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April 26, 2007 LNB BANCORP, INC. REPORTS FIRST QUARTER RESULTS
Lorain, Ohio – April 26, 2007 -- LNB Bancorp, Inc. (NASDAQ: LNBB) today reported net income for the three months ended March 31, 2007 of $1,535,000, or $.24 per diluted share, up 9 percent from the $1,448,000, or $.22 per diluted share, reported for the same period a year ago. "We are pleased to see a gain in our earnings on a year-to-year basis," said Daniel E. Klimas, president and chief executive officer of LNB Bancorp, Inc., "Our results, however, continue to reflect the margin pressures we have experienced since mid-year 2006. This compression has been primarily caused by the flat yield curve, and slower than expected loan growth. Our margin was also impacted by the current level of nonperforming loans. "Moving into the second quarter, our loan pipeline is increasing and we have begun to experience some success in working through a few of our current problem loans," said Klimas. On January 16, 2007, LNB Bancorp, Inc. and Morgan Bancorp, Inc., of Hudson, Ohio announced the signing of a definitive agreement for LNB to acquire Morgan and its wholly-owned subsidiary, Morgan Bank, N.A., in a stock and cash merger transaction valued at approximately $26.5 million. It is anticipated that this acquisition will be completed in May of this year. "We have made some significant investments over the past 18 months in terms of locations and personnel as we create a community bank of scale," said Klimas. "While those investments, including the Morgan acquisition, certainly carry a short-term cost, we are confident that these strategic moves will have a positive long-term impact on our company." Key Performance Measures Noninterest income was $2,989,000 for the first quarter of 2007, an increase of $868,000, or 40.9 percent compared to $2,121,000 for the same period in 2006, and an increase of $189,000, or 6.75 percent over the fourth quarter of 2006. The two biggest components of noninterest income are deposit service charges and trust and investment management services. Deposit service charges during the first quarter of 2007 totaled $1,082,000, an 11.8 percent increase over the same period last year, and a decrease of 9.8 percent from the fourth quarter of 2006. Trust and investment management services were $522,000 for the first quarter of 2007, compared to $509,000 for the same period in 2006. During the first quarter of 2007, the Company established a secondary market mortgage sales program through which the Company sold $13,155,000 in mortgage loans to Freddie Mac. These were primarily 15-year and 30-year fixed rate mortgages. The Company recognized gains of $189,000 on these sales. In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, which permits the measurement of selected eligible financial instruments at fair value at specified election dates. Preliminary analysis of the merger with Morgan Bancorp suggests that the combination will not improve the Company’s existing net interest margin exposure to falling rates. A major component of Morgan’s balance sheet is indirect automobile loans, and depending on the prepayment behavior of this portfolio, the combined exposure to falling rates could increase. Therefore in connection with the anticipated acquisition, the Company has elected early adoption of SFAS No. 159 to add an additional tool that might be used to improve the asset-liability structure of the combined balance sheet. The goal is to make the net interest margin more stable over a wider range of rate environments. As part of this early adoption the Company selected the fair value measurement option for approximately $51 million of its aggregate $156 million available-for-sale investment securities as of January 1, 2007. The securities chosen for the fair value measurement option were substantially all of the Company’s entire well-seasoned seven-year balloon and 15-year mortgage-backed securities. These securities represent approximately the same balances and approximately the same duration characteristics as Morgan’s indirect portfolio. As of January 1, 2007, the date of the initial fair value measurement of these securities as required under SFAS No. 159, the carrying value of these securities exceeded their fair value by approximately $1,192,000 net of tax. This cumulative-effect adjustment was recorded as a charge to beginning retained earnings at January 1, 2007. Under SFAS 159, this one-time charge will not be recognized in current earnings. While the adjustment to retained earnings is a permanent adjustment, there is no material impact to shareholders' equity because the Company had already recorded the market value adjustment in "accumulated other comprehensive loss" at December 31, 2006. These securities were reclassified as trading securities as of January 1, 2007. Securities that are held for the sole purpose of being sold in the near term are deemed trading securities with any related unrealized gains and losses reported in earnings. As such, a gain of $473,000 was recorded during the first quarter of 2007 on these securities. Subsequent to the end of the second quarter of 2007 and in connection with the anticipated completion of the Morgan transaction, the Company intends to complete a repositioning of its balance sheet. The Company expects that this repositioning will include the sale of investment securities and the purchase of a mixture of well-structured Collateralized Mortgage Obligations (CMO) and Mortgage Backed Securities (MBS’s) and municipal bonds, as well as agency securities. The Company is evaluating the investment securities that may be purchased and other financial assets and liabilities to determine the