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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 OR 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission file
December 31, 2001 number 0-13203
LNB Bancorp, Inc.
(Exact name of the registrant as specified in its Charter)
Ohio 34-1406303
(State of incorporation) (I.R.S. Employer Identification No.)
457 Broadway, Lorain, Ohio 44052-1769
(Address of principal executive offices) (Zip Code)
(440) 244 - 6000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, Par Value $1.00 NASDAQ - National Market
Per Share
Preferred Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting common stock held by non-affiliates
of the Registrant at February 28, 2002 was approximately $77,577,000.
The number of shares of Registrant's Common Stock outstanding on February 28,
2002 was 4,317,558.
1
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2001 Annual Report to Stockholders of Registrant are
incorporated by reference in Parts I, II, and IV of this report. Portions of
the Definitive Proxy Statement of Registrant dated March 18, 2002 (the Proxy
Statement) are incorporated by reference in Part III of this report.
2
LNB Bancorp, Inc.
Form 10-K Report
Table of Contents
2001
Page
PART I
Item 1 Business
a. General Development of Business 4
b. Financial Information About Industry
Segments 5
c. Description of LNB Bancorp, Inc.'s Business 5
d. Financial Information About Foreign and
Domestic Operations and Export Sales 10
e. Statistical Disclosure by Bank Holding
Companies 10
I. Distribution of Assets, Liabilities
and Shareholders' Equity: Interest Rates
and Interest Differential 11
II. Investment Portfolio 11
III. Loan Portfolio 14
IV. Summary of Loan Loss Experience 19
V. Deposits 23
VI. Return on Equity and Assets 24
VII. Short-Term Borrowings 24
Item 2 Properties 25
Item 3 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Shareholders 26
PART II
Item 5 Market for the Registrant's Common Equity and
Related Shareholder Matters 28
Item 6 Selected Financial Data 28
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 29
Item 7(a) Quantitative and Qualitative Disclosures about
Market Risk 29
Item 8 Financial Statements and Supplementary Data 29
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 29
PART III
Item 10 Directors and Executive Officers of the Registrant 29
Item 11 Executive Compensation 30
Item 12 Security Ownership of Certain Beneficial Owners
and Management 30
Item 13 Certain Relationships and Related Transactions 32
3
PART IV
Item 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 30
SIGNATURES 32
EXHIBIT INDEX 34
4
PART 1
ITEM 1 - BUSINESS
a) GENERAL DEVELOPMENT OF BUSINESS
LNB Bancorp, Inc.(the Parent Company), a financial 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 subsidiaries. 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 LNB Bancorp, Inc. common 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 number of authorized
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.
At a special meeting of shareholders held on December 14, 1999, the
Corporation's Shareholders approved an amendment to the Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 5,000,000 to 15,000,000 shares. Also, on December 14, 1999,
the Corporation's Shareholders approved an amendment to the Articles of
Incorporation to provide for 1,000,000 shares of Voting Preferred Stock.
5
On October 24, 2000, the Board of Directors of LNB Bancorp, Inc. adopted
a Shareholder Rights Plan. The rights plan is designed to prevent a
potential acquiror from exceeding a prescribed ownership level in LNB
Bancorp, Inc., other than in the context of a negotiated acquisition
involving the Board of Directors.
On November 14, 2000, LNB Bancorp, Inc. filed its Second Amended Articles of
Incorporation which authorized and provided the terms of 750,000 Series A
Voting Preferred Shares.
LNB Bancorp, Inc. has broader powers than the Bank. These powers principally
include the power to engage in certain non-banking businesses that are
financial in nature, 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.
b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Corporation and subsidiary companies are engaged in one line of
business which is banking services. Neither of the two new subsidiaries
represent a significant part of LNB Bancorp, Inc. at December 31, 2001.
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., (the Bancorp), is a $665 million financial holding company
headquartered in Lorain, Ohio. The Bancorp is a public company whose stock
is traded on The Nasdaq National Stock Market@ under the ticker symbol LNBB.
Its predecessor, 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 Bancorp received
its financial holding company status on March 13, 2000.
LNB Bancorp, Inc., offers life, accident and health insurance, and fixed
annuity products through its wholly owned insurance subsidiary Charleston
Insurance Agency, Inc.; and traditional title services through 49-percent
owned subsidiary Charleston Title Agency, LLC. In addition, pursuant to an
agreement between Lorain National Bank and Raymond James Financial Services,
Inc., member NASD/SIPX, Raymond James offers brokerage services including
stock, mutual funds and variable annuity products to Lorain National Bank
customers through the LNB Investment Center.
The Lorain National Bank operates 20 retail branches and 27 ATMs in the nine
communities of Lorain, Elyria, Amherst, Avon Lake, LaGrange, Oberlin, Olmsted
6
Township, Vermilion, and Westlake. Lorain National Bank offers a full range
of bank products and services while specializing in small business, mortgage,
and personal banking services, including investment management and trust
services.
The Bank's commercial lending activities consist of commercial loans, working
capital loans, commercial mortgage loans, construction loans, equipment
loans, equipment leases, letter of credit, revolving line of credit, Small
Business Administration loans, government guaranteed loans and Federal Home
Loan Bank program loans.
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, indirect automobile loans, and home equity
lines of credit.
The Bank's credit card lending activities consist of Visa Lorain Lighthouse
and VISA Gold cards, ATM cards, Access debit card and Bankcard Merchant
services.
The Bank's range of deposit services include checking accounts, free
checking, interest-bearing checking, CheckInvest accounts, savings accounts,
Holiday savings, money market accounts, Market Access 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.
Other bank 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, payroll direct deposit, cash management services, 24 hour
telephone banking with bill paying service, internet banking, Lockbox, sweep
accounts, ACH, 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 Investment and Trust Services Division of the Bank performs complete
trust administrative functions and offers agency and trust services and
Mutual fund investment products to individuals, partnerships, corporations,
institutions and municipalities. The Investment and Trust Services Division
designs and administers employee benefit plans.
The Bank is not dependent upon any one significant customer or specific
industry. The business of the Corporation is not seasonal to any material
7
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.
Lorain National Bank competes with seven other banks and bank holding
companies operating in Lorain County which range in size from approximately
$655 million to over $260.0 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 was 17.4% in 2001 and 17.4% in 2000, while ranking
number two in market share in 2001 and 2000. 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 financial holding company, is regulated under
the Bank Holding Company Act of 1956, as amended (the BHC Act), and is
subject to the supervision and examination of the Board of Governors of
the Federal Reserve System (the Federal Reserve Board). The BHC Act
requires the prior approval of the Federal Reserve Board for a financial
holding company to acquire or hold more than a 5% voting interest in any
8
bank and restricts interstate banking activities. The BHC Act allows
interstate bank acquisitions anywhere in the country and interstate
branching by acquisition and consolidation in those states that have not
opted out by January 1, 1997.
The BHC Act restricts LNB Bancorp, Inc.'s nonbanking activities to
those which are determined by the Federal Reserve Board to be financial
in nature, incidental to such financial activity or complementary to a
financial activity. The BHC Act does not place territorial
restrictions on the activities of nonbank subsidiaries of financial
holding companies. LNB Bancorp, Inc.'s banking subsidiary is subject to
limitations with respect to transactions with affiliates.
The enactment of the Graham-Leach-Bliley Act of 1999 (the GLB Act)
represented a pivotal point in the history of the financial services
industry. The GLB Act swept away large parts of a regulatory framework that
had its origins in the Depression Era of the 1930s. Effective March 11,
2000, new opportunities became available for banks, other depository
institutions, insurance companies, and securities firms to enter into
combinations that permit a single financial services organization to offer
customers a more complete array of financial products and services. The GLB
Act provides a new regulatory framework for regulation through the financial
holding company, which has as its umbrella regulator the Federal Reserve
Board. Functional regulation of the financial holding company's separately
regulated subsidiaries is conducted by their primary functional regulator.
The GLB Act requires "satisfactory" or higher Community Reinvestment Act
compliance for insured depository institutions and their financial holding
companies in order for them to engage in new financial activities. The GLB
Act provides a federal right to privacy of non-public personal information of
individual customers. LNB Bancorp, Inc. and its subsidiaries are also
subject to certain state laws that deal with the use and distribution of non-
public personal information.
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(13) under
Dividend Restrictions on page 18 of the LNB Bancorp, Inc. 2001 Annual Report.
This note is incorporated herein by reference.
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).
The Bank is also subject to the state banking laws of Ohio. Ohio adopted
nationwide reciprocal interstate banking. However, banking laws of other
states may restrict branching within the state and acquisitions or mergers
9
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 in Note 14 on page 19 of the LNB Bancorp, Inc. 2001 Annual
Report and is incorporated herein by reference.
The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA)
provides that a holding company's 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.
During 2000, the Securities and Exchange Commission issued Regulation
FD which established affirmative disclosure requirements on public
corporations such that material nonpublic information must be widely,
rather than selectively, disseminated. Regulation FD is based on the
premise that full and fair disclosure is the cornerstone of an efficient
market system. LNB Bancorp, Inc. is subject to Regulation FD. Through
Regulation FD, the Securities and Exchange Commission seeks to encourage
broad public disclosure in order to increase investor confidence in the
integrity of the capital markets.
Noncompliance with laws and regulations by financial 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 with laws and regulations
and does not anticipate any problems maintaining compliance on a
prospective basis. Recent regulatory inspections and examinations of
the Corporation 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 36 of the LNB Bancorp, Inc. 2001 Annual
Report.
10
Employees
As of December 31, 2001, the Corporation employed 240 full-time employees and
58 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 Corporation's market
area.
d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
The Corporation has no 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. 2001 Annual Report, portions of
which are incorporated in this Form 10-K by reference.
11
LNB BANCORP, INC.'S STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIAL
A. and B. The average balance sheet information and the related analysis
of net interest income for the years ending December 31, 2001, 2000, and
1999 are included in the Condensed Consolidated Average Balance Sheets,
within Management's Discussion and Analysis found on page 31 of the LNB
Bancorp, Inc. 2001 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, 2001 and
2000 are included in Rate/Volume Analysis of Net Interest Income within
Management's Discussion and Analysis found on page 31 of the LNB
Bancorp, Inc. 2001 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) 2001 2000 1999
- ------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury securities $ 1,085 $ 2,090 $ 11,075
Securities of other U.S. Government
agencies and corporations 105,085 76,133 64,484
State and political subdivisions 7,260 -0- -0-
Equity securities 4,198 1,295 169
- ------------------------------------------------------------------------
Total securities available for sale 117,628 79,518 75,728
- ------------------------------------------------------------------------
12
Securities held to maturity:
Securities of other U.S. Government
agencies and corporations 13,386 39,566 39,848
States and political subdivisions 3,805 4,865 4,794
- ------------------------------------------------------------------------
Total securities held to maturity 17,191 44,431 44,642
- ------------------------------------------------------------------------
Federal Home Loan Bank and
Federal Reserve Bank Stock 3,582 3,152 2,949
- ------------------------------------------------------------------------
Total securities $138,401 $127,101 $123,319
- ------------------------------------------------------------------------
B. MATURITY DISTRIBUTION OF SECURITIES
Maturities of securities owned by the Corporation as of December 31, 2001 are
presented below at amortized cost:
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 $ 1,080 $ -0- $ -0- $ -0- $ 1,080
U.S. Government
agencies and
corporations 9,015 57,105 13,624 27,660 107,404
States and political
subdivisions 463 344 544 5,894 7,245
- ------------------------------------------------------------------------
Total securities
available for sale 10,558 57,449 14,168 33,554 115,729
- ------------------------------------------------------------------------
Securities held to
maturity:
U.S. Government
agencies and
corporations -0- 7,007 6,379 -0- 13,386
States and political
subdivisions 702 486 66 2,551 3,805
- ------------------------------------------------------------------------
Total securities
held to maturity 702 7,493 6,445 2,551 17,191
- ------------------------------------------------------------------------
Total securities $11,260 $64,942 $20,613 $36,105 $132,920
- ------------------------------------------------------------------------
13
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, 2001:
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 6.43% 0.00% 0.00% 0.00% 6.43%
U.S. Government
agencies and
corporations 5.87 5.32 6.04 5.36 5.47
States and
political
subdivisions (1) 4.08 6.01 6.40 7.04 6.75
- ------------------------------------------------------------------------
Total securities
available for sale 5.85 5.32 6.05 5.42 5.49
- ------------------------------------------------------------------------
Securities held to
maturity:
U.S. Government
agencies and
corporations 0.00 5.79 5.49 0.00 5.65
States and
political
subdivisions (1) 7.13 7.49 8.87 7.74 7.62
- ------------------------------------------------------------------------
Total securities
held to maturity 7.13 5.90 5.52 7.74 6.09
- ------------------------------------------------------------------------
Total securities 5.93% 5.39% 5.88% 5.57% 5.57%
1) Yields on tax-exempt obligations are computed on a tax equivalent
basis based upon a 35% 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,
2001.
14
III. LOAN PORTFOLIO
A. The following table summarizes the distribution of the loan
portfolio:
December 31,
---------------------------------------------------
(Amounts in Thousands) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------
Commercial $219,511 $186,866 $157,897 $124,875 $120,892
Mortgage 158,221 157,575 152,825 147,651 142,223
Installment 57,886 69,821 74,682 65,793 37,250
Home equity lines 37,008 31,662 29,001 26,478 25,514
Credit cards 4,862 5,216 5,111 5,069 5,152
- ------------------------------------------------------------------------
TOTAL LOANS 477,488 451,140 419,516 369,866 331,031
Reserve for loan
Losses (5,890) (5,250) (4,667) (3,483) (4,168)
- ------------------------------------------------------------------------
NET LOANS $471,598 $445,890 $414,849 $366,383 $326,863
========================================================================
B. COMMERCIAL LOAN MATURITY AND REPRICING ANALYSIS
AS OF DECEMBER 31, 2001
(Amounts in Thousands) 2001
- ---------------------------------------------------------
Maturing and repricing in one year or less $215,088
Maturing and repricing after one year
but within five years 4,066
Maturing and repricing beyond five years 357
- ---------------------------------------------------------
TOTAL COMMERCIAL LOANS $219,511
=========================================================
Loans repricing beyond one year:
Fixed rate $ 937
Variable rate 3,486
- ---------------------------------------------------------
TOTAL $ 4,423
=========================================================
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C. RISK ELEMENTS
A summary of nonaccrual, restructured loans, other foreclosed assets,
accruing loans past due 90 days, and potential problem loans at December
31, follows:
(Amounts in Thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------
Nonaccrual loans:
Real estate loans $1,152 $1,652 $ 816 $ 980 $ 383
Commercial loans 51 378 42 54 42
Consumer loans 113 189 385 53 0
- -----------------------------------------------------------------
Total nonaccrual loans 1,316 2,219 1,243 1,087 425
Restructured loans 0 0 0 0 0
Other Foreclosed Assets 123 98 96 1,400 90
- -----------------------------------------------------------------
Total nonperforming
assets $1,439 $2,317 $1,339 $2,847 $ 515
- -----------------------------------------------------------------
Reserve for loan losses
to nonperforming assets 409.3% 226.6% 348.5% 140.1% 809.3%
=================================================================
Accruing loans past due
90 days $ 149 $ 306 $ 555 $ 213 $ 461
Potential problem
loans $8,579 $3,924 $4,348 $2,941 $8,764
=================================================================
(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, loans which have
been restructured, and other foreclosed assets. 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 increased during 1998 due to one
significant commercial loan credit of $1,300,000, placed in other
foreclosed assets at December 31, 1998, and subsequently liquidated for
$1,300,000 in January of 1999. The level of nonperforming assets
increased $978,000 during 2000. This increase is the result of a net
increase in nonaccrual loans of $976,000 plus increases in other
foreclosed assets in the amount of $2,000.
16
During 2001, non-accrual loans decreased due to decreases in commercial,
mortgage and indirect automobile credits placed on non-accrual status. The
reserve for loan loss coverage to total nonperforming assets increased from
1.4 times at 1998 year end to 3.5 times at 1999 year end while decreasing to
2.3 times at 2000 year end, and increased to 4.1 times at year-end 2001.
This ratio increased in 2001 from the net of: decreases in nonperforming
assets in the amount of $878,000 and increases in the loan loss reserve of
$640,000.
The level of nonperforming assets decreased by $878,000 during 2001. This
decrease is the result of a decrease in nonaccrual loans of $903,000 offset
by an increase in other foreclosed assets in the amount of $25,000. The
increase in other foreclosed assets relates to the net of: decreases in the
amount of $65,000 of repossessions of motor vehicles during 2001, plus an
increase of $90,000 in other real estate owned. The decrease in nonaccrual
loans is due to decreases in nonaccrual principal balances of $1,680,000
which have been paid off and brought current, loans charged-off in the amount
of $641,000, liquidation of nonaccrual loans of $478,000 and increases in
nonaccrual principal balances of $1,896,000. The decrease in nonaccrual
loans in 2001 was due primarily to commercial loan customers bringing credits
current.
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.
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 of these loans indicated
that a charge to the reserve for 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 15 of Form
10-K, at December 31, 2001, there are approximately $8,579,000 of loans
identified on Management's watch list which includes both loans which
Management has some concern 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.
17
At December 31, 2001, potential problem loans totaled $8,579,000, an
increase of $4,655,000 from one year ago. The net increase in potential
problem loans is mainly due to nine small to medium commercial credits plus
one large commercial credit added during 2001 in the amount of $5,950,000
less the liquidation of three large commercial credits in the amount of
$1,680,000 and some small commercial credits. Potential problem loans at
December 31, 2001 are primarily comprised of fourteen commercial credits that
the Bank is reviewing. Another $1,400,000 of these loans relates to the
extension of credits to a recreational entertainment center. Another
$660,000 of the potential problem loans relates to the extension of credit to
a retail beverage store. About $4,263,000 in potential problem loans relates
to credit extended to a manufacturing company. Another $632,000 of these
loans relates to the extension of credits to a retail furniture store.
Another $768,000 of these credits relates to the extension of credit to a
concrete company. These credits are being monitored by Management.
Management does not anticipate any charge-offs relative to these potential
problem loans. The potential problem loans in 2000, and 1999 remained at a
relatively moderate level.
(3) Foreign Outstandings - There were no foreign loans outstandings at
December 31, 2001, 2000 or 1999.
(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, 2001, 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 (20) of the "Notes to Consolidated Financial Statements"
18
which appears on page 23 of the LNB Bancorp, Inc. 2001 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, 2001, 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
$123,000 and $98,000 in Other Foreclosed Assets at December 31, 2001,
and 2000, respectively.
19
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes activity relating to the Reserve for
Loan Losses:
December 31,
-------------------------------------------
(Amounts in Thousands) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------
BALANCE AT BEGINNING
OF YEAR $ 5,250 $ 4,667 $ 3,483 $ 4,168 $ 4,116
Charge-offs:
Commercial (490) (25) (23) (3,060) (190)
Real Estate (26) (59) (359) (147) (359)
Consumer (1,223) (1,249) (668) (384) (300)
- ----------------------------------------------------------------------
Total charge-offs (1,739) (1,333) (1,050) (3,591) (849)
Recoveries:
Commercial 64 14 23 29 7
Real Estate 14 9 108 71 72
Consumer 101 193 103 81 72
- ----------------------------------------------------------------------
Total recoveries 179 216 234 181 151
- ----------------------------------------------------------------------
Net charge-offs (1,560) (1,117) (816) (3,410) (698)
- ----------------------------------------------------------------------
PROVISION FOR LOAN
LOSSES 2,200 1,700 2,000 2,725 750
- ----------------------------------------------------------------------
BALANCE AT END OF YEAR $ 5,890 $ 5,250 $ 4,667 $ 3,483 $ 4,168
======================================================================
ANALYTICAL DATA
BALANCES:
Average total loans $460,757 $437,593 $403,388 $346,161 $315,215
Total loans at year
ended 477,488 451,140 419,516 369,866 331,031
Net charge-offs 1,560 1,117 816 3,410 698
Provision for loan
losses 2,200 1,700 2,000 2,725 750
Reserve for loan
losses at year ended 5,890 5,250 4,667 3,483 4,168
RATIOS:
Net charge-offs to:
Average total loans 0.34% 0.26% 0.20% 0.99% 0.22%
Total loans at year
ended 0.33 0.25 0.19 0.92 0.21
Provision for loan
losses 70.91 65.71 40.80 125.14 93.07
Reserve for loan losses 26.49 21.28 17.48 97.90 16.75
20
Reserve for loan losses
to:
Average total loans 1.28 1.20 1.16 1.01 1.32
Total loans at year
ended 1.23 1.16 1.11 .94 1.26
The amount of 2001 net charge-offs resulted primarily from net charge-offs of
consumer indirect automobile credits and commercial credits. The 2001 higher
provision for loan losses charged to expense resulted from the net of
increases in net charge-offs and changes in the portfolio mix of loans
compared to historical levels of charge-offs. Net charge-offs for 2001
showed continued high charge-offs of consumer loans due to consumer indirect
automobile loans booked in late 1999 and early 2000. This was anticipated
and reserved for as of December 31, 2000.
