the adoption of that Statement. Financial institutions meeting conditions outlined in Statement 147 will be required to restate financial statements issued subsequent to the initial adoption of SFAS No. 147. The objective of that restatement requirement is to present the balance sheet and income statement as if the amount accounted for under Statement 72 as an unidentifiable intangible asset had been reclassified to goodwill as of the date Statement 142 was initially applied. (For example, a financial institution that adopted Statement 142 on January 1, 2002, would retroactively reclassify the unidentifiable intangible asset to goodwill as of that date and restate previously issued income statements to remove the amortization expenses recognized in 2002.) Those transition provisions are effective on October 1, 2002. The Corporation will adopt SFAS No. 147 effective during the fourth quarter of 2002. Management is currently analyzing the impact of adoption of SFAS No. 147 on the Corporation. 27 USA PATRIOT ACT On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept And Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). During the first quarter of 2002, the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, issued proposed and interim regulations as mandated by the USA PATRIOT Act that would: (i) prohibit certain financial institutions from providing correspondent accounts to foreign shell banks; (ii) require such financial institutions to take reasonable steps to ensure that correspondent accounts provided to foreign banks are not being used to indirectly provide banking services to foreign shell banks; (iii) require certain financial institutions that provide correspondent accounts to foreign banks to maintain records of the ownership of such foreign banks and their agents in the United States; (iv) require the termination of correspondent accounts of foreign banks that fail to turn over their account records in response to a lawful request from the Secretary of the Treasury or the Attorney General. Additionally the USA PATRIOT Act encourages information sharing among financial institutions and federal law enforcement agencies to identify, prevent, deter and report money laundering and terrorist activity. Management does not believe that the USA PATRIOT Act will have a material impact on the financial position, results of operation or liquidity of the Corporation. 28 PART I - OTHER INFORMATION ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market indices such as interest rates, foreign exchange rates and equity prices. The Corporation's principal market risk exposure is interest rate risk, with no material impact on earnings from changes in foreign exchange rates or equity prices. There have been no material changes in the asset and liability mix of the Corporation since December 31, 2001, which would impact the Corporation's level of market risk. Interest rate risk is the exposure to changes in market interest rates. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The Corporation monitors the interest rate sensitivity of its on - and - off - balance sheet positions by examining its near-term sensitivity and its longer term gap position. Corporate management has determined no significant changes in the Corporation's interest rate risk profile since December 31, 2001. ITEM 4 - CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Corporation carried out an evaluation under the supervision and with the participation of the Corporation's management, including the Corporation's President and Chief Executive Officer and Executive Vice President, Chief Financial Officer and Corporate Secretary, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to SEC rule 13a-14. Based upon that evaluation, the President and Chief Executive Officer and Executive Vice President, Chief Financial Officer and Corporate Secretary concluded that as of that date, the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation's periodic SEC filings. There were no significant changes made in the Corporation's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of the evaluation performed by the Corporation's President and Chief Executive Officer and Executive Vice President, Chief Financial Officer and Corporate Secretary. 29 Part II - OTHER INFORMATION ITEM 1 - Legal Proceedings None ITEM 2 - Changes in Securities None ITEM 3 - Defaults Upon Senior Securities None ITEM 4 - Submission of Matters to a Vote of Security Holders None ITEM 5 - Other Information None ITEM 6 - Exhibits and Reports on Form 8-K: (a) Exhibits - The following exhibits are filed as part of this report: EXHIBIT NO. EXHIBIT 3.1 LNB Bancorp, Inc. Second Amended Articles of Incorporation (Incorporated by reference to the quarterly report on Form 10-Q filed on November 14, 2000.) 3.2 LNB Bancorp, Inc. Amended Code of Regulations. (Incorporated by reference to the report on Form 8-K filed on January 4, 2001.) 4. Instruments Defining the Rights of Security Holders. (See Exhibits 3.1 and 3.2, above) 10.a Lorain National Bank Group Term Carve Out Plan, dated August 7, 2002. 99.1 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None 30 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LNB BANCORP, INC. (registrant) Date: November 13, 2002 /s/ Gregory D. Friedman _________________________ Gregory D. Friedman, CPA Executive Vice President, Chief Financial Officer and Corporate Secretary Date: November 13, 2002 /s/ Mitchell J. Fallis _________________________ Mitchell J. Fallis, CPA Vice President and Chief Accounting Officer 31 Certifications I, Gary C. Smith, President and Chief Executive Officer of LNB Bancorp, Inc., certify that: 1. I, have reviewed this quarterly report on Form 10-Q of LNB Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other 32 employees who have a significant role in the registrant's internal control; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date November 13, 2002 ______________________ By /s/Gary C. Smith ______________________ Gary C. Smith, President and Chief Executive Officer 33 I, Gregory D. Friedman, Executive Vice President, Chief Financial Officer and Corporate Secretary of LNB Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of LNB Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control; and 34 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date November 13, 2002 ____________________________ By /s/Gregory D. Friedman ____________________________ Gregory D. Friedman, Executive Vice President, Chief Financial Officer and Corporate Secretary 35 LNB Bancorp, Inc. Form 10-Q Exhibit Index Pursuant to Item 601 (a) of Regulation S-K EXHIBIT NO. PAGE DESCRIPTION 3.1 NA LNB Bancorp, Inc. Second Amended Articles of Incorporation (Incorporated by reference to the quarterly report on Form 10-Q filed on November 14, 2000.) 3.2 NA LNB Bancorp, Inc. Amended Code of Regulations. (Incorporated by reference to the report on Form 8-K filed on January 4, 2001.) 4. NA Instruments Defining the Rights of Security Holders. (See Exhibits 3.1 and 3.2, above) 10.a 36 Lorain National Bank Group Term Carve Out Plan, (the Plan), dated August 7, 2002. The Compensation Committee of the Corporation's Board of Directors has designated all executive officers as eligible to participate in the Plan. 99.1 51 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 99.2 52 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.