-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V3y5AMfGfTgyAO7N/w41ZkzXvXmJOWDvKU4m+LJbYHNI5sbTV5hiCnnbuIT8Bu9C OSg/29DqLC8YqPai+kZjSw== 0000737210-03-000054.txt : 20031114 0000737210-03-000054.hdr.sgml : 20031114 20031114160741 ACCESSION NUMBER: 0000737210-03-000054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LNB BANCORP INC CENTRAL INDEX KEY: 0000737210 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341406303 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13203 FILM NUMBER: 031004746 BUSINESS ADDRESS: STREET 1: 457 BROADWAY CITY: LORAIN STATE: OH ZIP: 44052-1769 BUSINESS PHONE: 800-860-1007 10-Q 1 lnb93003q.txt LNB BANCORP, INC. 3RD QUARTER 2003 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to LNB Bancorp, Inc. (Exact name of the registrant as specified in its charter) Ohio (State or other jurisdiction of incorporation) 000-13203 34-1406303 (Commission File Number) (I.R.S. Employer 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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) 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. 2 Outstanding at November 13, 2003: 6,607,562 shares Class of Common Stock: $1.00 par value 3 LNB Bancorp, Inc. Quarterly Report on Form 10-Q Quarter Ended September 30, 2003 Part I - Financial Information Item 1 - Financial Statements Interim financial information required by Rule 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 of Cash Flows 10 Notes to the Condensed Consolidated Financial Statements 13 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 31 Item 4 - Controls and Procedures 31 Part II - Other Information Item 1 - Legal Proceedings 32 Item 2 - Changes in Securities 32 Item 3 - Defaults upon Senior Securities 32 Item 4 - Submission of matters to a Vote of Security Holders 32 Item 5 - Other Information 32 Item 6 - Exhibits and reports on Form 8-K 32 Signatures 33 Exhibit Index 34 4 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SEPTEMBER 30, DECEMBER 31, CONDENSED CONSOLIDATED BALANCE SHEETS 2003 2002 ------------- ------------- (Unaudited) ASSETS: Cash and due from banks $ 28,860,000 $ 23,608,000 Federal funds sold and short-term investments 3,081,000 3,224,000 Securities: Available for sale, at fair value 151,697,000 137,909,000 Held to maturity, at cost (fair value $3,129,000 and $10,903,000, respectively) 2,981,000 10,648,000 Federal Home Loan Bank and Federal Reserve Bank and other equity stock, at cost 3,843,000 3,738,000 ------------- ------------- Total Securities 158,521,000 152,295,000 ------------- ------------- Loans: Portfolio loans 533,687,000 500,551,000 Loans available for sale 6,497,000 8,999,000 ------------- ------------- Total loans 540,184,000 509,550,000 Reserve for loan losses (7,642,000) (6,653,000) ------------- ------------- Net loans 532,542,000 502,897,000 ------------- ------------- Bank owned life insurance 12,480,000 11,930,000 Bank premises and equipment, net 10,587,000 10,748,000 Intangible assets 3,273,000 3,358,000 Accrued interest receivable 2,943,000 3,045,000 Other assets 4,340,000 4,272,000 Foreclosed assets 589,000 22,000 ------------- ------------- TOTAL ASSETS $757,216,000 $715,399,000 ============= ============= STATEMENT CONTINUED ON NEXT PAGE 5 STATEMENT CONTINUED FROM PREVIOUS PAGE LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Demand and other noninterest-bearing deposits $ 87,115,000 $ 80,879,000 Savings, Market Access and passbook accounts 277,411,000 280,616,000 Certificates of deposit 206,638,000 204,632,000 ------------- ------------- Total deposits 571,164,000 566,127,000 ------------- ------------- Securities sold under repurchase agreements and other short-term borrowings 26,187,000 26,866,000 Federal Home Loan Bank advances 86,425,000 48,925,000 Accrued interest payable 943,000 983,000 Accrued taxes, expenses and other liabilities 3,921,000 5,885,000 ------------- ------------- TOTAL LIABILITIES 688,640,000 648,786,000 ------------- ------------- 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 6,755,953 and 4,501,032, respectively and Shares outstanding 6,606,616 and 4,401,032 respectively 6,756,000 4,501,000 Additional capital 26,120,000 28,319,000 Retained earnings 39,128,000 35,639,000 Accumulated other comprehensive income (loss) (541,000) 1,054,000 Treasury stock at cost, 149,337 and 100,000 shares, respectively (2,887,000) (2,900,000) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 68,576,000 66,613,000 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $757,216,000 $715,399,000 ============= ============= 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) ------------------------- 2003 2002 INTEREST INCOME: ------------ ------------ Interest and fees on loans $24,774,000 $25,672,000 Interest and dividends on securities: U.S. Treasury securities -0- 7,000 U.S. Government agencies and corporations 3,217,000 4,557,000 States and political subdivisions 465,000 427,000 Other debt and equity securities 224,000 340,000 Interest on Federal funds sold and other interest-bearing instruments 32,000 75,000 ------------ ------------ TOTAL INTEREST INCOME 28,712,000 31,078,000 ------------ ------------ INTEREST EXPENSE: Interest on Deposits: Time certificates of $100,000 and over 1,109,000 1,011,000 Other deposits 4,514,000 6,666,000 Interest on securities sold under repurchase agreements and other short-term borrowings 157,000 364,000 Interest on Federal Home Loan Bank advances 1,284,000 1,312,000 ------------ ------------ TOTAL INTEREST EXPENSE 7,064,000 9,353,000 ------------ ------------ NET INTEREST INCOME 21,648,000 21,725,000 Provision for loan losses 2,125,000 1,725,000 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,523,000 