The Bank's policy is to maintain the reserve for loan losses at a level
considered by Management to be adequate for probable 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 and restructured); 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 Loan Losses on page 19 of the Form 10-K
are presented in the following table:
(Amounts in Thousands) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------
Commercial $ 426 $ 11 $ -0- 3,031 $183
Real estate 12 50 251 76 287
Consumer 1,122 1,056 565 303 228
- ------------------------------------------------------------------
Total net charge-offs $1,560 $1,117 $ 816 $3,410 $698
==================================================================
21
Both the provision and the reserve 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 loan losses by
major type follows:
(Amounts in Thousands) 2001 2000 1999 1998 1997
----------------------------------------------------------------
Commercial $3,750 $2,729 $1,803 $1,398 $2,404
Real estate 363 338 530 500 733
Consumer 1,351 1,738 1,236 704 515
Off-balance sheet risk 113 150 150 125 200
Unallocated 313 295 948 756 316
- ------------------------------------------------------------------
TOTAL $5,890 $5,250 $4,667 $3,483 $4,168
==================================================================
This allocation is made for analytical purposes. The total allowance is
available to absorb losses from any segment of the portfolio. The 2001
provision for loan losses was greater than net charge-offs by $640,000.
The 2000 provision for loan losses was greater than net charge-offs by
$583,000. The 1999 provision for loan losses was greater than net
charge-offs by $1,184,000. The allocated portion of the reserve for
loan losses has changed during 1997 through 2001 due to the loan
portfolio mix. The Bank allocates a portion of the reserve for loan
losses to off-balance sheet risks which consist primarily of commitments
to extend credit. The allocated portion of the reserve to consumer
loans decreased in 2001 due to a run off of indirect automobile loans and
their related credit risk. The allocated portion of commercial loans
increased in 2001 and 2000 due to credit risk increases in 2001 and 2000.
The following table shows the percentage of loans in each category to
total loans at year end:
2001 2000 1999 1998 1997
- -------------------------------------------------------------
Commercial 46.0% 41.4% 37.7% 33.8% 36.5%
Real estate 33.1 34.9 36.4 39.9 43.0
Consumer 20.9 23.7 25.9 26.3 20.5
------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
------------------------------------------
The loan portfolio mix has shifted during the past five years. Commercial
loans as a percent of total loans grew from 1997 through 2001 with a related
decrease in mortgage loans. During 1998, consumer loans increased by 5.8%
with a related decrease in commercial loans of 2.7% and real estate loans of
3.1%. During 1999, the commercial loans as a percentage of total loans
22
increased by 3.9% with a corresponding decrease in consumer loans by 0.4% and
real estate loans decreased by 3.5%. During 2000, the commercial loans as a
percentage of total loans increased by 3.7%, real estate loans decreased 1.5%
and consumer loans decreased by 2.2%. During 2001, the commercial loans as a
percentage of total loans increased by 4.6%, real estate loans decreased 1.8%
and consumer loans decreased by 2.8%.
The consumer loan portfolio is running off slightly due to the lack of
quality indirect automobile paper. Commercial loans experienced strong
growth during 2001. This is the result of increased demand and not reduced
credit standards. Commercial loans pending approval are at a good level at
year end 2001.
23
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) 2001 2000 1999
- ----------------------------------------------------------------
Demand deposits $ 81,097 $ 81,221 $ 81,348
NOW accounts 57,736 54,332 55,145
Money market accounts 14,949 13,385 17,355
Market access accounts 68,449 33,464 6,646
Savings deposits 93,272 101,276 107,654
Time deposits 195,656 205,877 195,563
- ----------------------------------------------------------------
Total $511,159 $489,555 $463,711
================================================================
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,
----------------------------------------
2001 2000 1999
- ---------------------------------------------------------------
NOW accounts 1.08% 1.19% 1.19%
Money market accounts 3.06 2.06 2.05
Market access accounts 3.62 5.44 4.50
Savings deposits 1.35 1.97 1.98
Time deposits 5.01 5.47 4.81
========================================
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, 2001.
Maturing within 3 months $ 51,135
After 3 but within 6 months 33,740
After 6 but within 12 months 36,387
After 12 months 56,011
- ----------------------------------------------
Total $177,273
==============================================
24
VI. RETURN ON EQUITY AND ASSETS
Information relating to key operating ratios for the years ended
December 31, 2001, 2000, 1999, 1998 and 1997 is presented in the tabular
form below.
December 31, 2001 2000 1999 1998 1997
- ----------------------------------------------------------------
Return on average assets 1.35% 1.39% 1.33% 1.34% 1.41%
Return on average equity 14.36 15.83 15.29 14.46 14.51
Dividend payout ratio 50.96 49.72 49.65 52.00 45.26
Average equity to
average assets 9.39 8.77 8.67 9.27 9.70
Net interest margin 4.73 4.85 4.88 5.17 5.20
VII. SHORT-TERM BORROWINGS
Information relating to short-term borrowings for the years ended
December 31, 2001, 2000 and 1999 appears on page 16 of the LNB Bancorp,
Inc. 2001 Annual Report under footnote (10) "Securities Sold Under
Repurchase Agreements and Other Short-Term Borrowings" and footnote (11)
Federal Home Loan Bank Advances, short-term and is incorporated herein by
reference.
25
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
Ely Square Office 124 Middle Avenue, 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
ATM Facility 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
Professional Development Center 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 at 457 Broadway 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
26
excellent condition, well maintained and are more than adequate to
conduct the business of Banking.
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
subsidiaries is a party to or which any of its property is subject.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 2001 there were
no matters submitted to a vote of security holders.
Pursuant to Form 10-M, General Instruction G(3), the following
information is included as additional item in Part I:
EXECUTIVE OFFICERS OF THE REGISTRANT
CURRENT POSITION AND EXECUTIVE
PRINCIPAL OCCUPATION OFFICER
NAME(AGE) DURING PAST 5 YEARS SINCE
Debra R. Brown Senior Vice President,(1999 to present) 1999
(43) Branch Administration
LNB Bancorp, Inc. and
The Lorain National Bank
Vice President (1997 - 1999)
Lorain National Bank
Robert Cox Senior Vice President Sales (2001 to 2001
(46) LNB Bancorp, Inc. and present)
The Lorain National Bank
Vice President (1999 - 2000)
Sales Coordinator (1998 - 1999)
Vice President and (1997- 1998)
Area Sales Manager
KeyBank
Sandra L. Dubell Senior Vice President and 1997
(56) Senior Lending Officer,
LNB Bancorp, Inc. and
The Lorain National Bank
Mitchell J. Fallis Vice President and 1996
(47) Chief Accounting Officer,
LNB Bancorp, Inc. and
The Lorain National Bank
27
Gregory D. Friedman Executive Vice President and 1990
(51) Chief Financial Officer,
LNB Bancorp, Inc. and
The Lorain National Bank
Michael D. Ireland Senior Vice President and 1987
(55) Senior Operations Officer,
LNB Bancorp, Inc. and
The Lorain National Bank
James W. Manning Director of Audit (2001 to present) 2001
(54) LNB Bancorp, Inc. and
The Lorain National Bank
Vice President and (2000 - 2001)
Senior Risk Manager
KeyCorp, Inc.
Vice President and (1998 - 2000)
Senior Internal Auditor
Carolina First Bank
Vice President (1997 - 1998)
Regional Audit Director
PNC Bank Corporation
Emma N. Mason Senior Vice President and 1987
(64) Senior Trust Officer,
LNB Bancorp, Inc. and
The Lorain National Bank
Carol A. Mesko Vice President (1999 to present) 2001
(56) Human Resources
The Lorain National Bank
Assistant Vice President (1997 - 1999)
Human Resources
The Lorain National Bank
Kevin W. Nelson Executive Vice President and 2000
(37) Chief Operating Officer (2000 to present)
LNB Bancorp, Inc. and
The Lorain National Bank
Division President (1998 - 2000)
Bankfirst National and
Bankfirst Ohio Corp.
President and
Chief Executive Officer (1998)
Bellbrook Community Bank and
Bankfirst Ohio Corp.
Senior Vice President and
28
Senior Lending Officer (1997 - 1998)
Bellbrook Community Bank and
Bankfirst Ohio Corp.
Gary C. Smith President and 1999
(54) Chief Executive Officer (2000 to present)
LNB Bancorp, Inc. and
The Lorain National Bank
Chairman of the Board
Charleston Insurance Agency, Inc.
First Executive Vice President
(1999 - 2000)
LNB Bancorp, Inc. and
The Lorain National Bank
Division President (1997 - 1999)
First National Bank of Zanesville
James H. Weber Senior Vice President and 1987
(55) Senior Marketing Officer
LNB Bancorp, Inc. and
The Lorain National Bank
Thomas P. Ryan, formerly an Executive Vice President, retired as an officer
and employee of the registrant on December 31, 2001.
PART II
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 the inside front
flap of the LNB Bancorp, Inc. 2001 Annual Report and are incorporated
herein by reference.
HOLDERS
The total number of shareholders was 2,180 as of February 28, 2002. 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 - SELECTED FINANCIAL DATA
A Five Year Consolidated Financial Summary of selected financial data on
page 27 of the LNB Bancorp, Inc. 2001 Annual Report is incorporated
herein by reference.
29
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 29 - 36 of the LNB Bancorp, Inc. 2001 Annual Report.
Also, see Item 8 - Financial Statements and Supplementary Data.
(a) Quantitative and Qualitative Disclosures about Market Risk are
incorporated herein by reference to pages 34 - 35 of the LNB
Bancorp, Inc. 2001 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. 2001 Annual Report (Appendix 13),
pages 6 through 25. The supplementary financial information specified
by Item 302 of Regulation S-K, selected unaudited quarterly financial
data, is included on page 26 of the LNB Bancorp, Inc. 2001 Annual
Report.
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income
for the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Report of Management
Report of Independent Auditors
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers of the Corporation is set
forth in Part I in accordance with General Instruction G(3), pursuant to
30
Instruction 3 to Item 401(b) of Regulation S-K. Other information
responding to Item 10 is included in the Proxy Statement of LNB Bancorp,
Inc. and Notice for the Annual Meeting of Shareholders on April 16,
2002, dated March 18, 2002, under the caption "Election of Directors"
and is incorporated herein by reference to Form DEF 14.A filed by LNB
Bancorp, Inc. dated March 18, 2002.
ITEM 11 - EXECUTIVE COMPENSATION
Pursuant to Instruction G, the information required by this item is
incorporated by reference to Form DEF 14.A filed by LNB Bancorp, Inc.,
dated March 18, 2002, from the caption titled "Executive Compensation
and Other Information" on pages 9 through 16 of the Proxy Statement of
LNB Bancorp, Inc. and Notice for the Annual Meeting of Shareholders on
April 16, 2002, dated March 18, 2002.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 3 and 4 of the Proxy Statement of
LNB Bancorp, Inc. and Notice for the Annual Meeting of Shareholders on
April 16, 2002, dated March 18, 2002, relating to "Ownership of Voting
Shares" is incorporated herein by reference to Form DEF 14.A filed by
LNB Bancorp, Inc. dated March 18, 2002.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G, the information required by this item is
incorporated by reference to Form DEF 14.A filed by LNB Bancorp, Inc.
dated March 18, 2002, from the caption titled "Compensation Committee
Interlocks and Insider Participation in Compensation Decisions" and
"Certain Transactions" on pages 16 and 18 of the Proxy Statement of LNB
Bancorp, Inc. and Notice for the Annual Meeting of Shareholders on April
16, 2002, dated March 18, 2002.
PART IV
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, dated January 22, 2002, appear on pages 6 through 25
of the LNB Bancorp, Inc. 2001 Annual Report and are incorporated herein
by reference:
(1) Financial Statements
Consolidated Balance Sheets
December 31, 2001 and 2000
31
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements for the Years
Ended December 31, 2001, 2000 and 1999
Report of Management
Report of Independent Auditors
(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
34 of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the 4th quarter of the year-ended
December 31, 2001.
(c) Exhibits required by Item 601 Regulation S-K
Reference is made to the Exhibit Index which is found on page 34 of
this Form 10-K.
(d) See Item 14(a)(2) above.
32
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/Gregory D. Friedman
------------------------
Gregory D. Friedman
Executive Vice President,
Chief Financial Officer
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/Daniel P. Batista DIRECTOR March 29, 2002
- -----------------------
Daniel P. Batista
/s/Robert M. Campana DIRECTOR March 29, 2002
- -----------------------
Robert M. Campana
/s/Terry D. Goode DIRECTOR March 29, 2002
- -----------------------
Terry D. Goode
/s/Wellsley O. Gray DIRECTOR March 29, 2002
- -----------------------
Wellsley O. Gray
/s/James R. Herrick DIRECTOR March 29, 2002
- -----------------------
James R. Herrick
/s/Lee C. Howley DIRECTOR March 29, 2002
- -----------------------
Lee C. Howley
/s/David M. Koethe DIRECTOR March 29, 2002
- -----------------------
David M. Koethe
33
/s/Benjamin G. Norton DIRECTOR March 29, 2002
- -----------------------
Benjamin G. Norton
/s/Jeffrey F. Riddell DIRECTOR March 29, 2002
- -----------------------
Jeffrey F. Riddell
/s/Thomas P. Ryan DIRECTOR March 29, 2002
- -----------------------
Thomas P. Ryan
/s/John W. Schaeffer, M.D. DIRECTOR March 29, 2002
- -----------------------
John W. Schaeffer, M.D.
/s/Eugene M. Sofranko DIRECTOR March 29, 2002
- -----------------------
Eugene M. Sofranko
ABSENT - EXCUSED DIRECTOR March 29, 2002
- -----------------------
Leo Weingarten
/s/Stanley G. Pijor CHAIRMAN OF THE March 29, 2002
- ----------------------- BOARD AND DIRECTOR
Stanley G. Pijor
/s/James F. Kidd VICE CHAIRMAN OF March 29, 2002
- ----------------------- THE BOARD AND
James F. Kidd DIRECTOR
/s/Gary C. Smith PRESIDENT AND March 29, 2002
- ----------------------- CHIEF EXECUTIVE
Gary C. Smith OFFICER AND
DIRECTOR
EXECUTIVE VICE
/s/Gregory D. Friedman PRESIDENT AND March 29, 2002
- ----------------------- CHIEF FINANCIAL
Gregory D. Friedman,CPA OFFICER
/s/Mitchell J. Fallis VICE PRESIDENT AND March 29, 2002
- ----------------------- CHIEF ACCOUNTING
Mitchell J. Fallis,CPA OFFICER
34
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. Second Amended Articles of N/A
Incorporation. Previously filed under Item 6,
Exhibit (3)i to Quarterly Report on Form 10-Q
(Commission File No. 0-13202) for the quarter
ended September 30, 2000, and incorporated herein
by reference.
(b)LNB Bancorp, Inc. Amended Code of Regulations. N/A
Previously filed under Item 7, Exhibit 3 to Form
8-K (Commission File No. 0-13203) filed January 4,
2001 and incorporated herein by reference.
(10) Material Contracts
(a)Restated and Amended (to conform with specific 39
Employment Benefit Plans and Provisions)
Employment Agreement by and between Gary C. Smith
and LNB Bancorp, Inc, and The Lorain National Bank
dated December 22, 2000.
(b)Restated and Amended (to conform with specific 58
Employment Benefit Plans and Provisions)
Employment Agreement by and between Kevin W. Nelson
and LNB Bancorp, Inc, and The Lorain National Bank
dated December 22, 2000.
(c)Restated and Amended (to conform with specific 77
Employment Benefit Plans and Provisions)
Employment Agreement by and between Gregory D.
Friedman and LNB Bancorp, Inc, and The Lorain National
Bank dated December 22, 2000.
(d)Supplemental Retirement Benefits Agreement by and N/A
between Gary C. Smith and LNB Bancorp, Inc, and The
Lorain National Bank dated December 22, 2000.
Previously filed as Exhibit (10a) to Annual Report
Form 10-K (Commission File No. 0-13203) for the year
ended December 31, 2000, and incorporated herein by
reference.
(e)Supplemental Retirement Benefits Agreement by and N/A
35
S-K
Reference Page
Number Exhibit Number
between Thomas P. Ryan and LNB Bancorp, Inc. and The
Lorain National Bank dated December 23, 2000.
Previously filed as Exhibit (10b) to Annual Report
Form 10-K (Commission File No. 0-13203) for the
year ended December 31, 2000 and incorporated herein
by reference.
(f)Supplemental Retirement Benefits Agreement by and N/A
between Gregory D. Friedman and LNB Bancorp, Inc. and
The Lorain National Bank dated December 22, 2000.
Previously filed as Exhibit (10c) to Annual Report
Form 10-K (Commission File No. 0-13203) for the
year ended December 31, 2000 and incorporated herein
by reference.
(g)Non-qualified Incentive Stock Option Agreement by N/A
and between Gary C. Smith and LNB Bancorp, Inc. dated
December 15, 2000. Previously filed as Exhibit (10d)
to Annual Report Form 10-K (Commission File No. 0-13203)
for the year ended December 31, 2000 and incorporated
herein by reference.
(h) Rights Agreement between LNB Bancorp, Inc. and N/A
Registrar and Transfer Company dated October 24, 2000.
Previously filed as Exhibit 1 to Form 8-A (Commission
File No. 0-13203) filed November 11, 2000, and
incorporated herein by reference.
(i)Employment Agreement by and between Kevin W. Nelson N/A
and LNB Bancorp, Inc. and The Lorain National Bank
dated February 13, 2000. Previously filed as Exhibit
(10a) to Annual Report Form 10-K (Commission File No.
0-13203) for the year ended December 31, 1999, and
incorporated herein by reference.
(j)Incentive Stock Option Agreement by and between N/A
Kevin W. Nelson and LNB Bancorp, Inc. dated February 13,
2000. Previously filed as Exhibit (10b) to Annual
Report Form 10-K (Commission File No. 0-13203) for the
year ended December 31, 1999 and incorporated herein
by reference.
(k)Amended Supplemental Retirement Agreement by and N/A
between James F. Kidd and The Lorain National Bank
dated June 15, 1999. Previously filed as Exhibit
36
S-K
Reference Page
Number Exhibit Number
(10a) to Quarterly Report on Form 10-Q (Commission File
No.0-13203) for the quarter ended June 30, 1999, and
incorporated herein by reference.
(l)Employment Agreement by and between Gary C. Smith N/A
and LNB Bancorp, Inc. and The Lorain National Bank
dated March 16, 1999. Previously filed as Exhibit
(10a) to Annual Report Form 10-K (Commission File
No. 0-13203) for the year ended December 31, 1998, and
incorporated herein by reference.
(m)Incentive Stock Option Agreement by and between N/A
Gary C. Smith and LNB Bancorp, Inc. dated March 16, 1999.
Previously filed as Exhibit (10b) to Annual Report Form
10-K (Commission File No. 0-13203) for the year ended
December 31, 1998, and incorporated herein by reference.
(n)Amended Employment Agreement by and between James F. N/A
Kidd and LNB Bancorp, Inc. And The Lorain National Bank
dated March 3, 1999. Previously filed as Exhibit (10c)
to Annual Report Form 10-K (Commission File No. 0-13203)
for the year ended December 31, 1998, and incorporated
herein by reference.
(o) Amended Employment Agreement by and between Thomas N/A
P. Ryan and LNB Bancorp, Inc. and The Lorain National
Bank dated March 3, 1999. Previously filed as Exhibit
(10d) to Annual Report Form 10-K (Commission File No.
0-13203) for the year ended December 31, 1998, and
incorporated herein by reference.
(p) 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.
