ITEM 1 - BUSINESS
a) GENERAL DEVELOPMENT OF BUSINESS
LNB Bancorp, Inc.(the Parent Company), a bank holding company, was incorporated on October 11, 1983 under the laws of the State of Ohio at the direction of the Board of Directors of The Lorain National Bank (the Bank), a national banking association, for the purpose of acquiring all the outstanding common stock of the Bank. The term "the Corporation" refers to LNB Bancorp, Inc. and its wholly-owned subsidiary. At a special meeting of the shareholders of the Bank, held on February 28, 1984, the shareholders approved the Plan of Reorganization, involving the merger of the Bank into the Lorain Interim Association, a national banking corporation, incorporated solely for the purpose of effecting the Reorganization Plan. Lorain Interim was a wholly-owned subsidiary of the Corporation.
Upon the consummation of the merger on March 30, 1984, under the Plan of Reorganization, the business of the Bank is conducted by the merged Bank under the name "The Lorain National Bank". Each outstanding share of common stock of the Bank, par value $2.50, was converted into one share of the Bancorp stock, par value $2.50. A total of 904,570 shares of corporate stock were issued at the effective date of the merger. On April 8, 1989, the shareholders of the Corporation approved a two-for-one stock split, which reduced the par value to $1.25. On April 20, 1993, the shareholders of the Corporation approved a five-for-four stock split, which reduced the par value to $1.00.
On April 18, 1995, the Corporation's Shareholders approved an amendment to the Articles of Incorporation to increase the authorized number of shares of Common Stock from 4,000,000 to 5,000,000 and fix the par value of Common Stock at $1.00 per share to allow for a five-for-four stock split.
On April 18, 1995, the Corporation's Board of Directors authorized a five-for-four stock split in the form of a 25 percent stock dividend. The stock split increased the number of shares outstanding by 802,692. Also, Common Stock has been increased by $802,692 with an offsetting reduction to additional capital to reflect the fixed $1.00 par value per share for each additional share issued pursuant to the stock split.
LNB Bancorp, Inc. has broader corporate powers than the Bank. These corporate powers principally include the power to engage in certain non-banking businesses closely related to banking, to own capital stock of banks located in Ohio and certain other states and to own capital stock of business corporations (other than banks) located within or outside Ohio. The Corporation has no present plans to engage in any non-banking activities or to acquire companies engaged in such activities.
b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Corporation and the Bank are engaged in commercial and retail banking. Reference is hereby made to Item 1e., Statistical Disclosure by Bank Holding Companies, and to Item 8 of this Form 10-K for financial information pertaining to the Corporation's business.
c) DESCRIPTION OF LNB BANCORP, INC.'S BUSINESS
LNB Bancorp, Inc. is a $542 million locally owned one bank holding company headquartered in Lorain, Ohio. The predecessor of LNB Bancorp, Inc., The Lorain National Bank, was formed as a result of the merger of The Lorain Banking Company and The National Bank of Lorain on January 1, 1961. The Lorain Banking Company was a state chartered bank founded in 1905. The National Bank of Lorain was a national bank receiving its national charter in 1934. On March 30, 1984, The Lorain National Bank became the wholly owned subsidiary of LNB Bancorp, Inc.
The Lorain National Bank operates 21 retail branches and 27 ATMs in the nine communities of Lorain, Elyria, Amherst, Avon Lake, LaGrange, Oberlin, Olmsted Township, Vermilion, and Westlake. The Bank is a full service bank offering a wide range of commercial and personal banking services including commercial loans, real estate loans, construction loans, consumer loans, Small Business Administration loans, Visa card and student loans. Other services offered include safe deposit boxes, night depository, U. S. savings bonds, travelers' checks, money orders, cashiers checks, bank-by-mail, automatic teller machine cash and transaction services, debit cards, wire transfers, electronic funds transfer, utility bill collections, notary public service, personal computer based cash management services, 24 hour telephone banking with bill paying service, discount brokerage services and other services tailored for both individuals and businesses. The Bank's electronic data processing department provides centralized electronic data processing services to local financial intermediaries.
The Bank's residential mortgage lending activities consist primarily of loans for purchasing personal residences, home equity loans, local lender loans, or loans for commercial or consumer purposes secured by residential mortgages. Consumer lending activities consist of traditional forms of financing for automobile and personal loans plus indirect automobile loans.
The Bank's range of deposit services include checking accounts, Checkinvest accounts, savings accounts, Holiday savings, money market accounts, Fortune Fifty accounts(a Senior Citizen program), individual retirement accounts, certificates of deposit, Keough plans, and overdraft protection. Deposits of the Bank are insured by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation.
The Trust and Investment Management Division of the Bank performs complete trust administrative functions and offers agency and trust services and Mutual funds investment products to individuals, partnerships, corporations, institutions and municipalities.
The Bank is not dependent upon any one significant customer or specific industry. The business of the Corporation is not seasonal to any material degree.
In the opinion of Management, LNB Bancorp, Inc. does not have exposure to material costs associated with environmental hazardous waste clean up.
Competition
Lorain National Bank faces strong competition both in making loans and attracting deposits. The deregulation of the banking industry and the wide spread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking has created a highly competitive environment for financial services providers. Lorain National Bank competes with other national and state banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies and other financial intermediaries operating in its market and elsewhere, many of whom have substantially greater financial and managerial resources.
The Lorain National Bank competes with seven other banks and bank holding companies operating in Lorain County which range in size from approximately $542 million to over $260 billion in assets. Other competition comes primarily from savings and loans, credit unions, and other financial intermediaries operating in Lorain County and counties adjacent to it. The Bank's market share of total deposits in Lorain County in all types of financial institutions decreased to 13.92% in 1998 compared to 15.19% in 1997. Lorain National Bank seeks to minimize the competitive effect of larger financial institutions through a community banking approach that emphasizes direct customer access to the Bank's president and other officers in an environment conducive to friendly, informed and courteous personal services. Management believes that Lorain National Bank is well positioned to compete successfully in its respective primary market area. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of the banking facilities and, in the case of loans to commercial borrowers, relative lending limits. Management believes that the commitment of Lorain National Bank to personal service, innovation and involvement in their respective communities and primary market areas, as well as their commitment to quality community banking service, are factors that contribute to it's competitive advantage.
Supervision and Regulation
LNB Bancorp, Inc., as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the Act), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the Federal Reserve Board). The Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank and restricts interstate banking activities. On September 29, 1994, the Act was amended by the Interstate Banking and Branch Efficiency Act of 1994 which authorizes interstate bank acquisitions anywhere in the country, effective one year after the date of enactment and interstate branching by acquisition and consolidation, effective June 1, 1997, in those states that have not opted out by that date.
The Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking and a proper incident
thereto. The Act does not place territorial restrictions on the banking subsidiaries of bank holding companies. LNB Bancorp, Inc.'s banking subsidiary is subject to limitations with respect to intercompany loans and investments.
A substantial portion of the Corporation's cash revenues is derived from dividends paid by its subsidiary bank. These dividends are subject to various legal and regulatory restrictions as summarized in Note(14) on page 28 of the LNB Bancorp, Inc. 1998 Annual Report. This note is incorporated herein by reference.
The Corporation and the Bank are subject to an extensive array of banking laws and regulations that are intended primarily for the protection of the customers and depositors of the Corporation's subsidiaries rather than holders of the Corporation's securities. These laws and regulations govern such areas as permissible activities, loans and investments, rates of interest that can be charged on loans and reserves. The Corporation and the Bank also are subject to general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio. Set forth below are brief descriptions of selected laws and regulations applicable to the Corporation and the Bank.
The Bank is subject to the provisions of the National Bank Act. The Bank is subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (OCC). The Bank is also subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Under the Act, as amended, and under Regulations of the Federal Reserve Board pursuant thereto, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit.
The Corporation and its subsidiary bank are also subject to the state banking laws of Ohio. Ohio adopted nationwide reciprocal interstate banking effective October, 1988. However, banking laws of other states may restrict branching of banks to other counties within the state and acquisitions or mergers involving banks and bank holding companies located in other states.
Federal regulators adopted risk-based capital guidelines and leverage standards for banks and bank holding companies. A discussion of the impact of risk-based capital guidelines and leverage standards is presented on page 28 of the LNB Bancorp, Inc. 1998 Annual Report and is incorporated herein by reference.
The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company and its controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of any FDIC assisted transaction involving an affiliated insured bank or savings association.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) covers an expanse of banking regulatory issues. FDICIA deals with the recapitalization of the Bank Insurance Fund, with deposit insurance reform including requiring the FDIC to establish a risk-based premium assessment system with a number of other regulatory and supervisory matters. The Bank will be required to make payments for the servicing of obligations of the Financing Corporation ("FICO") issued in connection with the resolution of savings and loan associations, so long as such obligations remain
outstanding.
Noncompliance to laws and regulations by bank holding companies and banks can lead to monetary penalties and/or an increased level of supervision or a combination of these two items. Management is not aware of any current instances of noncompliance to laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis. Recent regulatory inspections and examinations of the Bancorp and the Bank have not disclosed any significant instances of noncompliance. The minor instances of noncompliance detected during these inspections and examinations were promptly corrected by Management and no action was taken by the regulators against the Corporation or the Bank.
The earnings and growth of LNB Bancorp, Inc. are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board. Its policies influence the amount of bank loans and deposits and the interest rates charged and paid thereon, and thus have an effect on earnings. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Corporation and its subsidiary bank cannot be predicted. The discussion of "Impacts of Accounting and Regulatory Pronouncements" is incorporated herein by reference to page 42 of the LNB Bancorp, Inc. 1998 Annual Report.
Employees
As of December 31, 1998, the Corporation and the Bank employed 237 full-time employees and 79 part-time employees. The Corporation is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be very good. Employee benefits programs are considered by Management to be competitive with benefits programs provided by other financial institutions and major employers within the Bank's market area.
d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Corporation and the Bank do not have any offices located in foreign countries and they have no foreign assets, liabilities or related income and expense for the years presented.
e) STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
The following section contains certain financial disclosures related to the Corporation as required under the Securities and Exchange Commission's Industry Guide 3, "Statistical Disclosures by Bank Holding Companies", or a specific reference as to the location of the required disclosures in the LNB Bancorp, Inc. 1998 Annual Report, portions of which are incorporated in this Form 10-K by reference.
LNB BANCORP, INC.'S STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
A. & B. The average balance sheet information and the related analysis of net interest income for the years ending December 31, 1998, 1997, and 1996 are included in the Condensed Consolidated Average Balance Sheets, within Management's Discussion and Analysis found on page 37 of the LNB Bancorp, Inc. 1998 Annual Report and is incorporated into this Item I by reference.
All interest is reported on a fully taxable equivalent basis. Nonaccruing loans, for the purpose of the computations are included in the daily average loan amounts outstanding. Loan fees are included in interest on loans.
C. Tables setting forth the effect of volume and rate changes on interest income and expense for the years ended December 31, 1998 and 1997 are included in Rate/Volume Analysis of Net Interest Income within Management's Discussion and Analysis found on page 37 of the LNB Bancorp, Inc. 1998 Annual Report and is incorporated into this Item I by reference.
II. INVESTMENT PORTFOLIO
A. The carrying values of securities at year end are as follows:
December 31, ----------------------------------- Amounts in Thousands) 1998 1997 1996 - ------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 27,416 $ 11,155 $ 14,380 Securities of other U.S. Government agencies and corporations 50,531 6,031 -0- Equity securities 181 163 135 - ------------------------------------------------------------------------- Total securities available for sale 78,128 17,349 14,515 - ------------------------------------------------------------------------- Securities held to maturity: U.S. Treasury securities -0- 66,945 69,673 Securities of other U.S. Government agencies and corporations 33,719 24,996 16,500 States and political subdivisions 4,483 4,097 2,685 - ------------------------------------------------------------------------- Total securities held to maturity 38,202 96,038 88,858 - ------------------------------------------------------------------------- Federal Home Loan Bank and Federal Reserve Bank Stock $ 2,189 $ 1,987 $ 1,587 - ------------------------------------------------------------------------- Total securities $118,519 $115,374 $104,960 - -------------------------------------------------------------------------
B. MATURITY DISTRIBUTION OF INVESTMENT SECURITIES Maturities of nonequity securities owned by the Corporation as of December 31, 1998 are presented below: Maturing ---------------------------------------------------- Within From 1 to From 5 to After 10 (Amounts in Thousands) 1 year 5 years 10 years years Total - ------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $17,141 $10,192 $ -0- $ -0- $ 27,333 U.S. Government agencies and corporations 2,015 44,536 4,063 -0- 50,614 - ------------------------------------------------------------------------- Total securities available for sale 19,156 54,728 4,063 -0- 77,947 - ------------------------------------------------------------------------- Securities held to maturity: U.S. Treasury securities -0- -0- -0- -0- -0- U.S. Government agencies and corporations -0- -0- 33,719 -0- 33,719 States and political subdivisions 423 1,827 271 1,962 4,483 - ------------------------------------------------------------------------- Total securities held to maturity 423 1,827 33,990 1,962 38,202 - ------------------------------------------------------------------------- Total securities $19,579 $56,472 $37,872 $1,962 $115,885 - ------------------------------------------------------------------------- WEIGHTED-AVERAGE YIELD OF INVESTMENT SECURITIES The weighted-average yield for each range of maturities of investment securities is shown below as of December 31, 1998: Maturing ----------------------------------------------------- Within From 1 to From 5 to After 10 1 year 5 years 10 years years Total - -------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities 6.41% 6.35% 0.00% 0.00% 6.39% U.S. Government agencies and corporations 5.87 5.74 6.13 0.00 5.78 - ------------------------------------------------------------------------- Total securities available for sale 6.35 5.85 6.13 0.00 6.01 - ------------------------------------------------------------------------- Securities held to maturity: U.S. Treasury securities 0.00 0.00 0.00 0.00 0.00 U.S. Government agencies and corporations 0.00 0.00 5.52 0.00 5.52 States and political subdivisions (1) 4.31 4.83 5.19 4.88 4.83 - ------------------------------------------------------------------------- Total securities held to maturity 4.31 4.83 5.52 4.88 5.44 - ------------------------------------------------------------------------- Total securities 6.31% 5.82% 5.58% 4.88% 5.83%
1) Yields on tax-exempt obligations are computed on a tax equivalent basis based upon a 34% statutory Federal income tax rate.
C. Excluding those holdings of the securities portfolio in U.S. Treasury Securities and U.S. Government Agencies and Corporations, there were no investments in securities of any one issuer which exceeded 10% of the consolidated shareholders' equity of the Corporation at December 31, 1998.
III. LOAN PORTFOLIO
A. The following table summarized the distribution of the loan portfolio:
December 31, --------------------------------------------------- (Amounts in Thousands) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------- Commercial $124,875 $120,892 $113,170 $105,847 $104,209 Mortgage 147,651 142,223 138,455 124,012 114,611 Installment 65,793 37,250 27,683 23,310 19,933 Consumer revolving lines of credit 31,547 30,666 22,765 23,324 23,054 - -------------------------------------------------------------------------- TOTAL LOANS 369,866 331,031 302,073 276,493 261,807 Reserve for possible loan losses (3,483) (4,168) (4,116) (4,002) (3,832) - -------------------------------------------------------------------------- NET LOANS $366,383 $326,863 $297,957 $272,491 $257,975 ==========================================================================
B. COMMERCIAL LOAN MATURITY AND REPRICING ANALYSIS AS OF DECEMBER 31, 1998
(Amounts in Thousands) 1998 - ---------------------------------------------- Maturing in one year or less $ 21,955 Maturing after one year, but within five years 19,564 Maturing beyond five years 83,356 - ---------------------------------------------- TOTAL COMMERCIAL LOANS $124,875 ============================================== Loans repricing beyond one year: Fixed rate 10,706 Variable rate 92,214 - ---------------------------------------------- TOTAL $102,920 ==============================================
C. RISK ELEMENTS
A summary of nonaccrual, restructured loans, other real estate owned, accruing loans past due 90 days, and potential problem loans at December 31, follows:
(Amounts in Thousands) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------- Nonaccrual loans: Real estate loans $ 980 $ 383 $ 641 $ 511 $ 318 Commercial loans 54 42 114 221 0 Consumer loans 53 0 10 0 0 - ----------------------------------------------------------------- Total nonaccrual loans 1,087 425 765 732 318 Restructured loans 0 0 0 0 0 Other Real Estate owned 1,400 90 39 0 0 - ----------------------------------------------------------------- Total nonperforming assets $2,487 $ 515 $ 804 $ 732 $ 318 - ----------------------------------------------------------------- Reserve for possible loan losses to nonperforming assets 140.1% 809.3% 511.9% 546.7% 1,205.4% ================================================================= Accruing loans past due 90 days $ 213 $ 461 $ 357 $ 725 $ 419 Potential problem loans 2,941 8,764 1,066 942 1,197 =================================================================
(1) The Corporation, through its subsidiary bank, grants commercial, residential, and consumer loans to customers located primarily in the northern Ohio counties of Lorain, Cuyahoga, Erie and Huron.
Nonperforming assets consist of nonaccrual loans and loans which have been restructured, which are defined as follows:
Nonaccrual loans are loans which are 90 days past due and with respect to which, in Management's opinion, collection of interest is doubtful. These loans no longer accrue interest and are accounted for on a cash basis.
Loans are classified as restructured when, due to the deterioration of a customer's financial ability, the original terms have been favorably modified or either principal or interest has been forgiven.
The level of nonperforming assets remains at a relatively low level from 1994 through 1997 while increasing during 1998. The ratio of the reserve for possible loan loss to nonperforming assets increased from 511.9% in 1996 to 809.3% in 1997 and decreased to 140.1% in 1998. The 1998 decrease is the result of net increases in nonperforming assets in the amount of $1,972,000 and decreases in the loan loss reserve of $685,000.
The level of nonperforming assets increased $1,972,000 during 1998. This increase is the result of a net increase in nonaccrual loans of $662,000 plus increases in other real estate owned in the amount of $1,310,000. The increase in other real estate owned substantially relates to $1,300,000 from a single commercial credit relationship. This asset was subsequently sold for $1,300,000 in January 1999. The increase in
nonaccrual loans is due to decreases in nonaccrual principal balances of $970,000 which have been paid off and brought current, loans charged-off in the amount of $1,438,000, liquidation of nonaccrual loans of $264,000 and increases in nonaccrual principal balances of $3,334,000. The 1998 increase in nonaccrual loans was due primarily to six commercial loan customers and one mortgage loan customer. Management does not believe that this increase in nonaccrual loans is indicative of a failing economy and that this change did not result from any change in underwriting standards.
It is the Bank's policy to cease accruing interest on any loans where the principal and/or interest remains unpaid for 90 days or more, unless the loan is both well secured and in the process of collection. For the year ending December 31, 1998, the interest income that would have been earned on the nonaccrual loans in the loan portfolio would have been approximately $82,000; however, the interest income actually earned and reported as income in 1998 amounted to approximately $26,000.
In addition to the nonperforming assets classified above, the loan review committee identifies accruing loans past due 90 days plus potential problem loans. These loans are closely monitored by the loan review committee to assess the borrowers' ability to comply with the terms of the loans. Management's year-end review indicated that a charge to the reserve for possible loan losses or classification to nonperforming status was not warranted. Loans which are 90 days or more past due but continue to accrue interest are loans which, in Management's opinion, are well secured and are in the process of collection.
(2) Potential Problem Loans - As shown in the table on page 10 of Form 10-K, at December 31, 1998, there are approximately $2,941,000 of loans identified on Management's watch list which includes both loans which Management has some doubt as to the borrowers' ability to comply with the present repayment terms and loans which Management is actively monitoring due to changes in the borrowers financial condition. These loans and their potential loss exposure have been considered in Management's analysis of the adequacy of the allowance for loan losses.
At December 31, 1998, potential problem loans totaled $2,941,000, a decrease of $5,823,000 from one year ago. The decrease in potential problem loans is mainly due to a nonrecurring charge-off of $3,200,000 from a single commercial credit relationship plus reductions in the principal balances of loans from four commercial credit relationships totaling $1,430,000. Potential problem loans at December 31, 1998 are primarily comprised of three large credits that the Bank is reviewing. About $800,000 in potential problem loans relates to credit extended to finance the development of a single-family dwelling subdivision. These credits are being monitored by Management as the creditor liquidates their position through sales of real estate. Another $1,300,000 of these loans relates to the extension of credits to a recreational entertainment center. These credits are being monitored by Management which has noted an increase in net earnings during 1998. Another $700,000 of the potential problem loans relates to the extension of credit to a retail beverage store. These credits are being monitored by Management after the consolidation of loans. Management does not anticipate any charge-offs relative to these potential problem loans. The potential problem loans in 1994, 1995, and 1996 remained at a relatively constant low level.
(3) Foreign Outstandings - There were no foreign loans outstandings at December 31, 1998, 1997 or 1996.
(4) Loan Concentrations - Bank management reviews concentrations of credit and other portfolio risk elements on a quarterly basis. Management is not aware of any significant loans, group of loans or segments of the loan portfolio, other than those reported in the schedule of nonperforming loans, where there are serious doubts as to the ability of the borrower to comply with the present loan repayment terms. No loans are outstanding which would, if consolidated, be considered as a concentration of lending in any particular industry or group of industries nor are there significant amounts of loans made to agricultural or energy related businesses.
Credit risk is managed through the bank's loan loss review policy which provides loan department officers and the loan review committee with the responsibility to manage loan quality. The Corporation's credit policies are reviewed and modified on an ongoing basis in order to remain suitable for the management of credit risks within the loan portfolio as conditions change. At December 31, 1998, there were no significant concentrations of credit risk in the loan portfolio.
The Corporation's credit policies and review procedures are intended to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, Management must rely upon estimates, appraisals and evaluations of loans and the possibility that changes in such estimates, appraisals and evaluations could occur quickly because of changing economic conditions and the economic prospects of borrowers. Also see Note (12) of the "Notes to Consolidated Financial Statements" which appears on pages 26 and 27 of the LNB Bancorp, Inc. 1998 Annual Report and is incorporated herein by reference.
(5) No material amount of loans that have been classified by regulatory examiners as loss, substandard, doubtful, or special mention have been excluded from the amounts disclosed as nonaccrual, past due 90 days or more, restructured, or potential problem loans. Corporate management is not aware of any current recommendations by regulatory authorities which, if they were implemented, would have a material effect on the liquidity, capital resources or operations of the Corporation or its subsidiary bank.
D. Other interest-bearing assets - As of December 31, 1998, there are no other interest-bearing assets that would be required to be disclosed under Item III C.1 or 2 if such assets were loans. The Corporation had $1,400,000 and $90,000 in Other Real Estate Owned at December 31, 1998, and 1997, respectively.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes activity relating to the Reserve for Possible Loan Losses: December 31, ------------------------------------------- (Amounts in Thousands) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $ 4,168 $ 4,116 $ 4,002 $ 3,832 $ 3,714 Charge-offs: Commercial (3,060) (190) (296) (100) (190) Real Estate (147) (359) (185) (209) (141) Consumer (384) (300) (191) (140) (68) - ---------------------------------------------------------------------- Total charge-offs (3,591) (849) (672) (449) (399) Recoveries: Commercial 29 7 61 163 18 Real Estate 71 72 67 5 57 Consumer 81 72 58 51 42 - ---------------------------------------------------------------------- Total recoveries 181 151 186 219 117 - ---------------------------------------------------------------------- Net charge-offs (3,410) (698) (486) (230) (282) - ---------------------------------------------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 2,725 750 600 400 400 - ---------------------------------------------------------------------- BALANCE AT END OF YEAR $ 3,483 $4,168 $ 4,116 $ 4,002 $ 3,832 ======================================================================
ANALYTICAL DATA BALANCES: Average total loans $346,161 $315,215 $287,809 $272,011 $252,345 Total loans at year end 369,866 331,031 302,073 276,493 261,807 Net charge-offs 3,410 698 486 230 282 Provision for possible loan losses 2,725 750 600 400 400 Reserve for possible loan losses at year end 3,483 4,168 4,116 4,002 3,832
RATIOS: Net charge-offs to: Average total loans 0.99% 0.22% 0.17% 0.08% 0.11% Total loans at year end 0.92 0.21 0.16 0.08 0.11 Provision for possible loan losses 125.14 93.07 81.00 57.50 70.50 Reserve for possible loan losses 97.90 16.75 11.81 5.75 7.36 Reserve for possible loan losses to: Average total loans 1.01 1.32 1.43 1.47 1.52 Total loans at year end .94 1.26 1.36 1.45 1.46
The higher amount of 1998 net charge-offs and the higher provision for possible loan losses charge to expense resulted from increases in net charge-offs of commercial and consumer loans. Net charge-offs for 1998 included a nonrecurring $3,200,000 loss from a single commercial loan relationship. The decreasing trend in the provision for possible loan losses charged to expense which occurred from 1994 through 1995 resulted from the influences of an improvement in the local and national economy. The level of net charge-offs in 1999 is expected to be about $650,000.
The Bank's policy is to maintain the allowance for possible loan losses at a level considered by Management to be adequate for potential future losses. The evaluation performed by the Loan Review Committee is based upon a continuous review of delinquency trends; the amount of nonperforming loans (nonaccrual, restructured, and other real estate owned); loans past due 90 days or more and potential problem loans; historical and present trends in loans charged-off; changes in the composition and level of various loan categories; and current economic conditions.
Net charge-offs (recoveries) by portfolio type which are summarized from the analysis of the Reserve for Possible Loan Losses on page 13 of the Form 10-K are presented in the following table:
(Amounts in Thousands) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------ Commercial $3,031 $183 $235 $(63) $172 Real estate 76 287 118 204 84 Consumer 303 228 133 89 26 - ------------------------------------------------------------------ Total net charge-offs $3,410 $698 $486 $230 $282 ==================================================================
Both the provision and the allowance are based on an analysis of individual credits, prior and current loss experience, overall growth in the portfolio, changes in portfolio mix, current economic conditions, and other factors. Consumer and credit card loans are charged-off within industry norms, while commercial and mortgage loans are evaluated individually. An allocation of the ending reserve for possible loan losses by major type follows:
(Amounts in Thousands) 1998 1997 1996 1995 1994 ---------------------------------------------------------------- Commercial $1,398 $2,404 $1,429 $1,597 $1,487 Real estate 500 733 803 651 623 Consumer 704 515 381 363 348 Off-balance sheet risk 125 200 250 250 250 Unallocated 756 316 1,253 1,141 1,124 - ------------------------------------------------------------------ TOTAL $3,483 $4,168 $4,116 $4,002 $3,832 ================================================================== This allocation is made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. The 1998 provision for possible loan losses was less than net charge-offs by $685,000. The 1997 and 1996 provision for possible loan losses exceeded net charge-offs by $52,000 and $114,000 respectively. The allocated portion of the reserve for possible loan losses has remained relatively consistent during 1994 through 1996 due to a constant loan portfolio mix and a consistent credit risk. The Bank allocates a portion of the reserve for possible loan losses to off-balance sheet risks which consist
primarily of commitments to extend credit. The allocated portion of the reserve to consumer loans increased in 1998 and 1997 due to increases in credit risk from purchases of indirect automobile lending plus increased consumer loan outstandings. The allocated portion of commercial loans decreased in 1998 and increased in 1997 due to credit risk decreases in 1998 and increases in 1997.
The following table shows the percentage of loans in each category to total loans at year end:
1998 1997 1996 1995 1994 - ------------------------------------------------------------- Commercial 33.8% 36.5% 37.5% 38.3% 39.8% Real estate 39.9 43.0 45.8 44.8 43.8 Consumer 26.3 20.5 16.7 16.9 16.4 ------------------------------------------ 100.0% 100.0% 100.0% 100.0% 100.0% ------------------------------------------
The loan portfolio mix has shifted during the past five years. Consumer loans as a percent of total loans remained relatively constant from 1994 through 1996. During 1998 the consumer loans as a percentage of total loans increased by 5.8% with a corresponding decrease in commercial loans by 2.7% and real estate loans decreased by 3.1%. During 1997, consumer loans increased by 3.8% with a related decrease in commercial loans of 1.0% and real estate loans of 2.8%.
V. DEPOSITS
AVERAGE DEPOSITS BY CLASSIFICATION
The following table sets forth the classification of average deposits for the indicated period. December 31, ------------------------------------- (Amounts in Thousands) 1998 1997 1996 - ---------------------------------------------------------------- Demand deposits $ 72,575 $ 62,040 $ 58,989 NOW accounts 51,910 48,913 45,983 Money market accounts 18,599 19,473 21,650 Savings deposits 103,863 96,708 92,570 Time deposits 178,989 158,789 139,028 - ---------------------------------------------------------------- Total $425,936 $385,923 $358,220 ================================================================
AVERAGE RATES PAID ON DEPOSITS
The following table sets forth average rates paid on categories of interest-bearing deposits for the periods indicated: Years ended December 31, ---------------------------------------- 1998 1997 1996 - --------------------------------------------------------------- NOW accounts 1.22% 1.50% 1.61% Money market accounts 2.11 2.14 1.95 Savings deposits 2.15 2.20 2.20 Time deposits 5.17 5.29 5.25 ========================================
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
The following table sets forth the maturity of time deposits of $100,000 or more, in thousands of dollars, at December 31, 1998.
Maturing within 3 months $ 24,371 After 3 but within 6 months 5,362 After 6 but within 12 months 8,038 After 12 months 4,427 - ---------------------------------------------- Total $ 42,918 ==============================================
VI. RETURN ON EQUITY AND ASSETS
Information relating to key operating ratios for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 is presented in the tabular form below.
December 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------- Return on average assets 1.34% 1.41% 1.37% 1.21% 1.13% Return on average equity 14.46 14.51 13.70 12.72 12.16 Dividend payout ratio 52.00 45.26 44.28 43.47 42.98
Average equity to average assets 9.27 9.70 10.01 9.55 9.31 Net interest margin 5.17 5.20 5.33 5.14 5.09
VII. SHORT-TERM BORROWINGS
Information relating to short-term borrowings for the years ended December 31, 1998, 1997 and 1996 appears on page 26 of the LNB Bancorp, Inc. 1998 Annual Report under footnote (10)"Short-Term Borrowings" and is incorporated herein by reference.
ITEM 2
ITEM 2 - PROPERTIES
THE LORAIN NATIONAL BANK
The principal executive offices are located at its Main Office, 457 Broadway, Lorain, Ohio. The Bank owns the land and buildings occupied by the Main Office, twelve of its branch banking offices, the Branch Administration Building, the Maintenance Building, the Purchasing Building and the Computer Operations Center. The remaining nine branch offices are subject to lease obligations with various lessors and varying lease terms. There is no outstanding mortgage debt on any of the properties which the bank owns. Listed below are the branches/customer service facilities of the Bank and their locations:
Main Office 457 Broadway, Lorain Vermilion Office 4455 Liberty Avenue, Vermilion Amherst Office 1175 Cleveland Avenue, Amherst Lake Avenue Office 42935 North Ridge Road, Elyria Township Avon Lake Office 240 Miller Road, Avon Lake Kansas Avenue Office 1604 Kansas Avenue, Lorain Sixth Street Drive-In Office 200 Sixth Street, Lorain Pearl Avenue Office 2850 Pearl Avenue, Lorain Oberlin Office 40 East College Street, Oberlin West Park Drive Office 2130 West Park Drive, Lorain Second Street Office 221 Second Street, Elyria Cleveland Street Office 801 Cleveland Street, Elyria Oberlin Avenue Office 3660 Oberlin Avenue, Lorain Olmsted Township Office 27095 Bagley Road, Olmsted Township Westlake Office 30210 Detroit Road, Westlake Kendal at Oberlin Office 600 Kendal Drive, Oberlin The Renaissance Office 26376 John Road, Olmsted Township Westlake Village Office 28550 Westlake Village Drive, Westlake Cooper Foster Park Road Office 1920 Cooper Foster Park Road, Lorain Midway Mall Office 6395 Midway Mall, Elyria Village of LaGrange Office 546 North Center Street, LaGrange Computer Operations Center 2130 West Park Drive, Lorain Maintenance Building 2140 West Park Drive, Lorain Purchasing Building 2150 West Park Drive, Lorain Branch Administration Building 521 Broadway, Lorain
The Bank also owns automated teller machines and on-line teller terminals, as well as computers and related equipment for use in its business. The Corporate office facility is currently utilized at a level of 75%. The remaining space will be utilized as the Bank continues to grow. The Corporation considers its Corporate offices, branch offices and computer operations center to be in good to excellent condition, well maintained and are more than adequate to conduct the business of Banking.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary routine litigation incidental to its business, to which the Corporation or its subsidiary is a party to or which any of its property is subject.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1998 there were no matters submitted to a vote of security holders.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Common Stock Trading Ranges, Cash Dividends Declared information and information relating to dividend restrictions appear on pages 1 and 28 of the LNB Bancorp, Inc. 1998 Annual Report and are incorporated herein by reference.