20,000,000 ------------ ------------ NONINTEREST INCOME: Investment and Trust Services Division income 1,305,000 1,485,000 Service charges on deposit accounts 3,208,000 3,016,000 Other service charges, exchanges and fees 2,296,000 2,468,000 Gain on sale of VISA credit card portfolio 820,000 -0- Gain on sales of loans 195,000 56,000 Gain on sales of securities 449,000 600,000 Other operating income 241,000 248,000 ------------ ------------ TOTAL NONINTEREST INCOME 8,514,000 7,873,000 STATEMENT CONTINUED ON NEXT PAGE 7 STATEMENT CONTINUED FROM PREVIOUS PAGE NONINTERST EXPENSES: Salaries and employee benefits 8,886,000 8,470,000 Furniture and equipment expenses 1,807,000 1,628,000 Net occupancy expense of premises 1,160,000 1,113,000 Card related expenses 980,000 992,000 Supplies and postage 783,000 769,000 Outside services 1,073,000 917,000 Marketing and public relations 584,000 828,000 Ohio franchise tax 542,000 385,000 Other operating expenses 2,246,000 2,761,000 ------------ ------------ TOTAL NONINTEREST EXPENSES 18,061,000 17,863,000 ------------ ------------ INCOME BEFORE INCOME TAXES 9,976,000 10,010,000 INCOME TAXES 3,106,000 3,205,000 ------------ ------------ NET INCOME $ 6,870,000 $ 6,805,000 ============ ============ PER SHARE DATA: BASIC EARNINGS PER SHARE $ 1.04 $ 1.03 ====== ====== DILUTED EARNINGS PER SHARE $ 1.04 $ 1.03 ====== ====== DIVIDENDS DECLARED PER SHARE $ .51 $ .50 ====== ====== 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) -------------------------- 2003 2002 INTEREST INCOME ------------ ------------ Interest and fees on loans $ 8,264,000 $ 8,645,000 Interest and dividends on securities: U.S. Treasury securities -0- -0- U.S. Government agencies and corporations 899,000 1,497,000 States and political subdivisions 153,000 152,000 Other debt and equity securities 73,000 98,000 Interest on Federal funds sold and other interest-bearing instruments 11,000 23,000 ------------ ------------ TOTAL INTEREST INCOME 9,400,000 10,415,000 ------------ ------------ INTEREST EXPENSE: Interest on Deposits: Time certificates of $100,000 and over 349,000 382,000 Other deposits 1,340,000 2,119,000 Interest on securities sold under repurchase agreements and other short-term borrowings 42,000 120,000 Interest on Federal Home Loan Bank advances 455,000 451,000 ------------ ------------ TOTAL INTEREST EXPENSE 2,186,000 3,072,000 ------------ ------------ NET INTEREST INCOME 7,214,000 7,343,000 Provision for loan losses 991,000 600,000 NET INTEREST INCOME AFTER PROVISION ------------ ------------ FOR LOAN LOSSES 6,223,000 6,743,000 ------------ ------------ NONINTEREST INCOME: Investment and Trust Services Division income 451,000 442,000 Service charges on deposit accounts 1,153,000 1,106,000 Other service charges, exchanges and fees 755,000 873,000 Gain on sale of VISA credit card portfolio 820,000 -0- Gain on sales of loans 54,000 11,000 Gain (loss) on sale of securities (1,000) 60,000 Other operating income 111,000 76,000 ------------ ------------ TOTAL NONINTEREST INCOME 3,343,000 2,568,000 STATEMENT CONTINUED ON NEXT PAGE 9 STATEMENT CONTINUED FROM PREVIOUS PAGE NONINTEREST EXPENSES: Salaries and employee benefits 3,215,000 2,708,000 Furniture and equipment expenses 647,000 540,000 Net occupancy expense of premises 371,000 368,000 Card related expenses 344,000 344,000 Supplies and postage 245,000 236,000 Outside services 249,000 249,000 Marketing and public relations 179,000 276,000 Ohio franchise tax 180,000 157,000 Other operating expenses 796,000 1,001,000 ------------ ------------ TOTAL NONINTEREST EXPENSES 6,226,000 5,879,000 ------------ ------------ INCOME BEFORE INCOME TAXES 3,340,000 3,432,000 INCOME TAXES 985,000 1,056,000 ------------ ------------ NET INCOME $ 2,355,000 $ 2,376,000 ============ ============ PER SHARE DATA: BASIC EARNINGS PER SHARE $ .36 $ .36 ====== ====== DILUTED EARNINGS PER SHARE $ .36 $ .36 ====== ====== DIVIDENDS DECLARED PER SHARE $ .17 $ .17 ====== ====== 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) ------------------------- 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: ------------ ------------ Interest received $29,451,000 $31,848,000 Other income received 7,289,000 7,146,000 Interest paid (7,104,000) (9,428,000) Cash paid for salaries and employee benefits (9,998,000) (8,145,000) Originations of loans available for sale (23,767,000) (12,702,000) Proceeds from sales of loans available for sale 23,767,000 9,714,000 Gain on sale of loans available for sale (195,000) (56,000) Net occupancy expense of premises paid (923,000) (885,000) Furniture and equipment expenses paid (887,000) (691,000) Cash paid for supplies and postage (783,000) (769,000) Cash paid for other operating expenses (7,358,000) (5,476,000) Federal income taxes paid (3,270,000) (3,382,000) ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,222,000 7,174,000 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities held to maturity 7,660,000 5,859,000 Proceeds from sales and maturities of securities available for sale 123,929,000 66,611,000 Purchase of securities held to maturity -0- (640,000) Purchase of securities available for sale (138,465,000) (88,828,000) Net (increase) in loans made to customers (31,193,000) (21,728,000) Purchases of bank premises and equipment (1,021,000) (1,402,000) Proceeds from sales of bank premises and equipment 64,000 47,000 Purchases of BOLI -0- (10,413,000) Proceeds from liquidation of other foreclosed assets 22,000 152,000 Purchases of other foreclosed assets (589,000) (86,000) ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES (39,593,000) (50,428,000) ------------ ----------- STATEMENT