(q)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.
37
S-K
Reference Page
Number Exhibit Number
(r)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)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.
(t)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.
(u)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.
(v)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.
(w)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.
38
S-K
Reference Page
Number Exhibit Number
(x)Employment Agreement by and between Lorain National N/A
Bank 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.
(y)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.
(z)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.
(11) Statements re: Computation of Per Share Earnings. 96
(13) LNB Bancorp, Inc. 2001 Annual Report to Shareholders. 97
(21) Subsidiaries of LNB Bancorp, Inc. 220
(23) Consent of Independent Accountants. 230
(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, 2001 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, 2001 to be filed as an
amendment to this annual report on Form 10-K.
39
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 2001)
S - K Reference Number (10a)
Restated and Amended (to conform with specific
Employment Benefit Plans and Provisions)
Employment Agreement by and between Gary C. Smith
and LNB Bancorp, Inc, and The Lorain National Bank
dated December 22, 2000.
40
GARY C. SMITH
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), made at Lorain, Ohio, as of
the 22nd day of December, 2000, by and among GARY C. SMITH, herein referenced
as "Employee", 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), which together with their respective
successors and assigns are collectively herein referenced as "Employer", is
to EVIDENCE THAT:
WHEREAS Employer desires to secure and retain the employment services of
Employee as its President and Chief Executive Officer, and Employee desires
to accept employment as Employer's President and Chief Executive Officer; and
WHEREAS, but for Employee's promises made in this Agreement, especially
in Section 8, Employer would not employ Employee under the terms and
conditions of this Agreement and, therefore, expressly to induce Employer to
execute this Agreement, Employee represents that Employee fully understands
and accepts the restrictive covenants in Section 8 and agrees to be bound
thereby;
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein, Employer and Employee (collectively the "Parties" and individually a
"Party") hereby agree as follows:
1. Employment and Term.
1.1 Employee will render management services to Employer in the
capacity as Employer's President and Chief Executive Officer for the term of
this Agreement (herein called the "Agreement Term") commencing December 22,
2000, and continuing thereafter until terminated pursuant to the termination
provisions of this Agreement, including the provisions of Section 7.
1.2 Employee will devote Employee's full business-time and best
efforts to performing conscientiously, faithfully and loyally all duties:
(i) required of Employee by virtue of Employee's position as Employer's
President and Chief Executive Officer, (ii) set forth in Employer's Code of
Regulations, Bylaws and policies as adopted by Employer's Board of Directors,
and (iii) assigned or delegated to Employee by Employer's Chairman of the
Board of Directors.
1.3 Except as otherwise expressly provided herein, this Agreement
represents the entire agreement between Employee and Employer regarding
Employee's employment by Employer.
1.4 Except as otherwise expressly provided 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 all Parties.
1.5 No action by any Party and no refusal or neglect of any Party
41
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 such waiver is
expressed in a written document which is clearly designated as a waiver to a
specific provision(s) of this Agreement and unless such document is signed by
all Parties.
2. Compensation.
2.1 In consideration for the services rendered by Employee as
President and Chief Executive Officer, Employer agrees to pay Employee a
basic salary (herein called the "Basic Salary") equal to the sum of Two
Hundred Thousand Dollars ($200,000.00) for each twelve (12) consecutive
monthly period (a "Contract Year") of the Agreement Term. The Basic Salary
shall be payable in twenty-six (26) equal bi-weekly payments and prorated if
the Agreement Term is terminated prior to the completion of any Contract
Year.
2.2 As additional consideration for Employee's services performed
hereunder, Employee may (but shall not be entitled to) receive a
discretionary bonus from time to time. Such bonus (and Employee's
eligibility therefor) 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 Employer's Board of Directors (or a committee thereof). The
annual review shall occur not less than sixty (60) days prior to the end of
Employer's fiscal year for the express purpose of reviewing the current
fiscal year's performance of Employee. Any change in compensation as a
result of the annual review shall immediately act as an amendment of Section
2.1 above, effective as of the date of the compensation change.
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 and
adherence to each and every material promise, duty and obligation assigned to
or made by Employee under this Agreement.
3. Vacations and Time-Off.
3.1 Employee shall be entitled to twenty-seven (27) working days
of compensated vacation for each Contract Year, pursuant to the terms and
conditions of Employer's vacation time-off policy (as may be periodically
changed in Employer's sole discretion), to be taken at times as mutually
agreed in advance between Employee and Employer's Chairman of the Board of
Directors.
3.2 Except as may be periodically changed in Employer's sole
discretion, all vacation time-off shall be non-cumulative if not taken within
the Contract Year or within the first quarter of the succeeding Contract
Year; provided, however, that unused vacation time may be redeemed as
compensation pursuant to the terms and conditions of Employer's vacation
time-off policy.
42
3.3 Employee's vacation time-off may be increased by Employer in
its sole discretion.
3.4 Employee shall be permitted additional time-off to attend
professional meetings, seminars, and conventions and to satisfy professional
educational and licensure requirements as have been mutually agreed upon
between Employee and Employer's Chairman of the Board of Directors.
Attendance at such approved meetings, seminars, and conventions and
accomplishment of approved professional educational and licensure
requirements shall be fully compensated and shall not be considered vacation.
Employer shall reimburse Employee for all reasonable expenses incurred by
Employee 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 (which may be periodically changed in Employer's sole
discretion).
3.6 Employee shall further be entitled to additional days of time-
off with full compensation for personal matters in accordance with Employer's
personal time-off policy (which may be periodically changed in Employer's
sole discretion).
4. Fringe Benefits.
4.1 Employee shall be entitled to all fringe benefits to which
other employees of Employer in Employee's classification are entitled.
4.2 As additional consideration for Employee's performance of
Employee's duties and responsibilities as President and Chief Executive
Officer of Employer, Employer agrees:
(A) To provide Employee with (i) short-term disability
benefits pursuant to Employer's short-term disability program (which may be
periodically changed or terminated in Employer's sole discretion), and (ii)
long-term disability insurance benefits commencing one hundred eighty (180)
days after Employee incurs a Disability, as defined in Section 11.1(E) of
this Agreement, and continuing pursuant to the terms of Employer's long-term
disability program (which may be periodically changed or terminated in
Employer's sole discretion); and
(B) To include Employee in Employer's defined benefit
retirement pension plan, stock option plan (if any), stock ownership plan and
flexible benefit plan, as such plans may be periodically changed or
terminated in Employer's sole discretion; and
(C) To provide Employee with such plan of hospitalization
insurance as maintained by Employer and as may be periodically changed or
terminated in Employer's sole discretion; and
(D) To provide (i) a term life insurance policy on the life
43
of Employee (provided that Employee is insurable under the standard rate
criteria of a commercial life insurance company) in an amount equal to 2.75
times the Basic Salary of Employee, but not to exceed Three Hundred Thousand
Dollars ($300,000.00), as may be periodically increased in Employer's sole
discretion, and payable to the beneficiary or beneficiaries of Employee's
choice, and (ii) an accidental death and dismemberment insurance policy upon
Employee in an amount equal to 2.75 times the Basic Salary, but not to exceed
One Hundred Fifty Thousand Dollars ($150,000.00), as may be increased in
Employer's sole discretion, and payable to the beneficiary or beneficiaries
of Employer's choice; and
(E) To provide Employee with such sick leave as presently in
force by Employer and as may be periodically changed or terminated in
Employer's sole discretion; and
(F) To purchase or lease for the use of Employee an
automobile as selected by Employee and approved by Employer, to reimburse
Employee for expenses related to its operation for business purposes upon
presentation of appropriate itemization and receipts, and to replace such
automobile after three (3) years of use by Employee; provided, however, that
upon termination of the Agreement Term for any reason, Employer shall be
immediately entitled to possession of said automobile; and
(G) To pay the initiation fee and monthly dues for an equity
membership for Employee at Elyria Country Club, Elyria, Ohio, and to
reimburse Employee for all future assessments and reasonable expenses
incurred by Employee at such Club in furtherance of Employer's business
interests upon presentation of appropriate itemizations and receipts; and
(H) To reimburse Employee for all reasonable and approved
expenses related to the performance of Employee's duties as President and
Chief Executive Officer, 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 Employee's duties and obligations hereunder (including, but
not limited to, professional continuing educational requirements); 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 Employer's President and Chief Executive
Officer.
5. Stock Options. If determined by Employer's Board of Directors,
Employee shall participate in any and all incentive stock option plans and
programs currently in existence or adopted by Employer after commencement of
the Agreement Term in accordance with all applicable eligibility
requirements, terms and conditions of such plans and programs (as may be
periodically changed or terminated in Employer's sole discretion).
6. Prohibition Against Transfer. Employee's duties, obligations and
services rendered under this Agreement are personal in nature and are unique
to Employer. Therefore, without Employer's prior written consent, Employee
shall not assign or otherwise transfer any of Employee's duties, obligations
or responsibilities hereunder.
44
7. Termination of the Agreement Term.
7.1 If either Employer or Employee 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 continuing right to terminate the Agreement Term without further
notice; provided, however, that Employer may immediately terminate the
Agreement Term if Employee violates or fails to adhere to any provision of
Section 8 (pertaining to non-disclosure and non-competition).
7.2 Through its Board of Directors, Employer may terminate the
Agreement Term without cause at any time upon ninety (90) days prior written
notice to Employee.
7.3 Subject to the terms and conditions of Section 11, Employee
may terminate the Agreement Term upon the occurrence of a "Change in Control"
as defined in Section 11.1(C) for "Good Reason" as defined in Section
11.1(F).
7.4 The Agreement Term shall automatically and immediately
terminate upon the death of Employee.
7.5 In the event of the Disability of Employee as defined in
Section 11.1(E) of this Agreement, the Agreement Term shall terminate and
Employee shall be entitled to benefits provided by Employer under Employer's
long-term disability program as designated in Section 4.2(A)(ii) of this
Agreement.
7.6 In Employee's sole discretion, Employee may terminate the
Agreement Term by giving the Board of Directors of Employer at least ninety
(90) days written notice of Employee's decision to terminate the Agreement
Term.
7.7 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.
7.8 Upon the termination of the Agreement Term pursuant to Section
7.1 (but only if Employee terminates the Agreement Term due to the Employer's
breach) or Section 7.2, Employer shall continue to pay Employee's total
compensation (as reflected on Employee's W-2 Federal Income Tax Statement
from Employer for the prior calendar year) for a period of one (1) year from
the date of termination of the Agreement Term; provided, however, that if
Employer chooses a two (2)-year Restricted Period under Section 8.1(G), then
Employer shall continue to pay such compensation for a period of two (2)
years from the date of termination of the Agreement Term. Any termination
payments payable to Employee shall survive Employee's death if Employee dies
during the period Employee is receiving termination payments as provided in
this Section 7.8.
8. Employee's Non-Disclosure and Non-Competition Promises.
45
8.1 For purposes of this Section 8, the Parties agree to and
understand the following definitions:
(A) "Competitive Act" means any of the following: (i)
Employee's rendering services (whether or not for compensation) to, for or on
behalf of a Competitor (as defined herein) as an employee, independent
contractor, consultant, advisor, representative, agent or in any other
capacity; and (ii) Employee's investment in or ownership (partial or total)
of a Competitor, unless the Competitor's stock is publicly traded on a
national exchange and Employee owns less than two percent (2%) of such stock.
(B) "Competitive Activity" means the performance or rendering
of any banking services; trust services and investment services; portfolio
management; retirement planning; administration of employee benefit plans;
administration of decedents' estates and court-supervised accounts,
guardianships, and custodial arrangements; personal tax and estate tax
planning; financial consulting services; investment advising services; and
any other business activity, service or product which competes with any
existing or future business activity, service or product of Employer.
(C) "Competitor" means any of the following: (i) any person,
sole proprietorship, partnership, association (other than Employer),
organization, corporation, limited liability company or other entity
(governmental or otherwise) who or which provides, renders or performs a
Competitive Activity (as defined herein) within the Service Area (as defined
herein), even if the Competitor has no office or other facilities located
within the Service Area; and (ii) any parent, subsidiary or other person or
entity affiliated with, or related by ownership to, any of the foregoing
designated in Subitem (i) of this Section 8.1(C).
(D) "Confidential Information" means all of the following
(whether written or verbal) pertaining to Employer: (i) trade secrets (as
defined by Ohio law); Client or Customer lists, records and other information
regarding Employer's Clients or Customers (whether or not evidenced in
writing); Client or Customer fee or price schedules and fee or price
policies; financial books, plans, records, ledgers and information; business
development plans; sales and marketing plans; research and development plans;
employment and personnel manuals, records, data and policies; business
manuals, methods and operations; business forms, correspondence, memoranda
and other records; computer records and related data; and any other
confidential or proprietary data and information of Employer or its Clients
or Customers which Employee encounters during the Employment Term (as defined
in Section 8.1(E)); and (ii) all products, technology, ideas, inventions,
discoveries, developments, devices, processes, business notes, forms and
documents, business products, computer programs, and other creations (and
improvements of any of the foregoing), whether patentable or copyrightable,
which Employee has acquired, developed, conceived or made (whether directly
or indirectly, whether solicited or unsolicited, or whether during normal
work hours or during off-time) during the Employment Term or during the
Restricted Period and which relate to any business activity of Employer or
are derived from the Confidential Information designated in Subsection (i) of
this Section 8.1(D).
46
(E) "Client" or "Customer" means a person, sole
proprietorship, partnership, association, organization, corporation, limited
liability company, or other entity (governmental or otherwise), wherever
located: (i) to or for which Employer sells any products or renders or
performs services either during the 180-day period immediately preceding
commencement of the Restricted Period or during the Restricted Period, or
(ii) which Employer solicits or (as demonstrated by plans, strategies or
other tangible preparation) intends to solicit to purchase products or
services from Employer either during the 180-day period immediately preceding
commencement of the Restricted Period or during the Restricted Period.
(F) "Employment Term" means the period of time starting on
the date Employee's employment with Employer commences and terminating at the
close of business on the date Employee's employment with Employer terminates.
(G) "Restricted Period" means a time-period, as chosen by
Employer (in its sole discretion) by written notice to Employee within thirty
(30) days after termination of the Employment Term, equal to either one (1)
year or two (2) years commencing on the date the Employment Term is
terminated by either Party (for any reason, with or without cause); provided,
however, that such period shall be extended to include any period of time
during which Employee engages in any activity constituting a breach of this
Agreement and any period of time during which litigation transpires wherein
Employee is held to have breached this Agreement.
(H) "Service Area" means: (i) Lorain County, Ohio and all
counties immediately contiguous to Lorain County, constituting those
geographic areas in which Employer presently conducts substantial business
activities; and (ii) those counties located in the State of Ohio in which
Employer conducts or transacts substantial business activities on the date
the Employment Term terminates; and (iii) those counties in the State of Ohio
in which, on the date the Employment Term terminates, Employer intends to
conduct or transact substantial business activities as demonstrated by plans,
strategies or other tangible preparation for such business activities.
(I) "Employer" means, for purposes of this Section 8, LNB
Bancorp, Inc. and The Lorain National Bank (a national bank association), all
direct and indirect parent and subsidiary entities thereof, and all entities
related to LNB Bancorp, Inc., to The Lorain National Bank or to such parent
and subsidiary entities by common ownership.
8.2 Expressly in consideration for Employer's promises made in
this Agreement and to induce Employer to sign this Agreement, Employee
promises and agrees that:
(A) Confidentiality. The Confidential Information is and, at
all times, shall remain the exclusive property of Employer, and Employee:
(i) shall hold the Confidential Information in strictest confidence and in a
position of trust for Employer and its Clients and Customers, and (ii) except
as may be necessary to perform Employee's employment duties with Employer but
only in compliance with Employer's confidentiality policies and all
applicable laws, shall not (directly or indirectly) use for any purpose,
copy, duplicate, disclose, convey to any third-party or convert any
47
Confidential Information, either during the Employment Term or at any time
following termination of the Employment Term (by any Party, for any reason,
with or without cause), and (iii) upon the request of Employer at any time
during or after the Employment Term, shall immediately deliver to Employer
all the Confidential Information in Employee's possession and shall neither
convey to any third-party nor retain any copies or duplicates thereof; and
(B) Competitive Acts. During the Employment Term and during
the Restricted Period, Employee (or any entity owned or controlled by
Employee) shall not directly or indirectly, without the prior written
approval of Employer, perform a Competitive Act; and
(C) Clients and Customers. During the Restricted Period,
Employee (or any entity owned or controlled by Employee) shall not directly
or indirectly: (i) solicit from or perform for any Client or Customer a
Competitive Activity, wherever such Client or Customer is located, or (ii)
influence (or attempt to influence) any Client or Customer to transfer such
Client's or Customer's patronage or business from Employer, or (iii)
otherwise interfere with any business relationship of Employer with any
Client or Customer; and
(D) Employees. During the Restricted Period, Employee (or
any entity owned or controlled by Employee) shall not directly or indirectly:
(i) employ, engage, contract for the services of, or solicit or otherwise
induce the services of any person who, during the one hundred eighty (180)-
day period immediately preceding commencement of the Restricted Period or
during the Restricted Period, is or was an employee of Employer, or (ii)
otherwise interfere with (or attempt to interfere with) any employment
relationship of Employer with any employee.
(E) Other Employment. During the Employment Term, Employee
shall not perform services (whether or not for compensation) as an employee,
independent contractor, consultant, representative or agent of any person,
sole proprietorship, partnership, limited liability company, corporation,
association (other than Employer), organization, or other entity
(governmental or otherwise) without the prior, written consent of Employer.
(F) Costs of Enforcement. Employee shall pay all reasonable
legal fees, court costs, expert fees, investigation costs, and other expenses
incurred by Employer in any litigation under which Employee is adjudicated to
have violated this Section 8.
8.3 Employee understands and agrees that:
(A) during the Employment Term, Employee will materially
assist Employer in the generation, development or enhancement of certain
Confidential Information, Clients and Customers and certain other business
assets and activities for Employer; and
(B) Employee's promises in this Section 8: (i) were
negotiated at arm's-length and with ample time for Employee to seek the
advice of legal counsel, (ii) are required for the fair and reasonable
protection of Employer and the Confidential Information, and (iii) do not
48
constitute an unreasonable hardship to Employee in working for Employer or in
subsequently earning a livelihood in Employee's field of expertise outside
the Service Area; and
(C) if Employee breaches (or threatens to breach) any or all
of the promises in this Section 8: the privacy and thereby the value of the
Confidential Information will be significantly jeopardized; Employer will be
subject to the immediate risk of material, immeasurable, and irreparable
damage and harm; the remedies at law for Employee's breach shall be
inadequate; and Employer shall therefore be entitled to injunctive relief
against Employee in addition to any and all other legal or equitable
remedies; and
(D) if Employee had not agreed to the restrictive promises in
this Agreement, Employer would not have signed this Agreement.
8.4 Employee's promises, duties and obligations made in this
Section 8 shall apply to Employee irrespective of whether a Change in Control
(as defined in Section 11.1) occurs and shall survive the voluntary or
involuntary cessation or termination of the Employment Term by either Party
(for any reason, with or without cause). If any of the restrictions
contained in this Section 8 are ever judicially held to exceed the geographic
or time limitations permitted by law, then such restrictions shall be deemed
to be reformed to comply with the maximum geographic and time limitations
permitted by law. The existence of any claim or cause of action by Employee
against Employer (whether or not derived from or based upon Employee's
employment with Employer) shall not constitute a defense to Employer's
enforcement of any covenant, duty or obligation of Employee in this Section
8.
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 to, attorneys' fees and court costs) directly or
indirectly arising or resulting from or in connection or association with any
threatened or pending action, suit or proceeding (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 against each other.
9.2 As a condition precedent to the indemnification and other
obligations of Employer under this Section 9, Employee must:
(A) Notify Employer of any actual or potential claim under
this Section 9; and
(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; and
49
(C) Permit Employer to assume total, complete and exclusive
control of the claim and all proceedings and matters relating thereto; and
(D) Cooperate in all reasonable respects with Employer in
handling the claims and all proceedings and matters related thereto.
10. Miscellaneous.
10.1 This Agreement constitutes the entire agreement among the
Parties with respect to the subject matter hereof and supersedes any and all
other prior or contemporaneous agreements or contracts (either oral or
written) between the Parties with respect to the subject matter hereof.
10.2 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.