HOLDERS
The total number of shareholders was 2,056 as of February 28, 1999. Upon the consummation of the Plan of Reorganization on March 30, 1984, the Corporation became a one bank holding company and shareholders of the Bank became shareholders of the Corporation, receiving one share of voting Common Stock for each outstanding share of Common Stock of the Bank.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
A Five Year Consolidated Financial Summary of selected financial data on page 34 of the LNB Bancorp, Inc. 1998 Annual Report is incorporated herein by reference.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis" is incorporated herein by reference to pages 35 - 43 of the LNB Bancorp, Inc. 1998 Annual Report. Also, see Item 8
Item 8 - Financial Statements and Supplementary Data. (a) Quantitative and Qualitative Disclosures about Market Risk are incorporated herein by reference to pages 40 - 41 of the LNB Bancorp, Inc. 1998 Annual Report to Shareholders.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Corporation's Independent Auditors' Report and Consolidated Financial Statements are listed below and are incorporated herein by reference to the LNB Bancorp, Inc. 1998 Annual Report (Exhibit 13), pages 14 through 33. The supplementary financial information specified by Item 302 of Regulation S-K, selected quarterly financial data, is included on page 44 of the LNB Bancorp, Inc. 1998 Annual Report.
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Report of Management
Independent Auditors' Report
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
All Directors of the Bank, prior to the merger, became Directors of the Bank and of the Corporation. The Officers of the Bank, prior to the merger, became Officers of the Bank and certain Executive Officers became Officers of the Corporation.
"Election of Directors" and "Director's Committees" on pages 3 through 5 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 22, 1999)is incorporated herein by reference. Also, see the additional information presented below which relates to Executive Officers of the Corporation and/or the Bank. BANK LNB BANCORP PRINCIPAL OCCUPATION DIRECTOR DIRECTOR NAME(AGE) DURING PAST 5 YEARS SINCE SINCE
Mitchell J. Fallis Vice President and (Not a Director) (44) Chief Accounting Officer, LNB Bancorp, Inc. and The Lorain National Bank
Gregory D. Friedman Senior Vice President, (Not a Director) (48) Chief Operating Officer and Chief Financial Officer, LNB Bancorp, Inc. and The Lorain National Bank
Michael D. Ireland Senior Vice President, (Not a Director) (52) LNB Bancorp, Inc. and The Lorain National Bank
Sandra L. Dubell Vice President and (Not a Director) (53) Chief Lending Officer, LNB Bancorp, Inc. and The Lorain National Bank
Emma N. Mason Senior Vice President, (Not a Director) (61) LNB Bancorp, Inc. and The Lorain National Bank
James H. Weber Senior Vice President, (Not a Director) (52) LNB Bancorp, Inc. and The Lorain National Bank
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information contained on pages 8 through 12 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 22, 1999) is incorporated herein by reference.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on page 15 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 22, 1999), relating to "Compliance with Section 16(A) of the Securities Exchange Act" is incorporated herein by reference.
The information contained on page 14 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 22, 1999), relating to "Beneficial Ownership of Shares" is incorporated herein by reference.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on pages 6, 7, 9 and 14 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 22, 1999) is incorporated herein by reference.
Analysis of Loans to Related Parties:
The information contained in Note (6) "Transactions with Related Parties" on page 24 of the LNB Bancorp, Inc. 1998 Annual Report is incorporated herein by reference.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following Consolidated Financial Statements and related Notes to Consolidated Financial Statements, together with the Independent Auditors' Report, KPMG LLP, dated January 26, 1999, appear on pages 14 through 33 of the LNB Bancorp, Inc. 1998 Annual Report and are incorporated herein by reference:
(1) Financial Statements
Consolidated Balance Sheets December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998, 1997 and 1996
Report of Management
Independent Auditors' Report
(2) Financial Statement Schedules
Financial statement schedules are omitted as they are not required or are not applicable or because the required information is included in the consolidated financial statements or notes thereto.
(3) Exhibits required by Item 601 Regulation S-K
Reference is made to the Exhibit Index which is found on page 24 of this Form 10-K.
(b) Reports on Form 8-K
On December 11, 1998, LNB Bancorp, Inc. filed a Form 8-K with the Securities and Exchange Commission under Item 5 Other Events. LNB Bancorp, Inc. reported that projected 1998 Consolidated Net Income was revised downward to 5% over 1997 Consolidated Net Income.
(c) Exhibits required by Item 601 Regulation S-K
Reference is made to the Exhibit Index which is found on page 24 of this Form 10-K.
(d) See Item 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LNB Bancorp, Inc. (Registrant)
By /s/ Thomas P. Ryan ------------------------ Thomas P. Ryan Executive Vice President, Secretary/Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
/s/ James L. Bardoner DIRECTOR March 23, 1999 - ----------------------- James L. Bardoner
/s/ Daniel P. Batista DIRECTOR March 23, 1999 - ----------------------- Daniel P. Batista
/s/ Robert M. Campana DIRECTOR March 23, 1999 - ----------------------- Robert M. Campana
/s/ Terry D. Goode DIRECTOR March 23, 1999 - ----------------------- Terry D. Goode
/s/ Wellsley O. Gray DIRECTOR March 23, 1999 - ----------------------- Wellsley O. Gray
/s/ David M. Koethe DIRECTOR March 23, 1999 - ----------------------- David M. Koethe
/s/ Benjamin G. Norton DIRECTOR March 23, 1999 - ----------------------- Benjamin G. Norton
ABSENT -EXCUSED DIRECTOR March 23, 1999 - ----------------------- Jeffrey F. Riddell
/s/ T. L. Smith, M.D. DIRECTOR March 23, 1999 - ----------------------- T. L. Smith, M.D.
/s/ Eugene M. Sofranko DIRECTOR March 23, 1999 - ----------------------- Eugene M. Sofranko /s/ Paul T. Stack DIRECTOR March 23, 1999 - ----------------------- Paul T. Stack
ABSENT - EXCUSED DIRECTOR March 23, 1999 - ----------------------- Leo Weingarten
/s/ Stanley G. Pijor CHAIRMAN OF THE March 23, 1999 - ----------------------- BOARD AND DIRECTOR Stanley G. Pijor
/s/ James F. Kidd PRESIDENT, CHIEF March 23, 1999 - ----------------------- EXECUTIVE OFFICER James F. Kidd AND DIRECTOR
SENIOR VICE /s/ Gregory D. Friedman PRESIDENT, March 23, 1999 - ----------------------- CHIEF FINANCIAL Gregory D. Friedman OFFICER AND CHIEF OPERATING OFFICER
/s/ Mitchell J. Fallis VICE PRESIDENT AND March 23, 1999 - ----------------------- CHIEF ACCOUNTING Mitchell J. Fallis OFFICER
LNB Bancorp, Inc.
Exhibit Index Pursuant to Item 601 (a) of Regulation S-K S-K Reference Page Number Exhibit Number
(3) (a)LNB Bancorp, Inc. Articles of Incorporation and Code N/A of Regulations dated April 16, 1986 (amended). Previously filed as Exhibit (3) to Annual Report Form 10-K (Commission File No. 2-8867-1) for the year ended December 31, 1986, and incorporated herein by reference.
(b)LNB Bancorp, Inc. Articles of Incorporation and Code N/A of Regulations (amended). Previously, filed as Exhibit (3) to Annual Report Form 10-K (Commission File No.2-8867-1) for the year ended December 31, 1985, and incorporated herein by reference.
(10) Material Contracts
(a)Employment Agreement by and between Gary C. Smith 27 and LNB Bancorp, Inc. and The Lorain National Bank dated March 6, 1999.
(b)Incentive Stock Option Agreement by and between 36 Gary C. Smith and LNB Bancorp, Inc. dated March 6, 1999.
(c) Amended Employment Agreement by and between James F. 39 Kidd and LNB Bancorp, Inc. And The Lorain National Bank dated March 3, 1999.
(d) Amended Employment Agreement by and between Thomas 44 P. Ryan and LNB Bancorp, Inc. and The Lorain National Bank dated March 3, 1999.
(e) Branch Purchase and Assumption Agreement by and N/A between KeyBank National Association and the Lorain National Bank dated April 10, 1997. Previously filed as Exhibit (99.1) to Form 8-K (Commission File No. 0-13203) filed October 3, 1997, and incorporated herein by reference.
(f)Supplemental Retirement Agreement by and between N/A James F. Kidd and The Lorain National Bank dated July 30, 1996. Previously filed as Exhibit (10a) to Quarterly Report on Form 10-Q (Commission File No.0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference.
(g)Supplemental Retirement Agreement by and between N/A Thomas P. Ryan and The Lorain National Bank dated July 30, 1996. Previously filed as Exhibit(10b) to Quarterly Report on Form 10-Q (Commission File No. 0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference.
S-K Reference Page Number Exhibit Number
(h)Supplemental Retirement Agreement by and between N/A Gregory D. Friedman and The Lorain National Bank dated July 30, 1996. Previously filed as Exhibit (10c) to Quarterly Report on Form 10-Q (Commission File No. 0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference.
(I)Employment Agreement by and between James F. Kidd N/A and LNB Bancorp, Inc. and The Lorain National Bank dated September 11, 1995. Previously filed as Exhibit (10a) to Quarterly Report on Form 10-Q (Commission File No. 0-13203) for the quarter ended September 30, 1995, and incorporated herein by reference.
(j)Employment Agreement by and between Thomas P. Ryan N/A and LNB Bancorp, Inc. and The Lorain National Bank dated September 11, 1995. Previously filed as Exhibit (10b) to Quarterly Report on Form 10-Q (Commission File No. 0-13203) for the quarter ended September 30, 1995, and incorporated herein by reference.
(k)Consultant Agreement by and between Lorain National N/A Bank, LNB Bancorp, Inc. and Stanley G. Pijor dated March 15, 1994. Previously filed as Exhibit (10) to Annual Report Form 10-K (Commission File No. 0-13203) for the year ended December 31, 1993 and incorporated herein by reference.
(l)Supplemental Retirement Agreement by and between N/A Stanley G. Pijor and The Lorain National Bank dated December 31, 1987. Previously filed as Exhibit (10) to Annual Report on Form 10-K (Commission File No. 0-13203) for the year ended December 31, 1987, and incorporated herein by reference.
(m)Employment Agreement by and between Lorain National N/A Bank, LNB Bancorp, Inc. and Stanley G. Pijor dated December 31, 1987. Previously filed as Exhibit (10) to Annual Report Form 10-K (Commission File No. 0-13203) for the year ended December 31, 1987 and incorporated herein by reference.
(n)The Lorain National Bank 1985 Incentive Stock Option N/A Plan dated April 16, 1985. Previously filed as Exhibit (10) to Annual Report on Form 10-K (Commission File No. 2-8867-1) for the year ended December 31, 1985, and incorporated herein by reference.
(o) Agreement To Join In The Filing of Consolidated N/A Federal Income Tax Returns between LNB Bancorp, Inc. and The Lorain National Bank dated December 15, 1986. Previously filed as Exhibit (10) to Annual Report on Form 10-K (Commission File No. 2-8867-1) for the year ended December 31, 1986 and incorporated herein by reference.
S-K Reference Page Number Exhibit Number
(11) Statements re: Computation of Per Share Earnings. 49
(13) LNB Bancorp, Inc. 1998 Annual Report to Shareholders. 50
(21) Subsidiary of LNB Bancorp, Inc. 154
(22) Notice of Annual Meeting to Shareholders and Proxy 155 Statement (dated March 22, 1999).
(23) Consent of Independent Accountants. 180
(27) Financial Data Schedule. 181
(99.1) Annual report on Form 10-K/A of The Lorain National Bank N/A Employee Stock Ownership Plan (registration number 33-65034) for the plan year ended December 31, 1998 to be filed as an amendment to this annual report on Form 10-K.
(99.2) Annual report on Form 10-K/A of The Lorain National Bank N/A Stock Purchase Plan (registration number 33-65034) for the plan year ended December 31, 1998 to be filed as an amendment to this annual report on Form 10-K.
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (10a)
Employment Agreement by and between Gary C. Smith and LNB Bancorp, Inc. and The Lorain National Bank dated March 6, 1999.
EMPLOYMENT AGREEMENT
THIS AGREEMENT made at Lorain, Ohio on the 16 day of March, 1999 by and between GARY C. SMITH, referred to below as "Employee", and LNB BANCORP, INC., an Ohio corporation, and LORAIN NATIONAL BANK, a banking organization organized and existing under the laws of the United States of America which, together with their successors and assigns are collectively referred to below as "Employer". Employee and Employer are also referred to below, collectively as the "Parties" and individually as a "Party".
R E C I T A L S :
The Employer desires to secure and retain the services of Employee as its Senior Executive Vice President from the effective date of this contract, and Employee desires to accept such employment as Senior Executive Vice President.
WHEREAS, but for Employee's promises made in this Agreement, especially in Section 8 hereof, Employer would not employ Employee under the terms and conditions of this Agreement. Therefore, expressly to induce Employer to execute this Agreement, Employee represents that Employee fully understands and fully accepts the Restrictive Covenants in Section 8 hereof and agrees to be bound thereby.
NOW, THEREFORE, in consideration of the mutual covenants and conditions herein, the parties do hereby agree as follows:
1. Employment and Term.
1.1 Employee will render professional management services to Employer in the capacity of Senior Executive Vice President commencing May 3, 1999 and continue in effect thereafter unless terminated pursuant to the termination provisions of this Agreement, including the provisions of Section 7 hereof.
1.2 He will at all times faithfully, industriously and to best of his ability perform all duties that may be required of him by virtue of his position as Senior Executive Vice President and all duties set forth in the Employer's Code of Regulations, Bylaws and the policies as adopted by the Employer's Board of Directors. In addition, he shall perform in the same manner any duties assigned or delegated to him by the President and Chief Executive Officer and the Chairman of the Board of Employer.
1.3 On or about January 1, 2000, Employee shall become the President and Chief Executive Officer of Employer and thereafter render professional management services commensurate with such position. All of the above is subject, however, to the termination provisions contained in this Agreement.
1.4 Upon Employee becoming the President and Chief Executive Officer of Employer, Employer shall at the next annual meeting of shareholders of Employer nominate and present Employee's name to Employer's shareholders for election as a member of the Board of Directors of Employer.
1.5 Except as otherwise expressly provided herein, this Agreement represents the entire agreement between Employer and Employee regarding Employee's employment by Employer.
1.6 Except as otherwise expressly stated herein this Agreement may
be changed or amended only by a written document which is clearly designated as an amendment to this specific Agreement and only if such document is signed by both parties.
1.7 No action by either party and no refusal or neglect of either party to exercise a right granted under this Agreement or to enforce compliance with any provision of this Agreement shall constitute a waiver of any provision of or any right under this Agreement, unless a waiver is expressed in a written document which is clearly designated as a waiver and unless such document is signed by both parties.
2. Compensation.
2.1 In consideration for the services as Senior Executive Vice President, Employer agrees to pay Employee the sum of One Hundred Eighty Five Thousand Dollars ($185,000.00) for the first twelve (12) consecutive monthly period of the Agreement term and upon Employee being appointed President and Chief Executive Officer of Employer, his basic salary shall immediately increase to the sum of Two Hundred Thousand Dollars ($200,000.00) for the next ensuing twelve (12) consecutive monthly period of the Agreement term and thereafter. The said basic salary shall be payable in twenty-six (26) equal bi-weekly payments during each twelve (12) consecutive monthly period of the Agreement term and prorated if the Agreement term is terminated prior to the completion of a twelve (12) consecutive monthly period.
2.2 As additional consideration for Employee's services hereunder, Employee may receive a discretionary bonus from time to time. Such bonus shall be determined by Employer's Board of Directors in its sole discretion.
2.3 There shall be an annual review of Employee's performance and compensation by the Employer's Board of Directors or a committee thereof. The annual review shall occur not less than sixty (60) days after the end of Employer's fiscal year for the express purpose of reviewing the prior years performance of Employee. Any change in compensation shall immediately act as an amendment of Section 2.1 above.
2.4 The obligations of Employer to pay Employee's basic salary, bonuses, if any, and other benefits under this Agreement are expressly conditioned upon Employee's continued and faithful performance of an adherence to each and every material promise, duty and obligation assigned to or made by Employee under this Agreement.
3. Vacation and Time Off.
3.1 Employee shall be entitled to twenty-two (22) working days of compensated vacation in each of the contract years, pursuant to the terms and conditions of Employer's vacation time off policy, to be taken at times mutually agreed upon in advance between Employee and the President and Chief Executive Officer of Employer and/or if appropriate the Chairman of the Board of Directors of Employer.
3.2 All vacation time off shall be non-cumulative if not taken within the appropriate contract year or within the first quarter of the succeeding contract year and except that unused vacation time may be redeemed as compensation pursuant to the terms and conditions of Employer's vacation time off policy.
3.3 Employee's vacation time off may be increased by Employer in its sole discretion.
3.4 Employee shall be permitted to be absent from his duties during business hours to attend professional meetings, seminars, conventions, business development and attend to such outside professional duties as have been mutually agreed upon between Employee and the President and Chief Executive Officer of Employer and/or if appropriate, the Chairman of the Board of Directors of Employer. Attendance at such approved meetings, seminars, conventions, business development and accomplishment of approved professional duties shall be fully compensated and shall not be considered vacation. Employer shall reimburse Employee for all reasonable expenses incurred by him incident to attendance at approved professional meetings, seminars and conventions and such reasonable entertainment expenses incurred by Employee in furtherance of Employer's interest.
3.5 Employee shall also be entitled to additional days of time off with full compensation for holidays in accordance with Employer's holiday time off policy.
4. Fringe Benefits.
4.1 Employee shall be entitled to all fringe benefits to which other employees of Employer are entitled. In addition thereto, and as additional consideration for Employee accepting the position of Senior Executive Vice President of Employer, Employer agrees to provide Employee:
A. Disability compensation allowance which shall commence one hundred eighty (180) days after Employee incurring a disability which precludes his ability to perform his duties under this Agreement and shall continue pursuant to the terms of Employers long-term disability policy.
B. Inclusion under Employer's pension, retirement, profit sharing, and stock option plan as presently in force or as adopted and as amended from time to time.
C. A family plan of hospitalization as in force by Employer and as amended from time to time. Such family plan of hospitalization shall be in effect immediately upon Employee's commencement of employment.
D. A term life insurance policy on Employee provided he is insurable under the standard rate criteria of a commercial life insurance company in an amount equal to 2.7 times the base annual compensation of Employee, but not to exceed Three Hundred Thousand Dollars ($300,000.00) payable to the beneficiary of his choice.
E. Sick leave as presently in force by Employer and as amended from time to time.
F. Purchase or lease for the use of Employee an automobile as selected by Employee and agreed to by Employer and to reimburse him for expenses related to its operation for business purposes. Such automobile shall be replaced after three (3) years of use by Employee. Upon termination of this Agreement for any reason, Employer shall be immediately entitled to possession of said automobile.
G. To pay the initiation fee and monthly dues for a membership for Employee at a country club of his choice located in Lorain County, Ohio. All expenses incurred by Employee at such country club in
furtherance of Employer's business or interest shall be reimbursed to Employee by Employer upon presentation of appropriate itemization and receipts. The identity of the country club and the type of membership thereat shall be mutually agreed upon, in advance, by Employee and Employer.
H. Reimburse Employee reasonable expenses related to the performance of Employee's duties as Senior Executive Vice President including (but not limited to): entertainment and promotional expenses; educational expenses incurred for the purpose of maintaining or improving Employee's skills directly related to the performance of his duties and obligations hereunder; expenses of membership in civic groups, clubs and fraternal organizations; and all other items of reasonable and necessary expenses incurred by Employee in the performance of Employee's duties as Senior Executive Vice President under this Agreement.
I. To pay all moving expenses incidental to the relocation of Employee to Lorain County, Ohio in an amount not to exceed Eight Thousand Dollars ($8,000.00). Employee shall furnish to Employer paid receipt or estimate for such moving expense.
J. Pay Employee's reasonable and customary daily expenses from the date of the commencement of this Agreement to the date of Employee's relocation to a residence in Lorain County, Ohio, but not to exceed a six (6) month period.
5. Stock Option.
5.1 Employer grants the Employee an option to purchase Ten Thousand (10,000) shares of common stock of the Employer at a purchase price of Thirty Dollars ($30.00) per share pursuant to the terms and provisions of an Incentive Stock Option Agreement attached hereto marked "Exhibit A" and made a part hereof.
6. Prohibition Against Transfer.
6.1 Employee's duties, obligations and services rendered under this Agreement are personal in nature and are unique to Employee. Therefore, without Employer's prior written consent, Employee shall not assign or otherwise transfer any of Employee's duties, obligations or responsibilities hereunder.
7. Termination.
7.1 In addition to any termination under the foregoing Sections, this Agreement shall be terminated:
A. If either party materially violates the terms and conditions of this Agreement, the other party shall give the breaching party notice of said violation and if the breaching party does not cure such violation within sixty (60) days after notice, then the other party shall have the right to terminate this Agreement without further notice.
B. The Employer through its Board of Directors may terminate this Agreement without cause at any time upon ninety (90) days prior written notice to Employee.
C. By Employee upon "change in control of the Employer" as hereinafter defined.
D. Upon the death of Employee.
E. In the event of the disability of Employee resulting in his inability to perform his duties for a period of six (6) months, he shall be considered permanently disabled and he shall in that event be entitled to the salary and benefits provided by Employer under its long term disability policy.
F. Upon the termination of this Agreement, pursuant to Subparagraph (A) (but only if Employee terminates the Agreement due to the Employer's breach) or Paragraph (B) all rights, duties and obligations of the parties hereto shall cease except that Employer shall continue to pay Employee his total Lorain National Bank compensation as reflected on his W-2 Federal Income Tax Statement for the prior year for a period one (1) year from the date of termination. In the event the Agreement is terminated pursuant to Paragraph (C) hereof, all rights, duties and obligations of the parties hereto shall cease except that Employer shall continue to pay Employee his total Lorain National Bank compensation as reflected on his W-2 Federal Income Tax Statement for the prior year for a period of two (2) years from the date of termination.
G. The termination payments payable to Employee shall survive Employee's death should he die during the period he is receiving termination payments as provided for in Section F above.
H. During the Agreement term, Employee may, in his discretion, without cause, terminate his employment with Employer by giving the Board of Directors of Employer at least ninety (90) days written notice of his decision to terminate his Agreement. Upon the effective date of such employment termination by Employee, and upon such termination both parties shall be released from any and all liabilities hereunder.
I. "Change in control of Employer" shall mean the occurrence of any of the following events.
i. Individuals who on January 1, 1999 constitute the Employer's Board of Directors (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Employer's Board of Directors, provided that any person becoming a Director subsequent to January 1, 1999, whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by specific vote or by approval of the proxy statement of the Employer in which such person is named as a nominee for Director without written objection by such Incumbent Directors to such nomination) shall be deemed to be an Incumbent Director; provided, however, that no individual elected or nominated as a Director of the Employer initially as a result of an actual or threatened election contest with respect to the Directors of any other actual or threatened election contest with respect to Directors or any other actual or threatened solicitation of proxies by or on behalf of any persons other than the Board shall be deemed to be an Incumbent Director.
ii. Any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Employer representing 15% or more of the combined voting power of the Employer's
then outstanding securities eligible to vote for the election of the Board (the "Employer Voting Securities"); provided, however, that the event described in this paragraph 2 shall not be deemed to be a Change in Control of the Employer by virtue of any of the following acquisitions: (a) by the Employer or any Subsidiary, (b) by any employee benefit plan sponsored or maintained by the Employer or any Subsidiary, or by an employee stock benefit trust created by the Employer or any Subsidiary, (c) by any underwriter temporarily holding securities pursuant to an offering of such securities; or (d) a transaction (other than one described in 3 below) in which Employer Voting Securities are acquired from the Employer, if a majority of the Incumbent Directors approves a resolution providing expressly that the acquisition pursuant to this clause (d) does not constitute a Change in Control under this paragraph 2;
iii. The consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Employer, or any of its Subsidiaries that requires the approval of the Employer's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (a) more than 50% of the total voting power of the corporation resulting from the consummation of such Business Combination (the "Surviving Corporation"), or if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Employer Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, represented by shares into which such Employer Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Employer Voting Securities among the holders thereof immediately prior to the Business Combination, (b) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation or any employee stock benefit trust created by the surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 15% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation); and (c) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval for the execution of the initial agreement providing for such Business Combination (any Business Combination must satisfy the criteria specified in (a), (b) and (c) above so as to not constitute a "Change in Control of the Corporation"); or
iv. The occurrence of a complete liquidation or dissolution of the Employer or any of its Subsidiaries, or a sale of all or substantially all of the assets of the Employer, or any of its Subsidiaries.
J. Employer shall have the sole discretion to determine whether Employee shall continue to render services hereunder during such notice periods as provided for in this Section 7. Termination.
8. Non Competition.
8.1 Employee, as a condition of this Agreement, covenants and agrees that in the event this Agreement should be terminated for any reason other
than termination for cause against Employer or termination due to change in control of the Employer, the Employee shall not compete with Employer at any location within fifty (50) miles radius of Employer's main office or any of its branch locations for a period of one (1) year. For purposes of this Agreement "non-compete" means that Employee shall not engage directly or indirectly in competition with Employer either directly of indirectly, own (partially or completely) or control through stock or otherwise or work or render services for, be employed or engaged by, represent in any capacity, or advise or consult any corporation, partnership, entity or other enterprise who or which conducts or is involved with any business activity which competes with any business activity, product or service rendered, performed or produced by Employer.
8.2 - Employee acknowledges that all information, knowledge and data connected with or related to the operations of Employer, including without limitation, all techniques, methods, systems, methodologies, facts, data or other information, of whatever kind or whatever form concerning the business or affairs of Employer are valuable, special and unique assets of the Employer and that Employee shall not disclose or divulge any such information, knowledge or data to any person, association, partnership, corporation or entity for any reason or purpose whatsoever.
8.3 - In the event of a breach or a threatened breach by Employee of his obligations under this paragraph 8, Employee hereby acknowledges and stipulates that Employer shall not have an adequate remedy at law, shall suffer irreparable harm and therefore it is mutually agreed and stipulated by the parties hereto that, in addition to any other remedies at law or in equity which the Employer may have, the Employer shall be entitled to obtain in a court of law and/or equity a temporary and/or permanent injunction restraining Employee from any further violation or breach of such covenants.
9. Indemnification.
9.1 - Employer hereby indemnifies and saves Employee harmless from and against all claims, liabilities, judgments, decrees, fines, penalties, fees, amounts paid in settlement or any other costs, losses, expenses (including but not limited, attorney fees and court costs) directly or indirectly arising or resulting from or in connection or association with any threatened or pending action, suit or proceedings (whether civil, criminal, administrative, investigatory or otherwise) and any appeals related thereto under which Employee is a party or participant because of Employee's good faith actions or omissions arising from the performance of Employee's duties and obligations under this Agreement except for such claims including court proceedings brought by the respective parties hereto against each other.
9.2 - As a condition precedent to the indemnification and other obligations of Employer under this section 8, Employee must first:
A. Notify Employer of any actual or potential claim under this section.
B. Authorize and permit Employer in its sole discretion to choose any legal counsel to defend or otherwise handle the claim and all proceedings and matters relating thereto.
C. Permit Employer to assume total complete and exclusive control of the claim and all proceedings and matters relating thereto.
10. Miscellaneous.
10.1 - This Agreement constitutes the entire agreement between the parties and contains all the agreements between them with respect to the subject matter hereof. It also supersedes any and all other agreements or contracts, either oral or written between the parties with respect to the subject matter hereof.
10.2 - Except as otherwise specifically provided the terms and condition of this Agreement may be amended at any time by mutual agreement of the parties, provided that before any amendment shall be valid or effective it shall have been approved by the Board of Directors of Employer and reduced to writing.
10.3 - The invalidity or unenforceability of any particular provision of this Agreement shall not affect its other provisions and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted.
10.4 - Except as otherwise expressly provided herein, this Agreement shall be binding upon and inure to the benefit of Employer, its successors and assigns and upon Employee, his administrators, executors, legatees, heirs and assigns.
10.5 - This Agreement shall be construed and enforced under and in accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties have hereunto set their hands the day and year first above written.
In the Presence of:
/s/Daniel P. Batista /s/Gary C. Smith _________________________________ __________________________________ Gary C. Smith - "Employee" /s/Denise M. DeVito _______________________________
LNB BANCORP, INC. /s/Daniel P. Batista by: /s/James F. Kidd ________________________________ ________________________________
/s/Denise M. DeVito ________________________________
LORAIN NATIONAL BANK /s/Daniel P. Batista by: /s/James F. Kidd ________________________________ ________________________________
/s/Denise M. DeVito ________________________________
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (10b)
Incentive Stock Option Agreement by and between Gary C. Smith and LNB Bancorp, Inc. dated March 6, 1999.
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into this 11 day of March, 1999, by and between LNB BANCORP, INC., an Ohio corporation (the "Company"), and GARY C. SMITH ("Employee").
RECITALS The Company is an Ohio corporation. The Company owns all of the outstanding common shares of Lorain National Bank, a banking association organized and existing under the banking laws of the United States of America (the "Bank").
The Company is issuing the Options provided for in this Agreement to the Employee hereunder in connection with the agreement by Employee to accept a position as Senior Executive Vice President of the Company and the Bank.
The Company's Board of Directors has determined that the issuance of options pursuant to this Agreement is in the best interest of the Company and its shareholders.
AGREEMENT
Now, therefore, intending to be legally bound and in consideration of the mutual covenants set forth herein, the parties hereto agree as follows:
1. Number of Shares and Price Per Share
A Stock Option for a total of 10,000 shares of Company Common Stock, $1 a value, of the Company is hereby granted to Employee at an exercise price of $30 per share, hereinafter the "Option(s)." All Options granted hereunder are nonqualified stock options.
2. Duration and Exercise of Options
A. The option exercise period shall be ten (10) years from the date Employee commences employment with Company and Bank, provided, that such period shall be reduced with respect to any Options, as outlined below, in the event of death, disability or termination of employment or retirement of the Employee.
B. The exercise of any Option and delivery of the optioned shares shall be contingent upon receipt by the Company of written notice specifying the number of shares to be purchased, accompanied by the full purchase price in cash, or, at the discretion of the Company, in whole or in part in common shares of the Company valued at fair market value, as determined by the Company's Board of Directors.
C. No Option may be exercised after termination of employment of Employee except as hereinafter provided.
D. Upon termination of the Employee's services as an employee of the Company (whether by retirement under a retirement plan of the Company or otherwise), for any reason other than death, disability or termination for cause his stock option shall be exercisable only as to those shares of common stock which were immediately purchasable by him at the date of such termination and shall be exercisable only for a period of three (3) months after the date of termination. If Employee's services as an officer or other employee is terminated for cause, all rights under this Stock Option
shall expire upon such termination. The Board of Directors of Company shall determine, for the purposes of this Agreement, the reason for termination of Employee's employment and its determination shall be binding and conclusive. Upon the death or disability (disability shall mean and be limited to disability within the meaning of Section 22(e)(3) of the Internal Revenue Code) of the Employee during his period of service as an employee of Company, his Stock Option shall be exercisable only for a period of twelve (12) months after the date of death or disability.
E. Options may be exercised in whole or in part, but only with respect to whole shares and a minimum of 100 share lots.
F. The Company shall not be required to issue or deliver any certificate for shares of its stock purchased upon the exercise of any part of the Option before: (I) completion of any registration or other qualification of such shares under any state or federal law or ruling or regulation of any governmental regulatory body that the Company shall, in its sole discretion, determine is necessary or advisable; and (ii) the Board of Directors of the Company shall have been advised by counsel that all applicable legal requirements have been complied with.
3. Nontransferability of Options
The Option shall not be transferable otherwise than by will or by the laws of descent and distribution, and may be exercised during the lifetime of the Employee only by him.
4. Effect of Stock Dividends, etc.
The Board of Directors of the Company shall make appropriate adjustments in the price of the shares and the number allotted or subject to allotment if there are any changes in the common stock of the Company by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, mergers or consolidations.
5. Authority to Withhold Tax
The Employee hereby consents to the withholding of such taxes as are required by the Company, and further agrees that as a condition of exercise of the Option by the Employee, the Company may, if in its sole discretion the Company determines that such payroll withholding is impractical or insufficient, require that the Employee advance all or a portion of such taxes to the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.
LNB BANCORP, INC. (the "Company") By: /s/James F. Kidd _______________________________ James F. Kidd, President & CEO
/s/Gary C. Smith __________________________________ Gary C. Smith, "Employee"
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (10c)
Amended Employment Agreement by and between James F. Kidd and LNB Bancorp, Inc. and The Lorain National Bank dated March 3, 1999.