CONTINUED ON NEXT PAGE 11 STATEMENT CONTINUED FROM PREVIOUS PAGE CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease)in demand and other noninterest-bearing deposits 6,236,000 (314,000) Net increase (decrease)in savings and passbook deposits (3,205,000) 20,331,000 Net increase in certificates of deposit 2,006,000 29,314,000 Net (decrease) in securities sold under repurchase agreements and other short-term borrowings (679,000) (22,591,000) Proceeds from Federal Home Loan Bank advances 262,095,000 35,830,000 Payment on Federal Home Loan Bank advances (224,595,000) (19,800,000) Cash paid in lieu of fractional shares related to three-for-two stock split (13,000) -0- Proceeds from exercise of stock options 56,000 33,000 (Purchase) redemption of Treasury Stock 13,000 -0- Dividends paid (3,434,000) (3,344,000) NET CASH PROVIDED BY FINANCING ------------ ----------- ACTIVITIES 38,480,000 39,459,000 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,109,000 (3,795,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 26,832,000 31,505,000 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $31,941,000 $27,710,000 ============ ============ STATEMENT CONTINUED ON NEXT PAGE 12 STATEMENT CONTINUED FROM PREVIOUS PAGE RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $6,870,000 $6,805,000 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of investments & loans (449,000) 568,000 Gain on sale of VISA portfolio (820,000) -0- Depreciation and amortization 1,157,000 1,165,000 Amortization of intangible assets 85,000 94,000 Amortization of premium on investment securities 997,000 267,000 Amortization of deferred loan fees and costs, net (382,000) (191,000) Originations of loans available for sale (23,767,000) (12,702,000) Proceeds from sales of loans available for sale 23,767,000 9,714,000 Gain on sale of loans held for sale (195,000) (56,000) Provision for loan losses 2,125,000 1,725,000 Increase in CSV - BOLI (550,000) (278,000) Decrease in accrued interest receivable 102,000 470,000 (Increase) in other assets (68,000) (111,000) (Decrease) in accrued interest payable (40,000) (75,000) Increase in accrued taxes, expenses and other liabilities (1,899,000) (98,000) Other, net (711,000) (123,000) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,222,000 $ 7,174,000 ============ ============ See notes to unaudited condensed consolidated financial statements. 13 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., North Coast Community Development Corporation and a 49% interest in Charleston Title Agency, LLC., at September 30, 2003, compared to December 31, 2002 and the related unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2003 compared to 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, 2003 compared to the same periods in 2002. The term "the Corporation" refers to LNB Bancorp, Inc. and its 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, 2002 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, 2003, the unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2003 and 2002 and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002 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, 2002 has been taken from the 14 audited financial statements and condensed. The results of operations for the three months and nine months ended September 30, 2003 are not necessarily indicative of the operating results for the full year. All 2002 financial statements and related per-share amounts herein have been restated to reflect the adoption of Statement of Financial Accounting Standards (SFAS) No. 147 "Acquisitions of Certain Financial Institutions" and SFAS No. 142 "Goodwill and Other Intangible Assets" as related to intangibles. Per-share amounts have also been adjusted to reflect a two- percent stock dividend on July 2, 2002, and a three-for two stock split on March 14, 2003. COMMON STOCK On February 25, 2003, the Board of Directors of LNB Bancorp, Inc. declared a three-for-two split of common stock. Shareholders received one additional common share for every two shares owned on the stock-split record date of March 10, 2003. Shareholders participating in the Bancorp's dividend reinvestment plan, LNBB Direct (the Plan), were issued fractional shares. Shareholders not participating in the Plan were issued cash in lieu of fractional shares. For additional information see Form 8-K filed on February 25, 2003. 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 15 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 2002 amounts have been reclassified to conform to the 2003 presentation. 16 2. EARNINGS PER SHARE Earnings per share is calculated as follows: For the 9 Months ended September 30, 2003 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $6,870,000 Basic EPS Income available to common shareholders $6,870,000 6,604,024 $1.04 Effect of Dilutive Securities Incentive Stock Options -0- 15,332 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $6,870,000 6,619,356 $1.04 ========== ========= ===== For the 9 Months ended September 30, 2002 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $6,805,000 Basic EPS Income available to common shareholders $6,805,000 6,601,548 $1.03 Effect of Dilutive Securities Incentive Stock Options -0- 5,028 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $6,805,000 6,606,576 $1.03 ========== ========= ===== 17 For the 3 Months ended September 30, 2003 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $2,355,000 Basic EPS Income available to common shareholders $2,355,000 6,606,234 $ .36 Effect of Dilutive Securities Incentive Stock Options -0- 16,068 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $2,355,000 6,622,302 $ .36 ========== ========= ===== For the 3 Months ended September 30, 2002 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $2,376,000 Basic EPS Income available to common shareholders $2,376,000 6,601,548 $ .36 Effect of Dilutive Securities Incentive Stock Options -0- 7,983 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $2,376,000 6,609,531 $ .36 ========== ========= ===== 18 Earnings per share as reported and pro forma information for the nine and three months ended September 30, 2003 and 2002 are as follows: Nine Months Ended September 30, 2003 2002 -------------- -------------- As reported net income available to common shareholders $6,870,000 $6,805,000 Less: stock-based compensation expense determined under fair fair value method, net of tax -0- (17,000) -------------- -------------- Pro forma net income $6,870,000 $6,791,000 ============== ============== As reported earnings per share $1.04 $1.03 Pro forma earnings per share $1.04 $1.03 As reported earnings per diluted share $1.04 $1.03 Pro forma earnings per diluted share $1.04 $1.03 Three Months Ended September 30, 2003 2002 -------------- -------------- As reported net income available to common shareholders $2,355,000 $2,376,000 Less: stock-based compensation expense determined under fair fair value method, net of tax -0- -0- -------------- -------------- Pro forma net income $2,355,000 $2,376,000 ============== ============== As reported earnings per share $.36 $.36 Pro forma earnings per share $.36 $.36 As reported earnings per diluted share $.36 $.36 Pro forma earnings per diluted share $.36 $.36 19 3. COMPREHENSIVE INCOME The Corporation's comprehensive income for the nine months ended September 30, 2003 and 2002 are as follows: For the nine months ended September 30, 2003 2002 -------------------------------- Net income $ 6,870,000 $ 6,805,000 Other comprehensive income: Change in unrealized gain on securities available for sale, net of tax (credit) of $(822,000) and $88,000 (1,595,000) 170,000 ------------ ------------ Comprehensive Income $ 5,275,000 $ 6,975,000 ============ ============ Disclosure of Reclassification Amount Unrealized holding gains (loss) arising during the period, net of tax $(1,299,000) $ 566,000 Less reclassification adjustment for gains included in net income, net of tax of $153,000 and $204,000 296,000 396,000 ------------ ------------ Change in unrealized gain (loss) on securities available for sale, net of tax $(1,595,000) $ 170,000 ============ ============ The Corporation's comprehensive income for the three months ended September 30, 2003 and 2002 are as follows: For the three months ended September 30 2003 2002 ------------------------------------ Net income $ 2,355,000 $ 2,376,000 Other comprehensive income: Change in unrealized gain on securities available for sale, net of tax (credit) of $628,000 and $150,000 (1,220,000) 292,000 ------------ ------------ Comprehensive Income $ 1,135,000 $ 2,668,000 ============ ============ 20 Disclosure of Reclassification Amount Unrealized holding gains (loss) arising during the period, net of tax $(1,221,000) $ 332,000 Less reclassification adjustment for gains included in net income, net of tax of $-0- and $20,000 (1,000) 40,000 ------------ ------------- Change in unrealized gain (loss) on securities available for sale, net of tax $(1,220,000) $ 292,000 ============ ============= 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 2002 Annual Report to Shareholders for the year ended December 31, 2002 for additional information incorporated by reference. 21 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 $41,817,000 during the first nine months of 2003, to $757,216,000. This growth was funded by increases in demand, savings, public fund certificates of deposit and Checkinvest deposit accounts and Federal Home Loan Bank advances. Total earning assets increased 5.5% to $701,786,000 at September 30, 2003 from December 31, 2002. The ratio of earning assets to total assets decreased from 92.97% at December 31, 2002 to 92.68% at September 30, 2003. The loan to deposit ratio has increased from 90.01% at 2002 year-end to 94.58% at September 30, 2003. Federal funds sold and short-term investments decreased by $143,000 during the first nine months of 2003. Total securities increased $6,220,000 ending the third quarter at $158,521,000. Gross unrealized gains and (losses) in the securities portfolio were approximately $856,000 and ($1,458,000), respectively at September 30, 2003. The decrease in the fair value of the securities portfolio is due to increases in intermediate and long-term 22 interest rates during 2003. Net loans grew by $29,645,000 during the first nine months to $532,542,000 at September 30, 2003 for a 5.9% growth rate. Commercial and consumer loan growth was particularly strong due to local market loan demands, showing nine month increases of $44,202,000 and $9,885,000, respectively. Mortgage loans decreased by $23,453,000 during the first nine months of 2003. The consumer loan portfolio has increased because of purchased consumer loans of $7,480,000 and increases in home equity lines of credit offset in part by the sale of the VISA credit card portfolio in the amount of $4,356,000. Mortgages decreased due to refinancing and sales of mortgage loans on the secondary market. The reserve for loan losses was $7,642,000 at September 30, 2003. Activity for the nine months ended September 30, 2003 included provision for loan losses of $2,125,000, recoveries of $262,000 and loan charge-offs of $1,398,000. The Corporation recorded a higher level of loan loss provision during the first nine months of 2003 versus the comparable year-ago period, attributable to the impact on credit quality caused by the softening economy and changes in loan mix. The reserve for loan losses as a percentage of ending loans was 1.41% and 1.31% at September 30, 2003 and December 31, 2002, respectively. Corporate management believes that the reserve for loan losses as a percentage of loans at September 30, 2003 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 187.8% at September 30, 2003, from 352.9% at December 30, 2002. 