10.3 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, Employee's administrators, executors,
legatees, heirs and assigns. At any time, Employer may assign this Agreement
and Employer's rights, duties, obligations and benefits thereunder to any
Subsidiary as defined in Section 11.1(I) of this Agreement.
10.4 This Agreement shall be construed and enforced under and in
accordance with the laws of the State of Ohio; for all litigation arising
hereunder, the State Courts of Lorain County, Ohio shall have exclusive
venue; and each Party (separately and collectively) hereby submits to the
personal jurisdiction of the State Courts of Lorain County, Ohio for all
litigation arising under this Agreement.
10.5 All promises, representations, warranties and covenants of the
Parties shall survive termination of the Agreement Term, unless otherwise
expressly provided herein.
11. Change in Control.
11.1 For purposes solely of this Section 11, the following terms
shall have the respective meanings set forth below:
(A) "Bonus Amount" means the highest annual incentive bonus
earned by Employee from Employer (or its Subsidiaries) during the last three
(3) completed fiscal years of Employer immediately preceding Employee's Date
of Termination (annualized in the event Employee was not employed by Employer
or its Subsidiaries for the whole of any such fiscal year).
(B) "Cause" means any one or more of the following: (i) the
willful and continued failure of Employee to perform substantially Employee's
duties with Employer (other than any such failure resulting from Employee's
Disability as defined in Section 11.1(E) of this Agreement or any such
failure subsequent to Employee's being delivered a Notice of Termination
without Cause by Employer or after Employee's delivering a Notice of
50
Termination for Good Reason to Employer) after a written demand for
substantial performance is delivered to Employee by Employer's Board of
Directors which specifically identifies the manner in which the Board of
Directors believes that Employee has not substantially performed Employee's
duties and provides Employee with ten (10) days to correct such failure, or
(ii) the willful engaging by Employee in illegal conduct or gross misconduct
which is injurious to Employer or any Subsidiary, or (iii) the conviction of
Employee of, or a plea by Employee of nolo contendere to, a felony, or (iv)
Employee's breach of or failure to perform any of the non-competition and
non-disclosure covenants contained in Section 8 of this Agreement or
contained in any other document signed by Employee and by Employer. For
purpose of this paragraph (B), no act or failure to act by Employee shall be
considered "willful" unless done or omitted to be done by Employee in bad
faith and without reasonable belief that Employee's action or omission was in
the best interests of Employer. Any act or failure to act based upon
authority given pursuant to a resolution duly adopted by Employer's Board of
Directors, based upon the advice of counsel for Employer, or based upon the
instructions of Employer's Chief Executive Officer or another senior officer
of Employer shall be conclusively presumed to be done, or omitted to be done,
by Employee in good faith and in the best interests of Employer.
(C) "Change in Control" means the occurrence of any one of
the following events:
(i) if individuals who, on the date of this Agreement,
constitute the Board of Directors (the "Incumbent
Directors") of LNB Bancorp, Inc. (herein called
"Company") cease for any reason to constitute at
least a majority of Company's Board of Directors;
provided, however, that: (A) any person becoming a
director subsequent to the date of this Agreement,
whose election or nomination for election was
approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors then on Company's Board of
Directors (either by a specific vote or by approval
of the proxy statement of Company 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, and (B) no individual elected or nominated
as a director of Company initially as a result of an
actual or threatened election contest with respect
to directors or any other actual or threatened
solicitation of proxies by or on behalf of any
person other than Company's Board of Directors shall
be deemed to be an Incumbent Director;
(ii) if 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
51
indirectly, of securities of Company representing
twenty percent (20%) or more of the combined voting
power of Company's then-outstanding securities
eligible to vote for the election of Company's
Board of Directors (the "Company Voting
Securities"); provided, however, that the events
described in this clause (ii) shall not be deemed to
be a Change in Control by virtue of any of the
following acquisitions: (A) by Company or any
Subsidiary, (B) by any employee benefit plan
sponsored or maintained by Employer or any
Subsidiary or by any employee stock benefit trust
created by Employer or any Subsidiary, (C) by any
underwriter temporarily holding securities pursuant
to an offering of such securities, (D) pursuant to a
Non-Qualifying Transaction (as defined in
Clause (iii) of this paragraph (C), below),
(E) pursuant to any acquisition by Employee or any
group of persons including Employee (or any entity
controlled by Employee or by any group of persons
including Employee), or (F) a transaction (other
than one described in clause (iii) of this paragraph
(C), below) in which Company Voting Securities are
acquired from Company, if a majority of the
Incumbent Directors approves a resolution providing
expressly that the acquisition pursuant to this
subparagraph (F) does not constitute a Change in
Control under this clause (ii);
(iii) upon the consummation of a merger,
consolidation, share exchange or similar form of
corporate transaction involving Company or any of
its Subsidiaries that requires the approval of
Company'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
fifty percent (50%) of the total voting power of
either (x) the corporation resulting from the
consummation of such Business Combination (the
"Surviving Corporation") or, if applicable, (y) the
ultimate parent corporation that directly or
indirectly has beneficial ownership of one hundred
percent (100%) of the voting securities eligible to
elect directors of the Surviving Corporation (the
"Parent Corporation") is represented by Company
Voting Securities that were outstanding immediately
prior to such Business Combination (or, if
applicable, represented by shares into which such
Company 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 Company
52
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 twenty
percent (20%) 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 of Director's approval of the execution of
the initial agreement providing for such Business
Combination (any Business Combination which
satisfies all of the criteria specified in (A), (B)
and (C) of this Section 11.1(C)(iii) shall be deemed
to be a "Non-Qualifying Transaction"); or
(iv) if the shareholders of Company approve a plan of
complete liquidation or dissolution of Company or a
sale of all or substantially all of Company's assets
but only if, pursuant to such liquidation or sale,
the assets of Company are transferred to an entity
not owned (directly or indirectly) by Company's
shareholders.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any person acquires beneficial ownership of more than
twenty percent (20%) of Company Voting Securities as a result of the
acquisition of Company Voting Securities by Company which reduces the number
of Company Voting Securities outstanding; provided, however, that if (after
such acquisition by Company) such person becomes the beneficial owner of
additional Company Voting Securities that increases the percentage of
outstanding Company Voting Securities beneficially owned by such person, a
Change in Control shall then occur. Notwithstanding anything in this
Agreement to the contrary, if (1) Employee's employment is terminated prior
to a Change in Control for reasons that would have constituted a Qualifying
Termination if they had occurred following a Change in Control, (2) Employee
reasonably demonstrates that such termination was at the request of a third
party who had indicated an intention or taken steps reasonably calculated to
effect a Change in Control, and (3) a Change in Control involving such third
party (or a party competing with such third party to effectuate a Change in
Control) does occur, then (for purposes of this Agreement) the date
immediately prior to the date of such termination of employment (or event
constituting Good Reason) shall be treated as a Change in Control.
(D) "Date of Termination" means (1) the effective date on
which Employee's employment by Employer terminates as specified in a prior
53
written notice by Employer or Employee (as the case may be) to the other, or
(2) if Employee's employment by Employer terminates by reason of death, the
date of death of Employee, or (3) if the Employee incurs a Disability, the
date of such Disability as determined by a physician chosen by Employer. For
purposes of determining the timing of payments and benefits to Employee under
Section 11.2, the date of the actual Change in Control shall be treated as
Employee's Date of Termination.
(E) "Disability" means Employee's inability to perform
Employee's then-existing duties with Employer on a full-time basis for at
least one hundred eighty (180) consecutive days as a result of Employee's
incapacity due to physical or mental illness.
(F) "Good Reason" means, without Employee's express written
consent, the occurrence of any of the following events after a Change in
Control:
(i) (a) any change in the duties or responsibilities
(including reporting responsibilities) of Employee
that is inconsistent in any material and adverse
respect with Employee's positions, duties,
responsibilities or status with Employer immediately
prior to such Change in Control (including any
material and adverse diminution of such duties or
responsibilities), or (b) a material and adverse
change in Employee's titles or offices with Employer
(including, if applicable, membership on Employer's
Board of Directors) from those existing immediately
prior to such Change in Control;
(ii) (a) a reduction by Employer in Employee's Basic
Salary as in effect immediately prior to such Change
in Control (or as such Basic Salary may be increased
from time to time thereafter), or (b) the failure by
Employer to pay Employee an annual bonus in respect
of the year in which such Change in Control occurs
or any subsequent year in an amount greater than or
equal to the annual bonus earned for the year ended
prior to the year in which such Change in Control
occurs;
(iii) any requirement of Employer that Employee: (a)
be based anywhere more than fifty (50) miles from
the office where Employee is located at the time of
the Change in Control, or (b) travel on Employer
business to an extent substantially greater than the
travel obligations of Employee immediately prior to
such Change in Control;
(iv) the failure of Employer to: (a) continue in effect
any material employee benefit plan, compensation
plan, welfare benefit plan or other material fringe
benefit plan in which Employee is participating
54
immediately prior to such Change in Control or the
taking of any action by Employer which would
materially and adversely affect Employee's
participation in or reduce Employee's benefits under
any such plan, unless Employee is permitted to
participate in other plans providing Employee with
substantially equivalent benefits in the aggregate,
or (b) provide Employee with paid vacation in
accordance with the most favorable vacation policies
of Employer as in effect for Employee immediately
prior to such Change in Control, including the
crediting of all service for which Employee had been
credited under such vacation policies prior to the
Change in Control; or
(v) the failure of Employer to obtain the assumption
(and, if applicable, guarantee) agreement from any
successor (and Parent Corporation) as contemplated
in Section 11.4(B).
Notwithstanding any contrary provision in this Agreement: (1) an isolated,
insubstantial and inadvertent action taken in good faith and which is
remedied by Employer within ten (10) days after receipt of notice thereof
given by Employee shall not constitute Good Reason; and (2) Employee's right
to terminate employment for Good Reason shall not be affected by Employee's
incapacities due to mental or physical illness; and (3) Employee's continued
employment shall not constitute a consent to, or a waiver of rights with
respect to, any event or condition constituting Good Reason (provided,
however, that Employee must provide notice of termination of employment
within thirty (30) days following Employee's knowledge of an event
constituting Good Reason or such event shall not constitute Good Reason under
this Agreement).
(G) "Qualifying Termination" means a termination of
Employee's employment with Employer after a Change in Control (i) by Employer
other than for Cause, or (ii) by Employee for Good Reason. Termination of
Employee's employment on account of death, Disability or Retirement shall not
constitute a Qualifying Termination.
(H) "Retirement " means the termination of Employee's
employment with Employer: (i) on or after the first of the month coincident
with or next following Employee's attainment of age sixty-five (65), or (ii)
on such later date as may be provided in a written agreement between Employer
and Employee.
(I) "Subsidiary" means any corporation or other entity in
which Company: (i) has a direct or indirect ownership interest of fifty
percent (50%) or more of the total combined voting power of the then-
outstanding securities or interests of such corporation or other entity
entitled to vote generally in the election of directors, or (ii) has the
right to receive fifty percent (50%) or more of the distribution of profits
or fifty percent (50%) of the assets upon liquidation or dissolution of such
corporation or other entity.
55
(J) "Termination Period" means the period of time beginning
with a Change in Control and ending two (2) years following such Change in
Control.
(K) "Highest Base Salary" means Employee's highest annual
base salary (excluding any bonuses) paid to Employee by Employer during
Employer's last three (3) fiscal years completed immediately prior to the
Date of Termination.
(L) "Company" means LNB Bancorp, Inc. and its successors.
11.2 Notwithstanding any contrary provision in Section 7 or in any
other Section of this Agreement, if (during the Termination Period)
Employee's employment with Employer terminates pursuant to a Qualifying
Termination:
(A) Employer shall pay to Employee, within twenty (20) days
following the Date of Termination, a lump sum cash amount equal to the sum of
(i) two hundred percent (200%) of Employee's Highest Base Salary, as defined
in Section 11.1(K), through the Date of Termination, plus (ii) any base
salary and bonuses which have been earned through the Date of Termination and
are payable, to the extent not theretofore paid or deferred, plus (iii) a pro
rata portion of Employee's annual bonus for the fiscal year in which
Employee's Date of Termination occurs in an amount at least equal to (1)
Employee's Bonus Amount multiplied by (2) a fraction, the numerator of which
is the number of days in the fiscal year in which the Date of Termination
occurs through the Date of Termination and the denominator of which is three
hundred sixty-five (365), and reduced by (3) any amounts paid to Employee by
Employer as an executive bonus (pursuant to approval of the Board of
Directors) for the fiscal year in which Employee's Date of Termination
occurs, plus (iv) any accrued and unpaid vacation pay.
(B) Employer shall continue to provide, for a period of
twenty-four (24) months following the Date of Termination, Employee (and
Employee's dependents, if applicable) with the same level of medical, dental,
accident, disability and life insurance benefits and continuing education
payments (necessary for Employee to maintain any professional licensure
requirements related to Employee's employment duties with Employer) upon
substantially the same terms and conditions (including contributions required
by Employee for such benefits) as existed immediately prior to Employee's
Date of Termination (or, if more favorable to Employee, as such benefits and
terms and conditions existed immediately prior to the Change in Control);
provided, however, that if Employee is not eligible or qualified to continue
to participate in Employer's plans providing such benefits, Employer shall
otherwise provide such benefits on the same after-tax basis as if continued
participation had been permitted. Notwithstanding the foregoing, in the
event Employee becomes re-employed with another employer and becomes eligible
to receive welfare benefits from such employer, the welfare benefits
described herein shall be secondary to such benefits during the period of
such eligibility but only if (and to the extent that) Employer reimburses
Employee for any increased cost and provides any additional benefits
necessary to give Employee the benefits provided in this Section 11.2(B).
Employee's accrued benefits as of the Date of Termination under Employer's
56
employee benefit plans shall be payable in accordance with the terms of such
plans.
(C) Notwithstanding any contrary provision in this Section
11.2, Employer's payments to Employee under this Section 11.2 shall be
reduced to the extent that such payments (together with all other payments by
Employer to Employee under all other written or verbal agreements between
Employer and Employee) constitute an "excess parachute payment" under Section
280G of the Internal Revenue Code (as may be periodically amended).
11.3 Employer shall withhold from all payments due to Employee (or
Employee's beneficiaries or estate) hereunder all taxes which, by applicable
federal, state, local or other law, Employer is required to withhold
therefrom.
11.4 (A) This Section 11 shall not be terminated by any Business
Combination. In the event of any Business Combination, the provisions of
this Section 11 shall be binding upon the Surviving Corporation and such
Surviving Corporation shall be treated as Employer hereunder.
(B) Employer agrees that, in connection with any Business
Combination, Employer will cause any successor entity to Employer
unconditionally to assume (and, for any Parent Corporation in such Business
Combination, to guarantee), by written instrument delivered to Employee (or
Employee's beneficiaries or estate), all of the obligations of Employer under
this Section 11. Failure of Employer to obtain such assumption or guarantee
prior to the effectiveness of any such Business Combination that constitutes
a Change in Control shall be a breach of this Agreement and shall constitute
Good Reason hereunder and, further, shall entitle Employee to compensation
and other benefits from Employer in the same amount and on the same terms as
Employee would be entitled hereunder as if Employee's employment were
terminated following a Change in Control by reason of a Qualifying
Termination. For purposes of implementing this Section 11.4(B), the date on
which any such Business Combination becomes effective shall be deemed the
date Good Reason occurs and shall be the Date of Termination, if so requested
by Employee.
(C) This Section 11 shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Employee dies while any amounts would have been payable to Employee under
this Section 11 if Employee had continued to live, all such amounts (unless
otherwise provided herein) shall be paid in accordance with the terms of this
Section 11 to such person or persons appointed in writing by Employee to
receive such amounts or, if no person is so appointed, to Employee's estate.
11.5 In the event of a tender or exchange offer, proxy contest, or
the execution of any agreement which, if consummated, would constitute a
Change in Control, Employee agrees (as a condition to receiving any payments
and benefits under Section 11.2 of this Agreement) not to leave voluntarily
the employ of the Employer (other than as a result of Disability, Retirement
or an event which would constitute Good Reason if a Change in Control had
occurred) until the Change in Control occurs or, if earlier, such tender or
exchange offer, proxy contest or agreement is terminated or abandoned.
IN WITNESS WHEREOF, the Parties have set their hands as of the day and
57
year first above written.
In the Presence of:
/s/Ann E. Koler /s/Gary C. Smith
- ---------------------------- -------------------------
(Signature of First Witness) Gary C. Smith
/s/Denise M. Harmych "Employee"
- -----------------------------
(Signature of Second Witness)
LNB BANCORP, INC.
/s/Ann E. Koler By:/s/Gregory D. Friedman
- ---------------------------- --------------------------
(Signature of First Witness) Gregory D. Friedman, Vice President
/s/Denise M. Harmych
- -----------------------------
(Signature of Second Witness)
THE LORAIN NATIONAL BANK
/s/Ann E. Koler By:/s/Gregory D. Friedman
- ----------------------------- -----------------------------
(Signature of First Witness) Gregory D. Friedman, Vice President
/s/Denise M. Harmych
- ------------------------------
(Signature of Second Witness) "Employer"
58
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 2001)
S - K Reference Number (10b)
Restated and Amended (to conform with specific
Employment Benefit Plans and Provisions)
Employment Agreement by and between Kevin W. Nelson
and LNB Bancorp, Inc, and The Lorain National Bank
dated December 22, 2000.
59
KEVIN W. NELSON
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), made at Lorain, Ohio, as of
the 22nd day of December, 2000, by and among KEVIN W. NELSON, herein
referenced as "Employee", 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), which together with their respective
successors and assigns are collectively herein referenced as "Employer", is
to EVIDENCE THAT:
WHEREAS Employer desires to secure and retain the employment services of
Employee as its Vice President and Chief Operating Officer, and Employee
desires to accept employment as Employer's Vice President and Chief Operating
Officer; and
WHEREAS, but for Employee's promises made in this Agreement, especially
in Section 8, Employer would not employ Employee under the terms and
conditions of this Agreement and, therefore, expressly to induce Employer to
execute this Agreement, Employee represents that Employee fully understands
and accepts the restrictive covenants in Section 8 and agrees to be bound
thereby;
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein, Employer and Employee (collectively the "Parties" and individually a
"Party") hereby agree as follows:
1. Employment and Term.
1.1 Employee will render management services to Employer in the
capacity as Employer's Vice President and Chief Operating Officer for the
term of this Agreement (herein called the "Agreement Term") commencing
December 22, 2000, and continuing thereafter until terminated pursuant to the
termination provisions of this Agreement, including the provisions of Section
7.
1.2 Employee will devote Employee's full business-time and best
efforts to performing conscientiously, faithfully and loyally all duties:
(i) required of Employee by virtue of Employee's position as Employer's Vice
President and Chief Operating Officer, (ii) set forth in Employer's Code of
Regulations, Bylaws and policies as adopted by Employer's Board of Directors,
and (iii) assigned or delegated to Employee by Employer's President and Chief
Executive Officer and/or the Chairman of the Board of Directors.
1.3 Except as otherwise expressly provided herein, this Agreement
represents the entire agreement between Employee and Employer regarding
Employee's employment by Employer.
1.4 Except as otherwise expressly provided 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 all Parties.
60
1.5 No action by any Party and no refusal or neglect of any 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 such waiver is
expressed in a written document which is clearly designated as a waiver to a
specific provision(s) of this Agreement and unless such document is signed by
all Parties.
2. Compensation.
2.1 In consideration for the services rendered by Employee as Vice
President and Chief Operating Officer, Employer agrees to pay Employee a
basic salary (herein called the "Basic Salary") equal to the sum of One
Hundred Fifteen Thousand Dollars ($115,000.00) for each twelve (12)
consecutive monthly period (a "Contract Year") of the Agreement Term. The
Basic Salary shall be payable in twenty-six (26) equal bi-weekly payments and
prorated if the Agreement Term is terminated prior to the completion of any
Contract Year.
2.2 As additional consideration for Employee's services performed
hereunder, Employee may (but shall not be entitled to) receive a
discretionary bonus from time to time. Such bonus (and Employee's
eligibility therefor) 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 Employer's Board of Directors (or a committee thereof). The
annual review shall occur not less than sixty (60) days prior to the end of
Employer's fiscal year for the express purpose of reviewing the current
fiscal year's performance of Employee. Any change in compensation as a
result of the annual review shall immediately act as an amendment of Section
2.1 above, effective as of the date of the compensation change.