AGREEMENT THIS AGREEMENT is entered into as of the 3 day of March, 1999, by and between JAMES F. KIDD ("Kidd") and LNB BANCORP, INC., an Ohio corporation and the LORAIN NATIONAL BANK, a banking organization organized and existing under the law of the United States of America (collectively "Employer"): WHEREAS, Kidd and Employer have entered into an Employment Agreement dated September 11, 1995; and WHEREAS, Kidd and Employer wish to modify and amend certain provisions of said Employment Agreement; and WHEREAS, the Board of Directors of Employer has authorized the Employer to enter into this Amended Employment Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained the Employment Agreement dated September 11, 1995 is hereby amended in the following respects:
1. Paragraph [12] of the Agreement is amended and restated to provide as follows:
"[12] Notwithstanding the provisions of Paragraph 9, this Agreement shall be terminated:
[a] If either party materially violates the terms and conditions of this Agreement, the other party shall have the right to terminate this Agreement upon thirty (30) days prior written notice to the breaching party;
[b] The Employer through its Board of Directors may terminate this Agreement without cause at any time upon ninety (90) days prior written notice to Kidd;
[c] Upon resignation of employment by Kidd occasioned by "Change in Control of the Employer" as hereinafter defined;
[d] Upon the death of Kidd provided he is not receiving termination payments pursuant to paragraph (f) hereof;
[e] In the event of the disability of Kidd resulting in his inability to perform his duties for a period of six (6) months, he shall be considered permanently disabled and he shall, in that event, be entitled to the salary and benefits he is then receiving on the date of determination of total disability and continuing for a period of two (2) years thereafter reduced however, by any amounts received by Kidd pursuant to a policy of disability insurance in force at the time of such disability;
[f] Upon the termination of this Agreement pursuant to subparagraph [a] (but only if Kidd terminates the Agreement due to the Employer's breach) or paragraph [b] or [c] hereof, all rights, duties and obligations of the parties hereto shall cease except that Employer shall continue to pay Kidd, provided he has not yet reached his 63rd birthday, his total Lorain National Bank compensation as would be reflected on his W-2 Federal Income Tax Statement for such year for a period of two (2) years from the date of termination. During such two-year period and in addition to the payment of his compensation, Employer shall continue to provide Kidd, at Employer's cost, all fringe benefits as though he were still an employee. Fringe benefits
include, but are not limited to, health and hospitalization insurance, life insurance and full pension accrual. Upon expiration of the two-year payment period Kidd shall be entitled to participate in Employer's health and hospitalization plan until he reaches age sixty five (65), provided he pays either directly or through Employer the premium attributable to his coverage under the Plan. If Kidd is over the age of sixty three (63) at the time of termination, salary and benefits as set forth above shall continue to be provided by Employer to Kidd until Kidd reaches age sixty five (65). Kidd may elect, in his sole discretion, to be paid salary due under this provision in a lump sum upon termination.
[g] The termination payments payable to Kidd shall survive Kidd's death should he die during the period he is receiving termination payments as provided for in Section [f] above.
[h] During the Agreement Term Kidd may, in his discretion, without cause, terminate his employment with Employer by giving the Board of Directors of Employer at least ninety (90) days written notice of his decision to terminate his Agreement. Upon the effective date of such employment termination by Kidd, and upon such termination both parties shall be released from any and all liabilities hereunder.
[i] "Change in Control of the Employer" shall mean the occurrence of any one of the following events:
i. Individuals who, on August 1, 1995, constitute the Employer's Board of Directors (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Employer's Board of Directors, provided that any person becoming a director subsequent to August 1, 1995, whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Employer in which such person is named as a nominee for director, without written objection by such Incumbent Directors to such nomination) shall be deemed to be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Employer initially as a result of an actual or threatened election contest with respect to directors of any other actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies by or on behalf of any persons other than the Board shall be deemed to be an Incumbent Director;
ii. Any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Employer representing 15% or more of the combined voting power of the Employer's then outstanding securities eligible to vote for the election of the Board (the "Employer Voting Securities"); provided, however, that the event described in this paragraph ii shall not be deemed to be a Change in Control of the Employer by
virtue of any of the following acquisitions: (a) by the Employer or any Subsidiary, (b) by any employee benefit plan sponsored or maintained by the Employer or any Subsidiary, or by an employee stock benefit trust created by the Employer or any Subsidiary, by any underwriter temporarily holding securities pursuant to an offering of such securities; or (d) a transaction (other than one described in iii below) in which Employer Voting Securities are acquired from the Employer, if a majority of the Incumbent Directors approves a resolution providing expressly that the acquisition pursuant to this clause (d) does not constitute a Change in Control under this paragraph ii;
iii. The consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Employer, or any of its Subsidiaries that requires the approval of the Employer's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (a) more than 50% of the total voting power of the corporation resulting from the consummation of such Business Combination (the "Surviving Corporation"), or if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Employer Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable,represented by shares into which such Employer Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Employer Voting Securities among the holders thereof immediately prior to the Business Combination, (b) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation or any employee stock benefit trust created by the surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 15% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation); and at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval for the execution of the initial agreement providing for such Business Combination (any Business Combination must satisfy the criteria specified in (a), (b) and above so as to not constitute a "Change in Control of the Corporation"); or
iv. The occurrence of a complete liquidation or dissolution of the Employer or any of its Subsidiaries, or a sale of all or substantially all of the assets of the Employer, or any of its Subsidiaries.
Notwithstanding the foregoing, a Change in Control of the Employer shall not be deemed to occur solely because any persons acquire beneficial ownership of more than 15% of the Employer Voting Securities as a result
of the acquisition of Employer Voting Securities by the Employer, which reduces the number of Employer Voting Securities outstanding; provided, that if after such acquisition by the Employer, such person becomes the beneficial owner of additional Employer Voting Securities that increases the percentage of outstanding Employer Voting Securities beneficially owned by such person, a Change in Control of the Employer shall then occur."
In all other respects the Employment Agreement of September 11, 1995 shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have hereunto signed and delivered this Amended Agreement the day and year first above set forth.
In The Presence Of: LNB BANCORP, INC.
/s/Daniel P. Batista BY:/s/Thomas P. Ryan ___________________________ ___________________________
/s/Ann E. Koler BY:/s/Stanley G. Pijor ___________________________ ___________________________
THE LORAIN NATIONAL BANK
BY:/s/Thomas P. Ryan ____________________________ __________________________
/s/Daniel P. Batista BY:/s/James E. Long ____________________________ __________________________
/s/Ann E. Koler /s/James F. Kidd _____________________________ _________________________ James F. Kidd
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (10d)
Amended Employment Agreement by and between Thomas P. Ryan and LNB Bancorp, Inc. and The Lorain National Bank dated March 3, 1999.
AGREEMENT
THIS AGREEMENT is entered into as of the 3 day of March, 1999, by and between Thomas P. Ryan ("Ryan") and LNB BANCORP, INC., an Ohio corporation and the LORAIN NATIONAL BANK, a banking organization organized and existing under the laws of the United States of America (collectively "Employer"): WHEREAS, Ryan and Employer have entered into an Employment Agreement dated September 11, 1995; and WHEREAS, Ryan and Employer wish to modify and amend certain provisions of said Employment Agreement; and WHEREAS, the Board of Directors of Employer has authorized the Employer to enter into this Amended Employment Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained the Employment Agreement dated September 11, 1995 is hereby amended in the following respects:
1. Paragraph [12] of the Agreement is amended and restated to provide as follows:
"[12] Notwithstanding the provisions of Paragraph 9, this Agreement shall be terminated:
[a] If either party materially violates the terms and conditions of this Agreement, the other party shall have the right to terminate this Agreement upon thirty (30) days prior written notice to the breaching party;
[b] The Employer through its Board of Directors may terminate this Agreement without cause at any time upon ninety (90) days prior written notice to Ryan;
[c] Upon resignation of employment by Ryan occasioned by "Change in Control of the Employer" as hereinafter defined;
[d] Upon the death of Ryan provided he is not receiving termination payments pursuant to paragraph (g) hereof;
[e] In the event of the disability of Ryan resulting in his inability to perform his duties for a period of Six (6) months, he shall be considered permanently disabled and he shall, in that event, be entitled to the salary and benefits he is then receiving on the date of determination of total disability and continuing for a period of two (2) years thereafter reduced however, by any amounts received by Ryan pursuant to a policy of disability insurance in force at the time of such disability;
[f] If there is a change in the duties or responsibilities (including reporting responsibilities) of Ryan that is inconsistent in any material and adverse respect with Ryan's position, duties, responsibilities or status with the employer (including any material adverse diminution of such duties or responsibilities) or a material and adverse change in Ryan's titles or offices (including, if applicable, membership on the Board of Directors) with the Employer as in effect at the date Of execution of this Agreement of Amendment.
[g] Upon the termination of the Agreement pursuant to subparagraph [a] (but only if Ryan terminates the Agreement due
to the Employer's breach) or paragraph [b] or [c] hereof, all rights, duties and obligations of the parties hereto shall cease except that employer shall continue to pay Ryan, provided he has not yet reached his 63rd birthday, his total Lorain National Bank compensation as would be reflected on his W-2 Federal Income Tax Statement for the prior year for a period of two (2) years from the date of termination. During such two-year period and in addition to the payment of his compensation, Employer shall continue to provide Ryan, at Employer's cost, all fringe benefits as though he were still an employee. Fringe benefits include, but are not limited to, health and hospitalization insurance, life insurance and full pension accrual. Upon expiration of the two-year payment period Ryan shall be entitled to participate in Employer's health and hospitalization plan until he reaches age sixty five (65), provided he pays either directly or through Employer the premium attributable to his coverage under the Plan. If Ryan is over the age of sixty three (63) at the time of termination, salary and benefits as set forth above shall continue to be provided by Employer to Ryan until Ryan reached age sixty five (65). Ryan may elect, in his sole discretion, to be paid salary due under this provision in a lump sum upon termination.
[h] The termination payments payable to Ryan shall survive Ryan's death should he die during the period he is receiving termination payments as provided for in Section [g] above.
[I] During the Agreement Term Ryan may, in his discretion, without cause, terminate his employment with Employer by giving the Board of Directors of Employer at least ninety (90) days written notice of his decision to terminate his Agreement. Upon the effective date of such employment termination by Ryan, and upon such termination both parties shall be released from any and all liabilities hereunder.
[j] "Change in Control of the Employer" shall mean the occurrence of any one of the following events:
I. Individuals who, on August 1, 1995, constitute the Employer's Board of Directors (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Employer's Board of Directors, provided that any person becoming a director subsequent to August 1, 1995, whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Employer in which such person is named as a nominee for director, without written objection by such Incumbent Directors to such nomination) shall be deemed to be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Employer initially as a result of an actual or threatened election contest with respect to directors of any other actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies by or on behalf of any persons other than the Board shall be deemed to be an Incumbent Director;
ii. Any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Employer representing 15% or more of the combined voting power of the Employer's then outstanding securities eligible to vote for the election of the Board (the "Employer Voting Securities"); provided, however, that the event described in this paragraph ii shall not be deemed to be a Change in Control of the Employer by virtue of any of the following acquisitions: (a) by the Employer or any Subsidiary, (b) by any employee benefit plan sponsored or maintained by the Employer or any Subsidiary, or by an employee stock benefit trust created by the Employer or any Subsidiary, by any underwriter temporarily holding securities pursuant to an offering of such securities; or (d) a transaction (other than one described in iii below) in which Employer Voting Securities are acquired from the Employer, if a majority of the Incumbent Directors approves a resolution providing expressly that the acquisition pursuant to this clause (d) does not constitute a Change in Control under this paragraph ii;
iii. The consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Employer, or any of its Subsidiaries that requires the approval of the Employer's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (a) more than 50% of the total voting power of the corporation resulting from the consummation of such Business Combination (the "Surviving Corporation"), or if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Employer Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, represented by shares into which such Employer Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Employer Voting Securities among the holders thereof immediately prior to the Business Combination, (b) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation or any employee stock benefit trust created by the surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 15% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval for the execution of the initial agreement providing for such Business Combination (any Business Combination must satisfy the criteria specified in (a), (b) and above so as to not constitute a "Change in Control of the Corporation"); or
iv. The occurrence of a complete liquidation or dissolution of the Employer or any of its Subsidiaries, or a sale of all or substantially all of the assets of the Employer, or any of its Subsidiaries. Notwithstanding the foregoing, a Change in Control of the Employer shall not be deemed to occur solely because any persons acquire beneficial ownership of more than 15% of the Employer Voting Securities as a result of the acquisition of Employer Voting Securities by the Employer, which reduces the number of Employer Voting Securities outstanding; provided, that if after such acquisition by the Employer, such person becomes the beneficial owner of additional Employer Voting Securities that increases the percentage of outstanding Employer Voting Securities beneficially owned by such person, a Change in Control of the Employer shall then occur." In all other respects the Employment Agreement of September 11, 1995 shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have hereunto signed and delivered this Amended Agreement the day and year first above set forth.
In The Presence Of: LNB BANCORP, INC.
/s/Daniel P. Batista BY:/s/James F. Kidd ___________________________ ___________________________
/s/Ann E. Koler BY:/s/Stanley G. Pijor ___________________________ ___________________________
THE LORAIN NATIONAL BANK
BY:/s/James F. Kidd ____________________________ __________________________
/s/Daniel P. Batista BY:/s/James E. Long ____________________________ __________________________
/s/Ann E. Koler /s/Thomas P. Ryan _____________________________ _________________________ Thomas P. Ryan
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (11)
Statements re: Computation of Per Share Earnings.
The statements regarding the Computation of Per Share Earnings is incorporated herein by reference to Footnote 2 "Earnings Per Share" on page 20 of the LNB Bancorp, Inc. 1998 Annual Report
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (13)
LNB Bancorp, Inc. 1998 Annual Report to Shareholders.
COVER DESCRIPTION
1998 Annual Report
LNB BANCORP, INC.
Left side of cover is beige, middle is white with green at the bottom and the right side is blue.
Inside front cover
Corporate and Shareholder Information
CORPORATE HEADQUARTERS
If you need to contact the Corporate headquarters of LNB Bancorp, Inc., call or write to:
LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052-1739 (440) 244-6000
ANNUAL MEETING
The 1999 Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 10:00 a.m. on Tuesday, April 20, 1999 at The Lorain National Bank, 521 Broadway, Lorain, Ohio.
ANNUAL AND QUARTERLY REPORTS AND FORM 10-K
Copies of the LNB Bancorp, Inc.'s Annual or Quarterly Reports or the Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be furnished to shareholders upon written request to:
Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052-1739
INDEPENDENT AUDITORS
KPMG LLP 1500 National City Center 1900 East Ninth Street Cleveland, Ohio 44114-3495
PRODUCTS AND SERVICES
For specific information on Lorain National Bank's products and services such as credit card, ATM and debit card, personal, student, mortgage, home equity, commercial, construction, and Small Business Administration loans, checking, savings and time deposits, 24 hour telephone banking, insurance, trust and investment management services, discount brokerage services, or data processing, please contact the Lorain National Bank Office located nearest you. For a listing of Bank Offices, see page 45 of the 1998 Annual Report.
INTERNET
Information on LNB Bancorp, Inc.'s financial results and Lorain National Bank's products and services can be accessed
on the Internet at www.4LNB.com.
COMMON STOCK INFORMATION
The common stock of LNB Bancorp, Inc. is traded on the over-the-counter market under the symbol LNBB. The stock is listed as "LNB Bancorp" in the newspapers. LNB Bancorp, Inc.'s CUSIP is 502100 10 0.
DIVIDEND CALENDAR
Cash dividends on common stock, if approved by the Board of Directors, are customarily paid to shareholders as follows:
Record Dates: March 15, June 14, September 13, and December 13, 1999
Dividend Payable Dates: April 1, July 1, October 1, 1999 and January 3, 2000
STOCK TRANSFER AGENT AND REGISTRAR
Shareholders requesting information about their stock holdings should call or write to:
Registrar and Transfer Company Investor Relations Department 10 Commerce Drive Cranford, New Jersey 07016-9982 (800) 368-5948
DIVIDEND REINVESTMENT AND CASH STOCK PURCHASE PLAN
LNB Bancorp, Inc. shareholders who wish to apply quarterly cash dividends or optional cash payments toward the purchase of additional LNB Bancorp, Inc. common stock may take advantage of a dividend reinvestment plan available through The Registrar and Transfer Company. Inquiries or requests for a description of the dividend reinvestment plan should be made to:
Registrar and Transfer Company Dividend Reinvestment Plans 10 Commerce Drive Cranford, New Jersey 07016-3572 (800) 368-5948
MARKET MAKERS IN LNB BANCORP, INC. STOCK
Akin Investment Services Group, Elyria, Ohio Everen Securities, Inc., Lorain, Ohio McDonald Investments Inc., Elyria, Sandusky and Cleveland, Ohio Mid-Ohio Securities Corp., Elyria, Ohio National Securities Corp., Lorain, Ohio Fifth Third/The Ohio Company, Lorain and Cleveland, Ohio
Half Page Insert
Our Mission
The mission of Lorain National Bank is to be a profitable, responsible, independent business that provides extraordi- nary service to our customers and community, while maxi- mizing shareholder value and creating a high-quality and challenging work environment for our employees.
Our Vision
Lorain National Bank's vision is to become recognized as the most progressive and dynamic, independent provider of financial services in our market.
Half Page insert
Corporate and Shareholder Information . . . . . . . . . . . . . .(Inside front cover)
Financial Highlights . . . . . . . . . . . . . . . . . . . 1
Common Stock Trading Ranges and Cash Dividends Declared . . . . . . . . . . . . . . . . 1
Corporate Profile . . . . . . . . . . . . . . . . . . . . 1
Message to Shareholders . . . . . . . . . . . . . . . . . 2
Customer Testimonials. . . . . . . . . . . . . . . . . . . 6
Consolidated Balance Sheets . . . . . . . . . . . . . . .14
Consolidated Statements of Income . . . . . . . . . . . .15
Consolidated Statements of Cash Flows . . . . . . . . . .16
Consolidated Statements of Shareholders' Equity . . . . .17
Notes to Consolidated Financial Statements . . . . . . . .18
Report of Management . . . . . . . . . . . . . . . . . . .33
Independent Auditors' Report . . . . . . . . . . . . . . .33
Five Year Consolidated Financial Summary . . . . . . . . .34
Management's Discussion and Analysis . . . . . . . . . . .35
Selected Quarterly Financial Data . . . . . . . . . . . .44
Banking Offices & ATMs . . . . . . . . . . . . . . . . . .45
Directors and Officers of LNB Bancorp, Inc.. . . . . . . .46
Officers of Lorain National Bank . . . . . . . . . . . . .47
Earnings and Dividend Performance . . .. . . . . . . . . .48
Financial Highlights
DECEMBER 31, 1998 1997 1988 - ---------------------------------------------------------------------- BANK OFFICES 21 20 16 BANK OFFICERS AND STAFF 316 298 283 SHAREHOLDERS 2,072 2,066 1,437 TOTAL ASSETS $541,746,000 $490,728,000 $301,179,000 TOTAL DEPOSITS $443,848,000 $410,655,000 $262,394,000 NET LOANS $366,383,000 $326,863,000 $189,322,000 ---------------------------------------------- TOTAL CAPITAL $ 48,676,000 $ 44,985,000 $ 23,207,000 ---------------------------------------------- NET INCOME $ 6,818,000 $ 6,482,000 $ 2,881,000 ---------------------------------------------- CASH DIVIDENDS DECLARED $ 3,545,000 $ 2,934,000 $ 1,009,000 ---------------------------------------------- SHARES OUTSTANDING 4,122,575 4,124,379 3,882,686 ---------------------------------------------- Shares outstanding have been adjusted for five-for-four stock splits in 1995 and 1993, a two-for-one stock split in 1989 and stock dividends.
Common Stock Trading Ranges and Cash Dividends Declared
1998 1997 -------------------------------------------------------- Bid Price Bid Price -------------------------------------------------------- Dividend Dividend High Low Amount High Low Amount ------- ------ --------- ------- ------ -------- First Quarter $28.25 $27.25 $.20 $29.75 $29.00 $.16 Second Quarter 27.50 27.00 .20 29.75 29.00 .16 Third Quarter 28.00 27.50 .21 29.75 28.75 .17 Fourth Quarter 28.00 27.75 .25 28.75 27.50 .22
The shares of common stock, par value $1.00 per share, of LNB Bancorp, Inc. are traded on the over-the-counter market primarily through registered brokers in the Corporation's service area. The above bid prices represent quotations between dealers without adjustments for retail markups, markdowns or commissions and may not represent actual transactions. Dividend amounts have been adjusted for the 2% stock dividend on April 15, 1997.
Corporate Profile
LNB Bancorp, Inc. is a $542 million locally owned one bank holding company headquartered in Lorain, Ohio. The predecessor of LNB Bancorp, Inc., The Lorain National Bank, was formed as a result of the merger of The Lorain Banking Company and The National Bank of Lorain on January 1, 1961. The Lorain Banking Company was a state chartered bank founded in 1905. The National Bank of Lorain was a national bank receiving its national charter in 1934. On March 30, 1984, The Lorain National Bank became the wholly owned subsidiary of LNB Bancorp, Inc. Lorain National Bank is a member of the Federal Reserve Bank of Cleveland, a voluntary member of the Federal Home Loan Bank of Cincinnati, with its deposits insured by the Federal Deposit Insurance Corporation.
The Lorain National Bank specializes in personal, mortgage, and small
business banking services along with trust and investment management services with operations conducted through its main office, branch offices, and ATM network throughout Lorain, eastern Erie, and western Cuyahoga Counties. The Lorain National Bank operates 21 retail branches and 27 ATM's in the nine communities of Lorain, Elyria, Amherst, Avon Lake, LaGrange, Oberlin, Olmsted Township, Vermilion, and Westlake. Lorain National Bank offers products and services by telephone through its 24 hour Telebanker and Telepay systems and provides products and service information on the internet at www.4LNB.com. The Lorain National Bank is an Equal Employment Opportunity, Affirmative Action Employer and an Equal Housing Lender.
Logos for Federal Deposit Insurance Corporation, Federal Home Loan Bank System and Equal Housing Lender
END PUBLISHED PAGE 1
Top left column color photograph of James F. Kidd, President and Chief Executive Officer
Message to Shareholders It's a pleasure to address you after the close of another eventful year. In addition to recording our 17th consecutive year of increased earnings and record high cash dividends paid to our shareholders, we branched into new markets and welcomed our role as the only locally owned, independent bank in Lorain County. Among other highlights, LNB Bancorp, Inc. and its subsidiary, Lorain National Bank, broke the half-billion dollar asset mark in 1998 and laid the groundwork for a very promising 1999, including plans to relocate a branch office to Ely Square, Elyria during the second quarter.
From Vision to Reality Not long ago, we stated our Corporate Vision in this publication for the first time. Once published, it became clear to management and staff that we would not stand pat as the marketplace changed around us. Today, we are realizing our vision to become recognized as the most progressive, dynamic, independent provider of financial services in our market. In fact, it is likely that before this time next year, we will modify our vision statement to this effect: "It is our vision to remain unchallenged as the most progressive, dynamic, independent provider of financial services in our market." We're looking forward to realizing that vision in 1999.
The Bank of Choice As the number of competitors in our market shrinks, bank customers are left with fewer choices. In recent years, dozens of bank branches throughout the area have been closed or consolidated, creating crowded lobbies at some banks and leaving customers of others without branches nearby. In 1998, we attributed a substantial increase in the number of households Lorain National serves to this change in market dynamics. So what choices do consumers have? Studies show convenience and location still drive consumer banking preference, followed closely by service and price. On our new playing field, you will find neighborhood savings associations, credit unions, super-regional banks, and Lorain National. We applaud the efforts of those financial service organizations which continue to do an admirable job serving their customers. They, like us, are benefiting from merger mania. And while it's true that super-regionals are growing; the majority of their growth has come by way of acquisition, not repeat sales driven by customer satisfaction. The reasons for our success are clear. We've done an excellent job with the resources at our disposal. We have positioned ourselves as the local alternative - an advocate for personal service in a banking environment dominated by the volume-driven. The super-regionals are either absent from or have curtailed local involvement, pinning their hopes for success on name recognition, price differential and aggressive selling. While we employ some of those strategies here, being familiar faces in friendly places is what makes Lorain National unique. It's not a slogan we attach to our name like a monthly special. It's who we are. We are to many what a few big banks once were!
What Our Customers Think In the eight pages that follow this message, we have devoted space to a number of our customers who feel strongly about their relationships with Lorain National and have graciously agreed to express their support in words
END PUBLISHED PAGE 2
Top left column color photograph of Stanley G. Pijor, Chairman of the Board
and pictures from their places of business. They are a small sampling of thousands of customers Lorain National serves, yet their thoughts represent the sentiments of many. We are indebted to great customers like them and appreciate their support of our efforts.
Y2K Readiness
Significant time and effort have been invested in making the coming of the new millennium a non-event for Lorain National, its customers and shareholders. As of December 1998, all of the bank's mission-critical systems were tested and validated for adherence to Year 2000 (Y2K) compliance. At this time, the bank is on or ahead of schedule in its internal and external Y2K planning. Banks in particular are among the leaders of national preparedness initiatives and we are among the most active. In fact, members of our preparedness team have been asked by regulators and consultants to help other banks facilitate Y2K preparation. Lorain National's Y2K task force has performed admirably in its preparations and has implemented a communications plan to keep customers, shareholders, employees and the news media apprised of readiness issues.
1998 Financial Performance
In 1998 we posted our 17th consecutive year of record earnings, as net income increased by 5.2% over 1997, reaching $6,818,000. Basic earnings per share for 1998 increased 5.8% to $1.65 compared to $1.56 for 1997. Earnings for 1998 were higher than a year ago because of higher net interest income and non-interest income, offset in part by higher operating expenses and provision for loan losses. The graphs on page 48 depict our consolidated earnings and dividends over the past 10 years. Cash dividends declared per share for 1998 increased over 21% compared to 1997. Dividends declared per share in 1998 increased $.15 per share to $.86 per share, up from $.71 per share in 1997. Total cash dividends declared in 1998, including the $.04 EXTRA dividend declared by the Board of Directors in November, rose to $3,545,000. Total dividends declared eclipsed the $3 million mark for the first time in the history of LNB Bancorp, Inc. In each of the last 11 years, an increase in
TOTAL ASSETS millions of dollars (A Total Assets graph follows in printed version with assets on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
TOTAL LOANS millions of dollars (A Total Loans graph follows in printed version with loans on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
TOTAL DEPOSITS millions of dollars (A Total Deposits graph follows in printed version with deposits on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
Total Assets Total Loans Total Deposits Year Millions of Dollars Millions of Dollars Millions of Dollars 1998 $541.7 $369.9 $443.8 1997 $490.7 $331.0 $410.7 1996 $438.2 $302.1 $366.4 1995 $421.6 $276.5 $353.5 1994 $394.9 $261.8 $335.2
END PUBLISHED PAGE 3
the regular cash dividend has been approved by the Board of Directors. The cash dividends declared in 1998 represent a 251% increase over 1988, when $1,009,000 in cash dividends were declared. Other financial highlights as of December 31, 1998 include increases in total: assets, loans, deposits and Federal Home Loan Bank advances. Total assets rose 10.4% to $541.7 million as of December 31, 1998, up $51.0 million from year end 1997. Total loans grew by $38.9 million from one year ago to $369.9 million. Total deposits increased 8% to $443.8 million, up $33.2 million from year end 1997. Federal Home Loan Bank advances increased $20 million to $22.0 million at December 31, 1998. Total shareholders' equity increased $3.7 million to $48.7 million at December 31, 1998, an increase of 8.2% over the 1997 year-end equity position. The 1998 year end ratio of total shareholders' equity to total assets continues to remain strong at 9.0%. Year end risk based Tier 1 and total capital ratios were 12.31% and 13.30%, respectively. LNB Bancorp, Inc. and its subsidiary, Lorain National Bank, significantly exceed all applicable regulatory capital requirements.
In Memoriam It is with great sadness that we acknowledge the passing in 1998 of Don A. Sanborn, a member of the Lorain National Bank and LNB Bancorp, Inc. Boards of Directors for a combined 25 years. We are grateful to Mr. Sanborn for his many years of faithful service as a director of our organization. He will be missed.
1998 Highlights We began the year with the positioning message "Changing Banks Should Be Your Choice," which relates directly to our earlier discussion of mergers and acquisitions. Our message could be seen and heard on most advertising media we use, including outdoor billboards, newspaper ads and radio. It was our intent to provoke the thoughts of the general public by asking them to question why they bank where they do. Judging by the impressive response we received, our mission was accomplished - it was one of the most provocative positioning campaigns we've ever run. While solidifying our position in our core market, we expanded our scope of service at mid-year by branching into the community of LaGrange. Our new full-service branch office in the Sentinel Square shopping center on State Route 301 was well-received by residents of LaGrange, Grafton, Wellington and surrounding communities. Our new office is staffed by a lending officer, an assistant manager and five tellers. Deposit acquisition efforts have been highly successful. The LaGrange branch has quickly established a deposit base that rivals other branches in the system. We also installed a new drive-up automated teller machine adjacent to Dad's Sunoco and convenience store on State Route 58 in Amherst. The new ATM is situated on a busy stretch of highway north of the planned Ohio Turnpike exit. After construction of the
NET INCOME millions of dollars (A Net Income graph follows in printed version with income on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
TOTAL DIVIDENDS millions of dollars (A Total Dividends graph follows in printed version with dividends on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
DIVIDENDS PER SHARE cents* (A Dividends Per Share graph follows in printed version with dividends on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
Net Income Total Dividends Dividend Per Share Year Millions of Dollars Millions of Dollars Cents*
1998 $6,818 $3,545 $0.86 1997 $6,482 $2,934 $0.71 1996 $5,852 $2,591 $0.62 1995 $5,003 $2,175 $0.52 1994 $4,432 $1,905 $0.46
*Adjusted for stock dividends and splits END PUBLISHED PAGE 4
new turnpike interchange, due to begin this fall, we expect volume at the new ATM to grow even larger. During the third quarter of 1998, Lorain National introduced the CARE Quote Line, a third-party property and casualty insurance program which allows bank customers to seek competitive quotes, without obligation, on premiums and coverages from up to 20 highly-rated national insurance providers by telephone. Though still in its infancy, the new insurance program shows it can help us solidify customer relationships and expand our role as a financial services provider. Loan demand remained strong in 1998. Thanks to a healthy local economy, more than $68.9 million in new commercial loans were booked, $40.9 million in new mortgages and another $61.0 million in consumer loans were approved. Our home equity loan sales and increased indirect loan business from area automobile dealers contributed greatly to our overall growth in 1998. Mortgage lending benefited from favorable interest rates and consumer confidence in the economy. Sales of new homes locally echoed a trend of high growth nationally. According to the U.S. Department of Commerce, new home sales reached record levels during the last quarter of 1998. The National Association of Realtors reported that recent new home sales are at a 20-year high. The Trust and Investment Management Division continued to grow with $320.1 million in assets under management, which represents an increase of 29% in 1998, over the year-end 1997 position. Direct revenues for the division in 1998 increased 46%. By increasing the use of technology and continuously raising standards, we continue to excel in personalized service and portfolio performance for our clients. At year-end, Lorain National Bank negotiated a long-term lease which allows the relocation of our Second Street Office to the former main office of PremierBank & Trust on Ely Square. The office, on Middle Avenue, was vacated in September by PremierBank following its acquisition by Akron-based First Merit Corporation. Lorain National will reconfigure the Ely Square office floor space to accommodate the delivery of Commercial Lending, Trust & Investment Management and retail banking services.
Excitement in 1999 Last year closed on a very positive note, as Lorain National completed another year of solid earnings growth and prospects for higher earnings in 1999 appear very good. Everyone in the organization is looking forward to opening new doors in the marketplace in the coming year. While the relocation of our Second Street Office to Ely Square is one of only a thousand feet or so, physically, the move speaks volumes for Lorain National Bank's expanded commitment to Elyria and surrounding communities. While we have maintained a presence in downtown Elyria for 23 years, we have not been in the Ely Square traffic pattern. By mid-year, we will be open for business six days a week in the heart of Elyria to deliver our brand of superior services to new and existing customers at that time. We will continue to aggressively seek new branching and alternative delivery opportunities as they arise. A recent study of U.S. banks showed that even though there is a large movement of customers to various forms of electronic banking, there is still a strong demand for bankers in branch offices. Lorain National's style of person to person banking supports that trend and we will continue to upgrade and seek improvements in our branch delivery system. The local economy continues to improve. As witnessed by our successful lending year, local demand for automobiles and new homes remains strong and shows no signs of diminishing in 1999. Another solid commercial
lending year is expected, which directly corresponds to the creation of new jobs locally. Employment levels remain relatively high and should remain constant in the coming year. In closing, we thank you for your support of our activities and look forward to an exciting 1999.
/s/James F. Kidd /s/Stanley G. Pijor
James F. Kidd Stanley G. Pijor President and Chairman of the Board Chief Executive Officer
END PUBLISHED PAGE 5
Left side of page color photograph of Sam Gilbert, President & CEO, Gilcrest Electric & Supply Co.