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, 2003. Nonperforming assets at September 30, 2003 totaled $4,070,000, up from $3,198,000 at June 30, 2003. The third quarter increase in nonperforming assets of $872,000 resulted from loans being paid off or brought current in the amount of $1,028,000, loans charged-off in the amount of $400,000, liquidation of nonaccrual loans of $34,000 and increases in nonaccrual loans of $2,334,000. The increase in nonaccrual loans in the third quarter of 2003 was due primarily to seven commercial loan customers, sixteen consumer loan customers and one mortgage loan customer. The level of nonperforming assets increased by $2,185,000 during the first nine months of 2003. This increase is the result of an increase in nonaccrual loans of $1,618,000 and increases in other foreclosed assets in the amount of $567,000. The increase in other foreclosed assets results from the acquisition of four commercial properties in the amount of $589,000 less liquidations of repossessed vehicles of $22,000. The increase in nonaccrual loans is due to decreases in nonaccrual principal balances of $2,323,000 which have been paid off or brought current, loans charged-off in the amount of $693,000, liquidation of nonaccrual loans of $448,000 and increases in 23 nonaccrual principal balances of $5,082,000. The increase in nonaccrual loans in the first nine months of 2003 was due primarily to twenty-one commercial loan customers, one mortgage loan customer and fifty personal loan customers. 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, 2003 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 09/30/03 06/30/03 03/31/03 12/31/02 -------- -------- -------- -------- Nonperforming Assets: Nonaccrual $3,481 $2,609 $2,319 $1,863 Restructured 0 0 0 0 Other Foreclosed Assets 589 589 0 22 -------- -------- -------- -------- Total Nonperforming Assets $4,070 $3,198 $2,319 $1,885 ======== ======== ======== ======== Reserve for loan losses to total nonperforming assets 187.8% 222.1% 289.0% 352.9% ======== ======== ======== ======== Accruing loans past due 90 days $ 25 $ 14 $ 62 $ 45 ======== ======== ======== ======== 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, 2003, potential problem loans totaled $18,746,000, an increase of $3,197,000 from the December 31, 2002 balance. The Corporation's credit policies are reviewed and modified on an ongoing basis in order to remain suitable for the management of credit risk within the loan portfolio as conditions change. At September 30, 2003, there are no significant concentrations of credit in the loan portfolio. The Corporation had outstanding loan and credit commitments to make loans totaling $113,592,000 and $140,685,000 at September 30, 2003 and December 31, 2002, respectively. The decrease in outstanding loan commitments results from a decrease in unused credit card lines resulting from the sale of the VISA credit card portfolio offset in part by an increase in the unused portion of home equity lines of credits from home equity loan promotions in the second and third quarters of 2003. Mortgage and commercial construction loan demand increased in the second and third quarters of 2003 as seasonal weather conditions improved and the construction season moved forward. 24 Consumer loan demand increased during 2003 as demand for home improvements and automobile loans increased. Total deposits increased $5,037,000 during the first nine months to $571,164,000. Noninterest-bearing deposits increased to $87,115,000, at September 30, 2003 for an increase of $6,236,000, while interest-bearing deposits decreased to $484,049,000 for a decrease of $1,199,000. Federal funds purchased and securities sold under agreements to repurchase decreased $679,000 during the first nine months of 2003 due to decreases in federal funds purchased. Since customer repurchase agreements balances are volatile on a daily basis, most funds generated by repurchase activity enter the Corporation's earning assets as short-term investments. Federal Home Loan Bank advances grew by $37,500,000 as a result of the Corporation funding asset growth with short-term low interest advances. 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 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 liquid position in order to take advantage of interest rate fluctuations. As of September 30, 2003, short- term security investments with maturities of one year or less totaled $3,382,000 which represented 2.1% of total securities. Adding cash and due from banks of $28,860,000 and Federal Funds sold and other interest bearing instruments of $3,081,000, total liquid assets represented 4.7% 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 $23,000,000, $40,000,000 and $34,119,000, respectively, with credit available in the amounts of $16,000,000, $10,000,000 and $34,119,000, respectively. Additional sources of liquidity at September 30, 2003 could be provided by available unused Federal Home Loan Bank long-term advances of $12,200,000 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 $68,576,000, at September 30, 2003, an increase of $1,963,000, or 2.9% from December 31, 2002. The increase resulted