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 and
adherence to each and every material promise, duty and obligation assigned to
or made by Employee under this Agreement.
3. Vacations and Time-Off.
3.1 Employee shall be entitled to twenty (20) working days of
compensated vacation for each Contract Year, pursuant to the terms and
conditions of Employer's vacation time-off policy (as may be periodically
changed in Employer's sole discretion), to be taken at times as mutually
agreed in advance between Employee and Employer's President and Chief
Executive Officer or Chairman of the Board of Directors.
3.2 Except as may be periodically changed in Employer's sole
discretion, all vacation time-off shall be non-cumulative if not taken within
the Contract Year or within the first quarter of the succeeding Contract
Year; provided, however, that unused vacation time may be redeemed as
compensation pursuant to the terms and conditions of Employer's vacation
61
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 additional time-off to attend
professional meetings, seminars, and conventions and to satisfy professional
educational and licensure requirements as have been mutually agreed upon
between Employee and Employer's President and Chief Executive Officer or
Chairman of the Board of Directors. Attendance at such approved meetings,
seminars, and conventions and accomplishment of approved professional
educational and licensure requirements shall be fully compensated and shall
not be considered vacation. Employer shall reimburse Employee for all
reasonable expenses incurred by Employee 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 (which may be periodically changed in Employer's sole
discretion).
3.6 Employee shall further be entitled to additional days of time-
off with full compensation for personal matters in accordance with Employer's
personal time-off policy (which may be periodically changed in Employer's
sole discretion).
4. Fringe Benefits.
4.1 Employee shall be entitled to all fringe benefits to which
other employees of Employer in Employee's classification are entitled.
4.2 As additional consideration for Employee's performance of
Employee's duties and responsibilities as Vice President and Chief Operating
Officer of Employer, Employer agrees:
(A) To provide Employee with (i) short-term disability
benefits pursuant to Employer's short-term disability program (which may be
periodically changed or terminated in Employer's sole discretion), and (ii)
long-term disability insurance benefits commencing one hundred eighty (180)
days after Employee incurs a Disability, as defined in Section 11.1(E) of
this Agreement, and continuing pursuant to the terms of Employer's long-term
disability program (which may be periodically changed or terminated in
Employer's sole discretion); and
(B) To include Employee in Employer's defined benefit
retirement pension plan, stock option plan (if any), stock ownership plan and
flexible benefit plan, as such plans may be periodically changed or
terminated in Employer's sole discretion; and
(C) To provide Employee with such plan of hospitalization
insurance as maintained by Employer and as may be periodically changed or
62
terminated in Employer's sole discretion; and
(D) To provide (i) a term life insurance policy on the life
of Employee (provided that Employee is insurable under the standard rate
criteria of a commercial life insurance company) in an amount equal to 2.75
times the Basic Salary of Employee, but not to exceed Three Hundred Thousand
Dollars ($300,000.00), as may be periodically increased in Employer's sole
discretion, and payable to the beneficiary or beneficiaries of Employee's
choice, and (ii) an accidental death and dismemberment insurance policy upon
Employee in an amount equal to 2.75 times the Basic Salary, but not to exceed
One Hundred Fifty Thousand Dollars ($150,000.00), as may be increased in
Employer's sole discretion, and payable to the beneficiary or beneficiaries
of Employer's choice; and
(E) To provide Employee with such sick leave as presently in
force by Employer and as may be periodically changed or terminated in
Employer's sole discretion; and
(F) To purchase or lease for the use of Employee an
automobile as selected by Employee and approved by Employer, to reimburse
Employee for expenses related to its operation for business purposes upon
presentation of appropriate itemization and receipts, and to replace such
automobile after three (3) years of use by Employee; provided, however, that
upon termination of the Agreement Term for any reason, Employer shall be
immediately entitled to possession of said automobile; and
(G) To pay the initiation fee and monthly dues for a
corporate membership for Employee at Spring Valley Country Club, Elyria,
Ohio, and to reimburse Employee for all future assessments and reasonable
expenses incurred by Employee at such Club in furtherance of Employer's
business interests upon presentation of appropriate itemizations and
receipts; and
(H) To reimburse Employee for all reasonable and approved
expenses related to the performance of Employee's duties as Vice President
and Chief Operating Officer, 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 Employee's duties and obligations hereunder (including, but
not limited to, professional continuing educational requirements); 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 Employer's Vice President and Chief
Operating Officer.
5. Stock Options. If determined by Employer's Board of Directors,
Employee shall participate in any and all incentive stock option plans and
programs currently in existence or adopted by Employer after commencement of
the Agreement Term in accordance with all applicable eligibility
requirements, terms and conditions of such plans and programs (as may be
periodically changed or terminated in Employer's sole discretion).
6. Prohibition Against Transfer. Employee's duties, obligations and
63
services rendered under this Agreement are personal in nature and are unique
to Employer. 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 of the Agreement Term.
7.1 If either Employer or Employee 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 continuing right to terminate the Agreement Term without further
notice; provided, however, that Employer may immediately terminate the
Agreement Term if Employee violates or fails to adhere to any provision of
Section 8 (pertaining to non-disclosure and non-competition).
7.2 Through its Board of Directors, Employer may terminate the
Agreement Term without cause at any time upon ninety (90) days prior written
notice to Employee.
7.3 Subject to the terms and conditions of Section 11, Employee
may terminate the Agreement Term upon the occurrence of a "Change in Control"
as defined in Section 11.1(C) for "Good Reason" as defined in Section
11.1(F).
7.4 The Agreement Term shall automatically and immediately
terminate upon the death of Employee.
7.5 In the event of the Disability of Employee as defined in
Section 11.1(E) of this Agreement, the Agreement Term shall terminate and
Employee shall be entitled to benefits provided by Employer under Employer's
long-term disability program as designated in Section 4.2(A)(ii) of this
Agreement.
7.6 In Employee's sole discretion, Employee may terminate the
Agreement Term by giving the Board of Directors of Employer at least ninety
(90) days written notice of Employee's decision to terminate the Agreement
Term.
7.7 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.
7.8 Upon the termination of the Agreement Term pursuant to Section
7.1 (but only if Employee terminates the Agreement Term due to the Employer's
breach) or Section 7.2, Employer shall continue to pay Employee's total
compensation (as reflected on Employee's W-2 Federal Income Tax Statement
from Employer for the prior calendar year) for a period of one (1) year from
the date of termination of the Agreement Term; provided, however, that if
Employer chooses a two (2)-year Restricted Period under Section 8.1(G), then
Employer shall continue to pay such compensation for a period of two (2)
years from the date of termination of the Agreement Term. Any termination
payments payable to Employee shall survive Employee's death if Employee dies
64
during the period Employee is receiving termination payments as provided in
this Section 7.8.
8. Employee's Non-Disclosure and Non-Competition Promises.
8.1 For purposes of this Section 8, the Parties agree to and
understand the following definitions:
(A) "Competitive Act" means any of the following: (i)
Employee's rendering services (whether or not for compensation) to, for or on
behalf of a Competitor (as defined herein) as an employee, independent
contractor, consultant, advisor, representative, agent or in any other
capacity; and (ii) Employee's investment in or ownership (partial or total)
of a Competitor, unless the Competitor's stock is publicly traded on a
national exchange and Employee owns less than two percent (2%) of such stock.
(B) "Competitive Activity" means the performance or rendering
of any banking services; trust services and investment services; portfolio
management; retirement planning; administration of employee benefit plans;
administration of decedents' estates and court-supervised accounts,
guardianships, and custodial arrangements; personal tax and estate tax
planning; financial consulting services; investment advising services; and
any other business activity, service or product which competes with any
existing or future business activity, service or product of Employer.
(C) "Competitor" means any of the following: (i) any person,
sole proprietorship, partnership, association (other than Employer),
organization, corporation, limited liability company or other entity
(governmental or otherwise) who or which provides, renders or performs a
Competitive Activity (as defined herein) within the Service Area (as defined
herein), even if the Competitor has no office or other facilities located
within the Service Area; and (ii) any parent, subsidiary or other person or
entity affiliated with, or related by ownership to, any of the foregoing
designated in Subitem (i) of this Section 8.1(C).
(D) "Confidential Information" means all of the following
(whether written or verbal) pertaining to Employer: (i) trade secrets (as
defined by Ohio law); Client or Customer lists, records and other information
regarding Employer's Clients or Customers (whether or not evidenced in
writing); Client or Customer fee or price schedules and fee or price
policies; financial books, plans, records, ledgers and information; business
development plans; sales and marketing plans; research and development plans;
employment and personnel manuals, records, data and policies; business
manuals, methods and operations; business forms, correspondence, memoranda
and other records; computer records and related data; and any other
confidential or proprietary data and information of Employer or its Clients
or Customers which Employee encounters during the Employment Term (as defined
in Section 8.1(E)); and (ii) all products, technology, ideas, inventions,
discoveries, developments, devices, processes, business notes, forms and
documents, business products, computer programs, and other creations (and
improvements of any of the foregoing), whether patentable or copyrightable,
which Employee has acquired, developed, conceived or made (whether directly
or indirectly, whether solicited or unsolicited, or whether during normal
65
work hours or during off-time) during the Employment Term or during the
Restricted Period and which relate to any business activity of Employer or
are derived from the Confidential Information designated in Subsection (i) of
this Section 8.1(D).
(E) "Client" or "Customer" means a person, sole
proprietorship, partnership, association, organization, corporation, limited
liability company, or other entity (governmental or otherwise), wherever
located: (i) to or for which Employer sells any products or renders or
performs services either during the 180-day period immediately preceding
commencement of the Restricted Period or during the Restricted Period, or
(ii) which Employer solicits or (as demonstrated by plans, strategies or
other tangible preparation) intends to solicit to purchase products or
services from Employer either during the 180-day period immediately preceding
commencement of the Restricted Period or during the Restricted Period.
(F) "Employment Term" means the period of time starting on
the date Employee's employment with Employer commences and terminating at the
close of business on the date Employee's employment with Employer terminates.
(G) "Restricted Period" means a time-period, as chosen by
Employer (in its sole discretion) by written notice to Employee within thirty
(30) days after termination of the Employment Term, equal to either one (1)
year or two (2) years commencing on the date the Employment Term is
terminated by either Party (for any reason, with or without cause); provided,
however, that such period shall be extended to include any period of time
during which Employee engages in any activity constituting a breach of this
Agreement and any period of time during which litigation transpires wherein
Employee is held to have breached this Agreement.
(H) "Service Area" means: (i) Lorain County, Ohio and all
counties immediately contiguous to Lorain County, constituting those
geographic areas in which Employer presently conducts substantial business
activities; and (ii) those counties located in the State of Ohio in which
Employer conducts or transacts substantial business activities on the date
the Employment Term terminates; and (iii) those counties in the State of Ohio
in which, on the date the Employment Term terminates, Employer intends to
conduct or transact substantial business activities as demonstrated by plans,
strategies or other tangible preparation for such business activities.
(I) "Employer" means, for purposes of this Section 8, LNB
Bancorp, Inc. and The Lorain National Bank (a national bank association), all
direct and indirect parent and subsidiary entities thereof, and all entities
related to LNB Bancorp, Inc., to The Lorain National Bank or to such parent
and subsidiary entities by common ownership.
8.2 Expressly in consideration for Employer's promises made in
this Agreement and to induce Employer to sign this Agreement, Employee
promises and agrees that:
(A) Confidentiality. The Confidential Information is and, at
all times, shall remain the exclusive property of Employer, and Employee:
(i) shall hold the Confidential Information in strictest confidence and in a
66
position of trust for Employer and its Clients and Customers, and (ii) except
as may be necessary to perform Employee's employment duties with Employer but
only in compliance with Employer's confidentiality policies and all
applicable laws, shall not (directly or indirectly) use for any purpose,
copy, duplicate, disclose, convey to any third-party or convert any
Confidential Information, either during the Employment Term or at any time
following termination of the Employment Term (by any Party, for any reason,
with or without cause), and (iii) upon the request of Employer at any time
during or after the Employment Term, shall immediately deliver to Employer
all the Confidential Information in Employee's possession and shall neither
convey to any third-party nor retain any copies or duplicates thereof; and
(B) Competitive Acts. During the Employment Term and during
the Restricted Period, Employee (or any entity owned or controlled by
Employee) shall not directly or indirectly, without the prior written
approval of the President and Chief Executive Officer of Employer (or any
person expressly designated by the President and Chief Executive Officer),
perform a Competitive Act; and
(C) Clients and Customers. During the Restricted Period,
Employee (or any entity owned or controlled by Employee) shall not directly
or indirectly: (i) solicit from or perform for any Client or Customer a
Competitive Activity, wherever such Client or Customer is located, or (ii)
influence (or attempt to influence) any Client or Customer to transfer such
Client's or Customer's patronage or business from Employer, or (iii)
otherwise interfere with any business relationship of Employer with any
Client or Customer; and
(D) Employees. During the Restricted Period, Employee (or
any entity owned or controlled by Employee) shall not directly or indirectly:
(i) employ, engage, contract for the services of, or solicit or otherwise
induce the services of any person who, during the one hundred eighty (180)-
day period immediately preceding commencement of the Restricted Period or
during the Restricted Period, is or was an employee of Employer, or (ii)
otherwise interfere with (or attempt to interfere with) any employment
relationship of Employer with any employee.
(E) Other Employment. During the Employment Term, Employee
shall not perform services (whether or not for compensation) as an employee,
independent contractor, consultant, representative or agent of any person,
sole proprietorship, partnership, limited liability company, corporation,
association (other than Employer), organization, or other entity
(governmental or otherwise) without the prior, written consent of the
President and Chief Executive Officer of Employer (or any person expressly
designated by the President).
(F) Costs of Enforcement. Employee shall pay all reasonable
legal fees, court costs, expert fees, investigation costs, and other expenses
incurred by Employer in any litigation under which Employee is adjudicated to
have violated this Section 8.
8.3 Employee understands and agrees that:
(A) during the Employment Term, Employee will materially
assist Employer in the generation, development or enhancement of certain
Confidential Information, Clients and Customers and certain other business
assets and activities for Employer; and
(B) Employee's promises in this Section 8: (i) were
negotiated at arm's-length and with ample time for Employee to seek the
advice of legal counsel, (ii) are required for the fair and reasonable
protection of Employer and the Confidential Information, and (iii) do not
constitute an unreasonable hardship to Employee in working for Employer or in
subsequently earning a livelihood in Employee's field of expertise outside
the Service Area; and
(C) if Employee breaches (or threatens to breach) any or all
of the promises in this Section 8: the privacy and thereby the value of the
Confidential Information will be significantly jeopardized; Employer will be
subject to the immediate risk of material, immeasurable, and irreparable
damage and harm; the remedies at law for Employee's breach shall be
inadequate; and Employer shall therefore be entitled to injunctive relief
against Employee in addition to any and all other legal or equitable
remedies; and
(D) if Employee had not agreed to the restrictive promises in
this Agreement, Employer would not have signed this Agreement.
8.4 Employee's promises, duties and obligations made in this
Section 8 shall apply to Employee irrespective of whether a Change in Control
(as defined in Section 11.1) occurs and shall survive the voluntary or
involuntary cessation or termination of the Employment Term by either Party
(for any reason, with or without cause). If any of the restrictions
contained in this Section 8 are ever judicially held to exceed the geographic
or time limitations permitted by law, then such restrictions shall be deemed
to be reformed to comply with the maximum geographic and time limitations
permitted by law. The existence of any claim or cause of action by Employee
against Employer (whether or not derived from or based upon Employee's
employment with Employer) shall not constitute a defense to Employer's
enforcement of any covenant, duty or obligation of Employee in this Section
8.
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 to, attorneys' fees and court costs) directly or
indirectly arising or resulting from or in connection or association with any
threatened or pending action, suit or proceeding (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 against each other.
68
9.2 As a condition precedent to the indemnification and other
obligations of Employer under this Section 9, Employee must:
(A) Notify Employer of any actual or potential claim under
this Section 9; and
(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; and
(C) Permit Employer to assume total, complete and exclusive
control of the claim and all proceedings and matters relating thereto; and
(D) Cooperate in all reasonable respects with Employer in
handling the claims and all proceedings and matters related thereto.
10. Miscellaneous.
10.1 This Agreement constitutes the entire agreement among the
Parties with respect to the subject matter hereof and supersedes any and all
other prior or contemporaneous agreements or contracts (either oral or
written) between the Parties with respect to the subject matter hereof.
10.2 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.
10.3 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, Employee's administrators, executors,
legatees, heirs and assigns. At any time, Employer may assign this Agreement
and Employer's rights, duties, obligations and benefits thereunder to any
Subsidiary as defined in Section 11.1(I) of this Agreement.
10.4 This Agreement shall be construed and enforced under and in
accordance with the laws of the State of Ohio; for all litigation arising
hereunder, the State Courts of Lorain County, Ohio shall have exclusive
venue; and each Party (separately and collectively) hereby submits to the
personal jurisdiction of the State Courts of Lorain County, Ohio for all
litigation arising under this Agreement.
10.5 All promises, representations, warranties and covenants of the
Parties shall survive termination of the Agreement Term, unless otherwise
expressly provided herein.
11. Change in Control.
11.1 For purposes solely of this Section 11, the following terms
shall have the respective meanings set forth below:
(A) "Bonus Amount" means the highest annual incentive bonus
earned by Employee from Employer (or its Subsidiaries) during the last three
69
(3) completed fiscal years of Employer immediately preceding Employee's Date
of Termination (annualized in the event Employee was not employed by Employer
or its Subsidiaries for the whole of any such fiscal year).
(B) "Cause" means any one or more of the following: (i) the
willful and continued failure of Employee to perform substantially Employee's
duties with Employer (other than any such failure resulting from Employee's
Disability as defined in Section 11.1(E) of this Agreement or any such
failure subsequent to Employee's being delivered a Notice of Termination
without Cause by Employer or after Employee's delivering a Notice of
Termination for Good Reason to Employer) after a written demand for
substantial performance is delivered to Employee by Employer's Board of
Directors which specifically identifies the manner in which the Board of
Directors believes that Employee has not substantially performed Employee's
duties and provides Employee with ten (10) days to correct such failure, or
(ii) the willful engaging by Employee in illegal conduct or gross misconduct
which is injurious to Employer or any Subsidiary, or (iii) the conviction of
Employee of, or a plea by Employee of nolo contendere to, a felony, or (iv)
Employee's breach of or failure to perform any of the non-competition and
non-disclosure covenants contained in Section 8 of this Agreement or
contained in any other document signed by Employee and by Employer. For
purpose of this paragraph (B), no act or failure to act by Employee shall be
considered "willful" unless done or omitted to be done by Employee in bad
faith and without reasonable belief that Employee's action or omission was in
the best interests of Employer. Any act or failure to act based upon
authority given pursuant to a resolution duly adopted by Employer's Board of
Directors, based upon the advice of counsel for Employer, or based upon the
instructions of Employer's Chief Executive Officer or another senior officer
of Employer shall be conclusively presumed to be done, or omitted to be done,
by Employee in good faith and in the best interests of Employer.