specific instruments that may be carried at fair value in accordance with the asset-liability management activities. The Company believes that this repositioning, together with other possible restructuring of the combined Company’s assets and liabilities will enable the Company to more effectively manage the combined Company’s net interest margin. In addition to this realignment of the asset-liability position of the Company, we believe that the securities that we expect to purchase will materially improve the yield of the Company’s portfolio. Noninterest expense was $7,358,000 in the first quarter 2007, a $149,000, or 2.1 percent, increase from $7,209,000 during the same period in 2006, and a $52,000, or 0.71 percent, increase from the fourth quarter in 2006. During 2006 and into the first quarter of 2007, the Company continued to make significant investment to strengthen its market presence in Lorain and Cuyahoga counties. Full service offices were opened in North Ridgeville in 2006 and southern Elyria in January of 2007. In 2006, a business development office was also opened in Cuyahoga County. In the first quarter of 2007, the Westlake, Ohio loan production office was relocated to Avon, Ohio. Both the Cuyahoga County and Avon offices are staffed with commercial banking and treasury management professionals. In this regard, salaries and employee benefits during the first quarter 2007 increased $245,000 or 6.8 percent, over the same period 2006. Net occupancy expense increased $77,000, or 16.1 percent, over the same period last year. Management continues to place a strong emphasis on control of expenses. Expenses, other than those mentioned above, were lower in comparison to the first quarter of 2006 by 5.5 percent. Credit quality continues to be a primary focus of management. The allowance for loan losses at March 31, 2007 was $7,258,000 or 1.17 percent, of outstanding loans, compared to $6,568,000 or 1.12 percent of outstanding loans at March 31, 2006. The provision charged to expense was $383,000 for the three months ended March 31, 2007 compared to $150,000 for the same period 2006. The allowance for loan losses was 43.53 percent and 101.34 percent of nonperforming loans at March 31, 2007 and 2006, respectively. At March 31, 2007, nonperforming loans were $16,675,000, compared to $12,812,000 and $6,481,000 at December 31, 2006 and March 31, 2006 respectively. At the end of the first quarter 2007, the ratios of total nonperforming loans to total portfolio loans and total nonperforming assets to total assets were 2.68 percent and 2.08 percent, respectively, as compared to the 2.04 percent and 1.66 percent, respectively, at year end 2006. The increase since December 31, 2006 was primarily the result of a comprehensive review of all commercial relationships involving amounts greater than $500,000. As of March 31, 2007 management did not identify any indicated losses on the increased balances. The Company’s senior management team is aggressively pursuing all options for resolution of these nonperforming loans. Management is confident that these levels will be reduced in the near term. Net charge-offs for the first quarter were $426,000 as compared to $369,000 and $204,000 in the fourth quarter 2006 and in the first quarter 2006, respectively. Net charge-offs (annualized) for the first quarter were 0.27 percent of average portfolio loans, as compared to 0.24 percent in the fourth quarter 2006, and 0.14 percent in the first quarter 2006. Total assets at the end of the first quarter 2007 were $852.8 million, an increase of $42.7 million, or 5.3 percent, compared to March 31, 2006 and $1.7 million, or .20 percent compared to December 31, 2006. Total deposits at the end of the first quarter this year were $722.6 million, up from $674.1 million a year ago and $717.3 million at the end of 2006. Total portfolio loans at March 31, 2007 were $621.9 million, up 5.73 percent from March 31, 2006, but down 1.0 percent compared to December 31, 2006. About LNB Bancorp, Inc. This press release contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “will,” “should,” “plan,” “intend,” “expect,” “continue,” “believe,” “anticipate” and “seek,” as well as similar expressions, are forward-looking in nature. Actual results and events may differ materially from those expressed or anticipated as a result of risks and uncertainties which include fluctuations in interest rates, inflation, government regulations, and economic conditions and competition in the geographic and business areas in which LNB Bancorp, Inc. conducts its operations, as well as the risks and uncertainties described from time to time in LNB Bancorp’s reports as filed with the Securities and Exchange Commission. We undertake no obligation to review or update any forward-looking statements, whether as a result of new information, future events or otherwise. Additional Information About the Merger and Where to Find It Shareholders are urged to read the proxy statement/prospectus, and other relevant documents filed with the SEC regarding the proposed transaction when they become available, because they will contain important information. The directors and executive officers of LNB and Morgan and other persons may be deemed to be participants in the solicitation of proxies in respect of the proposed merger. Information regarding LNB’s directors and executive officers is available in its proxy statement filed with the SEC on March 16, 2007. Information regarding Morgan’s directors and executive officers and other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, is or will be contained in the proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available. |
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