"When other banks failed to understand my needs, Lorain National recognized my hard work and saw the potential of my business. As a result, we have a great banking relationship."
Like a lot of start-up business owners, Sam Gilbert needed funds to launch his electrical contracting and supply business. Lorain National recognized Sam as a man of his word and a diligent worker, dedicated to his trade and the success of his company.
His Elyria business is one of the most successful electrical contracting and supply companies on northern Ohio.
One of Gilcrest's largest clients is NASA's John Glenn Research Center at Lewis Field (formerly Lewis Research) where electrical power fuels the dreams of tomorrow's space ventures.
END PUBLISHED PAGE 6
Right side of page color photograph of James A. Kastro, Executive Director, Second Harvest Food Bank
Being sensitive to the needs of the communities Lorain National serves is a fundamental quality of our organization.
Throughout the area, you will find our officers and staff serving as volunteers, mentors and directors of non-profit organizations like Second Harvest Food Bank of North Central Ohio.
Working with Jim and his staff to help Second Harvest is rewarding to us, both on a corporate and personal level.
It's a great example of how Lorain National gives something back to those who've supported us over the years.
"Feeding the hungry can be an overwhelming task. Fortunately, volunteers like those at Lorain National have been very helpful. Whether providing leadership, advice, or sorting food in our warehouse, LNB is always willing to support us."
END PUBLISHED PAGE 7
Left side of page color photograph of Terence R. Wright, President, Lorain Tool Enterprises, Inc.
"I began banking at Lorain National because they truly give detailed, personal attention to their customers. They have proven my business is important to them and they've treated me like a friend ever since."
Most people never see the specialized work of Terry Wright and his machinists at Lorain Tool Enterprises.
Starting from technical drawings, they craft metal and plastic into intricate geometric shapes on state-of-the-art computerized machinery to meet the exacting standards of their customers.
To ensure the quality of their products, Lorain Tool invests in high quality equipment and employs reliable, highly skilled people.
Likewise, we think Terry recognizes the value we've built into his bank.
END PUBLISHED PAGE 8
Right side of page color photograph of Joan Reidy, Co-Owner Avon Oaks Skilled Nursing.
Taking a family approach to skilled nursing is apparent throughout the halls of Avon Oaks Skilled Nursing facility.
Pre-schoolers from the daycare mingle with adult residents, bringing joy to the elderly as they share in the wonder of each other's daily accomplishments.
We applaud Joan and her family for providing a warm and caring facility for the old and young of our community.
"We've been friends with the people of Lorain National for years and it's clear to me that we each believe in the same thing - personal attention to those we serve."
END PUBLISHED PAGE 9
Top of page color photograph of Ron and Tamara Bennett, Owners, Head Quarters, Inc. Salon and Spa
"It is important to our establishment and associates that we work with a bank that aids us in our growth and future goals."
Recently named one of the fastest growing salon and spas in the nation, Head Quarters provides its guests with a relaxing oasis.
From the latest fashion trends to the feel-good image found at their spa, guests always receive quality service.
END PUBLISHED PAGE 10
Business is humming at Penton Honda/Suzuki. In fact, when Dale needed to add more room to accommodate a growing inventory and showroom, Lorain National was there to give his expansion a kick start.
Being responsive to dealerships in need of customer loans or financing needs of their own makes Lorain National a natural local choice.
"Responsiveness is an attribute of the products I sell. It also applies to my banker who provides me quick answers and prompt service on financing."
Bottom of page color photograph of Dale Barris, Owner, Penton Honda/Suzuki
END PUBLISHED PAGE 11
Left side of page color photograph of Johanna Mann, Owner, Mama Jo Homestyle Pies.
"A good recipe, quality ingredients and the right chemistry - sounds like the makings for a great bank."
There aren't many folks in our area who haven't tasted the delights coming from the ovens of Johanna Mann - then again, there are some people who don't eat pie.
Johanna's pies are part of a growing business and are synonymous with all major holiday meals and special occasions throughout the area.
Lorain National is proud to be associated with her recently expanded baking facility and storefront in Amherst.
Though our waistlines are suffering as a result, Mama Jo's is a customer we all love to visit.
END PUBLISHED PAGE 12
Right side of page color photograph of Albert V. Januzzi, Owner, Al Januzzi Footwear
While many shoe stores come and go, one name is recognized by quality shoe buyers throughout Lorain County - Al Januzzi.
Before plastic, vinyl, foam rubber and soles that light up, Al Januzzi was here with quality leather shoes that stand the test of time.
While it's true that styles have changed and Al's business has changed to meet demand, his company's insistence on quality and proper fit remains the same.
"Lorain National and I go back decades, when they were known as The Lorain Banking Company. We're both still in business today because we've changed with the times and stayed current with our customer's needs."
END PUBLISHED PAGE 13
Consolidated Balance Sheets
December 31, 1998 1997 ------------------------------------------------------------------------- ASSETS: Cash and due from banks (note 3) $ 26,177,000 $ 24,273,000 Federal funds sold and other interest- bearing instruments 6,624,000 134,000 Securities (note 5): Available for sale, at fair value 78,128,000 17,349,000 Held to maturity, at cost (fair value $40,253,000 and $96,861,000 respectively) 38,202,000 96,038,000 Federal Home Loan Bank and Federal Reserve Bank stock, at cost 2,189,000 1,987,000 ---------------------------- Total securities 118,519,000 115,374,000 ---------------------------- Loans (notes 6 and 7): Portfolio loans 359,475,000 319,666,000 Loans available for sale 10,391,000 11,365,000 ---------------------------- Total loans 369,866,000 331,031,000 Reserve for possible loan losses (3,483,000) (4,168,000) ---------------------------- Net loans 366,383,000 326,863,000 ---------------------------- Bank premises and equipment, net (note 8) 10,989,000 11,846,000 Intangible assets (note 4) 4,666,000 5,114,000 Accrued interest receivable 3,685,000 3,155,000 Other assets 4,703,000 3,969,000 ---------------------------- TOTAL ASSETS $541,746,000 $490,728,000 ---------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits (note 9): Demand and other noninterest-bearing deposits $ 85,558,000 $ 68,565,000 Savings and passbook accounts 182,011,000 172,936,000 Time deposits 176,279,000 169,154,000 ---------------------------- Total deposits 443,848,000 410,655,000 ---------------------------- Securities sold under repurchase agreements and other short-term borrowings (note 10) 22,960,000 28,950,000 Federal Home Loan Bank advances (note 11) 22,045,000 2,045,000 Accrued interest payable 1,487,000 1,379,000 Accrued taxes, expenses and other liabilities (Notes 13 and 19) 2,730,000 2,714,000 ---------------------------- Total liabilities 493,070,000 445,743,000 ----------------------------
Shareholders' equity: (note 14) Common stock, $1.00 par: Shares authorized 5,000,000 Shares issued 4,222,575 and 4,222,375, respectively and Shares outstanding 4,122,575 and 4,124,379, respectively (notes 16, 17 and 18) 4,223,000 4,222,000 Additional capital 22,602,000 22,599,000 Retained earnings (note 15) 24,210,000 20,937,000 Accumulated other comprehensive income 541,000 70,000 Treasury stock at cost, 100,000 and 97,996 shares, respectively (2,900,000) (2,843,000) ---------------------------- Total shareholders' equity 48,676,000 44,985,000 ---------------------------- Commitments and contingencies (notes 8 and 12) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $541,746,000 $490,728,000 ---------------------------- See accompanying notes to consolidated financial statements
END PUBLISHED PAGE 14
Consolidated Statements of Income
Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans: Taxable $ 30,664,000 $ 28,223,000 $ 25,851,000 Tax exempt 42,000 49,000 59,000 Interest and dividends on securities: U.S. Treasury securities 3,684,000 5,157,000 5,107,000 U.S. Government agencies and corporations 3,194,000 1,299,000 949,000 States and political subdivisions 204,000 150,000 228,000 Other debt and equity securities 152,000 134,000 93,000 Interest on Federal funds sold and other interest- bearing instruments 238,000 144,000 183,000 -------------------------------------------- TOTAL INTEREST INCOME 38,178,000 35,156,000 32,470,000
INTEREST EXPENSE: Interest on deposits: Time certificates of $100,000 and over 2,327,000 2,285,000 1,875,000 Other deposits 10,196,000 9,398,000 8,630,000 Interest on securities sold under repurchase agreements and other short-term borrowings 1,107,000 1,229,000 973,000 Interest on Federal Home Loan Bank advances 369,000 78,000 -0- -------------------------------------------- TOTAL INTEREST EXPENSE 13,999,000 12,990,000 11,478,000 -------------------------------------------- NET INTEREST INCOME 24,179,000 22,166,000 20,992,000 Provision for possible loan losses (note 7) 2,725,000 750,000 600,000 -------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 21,454,000 21,416,000 20,392,000 -------------------------------------------- OTHER INCOME: Trust and Investment Management Division income 1,887,000 1,293,000 1,095,000 Service charges on deposit accounts 2,533,000 2,143,000 1,903,000 Other service charges, exchanges and fees 2,515,000 2,316,000 1,870,000 Gains (losses) on sales of securities (note 5) 256,000 -0- (1,000) Other operating income 62,000 51,000 58,000 -------------------------------------------- TOTAL OTHER INCOME 7,253,000 5,803,000 4,925,000
OTHER EXPENSES: Salaries and employee benefits (notes 16, 17, 18 and 19) 9,153,000 8,652,000 8,134,000 Net occupancy expense of premises (note 8) 1,359,000 1,274,000 1,224,000 Furniture and equipment expenses (note 8) 2,020,000 2,290,000 2,045,000 Supplies and postage 1,037,000 967,000 971,000 Other operating expenses 5,292,000 4,204,000 4,191,000 -------------------------------------------- TOTAL OTHER EXPENSES 18,861,000 17,387,000 16,565,000 -------------------------------------------- INCOME FROM OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 9,846,000 9,832,000 8,752,000 -------------------------------------------- INCOME TAXES (note 13) 3,291,000 3,350,000 2,900,000 -------------------------------------------- INCOME FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 6,555,000 6,482,000 5,852,000 -------------------------------------------- CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF RELATED INCOME TAXES OF $136,000 (note 5) 263,000 -0- -0- -------------------------------------------- NET INCOME $ 6,818,000 $ 6,482,000 $ 5,852,000 -------------------------------------------- BASIC EARNINGS PER SHARE (note 2) $ 1.65 $ 1.56 $ 1.39 -------------------------------------------- DILUTIVE EARNINGS PER SHARE (note 2) $ 1.65 $ 1.55 $ 1.39 -------------------------------------------- DIVIDENDS DECLARED PER SHARE $ .86 $ .71 $ .62 --------------------------------------------
See accompanying notes to consolidated financial statements.
END PUBLISHED PAGE 15
Consolidated Statements of Cash Flows
Years ended December 31, 1998 1997 1996 ------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 38,031,000 $ 34,741,000 $ 32,561,000 Other income received 6,228,000 5,762,000 4,970,000 Interest paid (13,891,000) (12,874,000) (11,465,000) Cash paid for salaries and employee benefits (8,556,000) (8,580,000) (8,015,000) Net occupancy expense of premises paid (1,011,000) (950,000) (935,000) Furniture and equipment expenses paid (680,000) (818,000) (787,000) Cash paid for supplies and postage (1,037,000) (967,000) (971,000) Cash paid for other operating expenses (4,185,000) (5,135,000) (3,829,000) Federal income taxes paid (3,869,000) (3,176,000) (2,974,000) Proceeds from sales of trading securities 7,386,000 -0- -0- -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 18,416,000 8,003,000 8,555,000
CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities held to maturity 23,447,000 21,906,000 30,006,000 Proceeds from maturities of securities available for sale 29,891,000 5,475,000 7,764,000 Proceeds from sales of securities available for sale 17,782,000 -0- 1,999,000 Purchases of securities held to maturity (30,611,000) (29,319,000) (29,405,000) Purchases of securities available for sale (49,960,000) (8,511,000) (10,743,000) Net (increase) decrease in credit card loans 83,000 43,000 (132,000) Net (increase) in long-term loans (43,572,000) (30,077,000) (26,214,000) Purchases of bank premises, equipment and intangible assets (815,000) (7,280,000) (1,407,000) Proceeds from sales of bank premises and equipment 4,000 20,000 55,000 -------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (53,751,000) (47,743,000) (28,077,000)
CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and other noninterest-bearing deposits 16,993,000 4,763,000 3,639,000 Net increase in savings and passbook deposits 9,075,000 13,347,000 142,000 Net increase in time deposits 7,125,000 26,165,000 9,144,000 Net increase (decrease) in securities sold under repurchase agreements and other short-term borrowings (3,790,000) 3,364,000 (762,000) Proceeds from Federal Home Loan Bank advances 20,000,000 950,000 1,095,000 Proceeds from line of credit -0- 2,400,000 -0- Cash paid on line of credit (2,200,000) (200,000) -0- Purchase of treasury stock (57,000) (2,843,000) -0- Proceeds from exercise of stock options 4,000 21,000 179,000 Dividends paid (3,421,000) (2,813,000) (2,452,000) -------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 43,729,000 45,154,000 10,985,000 -------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,394,000 5,414,000 (8,537,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,407,000 18,993,000 27,530,000 -------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,801,000 $ 24,407,000 $ 18,993,000 -------------------------------------------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $ 6,818,000 $ 6,482,000 $ 5,852,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,688,000 1,660,000 1,547,000 Amortization of intangible assets 448,000 136,000 -0- Amortization of deferred loan fees and costs, net 1,244,000 378,000 280,000 Provision for possible loan losses 2,725,000 750,000 600,000 (Increase) decrease in accrued interest receivable (530,000) (434,000) 43,000 Fair value of trading securities transferred from held to maturity 7,386,000 -0- -0- Others, net (1,363,000) (969,000) 233,000 -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $18,416,000 $8,003,000 $8,555,000 -------------------------------------------- See accompanying notes to consolidated financial statements.
END PUBLISHED PAGE 16
Consolidated Statements of Shareholders' Equity
Accumulated Years Ended Other December 31, 1998 Common Additional Retained Comprehensive 1997 and 1996 Stock Capital Earnings Income - ------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $4,039,000 $17,854,000 $18,856,000 $ 42,000 ----------------------------------------------------------- Comprehensive income: Net income for 1996 -0- -0- 5,852,000 -0- Change in unrealized gain (loss) on securities available for sale, net of tax -0- -0- -0- (33,000)
Total comprehensive income Cash dividends declared, $.63 per share -0- -0- (2,591,000) -0- Issuance of 18,307 shares of common stock under stock option plans 18,000 161,000 -0- -0- Market value of stock issued in payment of 2% stock dividend, 80,879 shares 81,000 2,163,000 (2,244,000) -0- ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $4,138,000 $20,178,000 $19,873,000 $ 9,000 ----------------------------------------------------------- Years Ended Total December 31, 1998 Treasury Shareholders' 1997 and 1996 Stock Equity - ------------------------------------------------- BALANCE AT DECEMBER 31, 1995 -0- $40,791,000 ---------------------------------- Comprehensive income: Net income for 1996 -0- 5,852,000 Change in unrealized gain (loss) on securities available for sale, net of tax -0- (33,000) ---------- Total comprehensive income 5,819,000 Cash dividends declared, $.63 per share -0- (2,591,000) Issuance of 18,307 shares of common stock under stock option plans -0- 179,000 Market value of stock issued in payment of 2% stock dividend, 80,879 shares -0- -0- --------------------------------
BALANCE AT DECEMBER 31, 1996 -0- $44,198,000 ---------------------------------- Accumulated Years Ended Other December 31, 1998 Common Additional Retained Comprehensive 1997 and 1996 Stock Capital Earnings Income - ------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $4,138,000 $20,178,000 $19,873,000 $ 9,000 ----------------------------------------------------------- Comprehensive income: Net income for 1997 -0- -0- 6,482,000 -0- Change in unrealized gain on securities available for sale, net of tax -0- -0- -0- 61,000
Total comprehensive income Cash dividends declared, $.71 per share -0- -0- (2,934,000) -0- Issuance of 1,052 shares of common stock under stock option plans 1,000 20,000 -0- -0- Market value of stock issued in payment of 2% stock dividend, 82,790 shares 83,000 2,401,000 (2,484,000) -0- Purchase of 97,996 shares treasury stock -0- -0- -0- -0- ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $4,222,000 $22,599,000 $20,937,000 $ 70,000 ----------------------------------------------------------- Years Ended Total December 31, 1998 Treasury Shareholders' 1997 and 1996 Stock Equity - ------------------------------------------------- BALANCE AT DECEMBER 31, 1996 -0- $44,198,000 ---------------------------------- Comprehensive income: Net income for 1997 -0- 6,482,000 Change in unrealized gain on securities available for sale, net of tax -0- 61,000 ---------- Total comprehensive income 6,543,000 Cash dividends declared, $.71 per share -0- (2,934,000) Issuance of 1,052 shares of common stock under stock option plans -0- 21,000
Market value of stock issued in payment of 2% stock dividend, 82,790 shares -0- -0- Purchase of 97,996 shares treasury stock (2,843,000) (2,843,000) ------------------------------- BALANCE AT DECEMBER 31, 1997 $(2,843,000) $44,985,000 --------------------------------
Accumulated Years Ended Other December 31, 1998 Common Additional Retained Comprehensive 1997 and 1996 Stock Capital Earnings Income - ------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $4,222,000 $22,599,000 $20,937,000 $ 70,000 ----------------------------------------------------------- Comprehensive income: Net income for 1998 -0- -0- 6,818,000 -0- Change in unrealized gain on securities available for sale, net of tax -0- -0- -0- 471,000
Total comprehensive income Cash dividends declared, $.86 per share -0- -0- (3,545,000) -0- Issuance of 200 shares of common stock under stock option plans 1,000 3,000 -0- -0- Purchase of 2,004 shares treasury stock -0- -0- -0- -0- ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 $4,223,000 $22,602,000 $24,210,000 $541,000 ----------------------------------------------------------- Years Ended Total December 31, 1998 Treasury Shareholders' 1997 and 1996 Stock Equity - ------------------------------------------------- BALANCE AT DECEMBER 31, 1997 (2,843,000) $44,985,000 ---------------------------------- Comprehensive Income: Net income for 1998 -0- 6,818,000 Change in unrealized gain on securities available for sale, net of tax -0- 471,000 ----------- Total comprehensive income 7,289,000 Cash dividends declared, $.86 per share -0- (3,545,000)
Issuance of 200 shares of common stock under stock option plans -0- 4,000 Purchase of 2,004 shares treasury stock (57,000) (57,000) ------------------------------- BALANCE AT DECEMBER 31, 1998 $ (2,900,000) $48,676,000 --------------------------------
See accompanying notes to consolidated financial statements.
Disclosure of reclassification amount:
The following discloses the reclassification adjustments for Accumulated Other Comprehensive Income:
Years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------- Unrealized holding gains(losses) arising during the year, net of tax $640,000 $61,000 $(34,000) Reclassification adjustment for gains (losses) included in net income, net of tax of $87,000, $0, and $0, for 1998, 1997 and 1996, respectively. 169,000 -0- (1,000) -------------------------------- Change in unrealized gains(loss) on securities available for sale, net of tax $471,000 $61,000 $(33,000) --------------------------------
END PUBLISHED PAGE 17
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies:
(a) Principles of Consolidation: The consolidated financial statements include the accounts of LNB Bancorp, Inc. (the Corporation) and its wholly owned subsidiary, The Lorain National Bank (the Bank). All material intercompany transactions and balances have been eliminated in consolidation.
(b) Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving the use of management's estimates and assumptions include the allowance for loan losses, the realization of deferred tax assets, fair values of certain securities, the determination and carrying value of impaired loans, the carrying value of loans held for sale, the carrying value of other real estate, depreciation of premises and equipment, the postretirement benefit obligation, the actuarial present value of pension benefit obligations, net periodic pension expense and prepaid pension costs recognized in the Corporation's financial statements. Estimates that are more susceptible to change in the near term include the allowance for loan losses and the fair value of certain securities.
(c) Industry Segment Information: The Corporation's activities are considered to be a single industry segment for financial reporting purposes. LNB Bancorp, Inc. is a one-bank holding company engaged in the business of commercial and retail banking and trust and investment management services, with operations conducted through its main office and branches located throughout Lorain, eastern Erie and western Cuyahoga Counties of Ohio. This market provides the source for substantially all of the Bank's deposit, loan and trust activities. The majority of the Bank's income is derived from a diverse base of commercial, mortgage and retail lending activities and investments.
(d) Cash and Cash Equivalents: For purposes of reporting in the Consolidated Statements of Cash Flows, cash and cash equivalents include currency on hand, amounts due from banks, Federal funds sold, and securities purchased under resale agreements. Generally, Federal funds sold and securities purchased under resale agreements are for one day periods.
(e) Securities: Debt securities are classified as held to maturity, trading, or available for sale. Securities which are classified as being held to maturity are stated at cost. Securities are adjusted for amortization of premiums and accretion of discounts using the interest method. Securities available for sale are carried at fair value with unrealized gains and losses included as a component of accumulated other comprehensive income, net of tax. Securities classified as trading are carried at fair value with unrealized gains and losses included in earnings. Gains or losses on dispositions are based on net proceeds and the carrying value of
securities sold, using the specific identification method.
(f) Loans Available for Sale: The Bank has identified certain commercial and student loans which may be sold prior to maturity. These loans are carried at the lower of amortized cost or estimated fair value, determined on an aggregate basis for each type of loan available for sale.
(g) Reserve for Possible Loan Losses: 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 loans 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 must be established for the difference. The impairment reserve is established by either an allocation of the reserve for possible loan losses or by a provision for possible loan losses, depending upon the adequacy of the reserve for possible loan losses. The provision for possible loan losses is determined based on Management's evaluation of the loan portfolio and the adequacy of the reserve for possible loan losses under current economic conditions and such other factors which, in Management's judgement, deserve current recognition.
(h) Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed generally on the straight-line method over the estimated useful lives of the assets.
(I) Intangible Assets: Intangible assets arise from branch acquisitions and include Goodwill and Core Deposit Intangibles. Goodwill is the excess of purchase price over identified net assets in branch acquisitions. Core Deposit Intangibles represent the value of depositor relationships purchased. Goodwill is being amortized using the straight-line method over a period of fifteen years. Core Deposit Intangibles are being amortized using an accelerated method over a period of ten years for 1997 branch acquisitions. Goodwill and Core Deposit Intangibles are reviewed for possible impairment, for events or changes in circumstances that indicate the carrying amount of the asset may not be recoverable, and written down if necessary.
END PUBLISHED PAGE 18
(1) Summary of Significant Accounting Policies (continued):
(j) Other Real Estate Owned: Other real estate owned is carried in other assets on the Balance Sheet at fair value, net of estimated costs to sell, not to exceed the cost of property acquired through foreclosure.
(k) Additional Capital and Retained Earnings: The additional capital account includes amounts received in excess of par value of common stock sold and amounts voluntarily transferred from retained earnings. In the case of stock dividends, the Corporation transfers the market value of shares issued from retained earnings to the common stock and additional capital accounts.
(l) Interest and Fees on Loans: Interest income on loans is accrued on the principal balances of loans outstanding on a "simple interest" basis. The Bank's policy is to cease accruing interest on any loans where the principal and/or interest remains unpaid for 90 days or more, unless the loan is both well secured and in the process of collection. Loan origination fees and certain direct origination costs are deferred and amortized over the contractual lives of the related loans using the interest method.
(m) Trust and Investment Management Division Assets and Income: Property held by the Corporation in fiduciary or agency capacity for its customers is not included in the accompanying financial statements, as such items are not assets of the Corporation. Income from the Trust and Investment Management Division is reported on an accrual basis.
(n) Interest on Deposit Accounts: Interest on deposit accounts is accrued and charged to expense monthly and is paid or credited in accordance with the terms of the respective accounts.
(o) Federal Income Taxes: The Corporation and its wholly owned subsidiary file a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be removed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(p) Reclassifications: Certain 1996 and 1997 amounts have been reclassified to conform to the 1998 presentation.
(q) Employee Stock Ownership Plan and Stock Purchase Plan: These two qualified defined contribution plans are accounted for under the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions".
(r) Reporting Comprehensive Income: Effective January 1, 1998, the Corporation adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income". This statement requires companies to report all items that are recognized as components of
comprehensive income under accounting standards. As required, the Corporation displays the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital. The adoption of SFAS No. 130 required the reclassification of prior years financial statements.
END PUBLISHED PAGE 19
(2) Earnings Share Data:
The Corporation adopted SFAS No. 128 "Earnings Per Share" on January 1, 1997. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares outstanding during the year. Diluted earnings per share is computed based on the weighted average number of shares outstanding plus the effects of dilutive stock options outstanding during the year. The weighted average number of shares outstanding during each year reflects a two percent stock dividend in 1997 and 1996. Basic and diluted earnings per share is calculated as follows:
For the Years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------- Weighted average shares outstanding used in Basic Earnings Per Share calculation 4,122,857 4,168,322 4,211,028 Dilutive effect of incentive stock options 9,562 10,477 10,475 ---------------------------------------- Weighted average shares outstanding used in Diluted Earnings Per Share calculation 4,132,419 4,178,799 4,221,503 ---------------------------------------- Net income from operations before cumulative effect $6,555,000 $6,482,000 $5,852,000 Cumulative effect of a change in accounting principle, net of tax 263,000 -0- -0- ---------------------------------------- NET INCOME $6,818,000 $6,482,000 $5,852,000
BASIC EARNINGS PER SHARE: Net income from operations before cumulative effect $1.59 $1.56 $1.39 Cumulative effect of a change in accounting principle, net of tax 0.06 0.00 0.00 ---------------------------------------- BASIC EARNINGS PER SHARE $1.65 $1.56 $1.39 ---------------------------------------- DILUTED EARNINGS PER SHARE: Net income from operations before cumulative effect $1.59 $1.55 $1.39 Cumulative effect of a change in accounting principle, net of tax 0.06 0.00 0.00 ---------------------------------------- DILUTED EARNINGS PER SHARE $1.65 $1.55 $1.39 ----------------------------------------
END PUBLISHED PAGE 20
(3) Cash and Due From Banks:
In order to meet deposit reserve requirements, the Bank is required to maintain cash on hand and reserve balances at the Federal Reserve Bank. Cash and due from banks included approximately $8,244,000 and $6,951,000 at December 31, 1998 and 1997, respectively, to meet these deposit reserve requirements.
The average balances maintained in cash on hand and in reserve balances at the Federal Reserve Bank to meet deposit reserve requirements approximated $8,244,000 and $6,959,000, during 1998 and 1997 respectively.
(4) Acquisition and Intangible Assets:
On September 15, 1997, Lorain National Bank acquired three branch offices in Lorain County, Ohio from KeyBank, National Association (KeyBank), headquartered in Cleveland, Ohio. The transaction included the acquisition of approximately $45.3 million in deposits, $18.3 million in personal and commercial loans, as well as certain property and equipment.
The transaction was accounted for as a purchase and accordingly the acquired assets and liabilities were recorded at their fair values on the acquisition date. The effect of the KeyBank branch acquisition is included in the results of operation prospectively from the date of the acquisition.
The intangible assets arising from the KeyBank branch acquisition and included in the accompanying Consolidated Balance Sheets are summarized as follows at December 31, net of accumulated amortization:
1998 1997 ----------------------------- Goodwill $3,619,000 $3,883,000 Core deposit intangible 1,047,000 1,231,000 ----------------------------- Total intangible assets $4,666,000 $5,114,000 =============================
Amortization expense for intangible assets totaled $448,000 and $136,000 in 1998 and 1997, respectively.
END PUBLISHED PAGE 21
(5) Securities:
The amortized cost, gross unrealized gains and losses and fair values of securities at December 31, 1998 and 1997 follow: Gross Gross Amortized Unrealized Unrealized Fair December 31, 1998 Cost Gains Losses Value - -------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 27,067,000 $ 349,000 $ -0- $ 27,416,000 U.S. Government agencies and corporations 50,155,000 376,000 -0- 50,531,000 Equity securities 86,000 95,000 -0- 181,000 -------------------------------------------------- Total securities available for sale 77,308,000 820,000 -0- 78,128,000 -------------------------------------------------- Securities held to maturity: U.S.Government agencies and corporations 33,719,000 139,000 (339,000) 33,519,000 States and political subdivisions 4,483,000 81,000 (19,000) 4,545,000 -------------------------------------------------- Total securities held to maturity 38,202,000 220,000 (358,000) 38,064,000 -------------------------------------------------- Federal Home Loan Bank and Federal Reserve Bank stock 2,189,000 -0- -0- 2,189,000 -------------------------------------------------- Total securities $117,699,000 $1,040,000 $(358,000) $118,381,000 -------------------------------------------------- December 31, 1997 - -------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 11,154,000 $ 26,000 $ (25,000) $ 11,155,000 U.S. Government agencies and corporations 6,003,000 28,000 -0- 6,031,000 Equity securities 85,000 78,000 -0- 163,000 -------------------------------------------------- Total securities available for sale 17,242,000 132,000 (25,000) 17,349,000 -------------------------------------------------- Securities held to maturity: U.S. Treasury securities 66,945,000 679,000 (37,000) 67,587,000 U.S. Government agencies and corporations 24,996,000 122,000 (17,000) 25,101,000 States and political subdivisions 4,097,000 82,000 (6,000) 4,173,000 -------------------------------------------------- Total securities held to maturity 96,038,000 883,000 (60,000) 96,861,000 -------------------------------------------------- Federal Home Loan Bank and Federal Reserve Bank stock 1,987,000 -0- -0- 1,987,000 -------------------------------------------------- Total securities $115,267,000 $1,015,000 $ (85,000) $116,197,000 --------------------------------------------------- The amortized cost, fair values and yields of debt securities by contractual maturity date at December 31, 1998 follow:
Fully-Tax Amortized Fair Equivalent December 31, 1998 Cost Value Yield ------------------------------------------------------------------------- Securities available for sale: Due within 1 year $ 18,995,000 $19,156,000 6.35% After 1 but within 5 years 54,205,000 54,728,000 5.85 After 5 but within 10 years 4,022,000 4,063,000 6.13 --------------------------------------- Total 77,222,000 77,947,000 6.01 --------------------------------------- Securities held to maturity: Due within 1 year 423,000 425,000 4.31 After 1 but within 5 years 1,827,000 1,859,000 4.83 After 5 but within 10 years 33,990,000 33,819,000 5.52 After 10 years 1,962,000 1,961,000 4.88 --------------------------------------- 38,202,000 38,064,000 5.44 --------------------------------------- Total $115,424,000 $116,011,000 5.83% ---------------------------------------
END PUBLISHED PAGE 22
(5) Securities (continued):
During 1998, proceeds from the sale of securities were $25,168,000 resulting in gross realized gains of $655,000. There were no sales of securities in 1997. Proceeds from the sale of securities during 1996 were $1,999,000 resulting in gross realized losses of $1,000. All other redemptions during these three years were in the form of proceeds at maturity or calls by the issuers of debt. The carrying value of securities pledged to secure trust, public deposits, securities sold under repurchase agreements, line of credit, and for other purposes required by law amounted to $103,612,000 and $104,445,000 at December 31, 1998 and 1997, respectively.
The fair value of securities is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments. The securities portfolio contained approximately $2,713,000 and $3,364,000 in non-rated securities of state and political subdivisions at December 31, 1998 and 1997, respectively. Based upon yield, term to maturity and market risk, the valuation service estimated the fair value of these securities to be $2,794,000 and $3,702,000 at December 31, 1998 and 1997, respectively. The majority of these non-rated securities are short-term debt issues of local political subdivisions. Management has reviewed these non-rated securities and has determined that there is no impairment to their value as of December 31, 1998 and 1997.