(C) "Change in Control" means the occurrence of any one of
the following events:
(i) if individuals who, on the date of this Agreement,
constitute the Board of Directors (the "Incumbent
Directors") of LNB Bancorp, Inc. (herein called
"Company") cease for any reason to constitute at
least a majority of Company's Board of Directors;
provided, however, that: (A) any person becoming a
director subsequent to the date of this Agreement,
whose election or nomination for election was
approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors then on Company's Board of
Directors (either by a specific vote or by approval
of the proxy statement of Company 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, and (B) no individual elected or nominated
as a director of Company initially as a result of an
actual or threatened election contest with respect
to directors or any other actual or threatened
70
solicitation of proxies by or on behalf of any
person other than Company's Board of Directors shall
be deemed to be an Incumbent Director;
(ii) if 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 Company representing
twenty percent (20%) or more of the combined voting
power of Company's then-outstanding securities
eligible to vote for the election of Company's
Board of Directors (the "Company Voting
Securities"); provided, however, that the events
described in this clause (ii) shall not be deemed to
be a Change in Control by virtue of any of the
following acquisitions: (A) by Company or any
Subsidiary, (B) by any employee benefit plan
sponsored or maintained by Employer or any
Subsidiary or by any employee stock benefit trust
created by Employer or any Subsidiary, (C) by any
underwriter temporarily holding securities pursuant
to an offering of such securities, (D) pursuant to a
Non-Qualifying Transaction (as defined in clause
(iii) of this paragraph (C), below), (E) pursuant to
any acquisition by Employee or any group of persons
including Employee (or any entity controlled by
Employee or by any group of persons including
Employee), or (F) a transaction (other than one
described in clause (iii) of this paragraph (C),
below) in which Company Voting Securities are
acquired from Company, if a majority of the
Incumbent Directors approves a resolution providing
expressly that the acquisition pursuant to this
subparagraph (F) does not constitute a Change in
Control under this clause (ii);
(iii) upon the consummation of a merger,
consolidation, share exchange or similar form of
corporate transaction involving Company or any of
its Subsidiaries that requires the approval of
Company'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
fifty percent (50%) of the total voting power of
either (x) the corporation resulting from the
consummation of such Business Combination (the
"Surviving Corporation") or, if applicable, (y) the
ultimate parent corporation that directly or
indirectly has beneficial ownership of one hundred
71
percent (100%) of the voting securities eligible to
elect directors of the Surviving Corporation (the
"Parent Corporation") is represented by Company
Voting Securities that were outstanding immediately
prior to such Business Combination (or, if
applicable, represented by shares into which such
Company 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 Company
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 twenty
percent (20%) 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 of Director's approval of the execution of
the initial agreement providing for such Business
Combination (any Business Combination which
satisfies all of the criteria specified in (A), (B)
and (C) of this Section 11.1(C)(iii) shall be deemed
to be a "Non-Qualifying Transaction"); or
(iv) if the shareholders of Company approve a plan of
complete liquidation or dissolution of Company or a
sale of all or substantially all of Company's assets
but only if, pursuant to such liquidation or sale,
the assets of Company are transferred to an entity
not owned (directly or indirectly) by Company's
shareholders.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any person acquires beneficial ownership of more than
twenty percent (20%) of Company Voting Securities as a result of the
acquisition of Company Voting Securities by Company which reduces the number
of Company Voting Securities outstanding; provided, however, that if (after
such acquisition by Company) such person becomes the beneficial owner of
additional Company Voting Securities that increases the percentage of
outstanding Company Voting Securities beneficially owned by such person, a
Change in Control shall then occur. Notwithstanding anything in this
Agreement to the contrary, if (1) Employee's employment is terminated prior
to a Change in Control for reasons that would have constituted a Qualifying
Termination if they had occurred following a Change in Control, (2) Employee
72
reasonably demonstrates that such termination was at the request of a third
party who had indicated an intention or taken steps reasonably calculated to
effect a Change in Control, and (3) a Change in Control involving such third
party (or a party competing with such third party to effectuate a Change in
Control) does occur, then (for purposes of this Agreement) the date
immediately prior to the date of such termination of employment (or event
constituting Good Reason) shall be treated as a Change in Control.
(D) "Date of Termination" means (1) the effective date on
which Employee's employment by Employer terminates as specified in a prior
written notice by Employer or Employee (as the case may be) to the other, or
(2) if Employee's employment by Employer terminates by reason of death, the
date of death of Employee, or (3) if the Employee incurs a Disability, the
date of such Disability as determined by a physician chosen by Employer. For
purposes of determining the timing of payments and benefits to Employee under
Section 11.2, the date of the actual Change in Control shall be treated as
Employee's Date of Termination.
(E) "Disability" means Employee's inability to perform
Employee's then-existing duties with Employer on a full-time basis for at
least one hundred eighty (180) consecutive days as a result of Employee's
incapacity due to physical or mental illness.
(F) "Good Reason" means, without Employee's express written
consent, the occurrence of any of the following events after a Change in
Control:
(i) (a) any change in the duties or responsibilities
(including reporting responsibilities) of Employee
that is inconsistent in any material and adverse
respect with Employee's positions, duties,
responsibilities or status with Employer immediately
prior to such Change in Control (including any
material and adverse diminution of such duties or
responsibilities), or (b) a material and adverse
change in Employee's titles or offices with Employer
(including, if applicable, membership on Employer's
Board of Directors) from those existing immediately
prior to such Change in Control;
(ii) (a) a reduction by Employer in Employee's Basic
Salary as in effect immediately prior to such Change
in Control (or as such Basic Salary may be increased
from time to time thereafter), or (b) the failure by
Employer to pay Employee an annual bonus in respect
of the year in which such Change in Control occurs
or any subsequent year in an amount greater than or
equal to the annual bonus earned for the year ended
prior to the year in which such Change in Control
occurs;
(iii) any requirement of Employer that Employee: (a)
be based anywhere more than fifty (50) miles from
73
the office where Employee is located at the time of
the Change in Control, or (b) travel on Employer
business to an extent substantially greater than the
travel obligations of Employee immediately prior to
such Change in Control;
(iv) the failure of Employer to: (a) continue in effect
any material employee benefit plan, compensation
plan, welfare benefit plan or other material fringe
benefit plan in which Employee is participating
immediately prior to such Change in Control or the
taking of any action by Employer which would
materially and adversely affect Employee's
participation in or reduce Employee's benefits under
any such plan, unless Employee is permitted to
participate in other plans providing Employee with
substantially equivalent benefits in the aggregate,
or (b) provide Employee with paid vacation in
accordance with the most favorable vacation policies
of Employer as in effect for Employee immediately
prior to such Change in Control, including the
crediting of all service for which Employee had been
credited under such vacation policies prior to the
Change in Control; or
(v) the failure of Employer to obtain the assumption
(and, if applicable, guarantee) agreement from any
successor (and Parent Corporation) as contemplated
in Section 11.4(B).
Notwithstanding any contrary provision in this Agreement: (1) an isolated,
insubstantial and inadvertent action taken in good faith and which is
remedied by Employer within ten (10) days after receipt of notice thereof
given by Employee shall not constitute Good Reason; and (2) Employee's right
to terminate employment for Good Reason shall not be affected by Employee's
incapacities due to mental or physical illness; and (3) Employee's continued
employment shall not constitute a consent to, or a waiver of rights with
respect to, any event or condition constituting Good Reason (provided,
however, that Employee must provide notice of termination of employment
within thirty (30) days following Employee's knowledge of an event
constituting Good Reason or such event shall not constitute Good Reason under
this Agreement).
(G) "Qualifying Termination" means a termination of
Employee's employment with Employer after a Change in Control (i) by Employer
other than for Cause, or (ii) by Employee for Good Reason. Termination of
Employee's employment on account of death, Disability or Retirement shall not
constitute a Qualifying Termination.
(H) "Retirement " means the termination of Employee's
employment with Employer: (i) on or after the first of the month coincident
with or next following Employee's attainment of age sixty-five (65), or (ii)
on such later date as may be provided in a written agreement between Employer
74
and Employee.
(I) "Subsidiary" means any corporation or other entity in
which Company: (i) has a direct or indirect ownership interest of fifty
percent (50%) or more of the total combined voting power of the then-
outstanding securities or interests of such corporation or other entity
entitled to vote generally in the election of directors, or (ii) has the
right to receive fifty percent (50%) or more of the distribution of profits
or fifty percent (50%) of the assets upon liquidation or dissolution of such
corporation or other entity.
(J) "Termination Period" means the period of time beginning
with a Change in Control and ending two (2) years following such Change in
Control.
(K) "Highest Base Salary" means Employee's highest annual
base salary (excluding any bonuses) paid to Employee by Employer during
Employer's last three (3) fiscal years completed immediately prior to the
Date of Termination.
(L) "Company" means LNB Bancorp, Inc. and its successors.
11.2 Notwithstanding any contrary provision in Section 7 or in any
other Section of this Agreement, if (during the Termination Period)
Employee's employment with Employer terminates pursuant to a Qualifying
Termination:
(A) Employer shall pay to Employee, within twenty (20) days
following the Date of Termination, a lump sum cash amount equal to the sum of
(i) two hundred percent (200%) of Employee's Highest Base Salary, as defined
in Section 11.1(K), through the Date of Termination, plus (ii) any base
salary and bonuses which have been earned through the Date of Termination and
are payable, to the extent not theretofore paid or deferred, plus (iii) a pro
rata portion of Employee's annual bonus for the fiscal year in which
Employee's Date of Termination occurs in an amount at least equal to (1)
Employee's Bonus Amount multiplied by (2) a fraction, the numerator of which
is the number of days in the fiscal year in which the Date of Termination
occurs through the Date of Termination and the denominator of which is three
hundred sixty-five (365), and reduced by (3) any amounts paid to Employee by
Employer as an executive bonus (pursuant to approval of the Board of
Directors) for the fiscal year in which Employee's Date of Termination
occurs, plus (iv) any accrued and unpaid vacation pay.
(B) Employer shall continue to provide, for a period of
twenty-four (24) months following the Date of Termination, Employee (and
Employee's dependents, if applicable) with the same level of medical, dental,
accident, disability and life insurance benefits and continuing education
payments (necessary for Employee to maintain any professional licensure
requirements related to Employee's employment duties with Employer) upon
substantially the same terms and conditions (including contributions required
by Employee for such benefits) as existed immediately prior to Employee's
Date of Termination (or, if more favorable to Employee, as such benefits and
terms and conditions existed immediately prior to the Change in Control);
provided, however, that if Employee is not eligible or qualified to continue
75
to participate in Employer's plans providing such benefits, Employer shall
otherwise provide such benefits on the same after-tax basis as if continued
participation had been permitted. Notwithstanding the foregoing, in the
event Employee becomes re-employed with another employer and becomes eligible
to receive welfare benefits from such employer, the welfare benefits
described herein shall be secondary to such benefits during the period of
such eligibility but only if (and to the extent that) Employer reimburses
Employee for any increased cost and provides any additional benefits
necessary to give Employee the benefits provided in this Section 11.2(B).
Employee's accrued benefits as of the Date of Termination under Employer's
employee benefit plans shall be payable in accordance with the terms of such
plans.
(C) Notwithstanding any contrary provision in this Section
11.2, Employer's payments to Employee under this Section 11.2 shall be
reduced to the extent that such payments (together with all other payments by
Employer to Employee under all other written or verbal agreements between
Employer and Employee) constitute an "excess parachute payment" under Section
280G of the Internal Revenue Code (as may be periodically amended).
11.3 Employer shall withhold from all payments due to Employee (or
Employee's beneficiaries or estate) hereunder all taxes which, by applicable
federal, state, local or other law, Employer is required to withhold
therefrom.
11.4 (A) This Section 11 shall not be terminated by any Business
Combination. In the event of any Business Combination, the provisions of
this Section 11 shall be binding upon the Surviving Corporation and such
Surviving Corporation shall be treated as Employer hereunder.
(B) Employer agrees that, in connection with any Business
Combination, Employer will cause any successor entity to Employer
unconditionally to assume (and, for any Parent Corporation in such Business
Combination, to guarantee), by written instrument delivered to Employee (or
Employee's beneficiaries or estate), all of the obligations of Employer under
this Section 11. Failure of Employer to obtain such assumption or guarantee
prior to the effectiveness of any such Business Combination that constitutes
a Change in Control shall be a breach of this Agreement and shall constitute
Good Reason hereunder and, further, shall entitle Employee to compensation
and other benefits from Employer in the same amount and on the same terms as
Employee would be entitled hereunder as if Employee's employment were
terminated following a Change in Control by reason of a Qualifying
Termination. For purposes of implementing this Section 11.4(B), the date on
which any such Business Combination becomes effective shall be deemed the
date Good Reason occurs and shall be the Date of Termination, if so requested
by Employee.
(C) This Section 11 shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Employee dies while any amounts would have been payable to Employee under
this Section 11 if Employee had continued to live, all such amounts (unless
otherwise provided herein) shall be paid in accordance with the terms of this
Section 11 to such person or persons appointed in writing by Employee to
receive such amounts or, if no person is so appointed, to Employee's estate.
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11.5 In the event of a tender or exchange offer, proxy contest, or
the execution of any agreement which, if consummated, would constitute a
Change in Control, Employee agrees (as a condition to receiving any payments
and benefits under Section 11.2 of this Agreement) not to leave voluntarily
the employ of the Employer (other than as a result of Disability, Retirement
or an event which would constitute Good Reason if a Change in Control had
occurred) until the Change in Control occurs or, if earlier, such tender or
exchange offer, proxy contest or agreement is terminated or abandoned.
IN WITNESS WHEREOF, the Parties have set their hands as of the day and
year first above written.
In the Presence of:
/s/Ann E. Koler /s/Kevin W. Nelson
- ---------------------------- -------------------------
(Signature of First Witness) Kevin W. Nelson
/s/Denise M. Harmych "Employee"
- ----------------------------
(Signature of Second Witness)
LNB BANCORP, INC.
/s/Ann E. Koler By:/s/Gary C. Smith
- ---------------------------- -------------------------
(Signature of First Witness) Gary C. Smith, President
/s/Denise M. Harmych
- ----------------------------
(Signature of Second Witness)
THE LORAIN NATIONAL BANK
/s/Ann E. Koler By:/s/Gary C. Smith
- --------------------------- ------------------------
(Signature of First Witness) Gary C. Smith, President
/s/Denise M. Harmych
- -----------------------------
(Signature of Second Witness) "Employer"
77
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 2001)
S - K Reference Number (10c)
Restated and Amended (to conform with specific
Employment Benefit Plans and Provisions)
Employment Agreement by and between Gregory D.
Friedman and LNB Bancorp, Inc, and The Lorain National
Bank dated December 22, 2000.
78
GREGORY D. FRIEDMAN
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), made at Lorain, Ohio, as of
the 22nd day of December, 2000, by and among GREGORY D. FRIEDMAN, herein
referenced as "Employee", 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), which together with their respective
successors and assigns are collectively herein referenced as "Employer", is
to EVIDENCE THAT:
WHEREAS Employer desires to secure and retain the employment services of
Employee as its Vice President and Chief Financial Officer, and Employee
desires to accept employment as Employer's Vice President and Chief Financial
Officer; and
WHEREAS, but for Employee's promises made in this Agreement, especially
in Section 8, Employer would not employ Employee under the terms and
conditions of this Agreement and, therefore, expressly to induce Employer to
execute this Agreement, Employee represents that Employee fully understands
and accepts the restrictive covenants in Section 8 and agrees to be bound
thereby;
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein, Employer and Employee (collectively the "Parties" and individually a
"Party") hereby agree as follows:
1. Employment and Term.
1.1 Employee will render management services to Employer in the
capacity as Employer's Vice President and Chief Financial Officer for the
term of this Agreement (herein called the "Agreement Term") commencing
December 22, 2000, and continuing thereafter until terminated pursuant to the
termination provisions of this Agreement, including the provisions of Section
7.
1.2 Employee will devote Employee's full business-time and best
efforts to performing conscientiously, faithfully and loyally all duties:
(i) required of Employee by virtue of Employee's position as Employer's Vice
President and Chief Financial Officer, (ii) set forth in Employer's Code of
Regulations, Bylaws and policies as adopted by Employer's Board of Directors,
and (iii) assigned or delegated to Employee by Employer's President and Chief
Executive Officer and/or the Chairman of the Board of Directors.
1.3 Except as otherwise expressly provided herein, this Agreement
represents the entire agreement between Employee and Employer regarding
Employee's employment by Employer.
1.4 Except as otherwise expressly provided 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 all Parties.
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1.5 No action by any Party and no refusal or neglect of any 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 such waiver is
expressed in a written document which is clearly designated as a waiver to a
specific provision(s) of this Agreement and unless such document is signed by
all Parties.
2. Compensation.
2.1 In consideration for the services rendered by Employee as Vice
President and Chief Financial Officer, Employer agrees to pay Employee a
basic salary (herein called the "Basic Salary") equal to the sum of One
Hundred Twenty Thousand Dollars ($120,000.00) for each twelve (12)
consecutive monthly period (a "Contract Year") of the Agreement Term. The
Basic Salary shall be payable in twenty-six (26) equal bi-weekly payments and
prorated if the Agreement Term is terminated prior to the completion of any
Contract Year.
2.2 As additional consideration for Employee's services performed
hereunder, Employee may (but shall not be entitled to) receive a
discretionary bonus from time to time. Such bonus (and Employee's
eligibility therefor) 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 Employer's Board of Directors (or a committee thereof). The
annual review shall occur not less than sixty (60) days prior to the end of
Employer's fiscal year for the express purpose of reviewing the current
fiscal year's performance of Employee. Any change in compensation as a
result of the annual review shall immediately act as an amendment of Section
2.1 above, effective as of the date of the compensation change.
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 and
adherence to each and every material promise, duty and obligation assigned to
or made by Employee under this Agreement.
3. Vacations and Time-Off.
3.1 Employee shall be entitled to twenty-seven (27) working days
of compensated vacation for each Contract Year, pursuant to the terms and
conditions of Employer's vacation time-off policy (as may be periodically
changed in Employer's sole discretion), to be taken at times as mutually
agreed in advance between Employee and Employer's President and Chief
Executive Officer or Chairman of the Board of Directors.
3.2 Except as may be periodically changed in Employer's sole
discretion, all vacation time-off shall be non-cumulative if not taken within
the Contract Year or within the first quarter of the succeeding Contract
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Year; provided, however, 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 additional time-off to attend
professional meetings, seminars, and conventions and to satisfy professional
educational and licensure requirements as have been mutually agreed upon
between Employee and Employer's President and Chief Executive Officer or
Chairman of the Board of Directors. Attendance at such approved meetings,
seminars, and conventions and accomplishment of approved professional
educational and licensure requirements shall be fully compensated and shall
not be considered vacation. Employer shall reimburse Employee for all
reasonable expenses incurred by Employee 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 (which may be periodically changed in Employer's sole
discretion).
3.6 Employee shall further be entitled to additional days of time-
off with full compensation for personal matters in accordance with Employer's
personal time-off policy (which may be periodically changed in Employer's
sole discretion).
4. Fringe Benefits.
4.1 Employee shall be entitled to all fringe benefits to which
other employees of Employer in Employee's classification are entitled.
4.2 As additional consideration for Employee's performance of
Employee's duties and responsibilities as Vice President and Chief Financial
Officer of Employer, Employer agrees:
(A) To provide Employee with (i) short-term disability
benefits pursuant to Employer's short-term disability program (which may be
periodically changed or terminated in Employer's sole discretion), and (ii)
long-term disability insurance benefits commencing one hundred eighty (180)
days after Employee incurs a Disability, as defined in Section 11.1(E) of
this Agreement, and continuing pursuant to the terms of Employer's long-term
disability program (which may be periodically changed or terminated in
Employer's sole discretion); and
(B) To include Employee in Employer's defined benefit
retirement pension plan, stock option plan (if any), stock ownership plan and
flexible benefit plan, as such plans may be periodically changed or
terminated in Employer's sole discretion; and
81
(C) To provide Employee with such plan of hospitalization
insurance as maintained by Employer and as may be periodically changed or
terminated in Employer's sole discretion; and
(D) To provide (i) a term life insurance policy on the life
of Employee (provided that Employee is insurable under the standard rate
criteria of a commercial life insurance company) in an amount equal to 2.75
times the Basic Salary of Employee, but not to exceed Three Hundred Thousand
Dollars ($300,000.00), as may be periodically increased in Employer's sole
discretion, and payable to the beneficiary or beneficiaries of Employee's
choice, and (ii) an accidental death and dismemberment insurance policy upon
Employee in an amount equal to 2.75 times the Basic Salary, but not to exceed
One Hundred Fifty Thousand Dollars ($150,000.00), as may be increased in
Employer's sole discretion, and payable to the beneficiary or beneficiaries
of Employer's choice; and
(E) To provide Employee with such sick leave as presently in
force by Employer and as may be periodically changed or terminated in
Employer's sole discretion; and
(F) To purchase or lease for the use of Employee an
automobile as selected by Employee and approved by Employer, to reimburse
Employee for expenses related to its operation for business purposes upon
presentation of appropriate itemization and receipts, and to replace such
automobile after three (3) years of use by Employee; provided, however, that
upon termination of the Agreement Term for any reason, Employer shall be
immediately entitled to possession of said automobile; and
(G) To pay the initiation fee and monthly dues for a
corporate membership for Employee at Spring Valley Country Club, Elyria,
Ohio, and to reimburse Employee for all future assessments and reasonable
expenses incurred by Employee at such Club in furtherance of Employer's
business interests upon presentation of appropriate itemizations and
receipts; and
(H) To reimburse Employee for all reasonable and approved
expenses related to the performance of Employee's duties as Vice President
and Chief Financial Officer, 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 Employee's duties and obligations hereunder (including, but
not limited to, professional continuing educational requirements); 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 Employer's Vice President and Chief
Financial Officer.