primarily from $6,870,000 of net income generated from the first nine months of operations less cash dividends payable to shareholders of $3,369,000. The change in interest rates experienced in the first three 25 quarters of 2003 has caused a decrease in the fair value of available for sale securities which resulted in a decrease in shareholders' equity within accumulated other comprehensive income of $1,595,000 for the nine months ended September 30, 2003. As of September 30, 2003, LNB Bancorp, Inc. held 149,337 shares of common stock as treasury stock at a cost of $2,887,000. The Corporation and the Bank continue 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 and the Bank'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, 2003 2002 ------ ------ Tier I capital ratio 11.34% 12.57% Required Tier I capital ratio 4.00% 4.00% Total capital ratio 12.66% 13.77% Required total capital ratio 8.00% 8.00% Leverage ratio 8.76% 9.58% 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 the Corporation's current capital resources are sufficient to support any foreseeable acquisition activity. RESULTS OF OPERATIONS Earnings for the nine months ended September 30, 2003 were higher than a year ago because of higher noninterest income, offset in part by a slightly lower net interest income and higher loan loss provision and noninterest expenses. Decreases in yields on investments and loans more than offset increases in the volume of earning assets - resulting in a slight decrease in 2003 interest income. The downward repricing of interest-bearing liabilities more than offset increases in volume and contributed to a decrease in interest expense. The increase in noninterest income results primarily from increases in fees and service charges on deposit accounts and increases in gains on 26 sales of loans and gains on sale of the credit card portfolio offset in part by decreases in Investment and Trust Services Division income and decreases in gains on sales of securities. Increases in noninterest expenses resulted from increases in salaries and employee benefits, furniture and equipment expense, and outside services offset in part by decreases in marketing expenses. 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 for the first nine months of 2003, compared with the same period in 2002. The net interest margin for the nine months ended September 30, 2003 decreased 34 basis points to 4.26% compared to 4.60% for the same period one year ago. The net interest margin for the third quarter of 2003 was 4.10% compared to 4.54% for the third quarter of 2002. Interest and fees on loans was $24,774,000 for the first nine months of 2003 for a decrease of $898,000 when compared to the first nine months of 2002. Decreased loan income resulted from the net of increases in the loan portfolio of $30,634,000 for the first nine months of 2003 were more than offset by decreases in interest rates during 2003. Interest and dividends on securities was $3,906,000 for the first nine months of 2003 for a decrease of $1,425,000 over the same period in 2002. Decreased security income resulted from increases in the volume of securities which were more than offset by decreases in yields on those securities. Interest and dividends on securities represented 13.6% of total interest income at September 30, 2003 compared to 17.2% at September 30, 2002. Interest on Federal funds sold and short-term investments was $31,000 at September 30, 2003 compared to $33,000 at September 30, 2002. The decrease resulted from decreases in the average balances invested in these forms of financial instruments plus decreases in interest rates. 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 for the first nine months of 2003, compared with the same period in 2002. Total interest expense decreased by $2,289,000 when compared to the first nine months of 2002. The interest expense decrease resulted from a decrease in interest expense on deposits of $2,054,000 and repurchase agreement interest of $207,000, offset by decreases in Federal Home Loan Bank advances of $28,000. Also, total interest expense for the first nine months of 2003 was impacted by a net decrease in interest bearing deposits of $1,199,000, 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 2002. Total noninterest income increased by $641,000 when compared to the first nine months of 2002. This increase resulted primarily from increases in 27 gains on the sale of the credit card portfolio of $820,000, increases in gains on sales of loans of $139,000 plus increases in service charges on deposit accounts of $192,000 offset by decreases in other service charges, exchanges and fees of $172,000, decreases in gains on sales of securities of $151,000 and Investment and Trust Services Division Income of $180,000. The increase in service charges on deposit accounts is due, in part, to management's reevaluating the assessment process of transaction account charges plus increases in the volume of accounts that do not assess service charges. Other operating income decreased by $7,000. The Corporation continuously monitors noninterest expenses for greater profitability. The entire staff is geared to improving productivity at all levels. Noninterest expense for the nine months ended September 30, 2003 was $18,061,000, 1.11% above the first nine months of 2002. This increase was due primarily to increases in salaries and benefits, furniture and equipment expense and Ohio franchise tax offset in part by decreases in outside services and marketing expenses. The effective tax rate declined to 31.1% from 32.0% during the first nine months of 2003 and 2002, respectively. The rate