The Corporation adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) on October 1, 1998. The Corporation did not have any hedging activity or derivative instruments prior to September 30, 1998. However, the Corporation elected to reclassify approximately $7 million of held to maturity securities to trading securities and approximately $41 million in held to maturity securities to available for sale securities. The total amount of securities transferred to trading securities were sold during the quarter, resulting in a transition gain of $399,000 which is recorded as a change in accounting principle in the Consolidated Statements of Income. The above mentioned security transfers from the held to maturity category at the initial date of adoption shall not call into questions the Corporation's intent to hold other debt securities to maturity in the future. The unrealized holding gain on held to maturity securities transferred at the initial adoption of SFAS No. 133 was reported as a transition adjustment to net income and Accumulated Other Comprehensive Income. The cumulative effect of adoption of SFAS No. 133 is as follows:
Transfers of Debt Securities from the Held to Maturity to the Trading and Available for Sale Categories as Part of the Transition to SFAS No. 133 as of October 1, 1998 (Amounts in Thousands):
Before Transition Adjustment After Transition Adjustment ----------------------------------------------------------- Statement of Statement of Income Financial Position Financial Position Statement ------------------------------------------------------------ Carrying Fair Asset Stockholders' Gain Amount Value (Liability) Equity (Loss) ------------------------------------------------------------ Transfer to the trading category: Debt security $ 6,987 $ 7,386 $ 7,386 N/A $399 Transfer to available for sale category: Debt security $40,979 $41,696 $41,696 N/A $-0- Accumulated other comprehensive income N/A N/A N/A $473 $-0- - ------------------------------------------------------------------------
END PUBLISHED PAGE 23
(6) Transactions with Related Parties:
The Corporation, through its subsidiary Bank, makes loans to its officers, directors and their affiliates. These loans are made with substantially the same terms and conditions as transactions with nonrelated parties. An analysis of loans outstanding to related parties follows:
Years ended December 31, 1998 1997 ------------------------------------------------------------------------- Aggregate amount beginning of year $6,407,000 $3,884,000 Additions (deductions): New loans 1,178,000 974,000 Repayments (3,090,000) (1,070,000) Changes in directors and officers and/or their affiliations, net -0- 2,619,000 ------------------------------- Aggregate amount end of year $4,495,000 $6,407,000 ------------------------------- (7) Loans and Reserve for Possible Loan Losses:
Loan balances at December 31, 1998 and 1997 are summarized as follows:
December 31, 1998 1997 - -------------------------------------------------------------------------- Real estate loans (includes loans secured primarily by real estate only): Construction and land development $ 23,751,000 $ 27,018,000 One to four family residential 183,066,000 173,169,000 Multi-family residential 9,409,000 9,803,000 Non-farm non-residential properties 75,938,000 66,040,000 Commercial and industrial loans 20,741,000 21,697,000 Personal loans to individuals: Auto, single payment and installment 51,079,000 27,067,000 Credit card and related plans 5,069,000 5,152,000 Obligations of states and political subdivisions 521,000 685,000 All other loans 292,000 400,000 ------------------------------------ TOTAL LOANS 369,866,000 331,031,000 Reserve for possible loan losses (3,483,000) (4,168,000) ------------------------------------ NET LOANS $366,383,000 $326,863,000 ------------------------------------ Activity in the reserve for possible loan losses for 1998, 1997 and 1996 is summarized as follows:
Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------- Balance at beginning of year $4,168,000 $4,116,000 $4,002,000 Provision for possible loan losses 2,725,000 750,000 600,000 Loans charged-off (3,591,000) (849,000) (672,000) Recoveries on loans previously charged-off 181,000 151,000 186,000 -------------------------------------------- BALANCE AT END OF YEAR $3,483,000 $4,168,000 $4,116,000 --------------------------------------------
At December 31, 1998 and 1997, $10,391,000 and $11,365,000 of commercial and student loans were available for sale in the secondary market. The market value of loans available for sale equaled or exceeded its carrying value. At December 31, 1998, the Bank had firm commitments for the sale
of approximately $105,000 of these loans.
Information regarding impaired loans is as follows:
Years ended December 31 1998 1997 1996 - -------------------------------------------------------------------------- Year-end impaired loans with no allowance for loan losses allocated $ -0- $ -0- $305,000 Year-end impaired loans with allowance for loan losses allocated 2,089,000 -0- 911,000 Amount of the allowance allocated 139,000 -0- 152,000 Average of impaired loans during the year 1,130,000 820,000 983,000 Interest income recognized during impairment 82,000 43,000 66,000 Cash-basis interest income recognized 26,000 21,000 7,000 - --------------------------------------------------------------------------
END PUBLISHED PAGE 24
(8) Bank Premises and Equipment:
Bank premises and equipment are summarized as follows:
December 31, 1998 1997 ------------------------------------------------------------------------- Land $ 1,941,000 $ 1,941,000 Buildings 9,482,000 9,490,000 Equipment 14,293,000 13,677,000 Leasehold improvements 602,000 532,000 --------------------------------------------- 26,318,000 25,640,000 --------------------------------------------- Less accumulated depreciation and amortization 15,329,000 13,794,000 --------------------------------------------- TOTAL $10,989,000 $11,846,000 ---------------------------------------------
Depreciation and amortization of Bank premises and equipment charged to other expenses amounted to $1,472,000 in 1998, $1,446,000 in 1997 and $1,332,000 in 1996. Amortization of purchased software charged to other operating expenses amounted to $216,000 in 1998, $213,000 in 1997 and $215,000 in 1996.
At December 31, 1998, the Bank was obligated to pay rental commitments under noncancelable operating leases on branch offices and certain equipment as follows:
Year Ending Branch December 31, Offices Equipment ----------------------------------------------------------- 1999 $145,000 $12,000 2000 132,000 12,000 2001 133,000 12,000 2002 120,000 12,000 2003 88,000 12,000 2004 and thereafter 68,000 -0- --------------------------- Total $686,000 $60,000 ---------------------------
Rentals paid under leases on branch offices and equipment, respectively, amounted to $142,000 and $12,000 in 1998, $85,000 and $45,000 in 1997 and $101,000 and $54,000 in 1996.
(9) Deposits:
Deposit balances at December 31, 1998 and 1997 are summarized as follows: December 31, 1998 1997 - -------------------------------------------------------------------------- Demand and other noninterest-bearing deposits: Individuals, partnerships and corporations $ 73,275,000 $ 58,511,000 U.S. Government 237,000 379,000 States and political subdivisions 6,881,000 4,779,000 Certified, official, travelers checks and other 5,165,000 4,896,000 ----------------------------------- Total demand and other noninterest- bearing deposits 85,558,000 68,565,000 ----------------------------------- Savings and passbook accounts: Individuals and non-profit organizations 165,531,000 155,972,000 Corporations and profit organizations 16,480,000 16,964,000 ----------------------------------- Total savings and passbook accounts 182,011,000 172,936,000 ----------------------------------- Time deposits: Individuals, partnerships and corporations 151,583,000 150,900,000 States and political subdivisions 24,696,000 18,254,000 ------------------------------------ Total time deposits 176,279,000 169,154,000 ------------------------------------ TOTAL DEPOSITS $443,848,000 $410,655,000 ------------------------------------
The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $42,918,000 and $36,551,000 at December 31, 1998 and 1997, respectively.
The maturity distribution of time certificates of deposit as of December 31, 1998 and 1997 follows: After 3 After 6 Months Months Within 3 But Within But Within Months 6 Months 1 Year ------------------------------------------------------------------------- December 31, 1998 $62,012,000 $30,299,000 $36,671,000 ------------------------------------------------------------------------ December 31, 1997 $53,785,000 $33,634,000 $44,134,000 -------------------------------------------------------------------------
After 1 After 2 Year But Years But Within Within 2 Years 5 Years Total ------------------------------------------------------------------------- December 31, 1998 $31,973,000 $15,324,000 $176,279,000 ------------------------------------------------------------------------- December 31, 1997 $20,747,000 $16,854,000 $169,154,000 -------------------------------------------------------------------------
END PUBLISHED PAGE 25
(10) Short-Term Borrowings:
Information relating to short-term borrowings for the years ended December 31, 1998, 1997 and 1996 follows:
December 31, 1998 1997 1996 - -------------------------------------------------------------------------- Securities sold under repurchase agreements and other short-term borrowings At December 31: Outstanding $22,960,000 $26,750,000 $23,386,000 Interest rate 3.80% 6.03% 4.22% Average for the year: Outstanding $22,719,000 $23,885,000 $21,465,000 Interest rate 4.36% 4.74% 4.75% Maximum month-end outstanding $34,622,000 $36,938,000 $34,076,000 Line of credit At December 31 Outstanding $ -0- $ 2,200,000 N/A Interest rate N/A 6.40% N/A Average for the year: Outstanding $ 1,688,000 $ 1,422,000 N/A Interest rate 6.46% 6.51% N/A Maximum month-end outstanding $ 2,200,000 $ 2,400,000 N/A - --------------------------------------------------------------------------
In May of 1997, the Corporation obtained a $4,100,000 line of credit from a commercial bank to fund the purchase of treasury stock. The interest rate was based upon the current Eurodollar rate plus fifty basis points and is adjustable every six months. Interest is payable on a quarterly basis.
When there are outstanding balances on the line of credit, they are collateralized with U.S. Treasury securities or certificates of deposit. The line of credit expires in May of 1999 and is renewable.
(11) Federal Home Loan Bank Advances:
Lorain National Bank is a voluntary member of the Federal Home Loan Bank of Cincinnati (FHLB). Advances from the FHLB with maturities and fixed interest rates thereon at December 31, 1998 and 1997 are as follows:
Maturity Interest Rate 1998 1997 --------------------------------------------------------------- 2000 4.76% $ 5,000,000 $ -0- 2001 4.88-6.85% 11,095,000 1,095,000 2002 4.86-6.31% 5,950,000 950,000 --------------------------- Total $22,045,000 $2,045,000 ---------------------------
The Bank maintains a $25,000,000 line of credit with the FHLB which matures on September 8, 1999.
At December 31, 1998, pledged as collateral for FHLB advances were all of the shares of FHLB stock owned by the Bank, and qualified mortgage loans totaling $33,068,000. At December 31, 1998, Lorain National Bank was approved for $38,492,000 of FHLB advances. The Bank is required to own FHLB stock equal to 5% of the FHLB advances outstanding and owned
$1,924,600 at December 31, 1998. At December 31, 1998, the amount of credit available to the Bank from the FHLB was $16,447,000.
(12) Commitments, Credit Risk, and Contingencies:
In the normal course of business, the Bank enters into commitments with off-balance sheet risk to meet the financing needs of its customers. These instruments are currently limited to commitments to extend credit and standby letters of credit. Commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Bank since the time the commitment was made.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of 60 to 120 days or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on Management's credit evaluation of the applicant. Collateral held is generally single-family residential real estate and commercial real estate. Substantially all of the obligations to extend credit are variable rate commitments.
END PUBLISHED PAGE 26
(12) Commitments, Credit Risk, and Contingencies (continued):
The Bank's maximum potential obligation to extend credit for financial instruments with off-balance sheet risk follows:
December 31, 1998 1997 - ---------------------------------------------------------------------- Commitments to extend credit $70,566,000 $49,487,000 Credit card arrangements 18,520,000 17,394,000 Standby letters of credit 1,429,000 1,825,000 ---------------------------------- Total $90,515,000 $68,706,000 ----------------------------------
Most of the Bank's business activity is with customers located within the Bank's defined market area. As of December 31, 1998, the Bank had no significant concentrations of credit risk in its loan portfolio. The Bank also has no exposure to highly leveraged transactions and no foreign credits in its loan portfolio.
The nature of the Corporation's business results in a certain amount of litigation. Management, after reviewing with counsel all actions and proceedings pending against or involving LNB Bancorp, Inc. and Lorain National Bank, considers that the aggregate liability or loss, if any, resulting from them will not be material to the Corporation's financial position.
(13) Income Taxes:
The annual provision for income taxes consists of the following:
Years ended December 31, 1998 1997 1996 ------------------------------------------------------------------------- INCOME TAXES Federal Current $3,083,000 $3,329,000 $2,763,000 Federal Deferred 192,000 21,000 137,000 State 16,000 -0- -0- Cumulative effect adjustment 136,000 -0- -0- --------------------------------------------- TOTAL INCOME TAXES $3,427,000 $3,350,000 $2,900,000 ---------------------------------------------
The following presents a reconciliation of the total income taxes as shown on the Consolidated Statements of Income with that which would be computed by applying the statutory Federal tax rate of 35 percent to income before income taxes.
Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------- Computed "expected" tax expense $3,586,000 $3,441,000 $3,063,000 Increase (reduction) in income taxes resulting from: Tax exempt interest on obligations of states and political subdivisions (75,000) (60,000) (89,000) State income taxes net of Federal benefit 10,000 -0- -0- Other, net (94,000) (31,000) (74,000) ---------------------------------------------- TOTAL INCOME TAXES $3,427,000 $3,350,000 $2,900,000 ----------------------------------------------
Net deferred Federal tax assets are included in Other assets. Management believes that it is more likely than not that the deferred Federal tax assets will be realized. The tax effects of temporary differences that give rise to significant portions of the deferred Federal tax assets and deferred Federal tax liabilities are presented below.
December 31, 1998 1997 - ------------------------------------------------------------------------- Deferred Federal tax assets: Reserve for possible loan losses $ 785,000 $ 974,000 Deferred compensation 194,000 177,000 Accrued vacation payable 150,000 131,000 Intangible asset amortization 49,000 6,000 Accrued pension payable 42,000 -0- Other, net 5,000 7,000 ------------------------------------- Total deferred Federal tax assets 1,225,000 1,295,000
Deferred Federal tax liabilities: Bank premises and equipment depreciation (331,000) (361,000) Deferred charges (190,000) (114,000) FHLB stock dividends (107,000) (63,000) Unrealized gain on securities available for sale (278,000) (43,000) Prepaid pension expense -0- (11,000) Accrued loan fees and costs (71,000) (28,000) ------------------------------------- Total deferred Federal tax liabilities (977,000) (620,000) ------------------------------------- NET DEFERRED FEDERAL TAX ASSETS $ 248,000 $ 675,000 ------------------------------------- END PUBLISHED PAGE 27
(14) Shareholders' Equity and Regulatory Capital:
On May 20, 1997, the Board of Directors authorized the repurchase of up to 100,000 shares of common stock. The repurchased shares will be used primarily for qualified employee benefit plans, incentive stock option plans, stock dividends and other Corporate purposes. At December 31, 1998, LNB Bancorp, Inc. held 100,000 shares of common stock as Treasury Stock. LNB Bancorp, Inc. purchased 2,004 shares in 1998 and 97,996 shares in 1997 under this plan for a total cost of $2,900,000. During 1998 and 1997, no shares were issued out of Treasury Stock.
The Board of Directors adopted a dividend reinvestment plan on November 18, 1997. Under the plan, the first dividend reinvestment and cash stock purchase date was April 1, 1998. The plan allows shareholders to elect to use their quarterly cash dividends to purchase shares of LNB Bancorp, Inc. common stock. Additionally, cash can be contributed directly to the plan for the purchase of shares of common stock with a quarterly limit of $5,000. The dividend reinvestment plan authorized the sale of 150,000 shares of the Corporation's authorized but previously unissued common shares to shareholders who choose to invest all or a portion of their cash dividends plus additional cash payments. No shares were issued by the Corporation pursuant to the plan in 1998. During 1998, stock for the dividend reinvestment plan was purchased in the open market at the current market price.
Dividends paid by the Bank are the primary source of funds available to the Corporation for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Corporation is subject to restrictions by the Office of the Comptroller of Currency. These restrictions generally limit dividends to the current and prior two year's retained earnings. At December 31, 1998, approximately $1,471,000 of the Bank's retained earnings were available for dividends to the Corporation. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below the Corporation's regulatory capital requirements and minimum regulatory guidelines. These restrictions do not presently limit the Corporation from paying normal dividends.
The Corporation and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the consolidated financial statements.
The prompt corrective action regulations provide for five categories which in declining order are: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically undercapitalized." To be considered "well capitalized", an institution must generally have a leverage capital ratio of at least 5 percent, a Tier 1 risk-based capital ratio of at least 6 percent, and a total risk-based capital ratio of at least 10 percent. At December 31, 1998, and 1997, the capital ratios for the Corporation and its wholly owned subsidiary, Lorain National Bank, exceeded the above ratios required to be "well capitalized". The "well capitalized" status affords the Bank the ability
to operate with the greatest flexibility under current laws and regulations.
As of March 31, 1998, the most recent notification from the Comptroller of the Currency categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that Management believes have changed the Bank's category.
Analysis of Lorain National Bank and LNB Bancorp, Inc.'s Regulatory Capital and Regulatory Capital Requirements
Minimum Required Minimum Required December 31 Actual To Be Well Capitalized Capital - -------------------------------------------------------------------------- (amounts in thousands) Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------- 1998 Total capital (to risk weighted assets) Consolidated $46,952 13.30% $35,207 10.0% $28,166 8.0% Bank $44,114 12.52% $35,154 10.0% $28,124 8.0% 1998 Tier 1 capital (to risk weighted assets) Consolidated $43,469 12.31% $21,124 6.0% $14,082 4.0% Bank $32,631 9.26% $21,093 6.0% $14,062 4.0% 1998 Tier 1 capital (to average assets) Consolidated $43,469 8.64% $25,163 5.0% $20,130 4.0% Bank $32,631 6.54% $24,939 5.0% $19,951 4.0%
1997 Total capital (to risk weighted assets) Consolidated $43,529 14.34% $30,391 10.0% $24,313 8.0% Bank $40,788 13.81% $29,631 10.0% $23,704 8.0% 1997 Tier 1 capital (to risk weighted assets) Consolidated $39,801 13.11% $18,235 6.0% $12,157 4.0% Bank $29,090 9.85% $17,778 6.0% $11,852 4.0% 1997 Tier 1 capital (to average assets) Consolidated $39,801 8.65% $23,013 5.0% $18,411 4.0% Bank $29,090 6.39% $22,751 5.0% $18,201 4.0%
END PUBLISHED PAGE 28
(15)Parent Company:
Substantially all of the retained earnings of the Corporation represent undistributed net income of its subsidiary.
Condensed financial information of LNB Bancorp, Inc. (Parent Company only) is as follows:
Condensed Balance Sheets
December 31, 1998 1997 - -------------------------------------------------------------------------- ASSETS: Cash $1,126,000 $ 948,000 Interest-bearing instruments 2,624,000 134,000 Investment in subsidiary at equity in underlying value of its net assets 37,836,000 34,287,000 Securities available for sale 91,000 4,645,000 Notes receivable - subsidiary 8,000,000 8,000,000 Other assets 46,000 114,000 ----------------------------------- Totals assets $49,723,000 $48,128,000 ----------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities $ 1,047,000 $ 943,000 Line of credit -0- 2,200,000 Shareholders' equity 48,676,000 44,985,000 ----------------------------------- Total liabilities and shareholders' equity $49,723 000 $48,128,000 ----------------------------------- Condensed Statements of Income
Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------- INCOME: Cash dividends from subsidiary $ 3,381,000 $ 2,934,000 $10,509,000 Interest and other income 773,000 807,000 258,000 ---------------------------------------------- 4,154,000 3,741,000 10,767,000 EXPENSES: Other expenses 240,000 218,000 70,000 ---------------------------------------------- Income before income taxes and equity in undistributed net income of subsidiary 3,914,000 3,523,000 10,697,000 Income tax expense 189,000 201,000 63,000 Equity in undistributed net income of subsidiary (1) 3,093,000 3,160,000 (4,782,000) ---------------------------------------------- NET INCOME $ 6,818,000 $6,482,000 $5,852,000 ---------------------------------------------- (1) Amount in parentheses represents the excess of dividends declared over net income of subsidiary.
Condensed Statements of Cash Flows
Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Dividends from subsidiary $ 3,381,000 $ 2,934,000 $10,509,000 Other, net 392,000 399,000 107,000 --------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,773,000 3,333,000 10,616,000 --------------------------------------------- CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES: Proceeds from maturities of securities available for sale 4,569,000 467,000 965,000 Purchases of securities available for sale -0- (217,000) (1,127,000) Cash paid on line of credit (2,200,000) (200,000) -0- Advance to subsidiary -0- -0- (8,000,000) Proceeds from line of credit -0- 2,400,000 -0- Purchase of treasury stock (57,000) (2,843,000) -0- Proceeds from exercise of stock options 4,000 21,000 179,000 Dividends paid (3,421,000) (2,813,000) (2,452,000) --------------------------------------------- NET CASH USED IN INVESTING AND FINANCING ACTIVITIES (1,105,000) ( 3,815,000) (10,435,000) -------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,668,000 148,000 181,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,082,000 934,000 753,000 --------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,750,000 $ 1,082,000 $ 934,000 ---------------------------------------------
END PUBLISHED PAGE 29
(16) Employee Stock Ownership Plan:
The Lorain National Bank Employee Stock Ownership Plan (ESOP) is a non-contributory plan that covers substantially all employees. Contributions by the Bank to the ESOP are discretionary and subject to approval by the Board of Directors. Contributions are expensed in the year in which they are approved and totaled $200,000, $400,000 and $400,000 in 1998, 1997, and 1996, respectively. At December 31, 1998 there were 264 participants in the plan.
Under the terms of the ESOP agreement, Corporation common stock is to be the plan's primary investment. Therefore, it is anticipated that the ESOP will acquire additional Corporation common stock, at fair market value, in future years.
Transactions by the ESOP, relating to activity in the Corporation's common stock, are summarized below:
Years ended December 31, 1998 1997 1996 ------------------------------------------------------------------------- Cash dividend income $ 113,000 $ 89,000 $ 62,000 Stock dividend/split shares -0- 2,226 1,865 Shares purchased 6,823 20,628 22,542 Shares distributed 2,266 2,307 4,246 Year end holdings: Shares 132,114 127,557 107,010 Market value $3,666,000 $3,540,000 $3,103,000 As a percentage of total plan assets 94.4% 89.7% 86.0% - --------------------------------------------------------------------------
(17) Stock Purchase Plan:
The Bank maintains a voluntary Stock Purchase Plan. Under provisions of the plan, a participating employee can contribute up to 6% of their compensation. The Bank then makes a contribution equal to 50% of each participant's contribution. The plan uses the contributions to purchase Corporation common stock at fair market value. The common stock is distributed to plan participants, under provisions of the plan, based upon the participant's cumulative prorata share of plan assets.
The Bank's 50% matching contributions are expensed in the year in which the associated participant contributions are made and totaled $127,000, $123,000 and $110,000 in 1998, 1997 and 1996, respectively. At December 31, 1998, there were 220 participants in the plan.
Transactions by the Stock Purchase Plan, relating to the activity in the Corporation's common stock are summarized below:
Years ended December 31, 1998 1997 1996 ------------------------------------------------------------------------- Cash dividend income $ 104,000 $ 88,000 $ 76,000 Stock dividend/split shares -0- 2,467 2,427 Shares purchased 8,028 11,893 19,447 Shares distributed 10,710 17,288 13,394 Year end holdings: Shares 117,293 124,822 127,750 Market value $3,255,000 $3,465,000 $3,705,000 As a percentage of total plan assets 95.9% 99.1% 99.8% -------------------------------------------------------------------------
(18) Stock Option Plan:
The Corporation applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" to account for stock option plans and, accordingly, no compensation cost has been recognized for its incentive stock options in the financial statements. There were no stock options granted or available for granting under any of the Corporation's Incentive Stock Option Plans during 1998, 1997 and 1996. Additionally, no stock-based compensation, as defined by the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), was generated under any of the Corporation's other stock-based benefit plans during the same period. Therefore the Corporation has no additional compensation to report under SFAS No. 123, for the years ended December 31, 1998, 1997 and 1996.
The Corporation's shareholders approved incentive stock option plans on April 6, 1982 and April 16, 1985 for all officers at or above the position of Vice President or equivalent. Under each plan, 50,000 shares of stock were originally reserved. Options may be granted at fair market value at the date of the grant and, accordingly, no charges are reflected in salaries and employee benefits expense due to the granting of stock options. The excess of the option price over the par value of the shares purchased through the exercise of stock options is credited to additional capital. Options granted under the plans may not be outstanding for periods exceeding 10 years from date of grant.
There were no new options granted or forfeitures in the three year period ended December 31, 1998. All stock option shares granted are vested. Stock options exercised were 200, 1,071 and 18,307 shares in 1998, 1997 and 1996, respectively.
An analysis of the status of the stock option plans as of December 31, 1998 follows: Plan Year 1985 1982 ---------------------------------------------------------------- Options outstanding: Total 17,032 9,761 Vested 17,032 9,761 Options available for granting -0- -0- Exercise price $19.60 $14.64 ----------------------------------------------------------------- END PUBLISHED PAGE 30
(19) Retirement Pension Plan:
The Corporation adopted SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" on January 1, 1998. The Bank maintains a non-contributory defined benefit pension plan covering substantially all of its employees. In general, benefits are based on years of service and the employee's level of compensation. The Bank's funding policy is to contribute annually an actuarially determined amount to cover current service cost plus amortization of prior service costs.
The net periodic pension costs charged to other expenses amounted to $163,000 in 1998, $39,000 in 1997 and $55,000 in 1996. At December 31, 1998 there were 275 participants in the plan. The following table sets forth the defined benefit pension plan's Change in Projected Benefit Obligation and Change in Plan Assets and Funded Status including Prepaid (Accrued) Liability for the years ended December 31, 1998, 1997 and 1996.
Years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------- Change in projected benefit obligations: Projected benefit obligation at beginning of year $(7,952,000) $(7,025,000) $(7,252,000) Service cost (408,000) (278,000) (257,000) Interest cost (538,000) (469,000) (435,000) Employer contributions -0- (32,000) (248,000) Actuarial gain (653,000) (629,000) (227,000) Benefits paid 487,000 481,000 1,394,000 --------------------------------------------- Projected benefit obligation at end of year $(9,064,000) $(7,952,000) $(7,025,000) ---------------------------------------------
Change in plan assets: Fair value of plan assets at beginning of year $ 8,773,000 $ 7,666,000 $ 7,759,000 Actual return on plan assets 2,373,000 1,626,000 1,098,000 Employer contributions -0- 32,000 248,000 Benefits and expenses paid (487,000) (551,000) (1,439,000) --------------------------------------------- Fair value of plan assets at end of year $10,659,000 $ 8,773,000 $ 7,666,000 --------------------------------------------- Funded status $ 1,595,000 $ 821,000 $ 641,000 Unamortized net asset at transition (25,000) (56,000) (87,000) Unrecognized net gain subsequent to transition (1,476,000) (472,000) (220,000) Unamortized prior service cost (225,000) (260,000) (294,000) --------------------------------------------- Prepaid (Accrued) Pension Liability $ (131,000) $ 33,000 $ 40,000 ---------------------------------------------
Net Periodic Pension Cost consisted of the following:
Years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------- Service cost $ 408,000 $ 278,000 $ 257,000 Interest cost on projected benefit obligation 538,000 469,000 435,000 Return on plan assets (2,373,000) (1,626,000) (1,098,000) Amortization of transition net asset (31,000) (31,000) (31,000) Amortization of unrecognized gain 1,656,000 984,000 526,000 Amortization of unrecognized prior service liability (35,000) (35,000) (35,000) --------------------------------------------- Net periodic pension cost $ 163,000 $ 39,000 $ 54,000 ---------------------------------------------
The principal actuarial assumptions used follows: --------------------------------------------- Weighted average discount rate 5.95% 6.50% 6.50% --------------------------------------------- Expected long-term rate of return on plan assets 8.00% 8.50% 8.50% --------------------------------------------- Assumed rate of future compensation increases 5.00% 5.50% 5.00% ---------------------------------------------
END PUBLISHED PAGE 31
(20) Estimated Fair Value of Financial Instruments:
The Corporation discloses estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and due from banks and Federal funds sold and other interest bearing instruments and Accrued interest, accounts receivable and other financial assets: For these short-term financial instruments, the carrying value is a reasonable estimate of fair value.
Securities: The fair value of securities is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments.
Portfolio loans, net and loans available for sale, net: For variable rate loans with interest rates that may be adjusted on a quarterly, or more frequent basis, the carrying amount is a reasonable estimate of fair market value. The fair value of other types of loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market, checking and NOW accounts, is equal to the amount payable on demand as of December 31, for each year presented. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. For variable rate certificates of deposit, the carrying amount is a reasonable estimate of fair value.
Securities sold under repurchase agreements and other short-term borrowings and Accrued interest payable and other financial liabilities: For these short term financial instruments, the carrying value is a reasonable estimate of fair value.
Federal Home Loan Bank advances: The fair value of these long-term financial instruments is estimated by discounting future cash flows using current FHLB rates for the remaining term to maturity.
Commitments to extend credit and standby letters of credit: The difference between the notional amount and the estimated fair value of these commitments is not material.
Limitations: Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Estimates of fair value are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a substantial Trust Division that contributes net fee income annually. The Trust Division is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include property, plant, and equipment and deferred tax liabilities. In addition, it is not practicable for the Corporation to estimate the tax ramifications related to the realization of the unrealized gains and losses and they have not been reflected in any of the estimates of fair value. The impact of these tax ramifications can have a significant effect on estimates of fair value.
The estimated fair values of the Corporation's financial instruments at December 31, 1998 and 1997 are summarized as follows:
December 31, 1998 1997 ------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ------------------------------------------------------------------------- Financial assets: Cash and due from banks and Federal funds sold and other interest bearing $ 32,801,000 $ 32,801,000 $ 24,407,000 $ 24,407,000 instruments ============ ============ ============ ============ Securities $118,519,000 $118,381,000 $115,374,000 $116,197,000 ============ ============ ============ ============ Portfolio loans, net $355,992,000 $357,937,000 $315,498,000 $315,746,000 ============ ============ ============ ============ Loans available for sale, net $ 10,391,000 $ 10,391,000 $ 11,365,000 $ 11,365,000 ============ ============ ============ ============ Accrued interest, accounts receivable and other financial assets $ 7,742,000 $ 7,742,000 $ 6,299,000 $ 6,299,000 ============ ============ ============ ============ Financial liabilities: Deposits: Demand deposits, savings accounts and money market deposits $267,569,000 $267,569,000 $241,501,000 $241,501,000 Certificates of 176,279,000 177,783,000 169,154,000 169,838,000 deposit ------------ ------------ ------------ ------------ Total deposits $443,848,000 $445,352,000 $410,655,000 $411,339,000 ============ ============ ============ ============ Securities sold under repurchase agree- ments and other short-term borrowings $ 22,960,000 $ 22,960,000 $ 28,950,000 $ 28,950,000 ============ ============ ============ ============ Federal Home Loan $ 22,045,000 $ 21,830,000 $ 2,045,000 $ 2,057,000 Bank advances ============ ============ ============ ============ Accrued interest payable and other financial $ 3,429,000 $ 3,429,000 $ 3,691,000 $ 3,691,000 liabilities ============ ============ ============ ============ END PUBLISHED PAGE 32
Report of Management
To The Shareholders of LNB Bancorp, Inc. January 26, 1999
The integrity of the financial statements and other financial information contained in this Annual Report is the responsibility of the Management of LNB Bancorp, Inc. Such financial information has been prepared in accordance with generally accepted accounting principles, based on the best estimates and judgement of Management.
LNB Bancorp, Inc. maintains an internal control structure designed to provide reasonable assurance that transactions are executed and recorded in accordance with Management's authorizations, that assets are properly safeguarded, that financial information is objective and reliable and that compliance with laws and regulations is maintained. Because of the inherent limitations in any system of internal control there can be no absolute assurance that errors or irregularities will not occur. Nevertheless, Management believes that the internal control structure and related control procedures provide reasonable assurance that the objectives cited above are being attained.
The internal control structure includes the careful delineation of functions, the proper selection and training of staff, the communication of policies and procedures consistent with the highest standards of business conduct and the maintenance of an internal audit function that independently evaluates and formally reports on the adequacy and effectiveness of the system.
The Audit Committee of the Board of Directors is composed entirely of outside directors who are independent of Management and meets periodically with both internal and independent auditors to review the results and recommendations of their audits. The Committee selects the independent auditor with approval by the shareholders.
The accounting firm of KPMG LLP has been engaged by LNB Bancorp, Inc. to audit its financial statements and their report follows.