5. Stock Options. If determined by Employer's Board of Directors,
Employee shall participate in any and all incentive stock option plans and
programs currently in existence or adopted by Employer after commencement of
the Agreement Term in accordance with all applicable eligibility
requirements, terms and conditions of such plans and programs (as may be
periodically changed or terminated in Employer's sole discretion).
82
6. Prohibition Against Transfer. Employee's duties, obligations and
services rendered under this Agreement are personal in nature and are unique
to Employer. 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 of the Agreement Term.
7.1 If either Employer or Employee 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 continuing right to terminate the Agreement Term without further
notice; provided, however, that Employer may immediately terminate the
Agreement Term if Employee violates or fails to adhere to any provision of
Section 8 (pertaining to non-disclosure and non-competition).
7.2 Through its Board of Directors, Employer may terminate the
Agreement Term without cause at any time upon ninety (90) days prior written
notice to Employee.
7.3 Subject to the terms and conditions of Section 11, Employee
may terminate the Agreement Term upon the occurrence of a "Change in Control"
as defined in Section 11.1(C) for "Good Reason" as defined in Section
11.1(F).
7.4 The Agreement Term shall automatically and immediately
terminate upon the death of Employee.
7.5 In the event of the Disability of Employee as defined in
Section 11.1(E) of this Agreement, the Agreement Term shall terminate and
Employee shall be entitled to benefits provided by Employer under Employer's
long-term disability program as designated in Section 4.2(A)(ii) of this
Agreement.
7.6 In Employee's sole discretion, Employee may terminate the
Agreement Term by giving the Board of Directors of Employer at least ninety
(90) days written notice of Employee's decision to terminate the Agreement
Term.
7.7 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.
7.8 Upon the termination of the Agreement Term pursuant to Section
7.1 (but only if Employee terminates the Agreement Term due to the Employer's
breach) or Section 7.2, Employer shall continue to pay Employee's total
compensation (as reflected on Employee's W-2 Federal Income Tax Statement
from Employer for the prior calendar year) for a period of one (1) year from
the date of termination of the Agreement Term; provided, however, that if
Employer chooses a two (2)-year Restricted Period under Section 8.1(G), then
Employer shall continue to pay such compensation for a period of two (2)
years from the date of termination of the Agreement Term. Any termination
83
payments payable to Employee shall survive Employee's death if Employee dies
during the period Employee is receiving termination payments as provided in
this Section 7.8.
8. Employee's Non-Disclosure and Non-Competition Promises.
8.1 For purposes of this Section 8, the Parties agree to and
understand the following definitions:
(A) "Competitive Act" means any of the following: (i)
Employee's rendering services (whether or not for compensation) to, for or on
behalf of a Competitor (as defined herein) as an employee, independent
contractor, consultant, advisor, representative, agent or in any other
capacity; and (ii) Employee's investment in or ownership (partial or total)
of a Competitor, unless the Competitor's stock is publicly traded on a
national exchange and Employee owns less than two percent (2%) of such stock.
(B) "Competitive Activity" means the performance or rendering
of any banking services; trust services and investment services; portfolio
management; retirement planning; administration of employee benefit plans;
administration of decedents' estates and court-supervised accounts,
guardianships, and custodial arrangements; personal tax and estate tax
planning; financial consulting services; investment advising services; and
any other business activity, service or product which competes with any
existing or future business activity, service or product of Employer.
(C) "Competitor" means any of the following: (i) any person,
sole proprietorship, partnership, association (other than Employer),
organization, corporation, limited liability company or other entity
(governmental or otherwise) who or which provides, renders or performs a
Competitive Activity (as defined herein) within the Service Area (as defined
herein), even if the Competitor has no office or other facilities located
within the Service Area; and (ii) any parent, subsidiary or other person or
entity affiliated with, or related by ownership to, any of the foregoing
designated in Subitem (i) of this Section 8.1(C).
(D) "Confidential Information" means all of the following
(whether written or verbal) pertaining to Employer: (i) trade secrets (as
defined by Ohio law); Client or Customer lists, records and other information
regarding Employer's Clients or Customers (whether or not evidenced in
writing); Client or Customer fee or price schedules and fee or price
policies; financial books, plans, records, ledgers and information; business
development plans; sales and marketing plans; research and development plans;
employment and personnel manuals, records, data and policies; business
manuals, methods and operations; business forms, correspondence, memoranda
and other records; computer records and related data; and any other
confidential or proprietary data and information of Employer or its Clients
or Customers which Employee encounters during the Employment Term (as defined
in Section 8.1(E)); and (ii) all products, technology, ideas, inventions,
discoveries, developments, devices, processes, business notes, forms and
documents, business products, computer programs, and other creations (and
improvements of any of the foregoing), whether patentable or copyrightable,
which Employee has acquired, developed, conceived or made (whether directly
84
or indirectly, whether solicited or unsolicited, or whether during normal
work hours or during off-time) during the Employment Term or during the
Restricted Period and which relate to any business activity of Employer or
are derived from the Confidential Information designated in Subsection (i) of
this Section 8.1(D).
(E) "Client" or "Customer" means a person, sole
proprietorship, partnership, association, organization, corporation, limited
liability company, or other entity (governmental or otherwise), wherever
located: (i) to or for which Employer sells any products or renders or
performs services either during the 180-day period immediately preceding
commencement of the Restricted Period or during the Restricted Period, or
(ii) which Employer solicits or (as demonstrated by plans, strategies or
other tangible preparation) intends to solicit to purchase products or
services from Employer either during the 180-day period immediately preceding
commencement of the Restricted Period or during the Restricted Period.
(F) "Employment Term" means the period of time starting on
the date Employee's employment with Employer commences and terminating at the
close of business on the date Employee's employment with Employer terminates.
(G) "Restricted Period" means a time-period, as chosen by
Employer (in its sole discretion) by written notice to Employee within thirty
(30) days after termination of the Employment Term, equal to either one (1)
year or two (2) years commencing on the date the Employment Term is
terminated by either Party (for any reason, with or without cause); provided,
however, that such period shall be extended to include any period of time
during which Employee engages in any activity constituting a breach of this
Agreement and any period of time during which litigation transpires wherein
Employee is held to have breached this Agreement.
(H) "Service Area" means: (i) Lorain County, Ohio and all
counties immediately contiguous to Lorain County, constituting those
geographic areas in which Employer presently conducts substantial business
activities; and (ii) those counties located in the State of Ohio in which
Employer conducts or transacts substantial business activities on the date
the Employment Term terminates; and (iii) those counties in the State of Ohio
in which, on the date the Employment Term terminates, Employer intends to
conduct or transact substantial business activities as demonstrated by plans,
strategies or other tangible preparation for such business activities.
(I) "Employer" means, for purposes of this Section 8, LNB
Bancorp, Inc. and The Lorain National Bank (a national bank association), all
direct and indirect parent and subsidiary entities thereof, and all entities
related to LNB Bancorp, Inc., to The Lorain National Bank or to such parent
and subsidiary entities by common ownership.
8.2 Expressly in consideration for Employer's promises made in
this Agreement and to induce Employer to sign this Agreement, Employee
promises and agrees that:
(A) Confidentiality. The Confidential Information is and, at
all times, shall remain the exclusive property of Employer, and Employee:
85
(i) shall hold the Confidential Information in strictest confidence and in a
position of trust for Employer and its Clients and Customers, and (ii) except
as may be necessary to perform Employee's employment duties with Employer but
only in compliance with Employer's confidentiality policies and all
applicable laws, shall not (directly or indirectly) use for any purpose,
copy, duplicate, disclose, convey to any third-party or convert any
Confidential Information, either during the Employment Term or at any time
following termination of the Employment Term (by any Party, for any reason,
with or without cause), and (iii) upon the request of Employer at any time
during or after the Employment Term, shall immediately deliver to Employer
all the Confidential Information in Employee's possession and shall neither
convey to any third-party nor retain any copies or duplicates thereof; and
(B) Competitive Acts. During the Employment Term and during
the Restricted Period, Employee (or any entity owned or controlled by
Employee) shall not directly or indirectly, without the prior written
approval of the President and Chief Executive Officer of Employer (or any
person expressly designated by the President and Chief Executive Officer),
perform a Competitive Act; and
(C) Clients and Customers. During the Restricted Period,
Employee (or any entity owned or controlled by Employee) shall not directly
or indirectly: (i) solicit from or perform for any Client or Customer a
Competitive Activity, wherever such Client or Customer is located, or (ii)
influence (or attempt to influence) any Client or Customer to transfer such
Client's or Customer's patronage or business from Employer, or (iii)
otherwise interfere with any business relationship of Employer with any
Client or Customer; and
(D) Employees. During the Restricted Period, Employee (or
any entity owned or controlled by Employee) shall not directly or indirectly:
(i) employ, engage, contract for the services of, or solicit or otherwise
induce the services of any person who, during the one hundred eighty (180)-
day period immediately preceding commencement of the Restricted Period or
during the Restricted Period, is or was an employee of Employer, or (ii)
otherwise interfere with (or attempt to interfere with) any employment
relationship of Employer with any employee.
(E) Other Employment. During the Employment Term, Employee
shall not perform services (whether or not for compensation) as an employee,
independent contractor, consultant, representative or agent of any person,
sole proprietorship, partnership, limited liability company, corporation,
association (other than Employer), organization, or other entity
(governmental or otherwise) without the prior, written consent of the
President and Chief Executive Officer of Employer (or any person expressly
designated by the President).
(F) Costs of Enforcement. Employee shall pay all reasonable
legal fees, court costs, expert fees, investigation costs, and other expenses
incurred by Employer in any litigation under which Employee is adjudicated to
have violated this Section 8.
8.3 Employee understands and agrees that:
86
(A) during the Employment Term, Employee will materially
assist Employer in the generation, development or enhancement of certain
Confidential Information, Clients and Customers and certain other business
assets and activities for Employer; and
(B) Employee's promises in this Section 8: (i) were
negotiated at arm's-length and with ample time for Employee to seek the
advice of legal counsel, (ii) are required for the fair and reasonable
protection of Employer and the Confidential Information, and (iii) do not
constitute an unreasonable hardship to Employee in working for Employer or in
subsequently earning a livelihood in Employee's field of expertise outside
the Service Area; and
(C) if Employee breaches (or threatens to breach) any or all
of the promises in this Section 8: the privacy and thereby the value of the
Confidential Information will be significantly jeopardized; Employer will be
subject to the immediate risk of material, immeasurable, and irreparable
damage and harm; the remedies at law for Employee's breach shall be
inadequate; and Employer shall therefore be entitled to injunctive relief
against Employee in addition to any and all other legal or equitable
remedies; and
(D) if Employee had not agreed to the restrictive promises in
this Agreement, Employer would not have signed this Agreement.
8.4 Employee's promises, duties and obligations made in this
Section 8 shall apply to Employee irrespective of whether a Change in Control
(as defined in Section 11.1) occurs and shall survive the voluntary or
involuntary cessation or termination of the Employment Term by either Party
(for any reason, with or without cause). If any of the restrictions
contained in this Section 8 are ever judicially held to exceed the geographic
or time limitations permitted by law, then such restrictions shall be deemed
to be reformed to comply with the maximum geographic and time limitations
permitted by law. The existence of any claim or cause of action by Employee
against Employer (whether or not derived from or based upon Employee's
employment with Employer) shall not constitute a defense to Employer's
enforcement of any covenant, duty or obligation of Employee in this Section
8.
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 to, attorneys' fees and court costs) directly or
indirectly arising or resulting from or in connection or association with any
threatened or pending action, suit or proceeding (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 against each other.
87
9.2 As a condition precedent to the indemnification and other
obligations of Employer under this Section 9, Employee must:
(A) Notify Employer of any actual or potential claim under
this Section 9; and
(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; and
(C) Permit Employer to assume total, complete and exclusive
control of the claim and all proceedings and matters relating thereto; and
(D) Cooperate in all reasonable respects with Employer in
handling the claims and all proceedings and matters related thereto.
10. Miscellaneous.
10.1 This Agreement constitutes the entire agreement among the
Parties with respect to the subject matter hereof and supersedes any and all
other prior or contemporaneous agreements or contracts (either oral or
written) between the Parties with respect to the subject matter hereof.
10.2 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.
10.3 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, Employee's administrators, executors,
legatees, heirs and assigns. At any time, Employer may assign this Agreement
and Employer's rights, duties, obligations and benefits thereunder to any
Subsidiary as defined in Section 11.1(I) of this Agreement.
10.4 This Agreement shall be construed and enforced under and in
accordance with the laws of the State of Ohio; for all litigation arising
hereunder, the State Courts of Lorain County, Ohio shall have exclusive
venue; and each Party (separately and collectively) hereby submits to the
personal jurisdiction of the State Courts of Lorain County, Ohio for all
litigation arising under this Agreement.
10.5 All promises, representations, warranties and covenants
of the Parties shall survive termination of the Agreement Term, unless
otherwise expressly provided herein.
11. Change in Control.
11.1 For purposes solely of this Section 11, the following terms
shall have the respective meanings set forth below:
(A) "Bonus Amount" means the highest annual incentive bonus
88
earned by Employee from Employer (or its Subsidiaries) during the last three
(3) completed fiscal years of Employer immediately preceding Employee's Date
of Termination (annualized in the event Employee was not employed by Employer
or its Subsidiaries for the whole of any such fiscal year).
(B) "Cause" means any one or more of the following: (i) the
willful and continued failure of Employee to perform substantially Employee's
duties with Employer (other than any such failure resulting from Employee's
Disability as defined in Section 11.1(E) of this Agreement or any such
failure subsequent to Employee's being delivered a Notice of Termination
without Cause by Employer or after Employee's delivering a Notice of
Termination for Good Reason to Employer) after a written demand for
substantial performance is delivered to Employee by Employer's Board of
Directors which specifically identifies the manner in which the Board of
Directors believes that Employee has not substantially performed Employee's
duties and provides Employee with ten (10) days to correct such failure, or
(ii) the willful engaging by Employee in illegal conduct or gross misconduct
which is injurious to Employer or any Subsidiary, or (iii) the conviction of
Employee of, or a plea by Employee of nolo contendere to, a felony, or (iv)
Employee's breach of or failure to perform any of the non-competition and
non-disclosure covenants contained in Section 8 of this Agreement or
contained in any other document signed by Employee and by Employer. For
purpose of this paragraph (B), no act or failure to act by Employee shall be
considered "willful" unless done or omitted to be done by Employee in bad
faith and without reasonable belief that Employee's action or omission was in
the best interests of Employer. Any act or failure to act based upon
authority given pursuant to a resolution duly adopted by Employer's Board of
Directors, based upon the advice of counsel for Employer, or based upon the
instructions of Employer's Chief Executive Officer or another senior officer
of Employer shall be conclusively presumed to be done, or omitted to be done,
by Employee in good faith and in the best interests of Employer.
(C) "Change in Control" means the occurrence of any one of
the following events:
(i) if individuals who, on the date of this Agreement,
constitute the Board of Directors (the "Incumbent
Directors") of LNB Bancorp, Inc. (herein called
"Company") cease for any reason to constitute at
least a majority of Company's Board of Directors;
provided, however, that: (A) any person becoming a
director subsequent to the date of this Agreement,
whose election or nomination for election was
approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors then on Company's Board of
Directors (either by a specific vote or by approval
of the proxy statement of Company 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, and (B) no individual elected or nominated
as a director of Company initially as a result of an
actual or threatened election contest with respect
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to directors or any other actual or threatened
solicitation of proxies by or on behalf of any
person other than Company's Board of Directors shall
be deemed to be an Incumbent Director;
(ii) if 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 Company representing
twenty percent (20%) or more of the combined voting
power of Company's then-outstanding securities
eligible to vote for the election of Company's
Board of Directors (the "Company Voting
Securities"); provided, however, that the events
described in this clause (ii) shall not be deemed to
be a Change in Control by virtue of any of the
following acquisitions: (A) by Company or any
Subsidiary, (B) by any employee benefit plan
sponsored or maintained by Employer or any
Subsidiary or by any employee stock benefit trust
created by Employer or any Subsidiary, (C) by any
underwriter temporarily holding securities pursuant
to an offering of such securities, (D) pursuant to a
Non-Qualifying Transaction (as defined in
clause (iii) of this paragraph (C), below), (E)
pursuant to any acquisition by Employee or any group
of persons including Employee (or any entity
controlled by Employee or by any group of persons
including Employee), or (F) a transaction (other
than one described in clause (iii) of this paragraph
(C), below) in which Company Voting Securities are
acquired from Company, if a majority of the
Incumbent Directors approves a resolution providing
expressly that the acquisition pursuant to this
subparagraph (F) does not constitute a Change in
Control under this clause (ii);
(iii) upon the consummation of a merger,
consolidation, share exchange or similar form of
corporate transaction involving Company or any of
its Subsidiaries that requires the approval of
Company'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
fifty percent (50%) of the total voting power of
either (x) the corporation resulting from the
consummation of such Business Combination (the
"Surviving Corporation") or, if applicable, (y) the
ultimate parent corporation that directly or
90
indirectly has beneficial ownership of one hundred
percent (100%) of the voting securities eligible to
elect directors of the Surviving Corporation (the
"Parent Corporation") is represented by Company
Voting Securities that were outstanding immediately
prior to such Business Combination (or, if
applicable, represented by shares into which such
Company 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 Company
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 twenty
percent (20%) 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 of Director's approval of the execution of
the initial agreement providing for such Business
Combination (any Business Combination which
satisfies all of the criteria specified in (A), (B)
and (C) of this Section 11.1(C)(iii) shall be deemed
to be a "Non-Qualifying Transaction"); or
(iv) if the shareholders of Company approve a plan of
complete liquidation or dissolution of Company or a
sale of all or substantially all of Company's
assets but only if, pursuant to such liquidation or
sale, the assets of Company are transferred to an
entity not owned (directly or indirectly) by
Company's shareholders.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any person acquires beneficial ownership of more than
twenty percent (20%) of Company Voting Securities as a result of the
acquisition of Company Voting Securities by Company which reduces the number
of Company Voting Securities outstanding; provided, however, that if (after
such acquisition by Company) such person becomes the beneficial owner of
additional Company Voting Securities that increases the percentage of
outstanding Company Voting Securities beneficially owned by such person, a
Change in Control shall then occur. Notwithstanding anything in this
Agreement to the contrary, if (1) Employee's employment is terminated prior
to a Change in Control for reasons that would have constituted a Qualifying
91
Termination if they had occurred following a Change in Control, (2) Employee
reasonably demonstrates that such termination was at the request of a third
party who had indicated an intention or taken steps reasonably calculated to
effect a Change in Control, and (3) a Change in Control involving such third
party (or a party competing with such third party to effectuate a Change in
Control) does occur, then (for purposes of this Agreement) the date
immediately prior to the date of such termination of employment (or event
constituting Good Reason) shall be treated as a Change in Control.
(D) "Date of Termination" means (1) the effective date on
which Employee's employment by Employer terminates as specified in a prior
written notice by Employer or Employee (as the case may be) to the other, or
(2) if Employee's employment by Employer terminates by reason of death, the
date of death of Employee, or (3) if the Employee incurs a Disability, the
date of such Disability as determined by a physician chosen by Employer. For
purposes of determining the timing of payments and benefits to Employee under
Section 11.2, the date of the actual Change in Control shall be treated as
Employee's Date of Termination.
(E) "Disability" means Employee's inability to perform
Employee's then-existing duties with Employer on a full-time basis for at
least one hundred eighty (180) consecutive days as a result of Employee's
incapacity due to physical or mental illness.