decrease is due primarily to increases in tax exempt income to total interest income. Net income was $6,870,000 and $6,805,000 for the nine months ended September 30, 2003 and 2002, respectively. Net income per basic and diluted share was $1.04 and $1.03 for the nine months ended September 2003 and 2002, respectively, after giving effect for the three-for-two stock split on March 14, 2003 and the two percent stock dividend paid on July 1, 2002. THIRD QUARTER INFORMATION Interest and fees on loans for the third quarter of 2003 decreased $381,000 when compared to the third quarter of 2002. Decreased loan income resulted from the impact of increases in the average loan portfolio balance for the third quarter of 2003 as compared to the third quarter of 2002 which were more than offset by decreases in interest rates. Interest and dividends on securities was $1,125,000 for the third quarter of 2003 for a decrease of $622,000 over the same period in 2002. Decreased investment income resulted from the impact of increases in the average securities portfolio balance for the third quarter of 2003 as compared to the third quarter of 2002, which were more than offset by decreases in interest rates for 2003 compared with 2002. Interest on Federal funds sold and short-term investments was $11,000 and $23,000 for the third quarter of 2003 and 2002, respectively. Total interest expense for the third quarter of 2003 decreased by $886,000 when compared to the third quarter of 2002. The interest expense decrease resulted from decreases in deposit account interest of $812,000 and a decrease in interest expense from repurchase agreements and other short-term borrowings of $78,000, offset by increases in interest expense from Federal Home Loan Bank advances of $4,000. Also, total interest expense for the 28 third quarter of 2003 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 2002. 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 for the third quarter of 2003, compared with the same period in 2002. Total noninterest income increased by $775,000 when compared to the third quarter of 2002. This increase resulted primarily from increases in service charges of $47,000, gains on the sale of the VISA credit card portfolio of $820,000, increases in gains on sales of loans of $43,000, increases in other operating income of $35,000 and increases in income from Investment and Trust Services Division income of $9,000 offset in part by decreases in other service charges, and exchanges and fees of $118,000 and decreases in gains on sales of securities of $61,000. Noninterest expense for the three months ended September 30, 2003 was $6,226,000, 5.9% above the same period in 2002. This increase was due primarily to increases in salaries and employee benefits, and furniture and equipment expenses offset in part by decreases in outside services and marketing expenses. Salaries and employee benefits increased during the third quarter of 2003 from increased 401(K) employer matched contributions plus a one time charge for severance pay for one employee. On March 15, 2003, LNB Bancorp, Inc.'s wholly-owned subsidiary, North Coast Community Development Corporation was selected by the United States Department of the Treasury to receive $9 million in tax credit allocations under the New Markets Tax Credit program. LNB Bancorp, Inc. receives certain tax credits in proportion to loans made by North Coast Community Development Corporation. It is anticipated that North Coast Community Development Corporation will begin operations late in the fourth quarter of 2003. This tax credit will not significantly impact the provisions for federal income taxes during 2003. IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS Corporate management is not aware of any current recommendations by the Financial Accounting Standards Board or by regulatory authorities which, if they were implemented, would have a material effect on the liquidity, capital resources or operations of the Corporation. However, the potential impact of certain accounting and regulatory pronouncements warrant further discussion. Statement of Financial Accounting Standards No. 149: "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" This Statement amends Statement 133 for certain decisions made by the Board 29 as part of the Derivatives Implementation Group (DIG) process. For those amendments that relate to Statement 133 implementation guidance, the specific Statement 133 Implementations Issue necessitating the amendment is identified. If the amendment relates to a cleared issue, the clearance date also is noted. The Statement also amends Statement 133 to incorporate clarifications of the definition of a derivative. This Statement contains amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow Information and Present Value in Accounting Measurements," and FASB Statements No. 65, "Accounting for Certain Mortgage Banking Activities," No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," No. 95, "Statement of Cash Flows," and No. 126, "Exemption from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities." The provisions of SFAS No. 149 became effective for the Corporation for contracts entered into or modified after June 30, 2003. The Corporation adopted SFAS No. 149 during the third quarter of 2003 and its adoption did not have a material impact on our financial position, results of operations, or liquidity. FASB Interpretation No. 46 (FIN No. 46):"Consolidation of Variable Interest Entities" In January 2003, the FASB issued FIN No. 46 "Consolidation of Variable Interest Entities." The objective of this Interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the entity's expected residual returns, if they occur. The provisions of this Interpretation became effective upon issuance. As of December 31, 2002, the Corporation had no variable interest entities. The Corporation has determined that the Interpretation will have no impact on financial position, results of operations, or liquidity, as it applies to other areas within the Corporation. Statement of Financial Accounting Standards No. 150 (SFAS No. 150): "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 provides guidance on how an issuer classifies and measures in its statement of financial position the following financial instruments with characteristics of both liabilities and equity: mandatory redeemable shares, put options, and forward purchase contracts and obligations that can be settled with shares. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some 30 circumstances) because that financial instrument embodies an obligation of the issuer. The provisions of SFAS No. 150 became effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003, except for certain provisions which have been deferred. The Corporation adopted SFAS No. 150 and its adoption did not have any impact on our financial position, results of operations, or liquidity. 31 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, 2002, 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, 2002. ITEM 4 - CONTROLS AND PROCEDURES The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures as of September 30, 2003, pursuant to SEC rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective as of September 30, 2003, 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 was no change in the Corporation's internal control over financial reporting that occurred during the Corporation's fiscal quarter ended September 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. 32 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) 31.(a) Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 31.(b) Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 32.(a) Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 32.(b) Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 33 (b) Reports on Form 8-K July 10, 2003 - LNB Bancorp, Inc. issued a press release announcing its addition to the Russell 2000 Index, dated July 10, 2003. July 22, 2003 - LNB Bancorp, Inc. published and released its 2nd Quarter 2003 Report to Shareholders and issued a press release reporting financial results for the first half of 2003, dated July 22, 2003. July 31, 2003 - LNB Bancorp, Inc. issued a press release announcing being named to the Plain Dealer 100, dated July 31, 2003. August 19, 2003 - LNB Bancorp, Inc. issued a press release announcing a third-quarter cash dividend of $0.17 with a record date of September 15, 2003 and a payable date of October 1, 2003. August 21, 2003 - LNB Bancorp, Inc. issued a press release announcing its ranking prominently in the U. S. Bankers survey, dated August 21, 2003. Also, see the Exhibit Index which is found on the next page of this Form. 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 14, 2003 /s/ Gregory D. Friedman _________________________ Gregory D. Friedman, CPA Executive Vice President, Chief Financial Officer and Corporate Secretary Date: November 14, 2003 /s/ Mitchell J. Fallis _________________________ Mitchell J. Fallis, CPA Vice President and Chief Accounting Officer 34 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 current 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) 31.(a) 34 Certification - Gary C. Smith 31.(b) 36 Certification - Gregory D. Friedman 32.(a) 38 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 32.(b) 39 Certification pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. EX-99 3 lnb93003ex31a.txt CERTIFICATION PRESIDENT & CEO Exhibit 31.(a) 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) (THIS PARAGRAPH INTENTIONALLY LEFT BLANK.) c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date November 14, 2003 ______________________ By /s/Gary C. Smith ______________________ Gary C. Smith President and Chief Executive Officer EX-99 4 lnb93003ex31b.txt CERTIFICATION CFO Exhibit 31.(b) I, Gregory D. Friedman, CPA, 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) (THIS PARAGRAPH INTENTINNALY LEFT BLANK) c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date November 14, 2003 ____________________________ By /s/Gregory D. Friedman ____________________________ Gregory D. Friedman, CPA Executive Vice President, Chief Financial Officer and Corporate Secretary EX-99 5 lnb93003ex32a.txt CERTIFICATE PRESIDENT & CEO LNB Bancorp, Inc. Exhibit to Form 10 - Q (For the nine months ended September 30, 2003) Exhibit Number (32.(a)) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of LNB Bancorp, Inc. (the "Corporation") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gary C. Smith, President and Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gary C. Smith Gary C. Smith President and Chief Executive Officer November 14, 2003 EX-99 6 lnb93003ex32b.txt CERTIFICATE CFO LNB Bancorp, Inc. Exhibit to Form 10 - Q (For the nine months ended September 30, 2003) Exhibit Number (32.(b)) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of LNB Bancorp, Inc. (the "Corporation") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregory D. Friedman, Executive Vice President, Chief Financial Officer and Corporate Secretary of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gregory D. Friedman Gregory D. Friedman, CPA Executive Vice President, Chief Financial Officer and Corporate Secretary November 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----