/s/ James F. Kidd /s/ Gregory D. Friedman
James F. Kidd Gregory D. Friedman President and Senior Vice President, Chief Executive Officer Chief Operating Officer and Chief Financial Officer
Independent Auditors' Report
The Board of Directors LNB Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of LNB Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and shareholders' equity for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LNB Bancorp, Inc. and subsidiary at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Cleveland, Ohio January 26, 1999
END PUBLISHED PAGE 33
Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME AND DIVIDEND DECLARED - YEARS ENDED DECEMBER 31, 1998 1997 1996 - -------------------------------------------------------------------------- Total interest income $38,178,000 $35,156,000 $32,470,000 Total interest expense 13,999,000 12,990,000 11,478,000 --------------------------------------------- Net interest income 24,179,000 22,166,000 20,992,000 Provision for possible loan losses 2,725,000 750,000 600,000 Other income 6,997,000 5,803,000 4,926,000 Gains (losses) from sales of securities 655,000 -0- (1,000) Other expense 18,861,000 17,387,000 16,565,000 --------------------------------------------- Income before income taxes 10,245,000 9,832,000 8,752,000 Income taxes 3,427,000 3,350,000 2,900,000 --------------------------------------------- Net income $ 6,818,000 $ 6,482,000 $ 5,852,000 --------------------------------------------- Cash dividends declared $ 3,545,000 $ 2,934,000 $ 2,591,000 --------------------------------------------- - --------------------------------------- CONDENSED BALANCE SHEETS - DECEMBER 31, 1998 1997 1996 - -------------------------------------------------------------------------- Cash and cash equivalents $ 32,801,000 $ 24,407,000 $ 18,993,000 Securities 118,519,000 115,374,000 104,960,000 Net loans 366,383,000 326,863,000 297,957,000 Other assets 24,043,000 24,084,000 16,690,000 --------------------------------------------- Total assets $541,746,000 $490,728,000 $438,600,000 --------------------------------------------- Total deposits $443,848,000 $410,655,000 $366,380,000 Other borrowings 45,005,000 30,995,000 24,481,000 Other liabilities 4,217,000 4,093,000 3,541,000 --------------------------------------------- Total liabilities 493,070,000 445,743,000 394,402,000 --------------------------------------------- Total shareholders' equity 48,676,000 44,985,000 44,198,000 --------------------------------------------- Total liabilities and shareholders' equity $541,746,000 $490,728,000 $438,600,000 --------------------------------------------- - --------------- PER SHARE DATA 1998 1997 1996 - -------------------------------------------------------------------------- Basic earnings(2) $ 1.65 $ 1.56 $ 1.39 Diluted earnings(2) $ 1.65 $ 1.55 $ 1.39 Cash dividends(1) $ .86 $ .71 $ .62 Book value per share(1) $11.81 $10.91 $10.47 Shares outstanding at end of year(1) 4,122,575 4,124,379 4,221,304 - --------------------------------------------------------------------------
- ----------------- FINANCIAL RATIOS 1998 1997 1996 - -------------------------------------------------------------------------- Net interest margin(3) 5.17% 5.20% 5.33% Return on assets(4) 1.34 1.41 1.37 Return on shareholders' equity(4) 14.46 14.51 13.70 Shareholders' equity to assets(4) 9.27 9.70 10.01 Cash dividends to net income 52.00 45.26 44.28 Efficiency ratio(3) 60.33 62.01 63.65 Gross loans to deposits 83.33 80.61 82.45 Allowance for loan losses to total loans .94 1.26 1.36 Non-performing loans to total loans .35 .27 .37 - -------------------------------------------------------------------------- Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME AND CASH DIVIDEND DECLARED - YEARS ENDED DECEMBER 31, 1995 1994 - -------------------------------------------------------------------------- Total interest income $31,111,000 $26,830,000 Total interest expense 11,636,000 8,572,000 ------------------------------ Net interest income 19,475,000 18,258,000 Provision for possible loan losses 400,000 400,000 Other income 4,287,000 4,064,000 Gains (losses) from sales of securities -0- 70,000 Other expense 16,023,000 15,679,000 ------------------------------ Income before income taxes 7,339,000 6,313,000 Income taxes 2,336,000 1,881,000 ------------------------------ Net income $ 5,003,000 $ 4,432,000 ------------------------------ Cash dividend declared $ 2,175,000 $ 1,905,000 ------------------------------ - --------------------------------------- CONDENSED BALANCE SHEETS - DECEMBER 31, 1995 1994 - -------------------------------------------------------------------------- Cash and cash equivalents $ 27,530,000 $ 21,275,000 Securities 104,566,000 99,524,000 Net loans 272,491,000 257,975,000 Other assets 17,016,000 16,081,000 ------------------------------ Total assets $421,603,000 $394,855,000 ------------------------------ Total deposits $353,455,000 $335,219,000 Other borrowings 24,148,000 19,171,000 Other liabilities 3,209,000 2,954,000 ------------------------------ Total liabilities 380,812,000 357,344,000 ------------------------------ Total shareholders' equity 40,791,000 37,511,000 ------------------------------
Total liabilities and shareholders' equity $421,603,000 $394,855,000 ------------------------------ - --------------- PER SHARE DATA 1995 1994 - -------------------------------------------------------------------------- Basic earnings(2) $ 1.20 $ 1.05 Diluted earnings(2) $ 1.19 $ 1.05 Cash dividends(1) $ .52 $ .46 Book value per share(1) $ 9.71 $ 9.01 Shares outstanding at end of year(1) 4,202,537 4,161,670 - -------------------------------------------------------------------------- - ----------------- FINANCIAL RATIOS 1995 1994 - -------------------------------------------------------------------------- Net interest margin(3) 5.14% 5.09% Return on assets(4) 1.21 1.13 Return on shareholders' equity(4) 12.72 12.16 Shareholders' equity to assets(4) 9.55 9.31 Cash dividends to net income 43.47 42.98 Efficiency ratio(3) 66.87 69.32 Gross loans to deposits 78.23 78.10 Allowance for loan losses to total loans 1.45 1.46 Non-performing loans to total loans .53 .29 - -------------------------------------------------------------------------- (1) All share and per share data have been adjusted to reflect the 2 percent stock dividend in 1997 and 1996, the five-for-four stock split in 1995, and the 3 percent stock dividend in 1994. (2) Basic and diluted earnings per share is computed using the weighted average number of shares outstanding during each year. (3) Tax Equivalent Basis. (4) Ratios based on average annual balances.
END PUBLISHED PAGE 34
Management's Discussion & Analysis
Introduction: The following is Management's discussion and analysis of the financial condition and results of operations of LNB Bancorp, Inc. (the Corporation). It is intended to amplify certain financial information regarding LNB Bancorp, Inc. and should be read in conjunction with the Consolidated Financial Statements, related Notes, and other financial information and discussions included in the 1998 Annual Report to Shareholders.
Forward-Looking Statements: When used in this Annual Report, the words or phrases "are expected to", "will continue", "is anticipated", "estimate", "projected" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Corporation's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans, and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.
Earnings Summary: LNB Bancorp, Inc. posted its seventeenth consecutive year of increased earnings. LNB Bancorp, Inc.'s consolidated 1998 net income reached a record high of $6,818,000, compared to $6,482,000 in 1997 and $5,852,000 in 1996. Net income for 1998, 1997 and 1996 was favorably affected by an increase in net interest income and increased noninterest income offset in part by higher operating expenses and provision for possible loan losses. Basic earnings per share totaled $1.65 for 1998 compared to $1.56 for 1997 and $1.39 for 1996. Diluted earnings per share totaled $1.65 for 1998, compared to $1.55 for 1997 and $1.39 for 1996. Prior period earnings per share data has been restated to reflect the 2% stock dividend in 1997 and 1996. The return on average assets, a measure of profitability, decreased to 1.34% in 1998 from 1.41% in 1997 and 1.37% in 1996. Return on average shareholders' equity measures how profitable the shareholders' invested capital is employed. Return on average equity was 14.46% for 1998 compared to 14.51% and 13.70% in 1997 and 1996.
Net Interest Income: Net interest income, the difference between interest and loan fee income on earnings assets and the interest paid on deposits and borrowed funds, is the principal source of earnings for the Corporation. Throughout this discussion net interest income is presented on a fully taxable equivalent (FTE) basis which restates interest on tax-exempt securities and loans as if such interest was subject to federal income tax at the statutory rate. Net interest income is affected by market interest rates on both earning assets and interest bearing liabilities, the level of earning assets being funded by interest bearing liabilities, non-interest bearing liabilities and shareholders' equity and the growth in earning assets. In addition, net interest income is affected not only by Management's asset/liability strategies to alter the volume and mix of earning assets and sources of funds, but also such external factors as economic conditions and credit demand. A summary of the impacts of volume and rate changes on the Corporation's net interest income is presented on the next page. Changes in net interest income result from changes in both rate and volume. Volume refers to the impact of net changes in the balances of earning assets and
interest-bearing liabilities. Rate refers to the impact of net changes in interest rates. Net interest income (FTE) in 1998 increased by $2,030,000 from $22,236,000 in 1997 to $24,266,000 in 1998. This increase was affected by increases in the volume of interest-bearing assets and liabilities plus
BASIC EARNINGS PER SHARE dollars* (A Basic Earnings Per Share graph follows in printed version with basic earnings on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
RETURN ON AVERAGE ASSETS percent (A Return On Average Assets graph follows in printed version with return percent on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
RETURN ON AVERAGE EQUITY percent (A Return On Average Equity graph follows in printed version with return percent on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
Basic Return on Return on Earnings Per Share Average Assets Average Equity Year Dollars* Percent Percent
1998 $1.65 1.34% 14.46% 1997 $1.56 1.41% 14.51% 1996 $1.39 1.37% 13.70% 1995 $1.20 1.21% 12.72% 1994 $1.05 1.13% 12.16%
*Adjusted for stock dividends and splits
END PUBLISHED PAGE 35
Net Interest Income (continued):
decreases in market interest rates. The cost of funds decreased from 3.71% in 1997 to 3.64% in 1998, or a total of 7 basis points. During the same period, the yield on earning assets decreased 9 basis points to 8.15% in 1998, compared to 8.24% in 1997, resulting in a decrease in the net interest spread by 2 basis points in 1998. The increase in net interest income resulted from increases in the volume of earning assets, which were greater than the increases in the volume of interest-bearing liabilities. Thus, net interest income increased from 1997 to 1998 from increases in volumes, which was partially offset by changes in rates. Net interest income (FTE) increased by $1,136,000 in 1997 from $21,100,000 in 1996 to $22,236,000 in 1997. Net interest income in 1997 was affected by increases in the volume of interest-bearing assets and liabilities plus increases in market interest rates. The cost of funds increased from 3.58% in 1996 to 3.71% in 1997, or a total of 13 basis points. During the same period, the yield on earning assets increased 1 basis point to 8.24% in 1997, compared to 8.23% in 1996, resulting in a decrease in the net interest spread by 12 basis points in 1997. The net yield on earning assets in 1998 was 5.17% compared to 5.20% in 1997 and 5.33% in 1996. This relatively constant yield reflects the fact that the Corporation's portfolio of earning assets and interest-bearing liabilities are well matched and that Corporate Management is responsive to the impacts of competition, changes in market interest rates and regulation.
Results from Operations: The Corporation's primary source of interest income is from loans. The relationship of loan income to total interest income, on a fully-tax equivalent basis, was constant at 80.3% in 1997 and 1998. Interest and dividends on securities and Federal funds sold, as a percentage of total interest income, on a fully-tax equivalent basis, was constant at 19.7% in 1997 and 1998. The cost of interest bearing liabilities in 1998 was $13,999,000 compared to $12,990,000 and $11,478,000 in 1997 and 1996, respectively. The unfavorable impact of decreases in rates plus increases in volume caused interest expense to increase from 1997 to 1998. The unfavorable impact of increases in deposit rates plus increases in volume caused interest expense to increase from 1996 to 1997. Decreases in the average rates paid on savings, interest-bearing demand, and certificates of deposit accounts offset in part the 1998 increase in the cost of interest-bearing liabilities. Total other income, excluding gains on the sale of securities, grew 21% in 1998. Total other income in 1998 increased to $7,253,000 compared to $5,803,000 in 1997 for an increase of $1,450,000. This increase results from increases from Trust Division income of $594,000, increases in service charges on deposit accounts of $390,000, gains on the sale of securities of $256,000 and increases in other service charges of $199,000. The increase in Trust income results in part in the realization of certain one-time fee income and from increases in the volume of Trust assets under management. The increase in service charges on deposit accounts is due, in part, to reevaluating the assessment of transaction account charges. The increase in other service charges is the result of pricing increases in credit card and merchant fees and ATM fees. Total other income in 1997 increased by $878,000 to $5,803,000 as compared to 1996. This increase resulted from increases in Trust Division income of $198,000 and service charges of $240,000 and other service charges, commissions and fees of $446,000. The Corporation continuously monitors other expenses for greater
efficiency and profitability. The entire staff is geared to improve efficiency and productivity at all levels. The Corporation has made progress in this area as evidenced by improvement in the efficiency ratio from 63.65% in 1996 to 62.01% in 1997 and to 60.33% in 1998. Total other expenses increased 8.5% in 1998 compared to 1997 after a 5.0% increase for 1997 compared to 1996. The 1998 increase in other expenses resulted from increases in salaries and benefits, net occupancy expense, credit card and merchant expenses, and certain one time consulting expenses. Some of these additional expenses arose from the opening of the LaGrange branch office and from two branch offices acquired from KeyBank in late 1997. A significant portion of the increase in 1997 was the result of the effects of inflation on salaries and benefits plus increases in furniture and equipment expenses. Total other expenses in 1997 also increased due to the impact of the cost of acquisition of KeyBank branches plus increases in FDIC Deposit Insurance Premiums. The effective tax rate of the Corporation was 34.7%, 34.1%, and 33.1% in 1998, 1997, and 1996, respectively. The increase in the effective tax rate in 1998 and 1997 was primarily due to the decrease in the ratio of tax-exempt interest income to total interest income. A detailed analysis of income taxes is presented on page 27. The Corporation's Consolidated Statements of Income reflect the effects of inflation. Since interest rates, loan demand and deposit levels are related to inflation, the resulting changes in interest sensitive assets and liabilities are reflected in net interest income. Similarly, operating expenses such as salaries, rents and maintenance are affected by inflation. The only major expense items which do not reflect inflation are depreciation and amortization as these expenses are based on original purchase costs. Selected quarterly financial data for 1998, 1997 and 1996 is presented on page 44. There were significant intra-quarter fluctuations during the third and fourth quarters of 1998 from increases in the provision for possible loan losses. The 1998 fourth quarter increase in other income reflects gains on sales of securities of $256,000. Total interest income and total interest expense increased in the fourth quarter of 1997 due to the September 15, 1997 acquisition of loans and deposits from Key Bank.
END PUBLISHED PAGE 36
Condensed Consolidated Average Balance Sheets Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis December 31, 1998 - -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate ---------------------------------------------- ASSETS: Securities $114,839 $ 7,030 6.12% Securities-tax exempt 4,066 274 6.74 Federal funds sold and other interest-bearing instruments 4,422 238 5.38 Commercial loans 124,415 11,555 9.29 Commercial loans-tax exempt 600 59 9.83 Mortgage loans 144,393 11,307 7.83 Consumer loans 76,753 7,802 10.17 ---------------------------------------------- TOTAL EARNING ASSETS 469,488 38,265 8.15% ---------------------------------------------- Reserve for possible loan losses (4,514) Cash and due from banks 20,175 Other assets 23,414 ---------------------------------------------- TOTAL ASSETS $508,563 ---------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Certificates of deposit $178,989 $ 9,261 5.17% Savings deposits 103,863 2,236 2.15 Interest-bearing demand 70,509 1,026 1.46 Short-term borrowings 24,407 991 4.06 Long-term borrowings 7,031 485 6.90 ---------------------------------------------- TOTAL INTEREST- 384,799 13,999 3.64% BEARING LIABILITIES ---------------------------------------------- Noninterest-bearing deposits 72,575 Other liabilities 4,048 Shareholders' equity 47,141 ---------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $508,563 ---------------------------------------------- NET INTEREST INCOME (FTE) $24,266 Taxable equivalent adjustment (87) ---------------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS $24,179 ---------------------------------------------- NET YIELD ON EARNING ASSETS 5.17% ----------------------------------------------
Condensed Consolidated Average Balance Sheets Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis December 31, 1997 - -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate -------------------------------------------- ASSETS: Securities $106,938 $ 6,590 6.16% Securities-tax exempt 2,922 200 6.84 Federal funds sold and other interest-bearing instruments 2,579 145 5.62 Commercial loans 116,289 11,162 9.60 Commercial loans-tax exempt 760 68 8.95 Mortgage loans 141,642 11,158 7.88 Consumer loans 56,524 5,903 10.44 ---------------------------------------------- TOTAL EARNING ASSETS 427,654 35,226 8.24% ---------------------------------------------- Reserve for possible loan losses (4,217) Cash and due from banks 18,195 Other assets 18,635 ---------------------------------------------- TOTAL ASSETS $460,267 ----------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Certificates of deposit $158,789 $ 8,402 5.29% Savings deposits 96,708 2,130 2.20 Interest-bearing demand 68,386 1,151 1.68 Short-term borrowings 25,307 1,224 4.84 Long-term borrowings 1,225 83 6.78 ---------------------------------------------- TOTAL INTEREST- 350,415 12,990 3.71% BEARING LIABILITIES -------------------------------------------- Noninterest-bearing deposits 62,040 Other liabilities 3,124 Shareholders' equity 44,688 --------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $460,267 --------------------------------------------- NET INTEREST INCOME (FTE) $22,236 Taxable equivalent adjustment (70) --------------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS $22,166 --------------------------------------------- NET YIELD ON EARNING ASSETS 5.20% ---------------------------------------------
Condensed Consolidated Average Balance Sheets Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis December 31, 1996 - -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate ----------------------------------------------- ASSETS: Securities $ 98,661 $ 6,056 6.14% Securities-tax exempt 4,312 313 7.26 Federal funds sold and other interest-bearing instruments 4,916 276 5.61 Commercial loans 108,750 10,327 9.50 Commercial loans-tax exempt 929 82 8.83 Mortgage loans 130,026 10,369 7.97 Consumer loans 48,104 5,155 10.72 ---------------------------------------------- TOTAL EARNING ASSETS 395,698 32,578 8.23% ---------------------------------------------- Reserve for possible loan losses (4,043) Cash and due from banks 17,794 Other assets 17,173 ---------------------------------------------- TOTAL ASSETS $426,622 ---------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Certificates of deposit $139,028 $ 7,302 5.25% Savings deposits 92,570 2,041 2.20 Interest-bearing demand 67,633 1,162 1.72 Short-term borrowings 21,465 954 4.47 Long-term borrowings 291 19 6.53 ---------------------------------------------- TOTAL INTEREST- 320,987 11,478 3.58% BEARING LIABILITIES ---------------------------------------------- Noninterest-bearing deposits 58,989 Other liabilities 3,944 Shareholders' equity 42,702 ---------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $426,622 ---------------------------------------------- NET INTEREST INCOME(FTE) $21,100 Taxable equivalent adjustment (108) ---------------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS $20,992 ---------------------------------------------- NET YIELD ON EARNING ASSETS 5.33% ----------------------------------------------
Rate/Volume Analysis of Net Interest Income Years ended December 31, 1998 and 1997 - ------------------------------------------------------------------------- (Dollars in Thousands) Increase (Decrease) In Interest Income/Expense --------------------------------------------- Volume Rate Total --------------------------------------------- Securities $ 487 $ (47) $ 440 Securities-tax exempt 78 (4) 74 Federal funds sold and other interest- bearing instruments 104 (11) 93 Commercial loans 779 (386) 393 Commercial loans-tax exempt (14) 5 (9) Mortgage loans 217 (68) 149 Consumer loans 2,113 (214) 1,899 --------------------------------------------- TOTAL INTEREST INCOME 3,764 (725) 3,039 --------------------------------------------- Certificates of deposit 1,069 (210) 859 Savings deposits 158 (52) 106 Interest-bearing demand 36 (161) (125) Short-term borrowings (44) (189) (233) Long-term borrowings 393 9 402 --------------------------------------------- TOTAL INTEREST EXPENSE 1,612 (603) 1,009 --------------------------------------------- NET INTEREST INCOME $2,152 $ (122) $ 2,030 --------------------------------------------- Rate/Volume Analysis of Net Interest Income Years ended December 31, 1997 and 1996 - ------------------------------------------------------------------------- (Dollars in Thousands) Increase (Decrease) In Interest Income/Expense --------------------------------------------- Volume Rate Total --------------------------------------------- Securities $ 508 $ 26 $ 534 Securities-tax exempt (101) (12) (113) Federal funds sold and other interest- bearing instruments (131) -0- (131) Commercial loans 716 119 835 Commercial loans-tax exempt (15) 1 (14) Mortgage loans 926 (137) 789 Consumer loans 902 (154) 748 --------------------------------------------- TOTAL INTEREST INCOME 2,805 (157) 2,648 --------------------------------------------- Certificates of deposit 1,038 62 1,100 Savings deposits 91 (2) 89 Interest-bearing demand 13 (24) (11) Short-term borrowings 171 99 270 Long-term borrowings 61 3 64 --------------------------------------------- TOTAL INTEREST EXPENSE 1,374 138 1,512 --------------------------------------------- NET INTEREST INCOME $ 1,431 $ (295) $ 1,136 --------------------------------------------- END PUBLISHED PAGE 37
Provision and Reserve for Possible Loan Losses: The reserve for possible loan losses is maintained by Management at a level considered adequate to cover possible losses. The amount of the provision for possible loan losses charged to operating expenses is the amount necessary, in the opinion of Management, to maintain the reserve for possible loan losses at an adequate level. Management determines the adequacy of the reserve based on past experience, changes in portfolio size and mix, relative quality of the loan portfolio and the rate of loan growth, assessments of current and future economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates, which are subject to change over time. While Management's periodic analysis of the reserve for possible loan losses may dictate portions of the reserve be allocated to specific problem loans, the entire amount is available for any loan charge-offs that may occur. The reserve for possible loan losses on December 31, 1998, was $3,483,000, or .94% of outstanding loans, compared to $4,168,000, or 1.26% at year-end 1997. The provision for possible loan losses charged to operating expense was $2,725,000 and $750,000 in 1998 and 1997, respectively. In addition to meeting Management's expectations for adequacy, this level of funding for the reserve also kept the Bank's ratio of the reserve as a percentage of outstanding loans comparable to that of banks of similar size, loan portfolio size and mix and credit philosophies. During the third and fourth quarters of 1998, a special provision for loan losses of $1,800,000 was added to the reserve for possible loan losses. The special provision was required because of a non-recurring loan loss from a single, but significant, commercial loan relationship. Net charge-offs for 1998 were $3,410,000, as compared to $698,000 for 1997, while net charge-offs as a percentage of average loans outstanding for 1998 was 0.99%, compared to 0.22% for 1997. Net charge-offs for 1998 included a non-recurring $3,200,000 loss from the above mentioned single commercial loan relationship. The remaining balance due to the Bank of $1,300,000 was reclassified from loans to other assets at the end of 1998 when the Bank took the creditor's assets under management. The assets were subsequently sold for $1,300,000 in January of 1999. Non-performing loans at year-end 1998 were $1,300,000 compared to $886,000 at year-end 1997. Non-performing loans consist of loans past due 90 days or more and loans which have been placed on non-accrual status. As of December 31, 1998, 56% of non-performing loans were commercial loans, 7% were personal loans and 37% were residential mortgage loans. This compares to 41% for commercial loans, 5% for personal loans and 54% for mortgage loans at year-end 1997. Non-performing loans did not have a material impact on interest income during 1998, 1997 or 1996. The overall quality of the loan portfolio remains high, as the ratio of non-performing loans to total loans remains at low levels of 0.27% at year-end 1997 and 0.35% at year-end 1998. The Corporation's credit policies are reviewed and modified on an ongoing basis in order to remain suitable for management of credit risks within the loan portfolio as conditions change. At December 31, 1998, there were no significant concentrations of credit risk in the loan portfolio. Additional information regarding the loan portfolio is presented on page 24.
Financial Condition: Total assets of the Corporation rose 10.4% to $541.8 million for the year ended December 31, 1998. The asset growth was funded by increases in deposits and Federal Home Loan Bank advances. Total earning assets increased 10.9% to $495 million at year end 1998. During 1998, Federal
funds sold and other interest-bearing instruments increased by $6,490,000 to $6,624,000. Securities rose $3,145,000 to $118,519,000, and gross loans grew by $38,835,000 to $369,866,000. Consumer loan growth was particularly strong accounting for 76% of total loan growth in 1998. The consumer loan growth resulted from home equity loan sales plus increases in automobile indirect lending. Mortgage and Commercial loans accounted for 14% and 10%, respectively, of total loan portfolio growth during 1998. The maturity distribution of debt securities which appears on page 22 of this report, indicates that $75,450,000, or 65.4%, of debt securities mature within the next five year period with $19,418,000, or 16.8% maturing during 1999. At the close of 1998 and 1997 there were no significant differences between the book and fair values of the debt securities portfolio. The fair value of the debt securities portfolio exceeded its amortized cost by $587,000 or 0.5%, at the close of 1998. Total deposits held by the Corporation increased $33,193,000 during 1998 compared to an increase of $44,275,000 during 1997. Interest-bearing deposits represented 80.7% and 83.3% of total deposits at December 31, 1998 and 1997, respectively. Noninterest-bearing deposits increased by $16,993,000 while interest-bearing deposits increased by $16,200,000 during 1998. During 1997, noninterest-bearing deposits increased by $4,763,000 while interest-bearing deposits increased by $39,512,000. In both 1998 and 1997, as long-term deposits matured and new funds were deposited, these funds were primarily placed in short-term deposits. Total other borrowings, primarily repurchase agreements, decreased by $5,990,000 during 1998, following an increase of $5,564,000 in 1997. Due to the volatility of customer repurchase agreements all funds generated by repurchase agreement activity enter the Bank's earning assets as short-term investments. Federal Home Loan Bank advances increased by $20,000,000 to $22,045,000 at December 31, 1998. Federal Home Loan Bank advances were used to fund consumer loan growth.
END PUBLISHED PAGE 38
Capital Resources: Total shareholder's equity was $48,676,000 at December 31, 1998 compared to $44,985,000 at December 31, 1997, an increase of $3,691,000, or 8.2%. This increase was primarily attributable to net income of $6,818,000, less dividends declared to shareholders of $3,545,000, less the purchase of 2,004 shares of treasury stock at a cost of $57,000. The book value per share of common stock was $11.81 at year-end 1998 compared to $10.91 at year-end 1997, a 8.2% increase. Cash dividends declared on the common stock of LNB Bancorp, Inc. during the year ended December 31, 1998 totaled $3,545,000 or $.86 per share. This compared to $2,934,000, or $.71 per share for the year ended December 31, 1997. In addition to the regular fourth quarter dividend of $.21 per share, an EXTRA cash dividend of $.04 per share was declared by the Board of Directors. The 1998 dividends declared per share represent an increase of 20.8% over the cash dividend declared in 1997. Dividends declared in 1998 represented a payout ratio of 52.00% of net income compared to 45.26% in 1997. As discussed in Note 14 to the Consolidated Financial Statements, the Corporation's primary source of funds for the payment of dividends is its Bank subsidiary. During December of 1996, the Bank paid an additional $8,000,000 in dividends to the Corporation in order for it to have sufficient equity capital to take advantage of future acquisition opportunities and to pay future dividends. In order for the Bank to fund its balance sheet and remain well capitalized, the Corporation and the Bank entered into a subordinated debt agreement on December 30, 1996 for $8,000,000, payable on January 1, 2007 at an interest rate of 6.80%. The Bank, which is limited by regulation as to the amount of a dividend which can be paid, remains within these regulatory restrictions. Under regulations issued by the Federal Reserve Board and the Office of the Comptroller of the Currency, bank holding companies and banks are required to maintain certain minimum capital ratios in order to be considered "well capitalized." These guidelines require a minimum total risk-based capital ratio of 10%, a Tier 1 capital ratio of 6% and leverage ratio of 5%. All of the Corporation's assets, which include various risk-weighted percentages of assets on the balance sheet, as well as off-balance sheet exposures of unused commitments and letters of credit, are expressed as a percentage of risk-adjusted assets and compared to its capital. Tier 1 capital consists of shareholders' equity, exclusive of net unrealized gain (loss) on securities available for sale. Total risk-based capital consists of shareholders' equity, exclusive of net gain (loss) on securities available for sale, plus the allowable portion of the reserve for possible loan losses and subordinated debt. The allowance included in total risk-based capital cannot exceed 1.25% of risk-weighted assets. As of December 31, 1998, LNB Bancorp, Inc. had a total risk-based capital ratio of 13.30%, with a Tier 1 capital ratio of 12.31% compared to 14.34% and 13.11%, respectively, at December 31, 1997. Both of these risk-based capital ratios are well above minimum regulatory requirements. In addition to risk-based capital, a leverage ratio test must also be met. This ratio evaluates capital adequacy on the basis of Tier 1 capital-to-total average assets (unadjusted for risk). On December 31, 1998, LNB Bancorp, Inc.'s leverage ratio was 8.64%, which substantially exceeds the Corporation's minimum regulatory requirement. For additional information on the Corporation and Bank's capital ratios, refer to Note 14, Shareholders Equity on page 28. On an ongoing basis the Corporation analyzes acquisition opportunities in markets which are adjacent to or within the Corporation's current geographical market. Corporate management believes that its current capital resources are sufficient to support any foreseeable acquisition activity. The Corporation also retains a portion of the net income it
earns to accommodate current operational and regulatory capital requirements and to fund future growth opportunities. A part of future growth depends upon capital expenditure programs. Capital expenditures of approximately $2,000,000 are projected for 1999.
TOTAL SHAREHOLDERS' EQUITY millions of dollars (A Total Shareholders' Equity graph follows in printed version with total equity on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
AVERAGE EQUITY TO AVERAGE ASSETS percent (An Average Equity to Average Assets graph follows in printed version with average equity on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
BOOK VALUE PER SHARE dollars* (A Book Value Per Share graph follows in printed version with book value on the y-axis and years 1994 through 1998 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.)
Total Shareholders' Average Equity to Book Value Equity Average Assets Per Share Year Millions of Dollars Percent Dollars*
1998 $48.7 9.27% $11.81 1997 $45.0 9.70% $10.91 1996 $44.2 10.00% $10.47 1995 $40.8 9.55% $ 9.71 1994 $37.5 9.31% $ 9.01
*Adjusted for stock dividends and splits
END PUBLISHED PAGE 39
Quantitative and Qualitative Disclosures about 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. 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. The mission of the Asset/Liability Management Committee of Lorain National Bank is to effectively monitor and manage the Bank's exposure to interest rate risk, liquidity risk, and repricing risk and thereby provide the Bank with a stable net interest margin. Asset/liability management is the measurement and analysis of the Bank's exposure to changes in the interest rate environment. The Bank is subject to interest rate risk to the extent its liabilities reprice more rapidly than its assets. The Bank manages this risk on a continuing basis through the use of a number of objectives and strategies as an ongoing part of its strategic financial plan. The Bank's Asset/Liability Management Committee, which includes executive and senior management representatives, meets monthly. Objectives include monitoring and methods of managing the rate sensitivity and repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of net interest income. The Bank's asset and liability management program defined by the Board of Directors is designed to minimize the impact of significant changes in interest rates on net interest income. Strategies include attempting to market variable-rate loans, growth in the consumer loan portfolio which tend to have shorter terms to maturity, match fixed rate commercial loans with Federal Home Loan Bank advances, and utilizing deposit promotions in an effort to extend the term to maturity of its liabilities. Management may, at times, place greater emphasis on maximizing net interest margin rather than merely concentrating on interest rate risk depending on the relationship between short-and long-term interest rates, market conditions and consumer preference. Management believes that increased net income resulting from a moderate contrast between the maturity of its assets and liabilities can provide high enough returns to justify the increased risk exposure during periods of stable interest rates. The effectiveness of Management's administration of the Asset/Liability function is demonstrated by the Corporation's consistently high net yield on earning assets. The Corporation's net yield on earning assets remains at the high levels of 5.17% and 5.20% for the years ended December 31, 1998 and 1997, respectively. The Asset/Liability Management Committee has established limits on the amount of its interest rate risk exposure, however, there can be no assurance that Management's efforts to limit interest rate risk will be successful. One measure of exposure to interest rate risk is interest rate sensitivity gap analysis. The Bank uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-rate- sensitive assets exceeds the amount of the interest-rate-sensitive
liabilities, and is considered negative when the amount of interest-rate- sensitive liabilities exceeds the amount of interest-rate-sensitive assets. Generally, during a period of rising interest rates, with all factors held constant, a negative gap would adversely affect net interest income; while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, with all factors held constant, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. The Corporation's one year gap was 4.22% at December 31, 1998, 4.88% at December 31, 1997 and 1.35% at December 31, 1996. The decrease in the Corporation's one year gap at December 31, 1998 compared to December 31, 1997, was due to a decrease in assets maturing or otherwise repricing in one year or less totaling $3,385,000 (due to a decrease in loans and securities repricing during that period) partially offset by a decrease in liabilities maturing or otherwise repricing in one year or less totaling $2,304,000 (due primarily to an increase in savings deposits and decreases in short-term borrowings during that period). The increase in the Corporation's one year gap at December 31, 1997 compared to December 31, 1996 was due to an increase in assets maturing or otherwise repricing in one year or less totaling $42,194,000 (due to an increase in loans and securities repricing during that period) partially offset by an increase in liabilities maturing or otherwise repricing in one year or less totaling $25,981,000 (due primarily to an increase in certificates of deposit and short-term borrowings during that period). Corporate management does not anticipate any significant changes in the Corporation's market risk or interest rate risk profiles in 1999. The table on the page 41 sets forth the repricing dates of the Corporation's interest-earning assets and interest-bearing liabilities at December 31, 1998 and the interest rate sensitivity "gap" percentages at the dates indicated.
END PUBLISHED PAGE 40
Gap Analysis (Dollars in Thousands) - -------------------------------------------------------------------------- Expected Maturity/Repricing Date 1999 2000 2001 2002 - -------------------------------------------------------------------------- Fixed rate commercial, mortgage and consumer loans $25,644 $13,586 $12,107 $ 9,882 Weighted average yield 9.43% 9.27% 9.18% 9.07%
Variable rate commercial and consumer loans 107,327 420 309 739 Weighted average yield 9.00% 8.37% 8.75% 8.75%
Semi-variable mortgage loans(1) 50,790 16,792 23,841 15,925 Weighted average yield 7.45% 7.72% 7.27% 7.51%
Variable rate consumer loans 30,441 103 24 51 Weighted average yield 9.47% 8.80% 9.20% 10.61%
Other semi-variable rate loans(1) 7,870 1,086 485 457 Weighted average yield 7.51% 8.12% 7.58% 7.64%
Securities and other(2) 25,693 12,121 7,499 14,235 Weighted average yield 5.97% 6.24% 5.49% 6.03% - -------------------------------------------------------------------------- Total interest-earning assets 247,765 44,108 44,265 41,289 - -------------------------------------------------------------------------- Certificates of deposit 131,388 29,564 10,302 4,623 Weighted average yield 4.75% 5.39% 5.92% 5.54%
Savings deposits 42,620 42,620 21,309 -0- Weighted average yield 2.00% 2.00% 2.00% 0.00%
Interest-bearing demand 30,185 30,185 15,092 -0- Weighted average yield 1.46% 1.46% 1.46% 0.00%
Short-term borrowings 22,960 -0- -0- -0- Weighted average yield 3.80% 0.00% 0.00% 0.00%
Long-term borrowings -0- 5,000 11,095 5,950 Weighted average yield 0.00% 4.76% 5.05% 5.09% - ------------------------------------------------------------------------- Total interest-bearing liabilities 227,153 107,369 57,798 10,573 - ------------------------------------------------------------------------- Interest-earning assets less Interest-bearing liabilities 20,612 (63,261) (13,533) 30,716 Cumulative interest-rate sensitive gap 20,612 (42,649) (56,182) (25,466) Cumulative interest-rate gap as a percentage of total earning assets at December 31, 1998 4.22% Cumulative interest-rate gap as a percentage of total earning assets at December 31, 1997 4.88% Cumulative interest-rate gap as a percentage of total earning assets at December 31, 1996 1.35% - --------------------------------------------------------------------------
Gap Analysis (Dollars in Thousands) - ------------------------------------------------------------------------- Expected Maturity/Repricing Date Fair 2003 Thereafter Total Value(3) - -------------------------------------------------------------------------- Fixed rate commercial, mortgage and consumer loans $ 6,626 $ 8,337 $76,182 $76,201 Weighted average yield 8.89% 8.04% 9.15%
Variable rate commercial and consumer loans 213 -0- 109,008 109,008 Weighted average yield 8.87% 0.00% 8.99%
Semi-variable mortgage loans(1) 30,531 37 137,916 138,012 Weighted average yield 6.93% 6.95% 7.35%
Variable rate consumer loans 60 -0- 30,679 30,679 Weighted average yield 10.80% 0.00% 9.47%
Other semi-variable rate loans(1) 684 2,668 13,250 13,250 Weighted average yield 7.79% 7.43% 7.56%
Securities and other(2) 22,177 39,974 121,699 122,381 Weighted average yield 5.83% 6.32% 5.77% - -------------------------------------------------------------------------- Total interest-earning assets 60,291 51,016 488,734 489,531 - -------------------------------------------------------------------------- Certificates of deposit 392 10 176,279 177,783 Weighted average yield 6.00% 7.98% 5.00%
Savings deposits -0- -0- 106,549 106,549 Weighted average yield 0.00% 0.00% 2.00%
Interest-bearing demand -0- -0- 75,462 75,462 Weighted average yield 0.00% 0.00% 1.46%
Short-term borrowings -0- -0- 22,960 22,960 Weighted average yield 0.00% 0.00% 3.80%
Long-term borrowings -0- -0- 22,045 21,830 Weighted average yield 0.00% 0.00% 5.00% - -------------------------------------------------------------------------- Total interest-bearing liabilities 392 10 403 295 404,584 - -------------------------------------------------------------------------- Interest-earning assets less Interest-bearing liabilities 59,899 51,006 85,439 Cumulative interest- rate sensitive gap 34,433 85,439
(1)Semi-variable mortgage loans include mortgages in which the loan is fixed for the first three or five years of the loan and its interest rate is adjustable thereafter. (2)Securities available for sale are shown at amortized cost. (3)Fair value of loans are gross of deferred fees and allowance for loan losses.
END PUBLISHED PAGE 41
Liquidity Management: 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 demands 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 held to maturity 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. On December 31, 1998, cash and cash equivalents equaled $32,801,000 or 6.1% of total assets. The change in cash and cash equivalents is shown in the Consolidated Statement of Cash Flows on page 16 and arises from operating, investing, and financing activities. The adjustments to reconcile 1998 net income to net cash provided by operating activities primarily consists of depreciation and amortization of $1,688,000, amortization of intangible assets of $448,000, amortization of deferred loan fees and costs of $1,224,000 and a provision for possible loan losses of $2,725,000. These items represent expenses included in net income which do not represent an expenditure or receipt of cash. The cash flows from investing activities relate primarily to securities, loans and purchases of capital assets. Net cash used in investing activities was $46,365,000. Cash used in investing activities resulted from net increases in securities of $27,233,000 offset by proceeds from sales of securities available for sale and trading securities of $25,168,000. Cash used in investing activities included net loan increases of $43,655,000 and purchases of capital assets of $815,000. Net cash provided by financing activities was $43,729,000. Cash provided by financing activities included increases in deposits of $33,193,000, decreases in securities sold under repurchase agreements and other short-term borrowings of $3,790,000, Federal Home Loan Bank advances of $20,000,000 and proceeds from stock options exercised of $4,000. Cash used by financing activities primarily included the purchase of treasury stock in the amount of $57,000 and dividends paid of $3,421,000. These cash flows resulted in a $8,394,000 increase in cash and cash equivalents from December 31, 1997 to December 31, 1998. The Corporation can obtain additional liquidity from off-balance sheet sources which include the purchase of Federal funds from correspondent banks and borrowing from the Federal Reserve Bank's discount window. At year-end, the Bank had available Federal funds facilities in excess of $12,800,000 at three correspondent banks. Additionally, the Bank has a $25,000,000 cash management advance line of credit with the Federal Home Loan Bank of Cincinnati. The internal and external sources of funds for liquidity, in the opinion of Management, satisfy the liquidity needs of the Corporation and the Bank.
Impacts of Accounting and Regulatory Pronouncements: Corporate management is not aware of any proposed regulations or 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.
Financial Accounting Standards Board: The Financial Accounting Standards Board (FASB) has issued: SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" Implementation date by the Corporation: January 1, 1999 Impact on the Corporation: This Statement further amends Statement 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. After the securitization of a mortgage loan held for sale, any retained mortgage-backed securities shall be classified in accordance with the provisions of Statement 115. However, a mortgage banking enterprise must classify as trading any retained mortgage-backed securities that it commits to sell before or during the securitization process. Corporate management believes that adoption of SFAS No. 134 will not have a significant impact on the financial position or results of operations as, historically, the Corporation does not securitize loans for sale and retain the mortgage-backed security.
All other applicable Statements of Financial Accounting Standards that have been issued and have effective dates impacting 1998 and prior years financial statements have been adopted by the Corporation. Corporate Management believes there are no Statements of Financial Accounting Standards which have been issued and have implementation dates in the future which will materially impact the financial statements of future years.
END PUBLISHED PAGE 42
Year 2000 Readiness Disclosure: Several of the Corporation's and Bank's regulators including the Securities and Exchange Commission, Federal Reserve Board, and the Office of the Comptroller of Currency have issued guidance relative to the management and disclosures for year 2000 readiness. A discussion of year 2000 readiness as it relates to the Corporation, the Bank and their customers, suppliers and vendors follows. The Corporation established a strategic task force in September, 1997 to perform a comprehensive review of its computer and related systems to identify the systems that could be affected by the "Year 2000" issue and has developed an implementation plan to resolve the issue. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Corporation's programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The Corporation expects to incur internal staff costs, consulting, and other expenses to identify, correct or reprogram, and test the systems for the year 2000 readiness. The Corporation estimates that compliance costs for the year 2000 issue from 1997 through 2000 will not exceed $250,000. The 1998 compliance costs were $68,000 while 1997 compliance costs totaled $5,000. The majority of the remaining costs for year 2000 readiness relate to equipment upgrades and training. The Corporation continues to evaluate appropriate courses of corrective action, including replacement of certain systems whose associated costs would be recorded as assets and amortized. Accordingly, the Corporation does not expect that year 2000 compliance costs to be expensed over the next year will have a material effect on the financial position, liquidity or results of operation. To date, the Corporation is in the process of obtaining formal notifications from all of its major vendors and suppliers that their systems are year 2000 compliant. The Corporation is well on its way in the testing and evaluation of internal and external systems for year 2000 compliance. The Corporation has completed successful upgrades, testing, and validation of internal mission critical systems and they are Y2K compliant. The Corporation is performing a customer risk assessment relative to Year 2000 readiness. The Corporation's customer awareness program includes providing: seminars to business and non-profit entities, Year 2000 information on statements and maintaining a telephone number for customer inquiries. The Corporation provides quarterly updates to the Board of Directors regarding Year 2000 readiness. The project completion date for the Year 2000 readiness is slated for June, 1999. Financial institutions may experience increases in problem loans and credit losses in the event that borrowers fail to properly respond to the "Year 2000" issue. Cost of funds may become greater, if customers react to publicity about this issue by withdrawing deposits. Accordingly, the Corporation has formed an internal task force to assess potential problems relating to credit, liquidity, and third party risk, and where appropriate, develop contingency plans. This task force is conducting a survey of significant credit and deposit relationships to determine their "Year 2000" readiness and to evaluate the potential of credit and liquidity risk to the Corporation. Also, the "Year 2000" issue creates risk for the Corporation from unforeseen problems in its own computer systems and from third parties' with whom the Corporation deals on financial transactions. Such failures of the Corporation, and/or third parties' computer systems could have a material impact on the Corporation's ability to conduct its business, and especially to process and account for the transfer of funds electronically. Based upon testing of mission critical hardware and software, the Corporation does not anticipate that it will have to rely on a contingency
plan relating to these areas. However, the Corporation is in the process of developing a contingency plan that would cover the failure of mission critical hardware and software. The contingency plan is also being developed to cover Y2K failure(s) that might result from a failure(s) outside of the control of the Corporation; such as a utility company failure. The Corporation's contingency plan for Y2K failure of its core processing systems will be to handle and process customer transactions manually until the system failure is corrected. In the worst case scenario where any of the Corporation's mission critical systems, either internal or external, would fail, the Corporation will be operating in a manual mode. In preparation for the unlikely event of this worst case scenario, the Corporation is in the process of planning and training all of its' employees and will have all customer records backed up to ensure the accuracy of our customer records.
END PUBLISHED PAGE 43
Selected Quarterly Financial Data
Consolidated quarterly financial and per share data for the years ended December 31, 1998, 1997 and 1996 are summarized as follows: First Second Third Fourth Quarter Quarter Quarter Quarter Totals - -------------------------------------------------------------------------- Total 1998 $9,126,000 $9,377,000 $9,830,000 $9,845,000 $38,178,000 interest 1997 8,256,000 8,594,000 8,900,000 9,406,000 35,156,000 income 1996 7,892,000 8,032,000 8,187,000 8,359,000 32,470,000 - -------------------------------------------------------------------------- Total 1998 3,435,000 3,415,000 3,578,000 3,571,000 13,999,000 interest 1997 2,999,000 3,157,000 3,302,000 3,532,000 12,990,000 expense 1996 2,878,000 2,770,000 2,890,000 2,940,000 11,478,000 - -------------------------------------------------------------------------- Net 1998 5,691,000 5,962,000 6,252,000 6,274,000 24,179,000 interest 1997 5,257,000 5,437,000 5,598,000 5,874,000 22,166,000 income 1996 5,014,000 5,262,000 5,297,000 5,419,000 20,992,000 - -------------------------------------------------------------------------- Provision 1998 187,000 238,000 838,000 1,462,000 2,725,000 for 1997 125,000 125,000 125,000 375,000 750,000 possible 1996 125,000 175,000 125,000 175,000 600,000 loan losses - -------------------------------------------------------------------------- Net 1998 5,504,000 5,724,000 5,414,000 4,812,000 21,454,000 interest 1997 5,132,000 5,312,000 5,473,000 5,499,000 21,416,000 income 1996 4,889,000 5,087,000 5,172,000 5,244,000 20,392,000 after provision for possible loan losses - -------------------------------------------------------------------------- Other 1998 1,622,000 1,831,000 1,658,000 2,142,000 7,253,000 income 1997 1,293,000 1,399,000 1,544,000 1,567,000 5,803,000 1996 1,221,000 1,227,000 1,254,000 1,223,000 4,925,000 - -------------------------------------------------------------------------- Other 1998 4,582,000 4,909,000 4,314,000 5,192,000 18,997,000 expenses 1997 4,113,000 4,277,000 4,475,000 4,522,000 17,387,000 1996 4,128,000 4,173,000 4,152,000 4,112,000 16,565,000 - -------------------------------------------------------------------------- Income 1998 866,000 892,000 932,000 601,000 3,291,000 taxes 1997 787,000 839,000 882,000 842,000 3,350,000 1996 656,000 690,000 771,000 783,000 2,900,000 - -------------------------------------------------------------------------- Net income 1998 $1,678,000 $1,754,000 $1,826,000 $1,560,000 $6,818,000 1997 1,525,000 1,595,000 1,660,000 1,702,000 6,482,000 1996 1,326,000 1,451,000 1,503,000 1,572,000 5,852,000 - -------------------------------------------------------------------------- Basic 1998 $ .41 $ .42 $ .44 $ .38 $1.65 earnings 1997 .37 .38 .40 .41 1.56 per share 1996 .32 .35 .35 .37 1.39 (2) - -------------------------------------------------------------------------- Dividends 1998 $ .20 $ .20 $ .21 $ .25 $ .86 paid per 1997 .16 .16 .17 .22 .71 share (1) 1996 .13 .14 .16 .19 .62 - -------------------------------------------------------------------------- (1) All share and per share data have been adjusted to reflect the 2 percent stock dividend in 1997 and 1996. (2) Basic earnings per share is computed using the weighted average number of shares outstanding during each year. END PUBLISHED PAGE 36
Banking Offices & ATMs
ATM service available wherever you see this symbol**
Lorain Banking Offices Main Office 457 Broadway Lorain, Ohio 44052 (440)244-7185
**Sixth Street Drive-In Office 200 Sixth Street Lorain, Ohio 44052 (440)244-7242
**Cooper-Foster Park Road Office 1920 Cooper-Foster Park Road Lorain, Ohio 44053 (440)282-1252
**Kansas Avenue Office 1604 Kansas Avenue Lorain, Ohio 44052 (440)288-9151
**Oberlin Avenue Office 3660 Oberlin Avenue Lorain, Ohio 44053 (440)282-9196
**Pearl Avenue Office 2850 Pearl Avenue Lorain, Ohio 44055 (440)277-1103
**West Park Drive Office 2130 West Park Drive Lorain, Ohio 44053 (440))989-3131
Amherst Banking Office **Amherst Office 1175 Cleveland Avenue Amherst, Ohio 44001 (440)988-4423
Avon Lake Banking Office **Avon Lake Office 240 Miller Road Avon Lake, Ohio 44012 (440)933-2186
Elyria Banking Offices **Ely Square Office* 124 Middle Avenue Elyria, Ohio 44035 (440)323-4621
**Cleveland Street Office 801 Cleveland Street Elyria, Ohio 44035 (440)365-8397
**Lake Avenue Office 42935 North Ridge Road Elyria Township, Ohio 44035 (440)233-7196
**Midway Mall Office 6395 Midway Mall Blvd. Elyria, Ohio 44035 (440)324-6530
**Second Street Office* 221 Second Street Elyria, Ohio 44035 (440)323-4621
Village of LaGrange Banking Office **Village of LaGrange Office 546 North Center Street Village of LaGrange, Ohio 44050 (440)355-6734
Oberlin Banking Offices Kendal at Oberlin Office 600 Kendal Drive Oberlin, Ohio 44074 (440)774-5400
**Oberlin Office 40 East College Street Oberlin, Ohio 44074 (440)775-1361
Olmsted Township Banking Offices **Olmsted Township Office 27095 Bagley Road Olmsted Township, Ohio 44138 (440)235-4600
The Renaissance Office 26376 John Road Olmsted Township, Ohio 44138 (440)427-0041
Vermilion Banking Office **Vermilion Office 4455 East Liberty Avenue Vermilion, Ohio 44089 (440)967-3124
Westlake Banking Offices **Crossings of Westlake Office 30210 Detroit Road Westlake, Ohio 44145 (440)892-9696
Westlake Village Office 28550 Westlake Village Drive Westlake, Ohio 44145 (440)808-0229
Community-Based Automated Teller Machine Locations **Captain Larry's Marathon 1317 State Route 60 Vermilion, Ohio
**Convenient Food Mart 5375 West Erie Avenue Lorain, Ohio
**Dad's Sunoco 7580 Leavitt Road State Route 58 Amherst, Ohio
**Gateway Plaza Convenient 3451 Colorado Avenue Lorain, Ohio
**Lakeland Medical Center 3700 Kolbe Road Lorain, Ohio
**Lorain County Community College 1005 North Abbe Road Elyria, Ohio
**Lowe's Home Improvement Warehouse 620 Midway Boulevard Elyria, Ohio
**Midway Mall Food Court 3343 Midway Mall Blvd. Elyria, Ohio
Other Offices Executive Offices 457 Broadway Lorain, Ohio 44052 (440)244-7123
Branch Administration 457 Broadway Lorain, Ohio 44052 (440)244-7253
PAGE>141 Commercial, Consumer and Mortgage Loans 457 Broadway Lorain, Ohio 44052 (440)244-7220 (440)244-7272 (440)244-7216
Credit Cards 2130 West Park Drive Lorain, Ohio 44053 (440)989-3308
Customer Service 2130 West Park Drive Lorain, Ohio 44053 (440)989-3348
Human Resources 2130 West Park Drive Lorain, Ohio 44053 (440)989-3139
Operations 2130 West Park Drive Lorain, Ohio 44053 (440)989-3315
Purchasing 2150 West Park Drive Lorain, Ohio 44053 (440)989-3260
Trust and Investment Management Services 457 Broadway Lorain, Ohio 44052 (440)244-7226
All Other Departments & Information Not Listed Telebanker (440)245-4562 Toll Free (800)860-1007 Lorain (440)244-6000 Elyria (440)236-5047
*The Second Street Office will be relocated to Ely Square in the second quarter of 1999.
END PUBLISHED PAGE 45
Directors and Officers of LNB Bancorp, Inc.
Directors
Stanley G. Pijor Chairman of the Board LNB Bancorp, Inc. and Lorain National Bank
James L. Bardoner Retired, Former President Dorn Industries, Inc.
Daniel P. Batista Attorney/Partner Cook & Batista Co., L.P.A.
Robert M. Campana Managing Director P.C. Campana, Inc.
Terry D. Goode Vice President Lorain County Title Company
Wellsley O. Gray Retired
James F. Kidd President and Chief Executive Officer LNB Bancorp, Inc. and Lorain National Bank
David M. Koethe Chairman of the Board The Lorain Printing Company
Benjamin G. Norton H.R. Consultant Lorain Technology, Inc.
Jeffrey F. Riddell President and Chief Executive Officer, Consumeracq, Inc. and Consumers Builders Supply Co.
Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. Executive Vice President and Secretary Lorain National Bank
T. L. Smith, M.D. Retired Physician
Eugene M. Sofranko President and Chief Executive Officer Lorain Glass Company, Inc.
Paul T. Stack Retired
Leo Weingarten Retired
Officers
Stanley G. Pijor Chairman of the Board LNB Bancorp, Inc. and Lorain National Bank
James F. Kidd President and Chief Executive Officer
Thomas P. Ryan Executive Vice President and Secretary/Treasurer
Sandra L. Dubell Senior Vice President and Chief Lending Officer
Gregory D. Friedman Senior Vice President, Chief Operating Officer and Chief Financial Officer
Michael D. Ireland Senior Vice President
Emma N. Mason Senior Vice President
James H. Weber Senior Vice President
Mitchell J. Fallis Vice President and Chief Accounting Officer
END PUBLISHED PAGE 46
Officers of Lorain National Bank
Executive Officers
James F. Kidd President and Chief Executive Officer
Thomas P. Ryan Executive Vice President and Secretary
Gregory D. Friedman Senior Vice President, Chief Operating Officer and Chief Financial Officer
Senior Officers
Sandra L. Dubell Senior Vice President and Chief Lending Officer
Michael D. Ireland Senior Vice President Operations
Emma N. Mason Senior Vice President Trust and Investment Management
James H. Weber Senior Vice President Marketing Administration
Branch and Trust Officers
Branch Administration
Debra R. Brown Vice President
Teresa E. George Assistant Vice President
Branch Officers
Main Office & Sixth Street Drive-In Office Keith H. Kapanke Assistant Vice President
Amherst Office G. Dale Rosenkranz Vice President
Avon Lake Office Charles A. DeAngelis Assistant Vice President
Cleveland Street Office Timothy J. Gallagher Vice President
Cooper-Foster Park Road Office Linda Buehner Assistant Vice President
Kansas Avenue Office Connie Sklarek Assistant Cashier
Lake Avenue Office Christine M. Weber Assistant Vice President
Midway Mall Office Kimberly S. Plzak Assistant Vice President Carol Snyder Branch Staff Officer & Assistant Branch Manager
Oberlin Avenue Office Jennifer M. Nickolls Assistant Vice President
Oberlin Office & Kendal at Oberlin Office Marilyn R. Krasienko Assistant Vice President
Olmsted Township Office & The Renaissance Office Diana L. Schmittgen Assistant Vice President
Pearl Avenue Office Patricia A. Wolanczyk Assistant Cashier
Second Street Office James E. Schmittgen Vice President
Vermilion Office Robert B. White Vice President
Village of LaGrange Office Carrie Hartman Assistant Vice President
West Park Drive Office Rita M. Hoyt Assistant Cashier
The Crossings of Westlake Office & Westlake Village Office Susan M. Neiding Vice President
Trust and Investment Management
Edward J. Baker Vice President
Gerald S. Falcon Vice President
Brian D. Morgan Vice President
Patrick E. Sheridan Vice President
Neal A. Conger Vice President
Carol A. Cavanaugh Assistant Employee Benefits Officer
Loan Officers
Commercial Loans
John A. Funderburg Vice President
Denise M. Kosakowski Vice President
Ellen M. Walsh Vice President
Kenneth P. Wayton Vice President
Consumer Loans
Bruce Diso Vice President
Robert D. Asik Consumer Loan Officer
Kelly A. Dunfee Assistant Cashier
Credit Card Loans
Jeanne Maschari Vice President
Mortgage Loans
Edwin F. Klenz Vice President
Joel A. Krueck Assistant Vice President and CRA Officer
Loan Services
Cynthia M. Marks Assistant Cashier
Joan M. Raymond Assistant Vice President
Joyce L. Wasela Commercial Loans Operations Officer
Administration and Operations Officers
Accounting
Mitchell J. Fallis Vice President and Chief Accounting Officer
Mary L. Kapanke Fiscal Operations Officer
Auditing
Randy E. Lottman Assistant Vice President, Auditor and Compliance Officer
Cash Management
Patricia L. Cole Assistant Cashier
Deposit Services
Donna Jean Phillips Assistant Vice President
E.D.P. Services
Larry R. Johnson Vice President
Larry A. Hill Assistant Vice President
Human Resources
Carol A. Mesko Assistant Vice President
Teresa E. Kreger Assistant Cashier
Maintenance
Robert J. Witkowski Maintenance Officer
Marketing
Steven F. Cooper Vice President
Debra L. Temerario Marketing Operations Officer
Purchasing
Susan I. Tuttle Assistant Vice President
Sales
Robert L. Cox Sales Coordinator
Security
James E. Long Assistant Vice President
Training
Marianne Kocak Assistant Vice President
END PUBLISHED PAGE 47
Earnings and Dividend Performance
10 Year Earnings History 1989 through 1998
(10 Year Earnings History graph follows in printed version with years 1989 through 1998 on the y-axis and earnings on the x-axis in $2,500,000.00 increments ranging from $0 to $7,500,000.00. The graph is a horizontal bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid along with an accompanying legend for identification purposes.)
The graph above depicts the earnings history of LNB Bancorp, Inc. from 1989 through 1998.
The Corporation's Management team is proud of its record of continuously increasing profits over this ten year period.
Cumulative Cash Dividends Declared
Total Cash Dividends Declared 1989 - 1998: $1,795.86
(Cumulative Cash Dividends Declared graph follows in printed version with years 1989 through 1998 on the y-axis and Dividends Declared on the x-axis in $600.00 increments ranging from $0 to $1,800.00. The graph is horizontal bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid along with an accompanying legend for identification purposes.)
For shareholder information, the above graph reflects a 10 year chronological record of dividend performance following a hypothetical purchase of 100 shares of LNB Bancorp, Inc., stock without further reinvestment. Over the 10 year period, our hypothetical shareholder would have benefited from the cumulative cash dividends declared on the stock in the amount of $1,795.86.
Book Value Per Share 1989 through 1998
(Book Value Per Share graph follows in printed version with years 1989 through 1998 on the y-axis and book values on the x-axis in $4.00 increments ranging from $0.00 to $12.00. The graph is a horizontal bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid along with an accompanying legend for identification purposes.)
The graph above depicts the book value per share of LNB Bancorp, Inc. from 1989 through 1998. Senior Management has worked diligently to cause the rapid increase in the book value per share over the past five years.
The data points used to plot the three (3) graphs previously described follows: NET INCOME CUMULATIVE CASH BOOK VALUE YEAR IN THOUSANDS DIVIDENDS DECLARED PER SHARE 1998 $6,818,000.00 $1,796.00 $11.81 1997 $6,480,000.00 $1,482.00 $10.84 1996 $5,852,000.00 $1,223.00 $10.12 1995 $5,003,000.00 $ 997.00 $ 9.36 1994 $4,432,000.00 $ 808.00 $ 8.75 1993 $4,029,000.00 $ 639.00 $ 8.16 1992 $3,826,000.00 $ 486.00 $ 7.65 1991 $3,512,000.00 $ 348.00 $ 7.14 1990 $3,343,000.00 $ 221.00 $ 6.60 1989 $3,217,000.00 $ 106.00 $ 6.14
END PUBLISHED PAGE 48
THREE QUARTER PAGE INSERT FRONT SIDE
Please detach postage-paid card(s) and return through U.S. Mail or to a Lorain National Bank office near you.
Top card reads as follows: To: Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. 457 Broadway, Lorain, Ohio 44052
Yes, I am interested in obtaining information on LNB Bancorp, Inc.'s Dividend Reinvestment and Cash Stock Purchase Plan.
Name_________________________ Address______________________ City____State____Zip______Phone________
Middle card reads as follows: To: James F. Kidd President and Chief Executive Officer LNB Bancorp, Inc. 457 Broadway, Lorain Ohio 44052
Yes, I am interested in acquiring LNB Bancorp, Inc. stock and would like to be contacted by a stock broker when a stock purchase opportunity arises.
Name_________________________ Address______________________ City____State____Zip______Phone________
Number of Shares Requested__________
Bottom card reads as follows: 1998 Annual Report Survey Thank you for reading the 1998 LNB Bancorp, Inc. Annual Report. To help us improve our ability to serve you, please complete the following survey. The following grading scale should be used: Excellent-5; Good-4; Fair-3; Poor-2; and, Very Poor-1. - -------------------------------------------------------------------------- 1. Please rate the sections of the Annual Report you found most helpful. When evaluating, consider the overall quality, communication effectiveness and readability of the section. _____ Corporate Information _____ Message to Shareholders _____ Customer testimonials _____ Financial Statements and Notes _____ Stock and Dividend Information _____ Management's Discussion and Analysis _____ Earnings and Dividend Performance
2. Please rate the Annual Report on the following characteristics: _____ Appearance/design _____ Organization/ease of locating information _____ Ease of Reading _____ Use of Charts/graphs _____ Use of Photographs _____ Showing how LNB Bancorp, Inc. is positioned for the future _____ Helping you understand LNB Bancorp, Inc.
3. Please give a rating for your overall impression of the Annual Report._____
4. What information would you like to see in future Annual Reports? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________
5. Please provide name & address __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________
Thank you for answering these questions.
THREE QUARTER PAGE INSERT BACK SIDE
Three postage paid postcards
Top card reads as follows:
Lorain National Bank Attn: Thomas P. Ryan 457 Broadway Lorain, Ohio 44052-9986
Middle card reads as follows:
Lorain National Bank Attn: James F. Kidd 457 Broadway Lorain, Ohio 44052-9986
Bottom card reads as follows:
Lorain National Bank Attn: Mitchell J. Fallis 457 Broadway Lorain, Ohio 44052-9986
COVER DESCRIPTION
Inside Back Cover
Bottom right
Familiar faces... Friendly places
END OF INSIDE BACK COVER
Outside back cover
White background
LNB Bancorp, Inc.
Blue lettering
Mail: Lorain National Bank.457 Broadway. Lorain, Ohio 44052-1739 E-Mail: emailservices@4LNB.com,Internet: www.4LNB.com Telephone: (440) 244-6000 . Toll Free: (800) 860-1007 Telefax: (440) 244-4815
END OF PUBLISHED LNB BANCORP, INC. 1998 ANNUAL REPORT
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (21)
Corporate Organization Structure
.............................. . LNB Bancorp, Inc. . . One Bank Holding Company . . an Ohio Corporation (1) . .............................. . . ............................. . The Lorain National Bank . . Wholly-Owned Subsidiary . . an Ohio Corporation (1) . ............................. . . ................................. . LNB Financial Services, Inc. . . Wholly-Owned Subsidiary . . an Ohio Corporation (1) . . (inactive) . .................................
(1) The physical location and legal mailing address for all entities is:
457 Broadway Lorain, Ohio 44052
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (22)
Notice of Annual Meeting to Shareholders and Proxy Statement (dated March 22, 1999).
LNB BANCORP, INC. LORAIN, OHIO
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF LNB BANCORP, INC. March 22, 1999
The Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 521 Broadway, Lorain, Ohio 44052, on Tuesday, April 20, 1999, at 10:00 a.m.,Eastern Daylight Savings Time, for the purpose of considering and voting upon the following matters as more fully described in the Proxy Statement.
PROPOSALS: 1. ELECTION OF DIRECTORS - To elect five (5) directors to hold office until their term expires (April 22, 2002) or until their successors are elected and qualified.
2. OTHER BUSINESS - To transact such other business as may properly come before the meeting.
Shareholders of record at the close of business on March 8, 1999 will be entitled to vote the number of shares held of record in their names on that date. The transfer books will not be closed.
We urge you to sign and return the enclosed proxy as promptly as possible, whether or not you plan to attend the meeting in person. This proxy may be revoked prior to its exercise.
By Order of the Board of Directors
/s/ Thomas P. Ryan
Thomas P. Ryan Executive Vice President and Secretary/Treasurer
YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND MAIL THE ENCLOSED PROXY FORM(S) WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
THIS PAGE LEFT INTENTIONALLY BLANK
LNB BANCORP, INC. 457 BROADWAY LORAIN, OHIO 44052 PROXY STATEMENT MARCH 22, 1999
This proxy solicitation is made on behalf of the Board of Directors of LNB Bancorp, Inc., (hereinafter called the "Corporation") being a One Bank Holding Company owning all of the stock of The Lorain National Bank (hereinafter called the "Bank"). As of this date, the number of shares of Common Stock outstanding and entitled to vote at the Annual Meeting of Shareholders to be held on April 20, 1999, is 4,122,675. Only those shareholders of record at the close of business on March 8, 1999 shall be entitled to vote. This proxy may be revoked prior to its exercise. The cost of this solicitation is being paid by the Corporation.
VOTING
Each shareholder shall be entitled to one vote for each share of stock standing in their name on the books of the Corporation. No holder of shares of any class shall have the right to vote cumulatively in the election of directors. Shares held in accounts by the Bank's Trust and Investment Management Division will be voted by the trustee in accordance with written instructions from account administrators or account plan participants, and where no instructions are received, as the trustee deems proper. Shares of Common Stock represented by proxies in the accompanying form which are properly executed and returned to the Corporation will be voted at the Annual Meeting of Shareholders in accordance with the shareholders' instruction contained in such proxies. Where no such instructions are given, the shares will be voted for the election of directors as described herein, and at the discretion of the proxy holders on such other matters as may come before the meeting. The Board of Directors has no reason to believe that any of the nominees will be unable to serve as a director. In the event, however, of the death or unavailability of any nominee or nominees, the proxy to that extent will be voted for such other person or persons as the Board of Directors may recommend. The results of votes taken at the Annual Meeting will be disclosed in the Corporation's First Quarterly Report for 1999 on Form 10-Q, as filed with the Securities and Exchange Commission (SEC). The disclosure will include for each proposal, the number of votes for, the number of votes against and the number of abstentions. In addition, the disclosure will set forth the number of votes received by each candidate running for a directorship and the percentage of these votes as to the total shares outstanding.
ELECTION OF DIRECTORS
Article III of the Code of Regulations of the Corporation provides that directors are to be divided into three (3) classes. Each class serves a term of three (3) years, or until their respective successors are elected and qualified. In that the term of office for five (5) members of the present Board of Directors will expire on April 20, 1999, the Management has nominated the hereinafter named five (5) individuals for election to serve until April 22, 2002, or until their successors are elected and qualified. The affirmative vote of the holders of at least a majority of a quorum is required in order to elect each director. Under the Code of Regulations of the Corporation, a quorum is constituted by the presence, in person or
by proxy, of a majority of the voting power of the Corporation.
Other nominations may be made only in accordance with the notice procedures set forth in Article III of the Code of Regulations of the Corporation. The procedure states that nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of capital stock of the Corporation entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the existing Management of the Corporation, shall be made in writing and shall be delivered or mailed to the President of the Corporation not less than fourteen (14) days nor more than fifty (50) days prior to any meeting of shareholders called for the election of directors, provided however, that if less than twenty-one (21) days notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the President of the Corporation no later than the close of business on the seventh (7th) day following the day on which the notice of the meeting was mailed. Such notification shall contain the following information as to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of common stock of the Corporation that will be voted for each proposed nominee; (d) the name and resident address of the notifying shareholder; and (e) the number of shares of common stock of the Corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, at his discretion, be disregarded by the Chairman of the meeting, and upon his instructions, the vote teller may disregard all votes cast for each such nominee. Unless otherwise instructed, it is the intention of the persons named in the proxy to vote for the election of the following five(5) nominees: 1) Terry D. Goode 2) Wellsley O. Gray 3) James R. Herrick 4) Benjamin G. Norton 5) John W. Schaeffer, M.D.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH NOMINEE.
The following individuals are directors whose term of office is scheduled to expire on April 18, 2000:
1) Robert M. Campana 2) James F. Kidd 3) Jeffrey F. Riddell 4) Thomas P. Ryan 5) Paul T. Stack
The following individuals are directors whose term of office is scheduled to expire on April 17, 2001:
1) Daniel P. Batista 2) David M. Koethe 3) Stanley G. Pijor 4) Eugene M. Sofranko 5) Leo Weingarten
DIRECTOR'S COMMITTEES
The Bank has six (6) standing committees upon which members of the Board of Directors serve. They are:
1) The Audit Committee 4) The Pension/Fringe Benefit Committee 2) The Executive Committee 5) The Incentive Stock Option Committee 3) The Trust Committee 6) The Compensation Committee Membership of each of these committees is indicated by footnote on page 7.
The Audit Committee met three (3) times during the last fiscal year. It establishes policies for the administration of the Bank's Audit Division. The Executive Committee met twelve (12) times during the last fiscal year. This committee is authorized to approve matters relating to loans, the purchase of bills, notes, and other evidence of debt. The Trust Committee reviews the various trusts accepted by the Bank's Trust and Investment Management Division. It held six (6) meetings during the last fiscal year. The Pension/Fringe Benefit Committee reviews indirect compensation of officers and employees. It did not meet during the last fiscal year. The Incentive Stock Option Committee determines who will receive stock options and the number of shares to be granted under the terms of the Incentive Stock Option Plan. The actions of the Incentive Stock Option Committee are subject to the approval of the Compensation Committee. It did not meet during the last fiscal year. The Compensation Committee meets to review all officers' salaries. It held one (1) meeting during the last fiscal year. The Bank has no designated Nominating Committee. Nominees for the Board of Directors are determined by a vote of the total Board of Directors. The Bank held fifteen (15) Board of Directors meetings during the last fiscal year. Of the directors who served during 1998, Leo Weingarten attended fewer than 75% of the total number of meetings of the Board of Directors and all committee meetings of which the aforementioned director was a member. The Corporation held fifteen (15) Board of Directors meetings during the last fiscal year. Of the directors who served during 1998, Leo Weingarten attended fewer than 75% of the total of fifteen (15) meetings held.
DIRECTOR'S COMPENSATION
Each outside director of the Bank is entitled to receive an annual retainer fee of $4,000. Bank officers, who are also directors of the Bank, do not receive an annual retainer fee. All of the directors of the Corporation are also directors of the Bank. A director's fee of $500 is paid to outside directors for each meeting attended. Directors, who are also officers of the Corporation, receive a fee of $250, for their attendance at the Corporation's board meetings and receive no director's fees for their attendance at the meetings of the Bank's board. Mr. Stanley G. Pijor entered into a Consulting Agreement (The Agreement) with the Bank and the Corporation dated March 15, 1994. The Agreement provides that Mr. Pijor shall receive a consulting fee of $85,000 each year for a period of five (5) years commencing January 1, 1996. The Agreement also stipulates that Mr. Pijor will be provided with an automobile and will be reimbursed for reasonable expenses relative to his duties as a consultant during the term of the Agreement. Termination of the Agreement (by either party) would not prejudice Mr. Pijor's right to receive the benefits referred to above for a period of up to two (2) years.
BANK CORPORATION PRINCIPAL OCCUPATION DIRECTOR DIRECTOR NAME AND AGE FOR THE PAST FIVE YEARS SINCE SINCE
JAMES L. BARDONER* RETIRED, FORMER PRESIDENT 1974 1983 Age 80 Dorn Industries, Inc. (1-2-4-5-6) (Manufacturing Company)
DANIEL P. BATISTA ATTORNEY/PARTNER 1976 1983 Age 64 Cook & Batista Co.,L.P.A.(A) (2-3-5-6)
ROBERT M. CAMPANA MANAGING DIRECTOR 1996 1996 Age 39 P.C.Campana, Inc. (3)
TERRY D. GOODE VICE PRESIDENT 1997 1997 Age 44 Lorain County Title Company (1)
WELLSLEY O. GRAY RETIRED 1973 1983 Age 65 (1-3)
JAMES R. HERRICK PRESIDENT (New Nominee) Age 47 Liberty Ford Lincoln Mercury, Inc.
JAMES F. KIDD PRESIDENT AND 1989 1989 Age 59 CHIEF EXECUTIVE OFFICER (2-3-4) LNB Bancorp, Inc. and The Lorain National Bank
DAVID M. KOETHE CHAIRMAN OF THE BOARD 1975 1983 Age 63 The Lorain Printing Company(B) (2-3-4-5-6)
BENJAMIN G. NORTON H.R. CONSULTANT 1983 1983 Age 59 Lorain Technology, Inc. (3-7)
STANLEY G. PIJOR CHAIRMAN OF THE BOARD 1969 1983 Age 68 LNB Bancorp, Inc. and (2-3-4-6) The Lorain National Bank
JEFFREY F. RIDDELL PRESIDENT AND 1995 1995 Age 47 CHIEF EXECUTIVE OFFICER (1) Consumeracq, Inc. Consumers Builders Supply Company
THOMAS P. RYAN EXECUTIVE VICE PRESIDENT 1989 1989 Age 60 AND SECRETARY/TREASURER LNB Bancorp, Inc. EXECUTIVE VICE PRESIDENT AND SECRETARY The Lorain National Bank
BANK CORPORATION PRINCIPAL OCCUPATION DIRECTOR DIRECTOR NAME AND AGE FOR THE PAST FIVE YEARS SINCE SINCE
JOHN W. SCHAEFFER,M.D. PRESIDENT (New Nominee) Age 53 North Ohio Heart Center
T.L. SMITH, M.D.* RETIRED PHYSICIAN 1968 1983 Age 85 (1-2-4-5-6)
EUGENE M. SOFRANKO PRESIDENT AND 1974 1983 Age 68 CHIEF EXECUTIVE OFFICER (1-2-4-5-6) Lorain Glass Company, Inc.
PAUL T. STACK RETIRED 1974 1983 Age 69 (1-2-3-6)
LEO WEINGARTEN RETIRED 1964 1983 Age 79 (2-4-5-6)
(1) Member of Audit Committee (5) Member of Incentive Stock Option (2) Member of Executive Committee Committee (3) Member of Trust Committee (6) Member of Compensation Committee (4) Member of Pension/Fringe Benefit(7) Alternate Member of Executive Committee and Compensation Committees
(A) The Bank has retained the law firm of Cook & Batista Co., L.P.A. as legal counsel for the last several years. During the last fiscal year, The Lorain National Bank has paid to Cook & Batista, Co., L.P.A. an amount of $144,632. It is anticipated that this relationship will continue during the current fiscal year. (B) During the last fiscal year, The Lorain National Bank has paid to The Lorain Printing Company an amount of $117,487 for printing services and supplies. It is anticipated that such business relationship will continue during the current fiscal year. (C) Mr. Pijor entered into a Consulting Agreement with the Bank dated March 15, 1994. The agreement provides that Mr. Pijor receive a consulting fee of $85,000 each year for a period of five (5) years commencing on January 1, 1996. The Agreement also stipulates that Mr. Pijor will be provided with an automobile and will be reimbursed for reasonable expenses relative to his duties as a consultant during the term of the Agreement. Termination of the Agreement (by either party) would not prejudice Mr. Pijor's rights to receive the benefits referred to above for a period of up to two (2) years. Mr. Pijor was also a party to a Supplemental Retirement Agreement entered into with the Bank on December 31, 1987. Under the terms of this Agreement, Mr. Pijor shall receive an annual supplemental retirement benefit in the amount of $50,000 for a period on ten (10) years. The payment of these supplemental retirement benefits commenced in January of 1996. *In January of 1999, Mr. James L. Bardoner and Dr. T.L. Smith advised the Corporation and Bank that due to personal reasons they did not wish to seek renomination to the Board of Directors. Mr. Bardoner has served as a member of the Board of Directors of the Lorain National Bank since 1974 - a period of 25 years. Dr. T.L. Smith has served as a member of the Board of Directors of Lorain National Bank since 1968 - a period of 30
years. The Management of the Bank, as well as the Board of Directors, wish to take this opportunity to formally acknowledge and thank both of these gentlemen for their faithful and meritorious service which has contributed much to the Corporation and Bank's progress and success over the last 30 years.
EXECUTIVE COMPENSATION
LNB Bancorp, Inc. did not pay any separate compensation, other than Corporation director fees, to its executive officers during 1998, 1997, and 1996. All executive compensation was paid by Lorain National Bank. The information which follows discloses the annual and long term compensation for services in all capacities to the Corporation and the Bank for the fiscal years ended December 31, 1998, 1997 and 1996, for all persons who were, during 1998, (I) the chief executive officer and (ii) the other most highly compensated officers of the Bank who made in excess of $100,000 during 1998 (the Named Executive Officers).
SUMMARY COMPENSATION TABLE
The named executive officers disclosure requirements affect the Chief Executive Officer and those executive officers earning more than $100,000 in salary and bonuses. In 1998, 1997 and 1996, Mr. James F. Kidd, President and Chief Executive Officer, and Mr. Thomas P. Ryan, Executive Vice President and Secretary/Treasurer, met the criteria for disclosure. In 1998 and 1997, Mr. Gregory D. Friedman, Senior Vice President, Chief Operating Officer and Chief Financial Officer met the criteria for disclosure. The following table discloses the annual salary, bonuses and all other compensation awards and payouts for services in all capacities to the Corporation and the Bank for the fiscal years ended December 31, 1998, 1997 and 1996.
Compensation (1) ----------------------------------------------- Annual Name and -------------------------------- All Principal Position Year Salary Bonuses Other (2) - ---------------------------------------------------------------------- James F. Kidd 1998 $207,661 $ 0 $16,887 President and 1997 $180,962 $42,000 $22,411 Chief Executive Officer 1996 $151,154 $32,500 $20,600
Thomas P. Ryan 1998 $119,226 $ 0 $15,213 Executive Vice President 1997 $109,250 $16,350 $18,752 and Secretary/Treasurer 1996 $104,050 $15,375 $18,755
Gregory D. Friedman 1998 $102,485 $ 0 $ 7,000 Senior Vice President 1997 $ 91,021 $13,365 $11,078 Chief Operating Officer and Chief Financial Officer
(1) The aggregate of Other Annual Compensation is less than 10% of the total of annual salary and bonus for all individuals for all years presented and therefore is not required to be reported under the SEC rules. (2) All Other Compensation consisted of the following: James F. Kidd: 1998 1997 1996 Contribution, in Mr. Kidd's behalf to: The Bank's Stock Purchase Plan $5,000 $ 4,800 $ 4,500 The Bank's Employee Stock Ownership Plan $5,137 $11,141 $10,925 Mr. Kidd's Supplemental Life Insurance $2,250 $ 2,250 $ 2,250 Corporation director's fees $4,500 $ 4,250 $ 2,925
Thomas P. Ryan: 1998 1997 1996 Contribution, in Mr. Ryan's behalf to: The Bank's Stock Purchase Plan $3,472 $ 3,768 $ 3,583 The Bank's Employee Stock Ownership Plan $3,828 $ 8,746 $ 8,698 Mr. Ryan's Supplemental Life Insurance $3,413 $ 2,238 $ 2,079 Corporation director's fees $4,500 $ 4,000 $ 2,700 Anniversary Stock Award $ 0 $ 0 $ 1,695
Gregory D. Friedman: 1998 1997 Contribution, in Mr. Friedman's behalf to: The Bank's Stock Purchase Plan $2,981 $ 3,132 The Bank's Employee Stock Ownership Plan $3,290 $ 7,269 Mr. Friedman's Supplemental Life Insurance $ 729 $ 677
OPTION GRANTS TABLE (last fiscal year)
There were no stock options granted by the Corporation or the Bank in 1998.
LONG TERM INCENTIVE PLAN AWARD TABLE (last fiscal year)
There were no long term incentive plans or plan awards in 1998.
OPTION EXERCISES AND YEAR END VALUE TABLE (last fiscal year)
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE(1) Value of Number of Unexercised Unexercised In-the-Money Option Option Shares Shares Shares Acquired Value at FY-End(#) at FY-End ($) on Realized Exercisable/ Exercisable/ Name Exercise(#) ($)(2) Unexercisable Unexercisable(2) - -------------------------------------------------------------------------- James F. Kidd 0 $0 2143/0 $17,475/$0 Thomas P. Ryan 0 $0 2143/0 $17,475/$0 Gregory D. Friedman 0 $0 2985/0 $30,834/$0 (1) All amounts reflect the 2% stock dividend in April of 1997. (2) Market value of underlying securities at exercise date or year end, as the case may be, minus the exercise or price of "in-the-money" options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of: James L. Bardoner, Daniel P. Batista, David M. Koethe, Stanley G. Pijor, T.L. Smith, Eugene M. Sofranko, Paul T. Stack and Leo Weingarten. Mr. Batista is a shareholder of the law firm of Cook and Batista Co., L.P.A., which performs legal services for the Bank. During 1998, the Bank paid to Cook and Batista Co., L.P.A. legal fees in the amount of $144,632. The amount of Mr. Batista's interest in such fees cannot be practicably determined. Mr. Koethe is the Chairman of The Board of The Lorain Printing Company. During 1998, the Bank paid to The Lorain Printing Company an amount of $117,487 for printing services and supplies. The amount of Mr. Koethe's interest in such payments cannot be practicably determined. Mr. Stanley G. Pijor entered into a Consulting Agreement with the Bank dated March 5, 1994. The Agreement provides that Mr. Pijor shall receive a consulting fee of $85,000 each year for a period of five (5) years, commencing on January 1, 1996. The Agreement also stipulates that Mr. Pijor will be provided with an automobile and will be reimbursed for reasonable expenses relative to his duties as a consultant during the term of the Agreement. Mr. Pijor was also a party to a Supplemental Retirement Agreement entered into with the Bank on December 31, 1987. Under the terms of this Supplemental Retirement Agreement, Mr. Pijor shall receive supplemental retirement benefits in the amount of $50,000 per year, for a period of ten (10)
years. The payment of these supplemental retirement benefits commenced in January of 1996.
COMPENSATION COMMITTEE REPORT
The Lorain National Bank's Compensation Committee has the responsibility of evaluating and recommending to the Board of Directors, for its approval, the amount of compensation, including salary, bonus, and other benefits, for all officers of the Bank, including the named Executive Officers and the Chief Executive Officer. It is the philosophy and policy of the Compensation Committee to establish a compensation program for Bank officers to attract, motivate and retain a highly qualified management team. The criteria used to determine the recommended compensation of Bank officers includes their level of responsibility, performance, experience, the Committee's judgment as to the past performance and expected further contribution. A comparison to the industry peer group as well as national and regional surveys are also used. In addition, Mr. James F. Kidd, as the Bank's Chief Executive Officer, evaluates the performance of the other officers and presents his evaluations and salary recommendations for all officers, other than himself, to the Compensation Committee. The Committee is also advised by independent compensation consultants, concerning compensation of Bank officers. Based upon the foregoing, the Compensation Committee prepares a report on recommended base salaries for all officers. In addition, in some cases, the Compensation Committee recommends bonuses for certain officers of the Bank, based upon the attainment of preestablished performance goals. The recommendations of the Compensation Committee regarding base salaries and bonuses for all officers are subject to approval by the Board of Directors. As to the Chief Executive Officer, Mr. James F. Kidd's compensation, including salary, bonus, and other benefits is also based upon a recommendation of the Compensation Committee, which is then approved by the Board of Directors. The factors and criteria considered by the Compensation Committee included the pay level for CEOs of comparable banks, the financial performance of the Bank, and the individual performance and leadership of Mr. Kidd. Based upon the foregoing, and based upon the attainment of preestablished performance goals established by the Compensation Committee, the Compensation Committee recommended a base salary and bonus for Mr. Kidd for 1998, in the amounts set forth in the Summary Compensation Table, which amounts were approved by the Board of Directors. The members of the Compensation Committee are: James L. Bardoner T.L. Smith, M.D. Daniel P. Batista Eugene M. Sofranko David M. Koethe Paul T. Stack Stanley G. Pijor Leo Weingarten
EMPLOYMENT AGREEMENTS
As of September 1, 1995, Mr. James F. Kidd entered into an Employment Agreement with LNB Bancorp, Inc. and The Lorain National Bank. The Employment Agreement provides for Mr. Kidd's employment until he reaches the age of 65 as President. Mr. Kidd shall be compensated at the initial rate of One Hundred and Twenty Four Thousand Dollars ($124,000) with an annual compensation review each year thereafter. Mr. Kidd will continue to receive his present fringe benefits and such additional benefits as are set forth in the Bank's Employee Benefit Program. If the Employment Agreement is terminated earlier, other than for just cause, or by Mr. Kidd, then he will be entitled to the salary and benefits described above for a period of up to two (2) years.
As of September 1, 1995, Mr. Thomas P. Ryan entered into an Employment Agreement with LNB Bancorp, Inc. and The Lorain National Bank. The Employment Agreement provides for Mr. Ryan's employment until he reaches the age of 65 as Executive Vice President. Mr. Ryan shall be compensated at the initial rate of Ninety Seven Thousand Five Hundred Dollars ($97,500) with an annual compensation review each year thereafter. Mr. Ryan will continue to receive his present fringe benefits and such additional benefits as are set forth in the Bank's Employee Benefit Program. If the Employment Agreement is terminated earlier, other than for just cause, or by Mr. Ryan, then he will be entitled to the salary and benefits described above for a period of up to two (2) years.
PENSION PLAN
The Bank sponsors The Lorain National Bank Retirement Pension Plan (the Plan) covering substantially all employees of the Bank. An employee is eligible to participate on January 1 or July 1 after the attainment of age twenty-one (21) and completion of one year of service, as defined in the Plan. For the Plan year ended December 31, 1998, the Bank was not required to make any contributions to the Plan. Participants are eligible for normal retirement upon reaching age sixty-five (65). Annual benefit payments are determined as a percentage for the five (5) consecutive plan years that yield the highest average salary. Participants in the Plan prior to January 1, 1989 will have annual benefits reduced if they have less than fifteen (15) years of continuous employment upon retirement. Participants who join the Plan after January 1, 1989 will have benefit payments reduced if they have less than twenty-five (25) years of continuous employment upon retirement. The normal form of benefit payment is a joint and survivor annuity. Benefits become fully vested after a participant has completed five (5) years of service. The Plan also provides for the payment of early retirement, death, disability, and deferred vested benefits in the form of a lump sum distribution, or monthly annuity. Annual benefit payments under the provisions of the Plan are computed by a formula, the factors of which include annual compensation, years of service and the social security taxable wage base. The Plan was amended, effective January 1, 1995, to allow the payment of accrued benefits in the form of a lump sum distribution upon retirement at normal retirement age. The estimated present value of the accrued benefit using the Plan's actuarial equivalence assumptions for the Named Executive Officers ranged from $450,000 to $473,000 as of December 31, 1998. Assuming the participant selects the benefit payable in a ten (10) year Certain and Life Annuity at normal retirement date, the following table reflects annual benefits payable to the employee based upon average annual compensation levels and twenty-five (25) years of service.
Employee's Annual Estimated Pension Final Average Payments Assuming Minimum of Annual Compensation 25 Years of Service $250,000* $80,942 200,000* 80,942 160,000 80,942 100,000 48,692
*The current annual compensation limit with respect to determining an employee's annual pension payment is currently limited by the Internal Revenue Code to $160,000. The Plan reflects the annual compensation limit and this results in a maximum annual pension payment of $80,942. Therefore, an employee's annual estimated pension payment for final average compensation levels of $160,000 and above remains at the $80,942 level. Pension benefits accrued prior to 1995 are grandfathered, if their calculated benefit is greater than $80,942. These pension payments do not reflect any additional retirement benefits which the employee may receive in the form of Social Security and other forms of supplemental retirement benefits. Messrs. James F. Kidd, Thomas P. Ryan and Gregory D. Friedman have thirty-four (34), thirty-seven (37) and thirteen (13) credited years of service respectively, under the provisions of the Plan. Benefit payments under the provisions of the Plan are computed using formulas, the factors of which include annual compensation, years of service, social security taxable wage base, and, in the case of a lump sum distribution, current interest rates are also taken into consideration. On July 30, 1996, the Bank entered into Supplemental Retirement Agreements (SRA) with Mr. James F. Kidd, Mr. Thomas P. Ryan and Mr. Gregory D. Friedman. The purpose of the SRA is to provide supplemental retirement benefits to Messrs. Kidd, Ryan and Friedman in addition to the benefits provided by the Bank's qualified retirement plan, to assist the Bank in retaining their services through their normal retirement dates. The SRA provides for payments, monthly or annually, at Messrs. Kidd, Ryan and Friedman's election, in the event of: (a) normal retirement; ** (b)reduced supplemental retirement benefits in the event of early retirement; (c)disability prior to retirement; (d) death; or (e) discharge "without cause." Under the terms of their SRA, Messrs. Kidd, Ryan and Friedman will receive supplemental retirement benefits for a period of ten (10) years. The full benefit amount is equal to seventy percent (70%) of the compensation paid in the final year of employment, minus the Bank's pension benefit and Social Security benefits. Messrs. Kidd, Ryan and Friedman are entitled to the full benefit amount if they retire on their normal retirement date;** 75% of the full benefit amount if they retire at age 64; 50% of the full benefit amount if they retire at age 63; 25% of the full benefit amount if they retire at age 62; and no SRA benefit if they retire prior to age 62. In the event of disability prior to retirement, the disabled individual would receive their full SRA benefit amount beginning at age 65. In the event of death prior to retirement, after meeting the eligibility and employment requirements, the applicable benefit (based upon the decedent's age) is payable to his designated beneficiary. In the event of discharge "without cause", the discharged individual would receive their full SRA benefit amount, as if he retired at age 65, commencing at the recipient's discretion. The SRA is a non-qualified defined benefit agreement. As of December 31, 1998, the monthly benefits that would be paid at normal retirement age, would be $11,453, $2,288 and $7,397 for Messrs. Kidd, Ryan and Friedman respectively. **Mr. Kidd's normal retirement date is November 1, 2004 **Mr. Ryan's normal retirement date is April 1, 2003 **Mr. Friedman's normal retirement date is August 1, 2015
PERFORMANCE GRAPH
The graph which follows compares the five (5) year cumulative total return from investing $100 on December 31, 1993 in each of LNB Bancorp, Inc. common stock, the Standard & Poor's 500 Index (S&P 500 Index) of companies and the National Association of Securities Dealers Association Quotation System Bank Index (NASDAQ Bank Index) of companies, with dividends assumed to be reinvested when received.
Comparison of Five Year Cumulative Total Return* AMONG LNB BANCORP, INC, THE S&P 500 INDEX AND NASDAQ BANK INDEX
(PERFORMANCE GRAPH FOLLOWS IN PRINTED VERSION WITH YEARS 1993 THROUGH 1998 ON THE X-AXIS AND CUMULATIVE INVESTMENT ON THE Y-AXIS IN $100 INCREMENTS RANGING FROM $0 TO $400. THE CO-ORDINATES, BY YEAR, WHICH ARE PRESENTED IN THE TABLE BELOW ARE PLOTTED ON THE PREVIOUSLY DESCRIBED GRID ALONG WITH AN ACCOMPANYING LEGEND FOR IDENTIFICATION PURPOSES.)
* $100 INVESTED ON 12/31/93 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS.
DECEMBER 31, - -------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1998 - -------------------------------------------------------------------------- LNB Bancorp, Inc. $100 $121 $143 $155 $155 $160 - -------------------------------------------------------------------------- S&P 500 Index $100 $101 $139 $171 $229 $294 - -------------------------------------------------------------------------- NASDAQ Bank Index $100 $100 $148 $196 $328 $325 - --------------------------------------------------------------------------
BENEFICIAL OWNERSHIP OF SHARES
The following table reflects as of December 31, 1998, any person known to the Corporation to be the beneficial owner of more than five percent (5%) of any class of the Corporation's voting securities, consisting of common stock only, as well as the total number of shares of common stock beneficially owned by each director, nominee, and the director and executive officers of the Corporation as a group.
Five Percent Beneficial Ownership Amount and Nature Percent Name and Address of of Beneficial of Beneficial Owner Ownership Class
Standen and Co. as nominee for The Lorain National Bank 669,494(1) 16.20% 457 Broadway Lorain, Ohio 44052
(1) The Bank, a wholly owned subsidiary of LNB Bancorp, Inc. (a U. S. Corporation) disclaims beneficial ownership of all shares. The shares were held by the Bank in various accounts administered by it, as fiduciary, for the benefit of beneficiaries, donors, or principals of such accounts. The Bank, as fiduciary, had (a) sole power to vote 80,192 shares; (b) sole investment power to purchase/sell, but no power to vote on 260,113 shares; (c)shared investment power with sole power to vote with respect to 50,398 shares; and (d) no investment power and no power to vote on 260,113 shares. Shares of the Corporation held by the Bank in various fiduciary capacities will be voted only in accordance with directions, approvals or instructions where called by the governing instruments or by law, and in the absence of special factors affecting any individual account, will be voted in accordance with management's recommendations where the Bank as fiduciary has authority to determine the manner of voting.
BENEFICIAL OWNERSHIP OF MANAGEMENT (As of December 31, 1998) Sole Shared Total Amount Investment and Investment and of Beneficial Percent Name Voting Power Voting Power Ownership of Class
James L. Bardoner* 8,492 621 9,113 .22% Daniel P. Batista 23,318 43,863 67,181 1.63% Robert M. Campana 4,464 6,115 10,579 .26% Terry D. Goode 17,302 2,961 20,263 .49% Wellsley O. Gray 5,816 3,293 9,109 .22% James F. Kidd 36,648 13,674 50,322 1.22% David M. Koethe 53,500 186 53,686 1.30% Benjamin G. Norton 45,115 46,370 91,485 2.22% Stanley G. Pijor 56,318 32,982 89,300 2.16% Jeffrey F. Riddell 30,076 27,657 57,733 1.40% Thomas P. Ryan 17,757 16,856 34,613 .84% T. L. Smith, M.D.* 11,136 9,875 21,011 .51% Eugene M. Sofranko 7,103 22,497 29,600 .71% Paul T. Stack 9,028 1,275 10,303 .25% Leo Weingarten 102,242 4,277 106,519 2.58% Executive Officers who are not Directors 74,629 11,826 86,455 2.10% ------- -------- ------- ------
All Directors and Executive Officers as a Group 502,944 244,328 747,272 18.11% ======= ======== ======= ======
*See note on page 7.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Some of the directors of the Corporation and the companies with which they are associated, are customers of and had banking transactions with the Bank in the ordinary course of the Bank's business during 1998. Loans and commitments to loans included in such transactions were made on substantially the same terms, including interest rates and collateral, as were those prevailing at the time for comparable transactions with other persons, and in the opinion of the management of the Bank, do not involve more than a normal risk of collectibility or present other unfavorable features.
PRINCIPAL ACCOUNTANTS
The independent accounting firm of KPMG LLP has served as the principal accountants for the Bank since 1972. A representative of the firm will be present at the Annual Meeting and will be available to respond to questions.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Shareholders may submit proposals appropriate for shareholder action at the Corporation's Annual Meeting consistent with the regulations of the Securities and Exchange Commission. For proposals to be considered for inclusion in the Proxy Statement for the 2000 Annual Meeting, they must be received by the Corporation no later than December 1, 1999. Such proposals should be directed to LNB Bancorp, Inc., Attention: Shareholder Relations, 457 Broadway, Lorain, Ohio 44052.
OTHER BUSINESS
Management is not aware of any other matter which may be presented for action at the meeting other than the matters set forth herein. Should any matter other than those set forth herein be presented for a vote of the shareholders, the proxy in the enclosed form directs the persons voting such proxy to vote in accordance with their judgement.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires the Corporation's officers and directors to file reports of ownership and changes of ownership of the Corporation's registered securities on Forms 3, 4 and 5 with the Securities and Exchange Commission (SEC). The Corporation believes that all officers and directors complied with all filing requirements applicable to them with respect to transactions during fiscal year 1998.
ANNUAL REPORT
A copy of the Corporation's Annual Report has been mailed to shareholders prior to the meeting. The Annual Report is not intended to be part of this Proxy Statement. A report of the operations of the Corporation and the Bank for the fiscal year ended December 31, 1998 will be presented at the annual meeting. A copy of the Corporation's Annual Report on Form 10-K under the Securities Exchange Act of 1934 is available to shareholders without charge upon request to Thomas P. Ryan, Executive Vice President and Secretary/Treasurer, LNB Bancorp, Inc., 457 Broadway, Lorain, Ohio 44052-1739.
By Order of the Board of Directors
/s/ Thomas P. Ryan
Thomas P. Ryan Executive Vice President and Secretary/Treasurer
[X] PLEASE MARK VOTES REVOCABLE PROXY AS IN THIS EXAMPLE LNB BANCORP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 20, 1999
The undersigned hereby appoints James L. Bardoner, Thomas L. Smith, M.D. and David M. Koethe, and each of them, with the power of substitution, proxies and agents of the undersigned to vote at the Annual Meeting of Shareholders of LNB Bancorp, Inc. (the "Bank"), to be held at The Lorain National Bank, 521 Broadway, Lorain, Ohio 44052 on April 20, 1999, at 10:00 a.m., and at any adjournment thereof, all shares of common stock of the Corporation which the undersigned would be entitled to vote if personally present for the following matters.
The Board of Directors recommends a vote FOR each of the following:
1. ELECTION OF DIRECTORS for a three-year term expiring in 2002 (except as marked to the contrary below): For [ ] Withhold [ ] For All Except [ ]
Terry D. Goode, Wellsley O. Gray, James R. Herrick, Benjamin G. Norton and John W. Schaeffer, M.D.
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark "For All Except" and write that (those) nominee's name(s) in the space provided below.
_________________________________________________________________
2. To transact such other business as properly may come before the meeting.
In their discretion, the proxies are authorized to vote upon such other business as properly may come before the meeting.
This proxy, when properly executed, will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, this proxy will be voted FOR Proposal 1. The undersigned acknowledges receipt of the Notice of Annual Meeting of Shareholders and the related Proxy Statement.
Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by an authorized person.
Please be sure to sign and date this Proxy in the box below. Date [ ] [ ] Shareholder sign above Co-holder (if any) sign above Detach above card, sign, date and mail in postage paid envelope provided.
LNB BANCORP, INC.
PLEASE ACT PROMPTLY SIGN, DATE & MAIL YOUR PROXY CARD TODAY
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (23)
Consent of Independent Accountants.
EXHIBIT 23
Consent of Independent Accountants
The Board of Directors LNB Bancorp, Inc.
We consent to incorporation by reference in the registration statements No.33-64034 on Form S-8 and No. 333-43441 on Form S-3 of LNB Bancorp, Inc. of our report dated January 26, 1999, relating to the consolidated balance sheets of LNB Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of LNB Bancorp, Inc.
/s/ KPMG LLP
Cleveland, Ohio March 26, 1999
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1998)
S - K Reference Number (27)
Financial Data Schedule