(F) "Good Reason" means, without Employee's express written
consent, the occurrence of any of the following events after a Change in
Control:
(i) (a) any change in the duties or responsibilities
(including reporting responsibilities) of Employee
that is inconsistent in any material and adverse
respect with Employee's positions, duties,
responsibilities or status with Employer immediately
prior to such Change in Control (including any
material and adverse diminution of such duties or
responsibilities), or (b) a material and adverse
change in Employee's titles or offices with Employer
(including, if applicable, membership on Employer's
Board of Directors) from those existing immediately
prior to such Change in Control;
(ii) (a) a reduction by Employer in Employee's Basic
Salary as in effect immediately prior to such Change
in Control (or as such Basic Salary may be increased
from time to time thereafter), or (b) the failure by
Employer to pay Employee an annual bonus in respect
of the year in which such Change in Control occurs
or any subsequent year in an amount greater than
or equal to the annual bonus earned for the year
ended prior to the year in which such Change in
Control occurs;
92
(iii) any requirement of Employer that Employee: (a)
be based anywhere more than fifty (50) miles from
the office where Employee is located at the time of
the Change in Control, or (b) travel on Employer
business to an extent substantially greater than the
travel obligations of Employee immediately prior to
such Change in Control;
(iv) the failure of Employer to: (a) continue in effect
any material employee benefit plan, compensation
plan, welfare benefit plan or other material fringe
benefit plan in which Employee is participating
immediately prior to such Change in Control or the
taking of any action by Employer which would
materially and adversely affect Employee's
participation in or reduce Employee's benefits under
any such plan, unless Employee is permitted to
participate in other plans providing Employee with
substantially equivalent benefits in the aggregate,
or (b) provide Employee with paid vacation in
accordance with the most favorable vacation policies
of Employer as in effect for Employee immediately
prior to such Change in Control, including the
crediting of all service for which Employee had been
credited under such vacation policies prior to the
Change in Control; or
(v) the failure of Employer to obtain the assumption
(and, if applicable, guarantee) agreement from any
successor (and Parent Corporation) as contemplated
in Section 11.4(B).
Notwithstanding any contrary provision in this Agreement: (1) an isolated,
insubstantial and inadvertent action taken in good faith and which is
remedied by Employer within ten (10) days after receipt of notice thereof
given by Employee shall not constitute Good Reason; and (2) Employee's right
to terminate employment for Good Reason shall not be affected by Employee's
incapacities due to mental or physical illness; and (3) Employee's continued
employment shall not constitute a consent to, or a waiver of rights with
respect to, any event or condition constituting Good Reason (provided,
however, that Employee must provide notice of termination of employment
within thirty (30) days following Employee's knowledge of an event
constituting Good Reason or such event shall not constitute Good Reason under
this Agreement).
(G) "Qualifying Termination" means a termination of
Employee's employment with Employer after a Change in Control (i) by Employer
other than for Cause, or (ii) by Employee for Good Reason. Termination of
Employee's employment on account of death, Disability or Retirement shall not
constitute a Qualifying Termination.
(H) "Retirement " means the termination of Employee's
employment with Employer: (i) on or after the first of the month coincident
93
with or next following Employee's attainment of age sixty-five (65), or (ii)
on such later date as may be provided in a written agreement between Employer
and Employee.
(I) "Subsidiary" means any corporation or other entity in
which Company: (i) has a direct or indirect ownership interest of fifty
percent (50%) or more of the total combined voting power of the then-
outstanding securities or interests of such corporation or other entity
entitled to vote generally in the election of directors, or (ii) has the
right to receive fifty percent (50%) or more of the distribution of profits
or fifty percent (50%) of the assets upon liquidation or dissolution of such
corporation or other entity.
(J) "Termination Period" means the period of time beginning
with a Change in Control and ending two (2) years following such Change in
Control.
(K) "Highest Base Salary" means Employee's highest annual
base salary (excluding any bonuses) paid to Employee by Employer during
Employer's last three (3) fiscal years completed immediately prior to the
Date of Termination.
(L) "Company" means LNB Bancorp, Inc. and its successors.
11.2 Notwithstanding any contrary provision in Section 7 or in any
other Section of this Agreement, if (during the Termination Period)
Employee's employment with Employer terminates pursuant to a Qualifying
Termination:
(A) Employer shall pay to Employee, within twenty (20) days
following the Date of Termination, a lump sum cash amount equal to the sum of
(i) two hundred percent (200%) of Employee's Highest Base Salary, as defined
in Section 11.1(K), through the Date of Termination, plus (ii) any base
salary and bonuses which have been earned through the Date of Termination and
are payable, to the extent not theretofore paid or deferred, plus (iii) a pro
rata portion of Employee's annual bonus for the fiscal year in which
Employee's Date of Termination occurs in an amount at least equal to (1)
Employee's Bonus Amount multiplied by (2) a fraction, the numerator of which
is the number of days in the fiscal year in which the Date of Termination
occurs through the Date of Termination and the denominator of which is three
hundred sixty-five (365), and reduced by (3) any amounts paid to Employee by
Employer as an executive bonus (pursuant to approval of the Board of
Directors) for the fiscal year in which Employee's Date of Termination
occurs, plus (iv) any accrued and unpaid vacation pay.
(B) Employer shall continue to provide, for a period of
twenty-four (24) months following the Date of Termination, Employee (and
Employee's dependents, if applicable) with the same level of medical, dental,
accident, disability and life insurance benefits and continuing education
payments (necessary for Employee to maintain any professional licensure
requirements related to Employee's employment duties with Employer) upon
substantially the same terms and conditions (including contributions required
by Employee for such benefits) as existed immediately prior to Employee's
94
Date of Termination (or, if more favorable to Employee, as such benefits and
terms and conditions existed immediately prior to the Change in Control);
provided, however, that if Employee is not eligible or qualified to continue
to participate in Employer's plans providing such benefits, Employer shall
otherwise provide such benefits on the same after-tax basis as if continued
participation had been permitted. Notwithstanding the foregoing, in the
event Employee becomes re-employed with another employer and becomes eligible
to receive welfare benefits from such employer, the welfare benefits
described herein shall be secondary to such benefits during the period of
such eligibility but only if (and to the extent that) Employer reimburses
Employee for any increased cost and provides any additional benefits
necessary to give Employee the benefits provided in this Section 11.2(B).
Employee's accrued benefits as of the Date of Termination under Employer's
employee benefit plans shall be payable in accordance with the terms of such
plans.
(C) Notwithstanding any contrary provision in this Section
11.2, Employer's payments to Employee under this Section 11.2 shall be
reduced to the extent that such payments (together with all other payments by
Employer to Employee under all other written or verbal agreements between
Employer and Employee) constitute an "excess parachute payment" under Section
280G of the Internal Revenue Code (as may be periodically amended).
11.3 Employer shall withhold from all payments due to Employee (or
Employee's beneficiaries or estate) hereunder all taxes which, by applicable
federal, state, local or other law, Employer is required to withhold
therefrom.
11.4 (A) This Section 11 shall not be terminated by any Business
Combination. In the event of any Business Combination, the provisions of
this Section 11 shall be binding upon the Surviving Corporation and such
Surviving Corporation shall be treated as Employer hereunder.
(B) Employer agrees that, in connection with any Business
Combination, Employer will cause any successor entity to Employer
unconditionally to assume (and, for any Parent Corporation in such Business
Combination, to guarantee), by written instrument delivered to Employee (or
Employee's beneficiaries or estate), all of the obligations of Employer under
this Section 11. Failure of Employer to obtain such assumption or guarantee
prior to the effectiveness of any such Business Combination that constitutes
a Change in Control shall be a breach of this Agreement and shall constitute
Good Reason hereunder and, further, shall entitle Employee to compensation
and other benefits from Employer in the same amount and on the same terms as
Employee would be entitled hereunder as if Employee's employment were
terminated following a Change in Control by reason of a Qualifying
Termination. For purposes of implementing this Section 11.4(B), the date on
which any such Business Combination becomes effective shall be deemed the
date Good Reason occurs and shall be the Date of Termination, if so requested
by Employee.
(C) This Section 11 shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Employee dies while any amounts would have been payable to Employee under
this Section 11 if Employee had continued to live, all such amounts (unless
95
otherwise provided herein) shall be paid in accordance with the terms of this
Section 11 to such person or persons appointed in writing by Employee to
receive such amounts or, if no person is so appointed, to Employee's estate.
11.5 In the event of a tender or exchange offer, proxy contest, or
the execution of any agreement which, if consummated, would constitute a
Change in Control, Employee agrees (as a condition to receiving any payments
and benefits under Section 11.2 of this Agreement) not to leave voluntarily
the employ of the Employer (other than as a result of Disability, Retirement
or an event which would constitute Good Reason if a Change in Control had
occurred) until the Change in Control occurs or, if earlier, such tender or
exchange offer, proxy contest or agreement is terminated or abandoned.
IN WITNESS WHEREOF, the Parties have set their hands as of the day and
year first above written.
In the Presence of:
/s/Ann E. Koler /s/Gregory D. Friedman
- ---------------------------- ---------------------------
(Signature of First Witness) Gregory D. Friedman
/s/ Denise M. Harmych "Employee"
- ----------------------------- ---------------------------
(Signature of Second Witness)
LNB BANCORP, INC.
/s/Ann E. Koler By:/s/Gary C. Smith
- ---------------------------- ---------------------------
(Signature of First Witness) Gary C. Smith, President
/s/Denise M. Harmych
- -----------------------------
(Signature of Second Witness)
THE LORAIN NATIONAL BANK
/s/Ann E. Koler By:/s/Gary C. Smith
- ---------------------------- ---------------------------
(Signature of First Witness) Gary C. Smith, President
/s/Denise M. Harmych
- -----------------------------
(Signature of Second Witness) "Employer"
96
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 2001)
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 12 of the LNB Bancorp, Inc.
2001 Annual Report
97
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 2001)
S - K Reference Number (13)
LNB Bancorp, Inc. 2001 Annual Report
to Shareholders.
98
COVER DESCRIPTION
Photo of two seagulls.
ANNUITIES / MUTUAL FUNDS
TRUST / ESTATE PLANNING
TITLE AGENCY
BANKING
INVESTMENT MANAGEMENT
INSURANCE AGENCY
(Logo)LNB
Bancorp, Inc.
and subsidiaries
2001 Annual Report
99
Front of Cover Flap
CORPORATE PROFILE
(Logo)LNB
Bancorp, Inc.
LNB Bancorp, Inc., (the Bancorp), is a $665 million financial holding company
headquartered in Lorain, Ohio. The Bancorp is a public company whose stock
is traded on The Nasdaq National Stock Market@ under the ticker symbol LNBB.
Its predecessor, 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 Bancorp received
its financial holding company status on March 13, 2000.
The Bancorp's primary subsidiary, The Lorain National Bank, specializes in
personal, mortgage, and commercial banking products and services along with
investment management and trust services. Lorain National Bank operates 20
banking centers and 27 ATMs in the nine communities of Lorain, Elyria,
Amherst, Avon Lake, LaGrange, Oberlin, Olmsted Township, Vermilion, and
Westlake located in Ohio's Lorain, eastern Erie, and western Cuyahoga
counties. Lorain National Bank offers products and services by telephone
through its 24-hour Telebanker and Telepay systems and provides internet
banking at WWW.4LNB.COM. Lorain National Bank also provides services to
state and local governments, schools and colleges, foundations, and not-for-
profit associations. 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; and an Equal Employment Opportunity, Affirmative Action Employer
and Equal Housing Lender.
LNB Bancorp, Inc., offers life, accident and health insurance, and fixed
annuity products through its wholly owned insurance subsidiary Charleston
Insurance Agency, Inc.; and traditional title services through 49-percent
owned subsidiary Charleston Title Agency, LLC. In addition, pursuant to an
agreement between Lorain National Bank and Raymond James Financial Services,
Inc., member NASD/SIPC, Raymond James offers brokerage services including
stock, mutual funds and variable annuity products to Lorain National Bank
customers through the LNB Investment Center.
OUR VISION
The vision of LNB Bancorp, Inc. is to become recognized as the most
progressive and dynamic, independent provider of financial services in
our market.
100
OUR MISSION
The mission of LNB Bancorp, Inc. is to be a profitable, responsible,
independent business that provides extraordinary service to our
customers and community, while maximizing shareholder value and creating
a high-quality and challenging work environment for our employees.
Logos for NASDAQ Listing, Federal Deposit Insurance Corporation, Federal
Home Loan Bank System and Equal Housing Lender
LNB BANCORP, INC. - INVESTMENT FACTS
With our heritage dating back to 1905 and a strong tradition of continuous
growth, LNB Bancorp, Inc. has a long history of quality asset growth and
increased earnings and dividends per share.
Here are just a few highlights LNB Bancorp has:
*Posted 20 consecutive years of record earnings per share.
*Increased cash dividends for 18 consecutive years.
*Recorded net interest margin of 4.73 percent for 2001.
*Reported 2001 return on average assets (ROAA) and equity (ROAE) of 1.35
percent and 14.36 percent, respectively.
*The common stock of LNB Bancorp, Inc. traded with a dividend yield of
4.80 percent at year-end 2001 and 2000.
PRIVACY POLICY
The Privacy Policy of LNB Bancorp, Inc. and subsidiary companies describes
how we safeguard customers' financial privacy. For more information, visit
our website at WWW.4LNB.COM or by calling (440) 244-7126.
TABLE OF CONTENTS
Corporate and Investor Information. . . . . . . . . . . .IFC
LNB Bancorp, Inc. Common Stock
and Dividend Information . . . . . . . . . . . . . . . IFC
Consolidated Financial Highlights. . . . . . . . . . . . . 1
Message to Our Shareholders. . . . . . . . . . . . . . . . 2
Consolidated Balance Sheets . . . . . . . . . . . . . . . 6
Consolidated Statements of Income . . . . . . . . . . . . 7
101
Consolidated Statements of Cash Flows . . . . . . . . . . 8
Consolidated Statements of Shareholders' Equity . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . .10
Report of Management . . . . . . . . . . . . . . . . . . .25
Report of Independent Auditors . . . . . . . . . . . . . .25
Selected Unaudited Quarterly Financial Data . . . . . . .26
Five Year Consolidated Financial Summary . . . . . . . . .27
Glossary of Key Terms. . . . . . . . . . . . . . . . . . .28
Management's Discussion & Analysis . . . . . . . . . . . .29
Condensed Consolidated Average Balance Sheets. . . . . . .31
Rate/Volume Analysis of Net Interest Income. . . . . . . .31
Lorain National Bank Investment and Trust Services . . . .37
LNB Investment Center. . . . . . . . . . . . . . . . . . .37
Directors of LNB Bancorp, Inc. and Lorain National Bank. .38
Officers of LNB Bancorp, Inc.. . . . . . . . . . . . . . .38
Directors Emeriti of Lorain National Bank . . . . . . . .38
Directors and Officers of Charleston
Insurance Agency, Inc.. . . . . . . . . . . . . . . . . .38
Management of Lorain National Bank . . . . . . . . . . . .39
Annual Earnings, Dividends and Book Value
Per Share Performance . . . . . . . . . . . . . . . . . .40
LNB Bancorp, Inc. Subsidiary Locations . . . . . . . . . IBC
Banking Centers, ATMs, LNB Investment and Trust
Services and LNB Investment Center. . . . . . . . . . . IBF
102
Inside Front Cover Flap
CORPORATE AND INVESTOR INFORMATION
CORPORATE HEADQUARTERS
If you need to contact the corporate headquarters of LNB Bancorp, Inc.,
call, write or visit:
LNB Bancorp, Inc.
457 Broadway
Lorain, Ohio 44052-1739
Toll Free:(800) 860-1007
CORPORATE WEBSITE
www.4LNB.com
For up-to-date corporate, financial and product information.
CORPORATE E-MAIL ADDRESS
InvestorRelations@4LNB.com
ANNUAL MEETING
The 2002 Annual Meeting of Shareholders of LNB Bancorp, Inc. will be
held at 10:00 a.m., Eastern Daylight Savings Time, on Tuesday, April 16,
2002 at Lorain National Bank, 521 Broadway, Lorain, Ohio 44052.
CORPORATE FINANCIAL INFORMATION
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission. Copies of form 10-K and other filings are available at
www.4LNB.com or by contacting Investor Relations. Analysts, shareholders and
investors seeking additional corporate and financial information about LNB
Bancorp, Inc. should contact Investor Relations at:
LNB Bancorp, Inc.
Investor Relations
457 Broadway
Lorain, Ohio 44052-1739
Telephone: (440) 244-7317
Telefax: (440) 244-4815
QUARTERLY EARNINGS REPORTING
For 2002, LNB Bancorp, Inc.'s quarterly earnings are anticipated to be
announced on or about the fourth Tuesday of April, July, October 2002 and
January 2003. Any investor desiring a copy of an earnings release can obtain
one at www.4LNB.com or by calling (440) 244-7317.
INDEPENDENT AUDITORS
KPMG LLP
One Cleveland Center
1375 East 9th Street, Suite 2600
Cleveland, Ohio 44114-1796
103
STOCK TRANSFER AGENT AND REGISTRAR
Shareholders who hold their shares in physical certification form and
have requests for information about their share balances, a change in
name or address, lost certificates, or other shareholder account
matters, should call or write:
Registrar and Transfer Company
Investor Relations Department
10 Commerce Drive
Cranford, New Jersey 07016-9982
Toll Free: (800) 368-5948
STOCK LISTING
Logo for NASDAQ Listing
LNB Bancorp, Inc. common stock is traded on the Nasdaq Stock Market@ under
the ticker symbol LNBB.
LNBB DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
You may buy LNB Bancorp, Inc. common stock directly from LNB Bancorp, Inc.
through optional cash payments or automatic monthly deductions from your bank
account. You mat also have you dividends reinvested automatically. This is
not an offer of LNB Bancorp, Inc. stock. Call 1(800) 368-3948 for a
prospectus and more information on LNBB Direct Stock Purchase and Dividend
Reinvestment Plan, or by completing the postage paid card titled "LNBB Direct
Stock Purchase & Dividend Reinvestment Plan" located at the end of this
Annual Report.
LORAIN NATIONAL BANK
Lorain National Bank operates 20 banking centers and 27 ATMs in nine
communities offering:
*Personal, mortgage and commercial banking products and services
*Investment Management and Trust Services
*24-hour telephone banking
*Internet banking at www.4LNB.com
Individuals seeking additional information on banking products and services
should contact:
Lorain National Bank
457 Broadway
Lorain, Ohio 44052-1739
Telephone: (440) 989-3348
LNB INVESTMENT CENTER AND CHARLESTON INSURANCE AGENCY, INC.
In addition to traditional banking services, customer's can access a wide
range of insurance, investment products and services, including:
*Life, Accident and Health Insurance and Fixed Annuity Products offered
through Charleston Insurance Agency, Inc. and
*Brokerage Services including stock, mutual funds and variable annuity
products offered through Raymond James Financial Services Inc., member
104
NASD/SIPC at the LNB Investment Center.
Individuals seeking additional information on investment products and
services should contact:
LNB Investment Center
457 Broadway
Lorain, Ohio 44052-1739
Toll Free: (800) 845-2152
CHARLESTON TITLE AGENCY, LLC
LNB Bancorp, Inc.'s 49-percent-owned subsidiary, Charleston Title Agency, LLC
offers traditional title services. Individuals seeking additional
information on title services should contact:
Charleston Title Agency, LLC
424 Middle Avenue
Elyria, Ohio 44035
Telephone: (440) 244-5212
LNB Bancorp, Inc. Logo
105
Inside front cover
LNB Bancorp, Inc. Common Stock and Dividend Information
COMMON STOCK TRADING RANGES AND CASH DIVIDENDS DECLARED
2001 2000
- ---------------------------------------------
Closing Price* Closing Price*
High Low High Low
- ---------------------------------------------
First Quarter $22.67 $19.61 $23.77 $18.38
Second Quarter 21.52 19.61 25.19 19.61
Third Quarter 22.00 19.70 21.05 17.65
Fourth Quarter 22.50 18.80 22.79 20.10
- ---------------------------------------------
2001 2000
- -------------------------------------------------------------
Cash Cash
Dividend Dividend
Amount* Amount*
- -------------------------------------------------------------
First Quarter - regular . . . . .$ .25 $ .23
Second Quarter - regular. . . . . .25 .24
Third Quarter - regular . . . . . .25 .25
Fourth Quarter - regular. . . . . .25 .25
Fourth Quarter - EXTRA. . . . . . .02 .01
----- -----
Total Dividends . . . . . . . . .$1.02 $ .98
- -------------------------------------------------------------
*All closing prices and cash dividend amounts have been adjusted to
reflect the two percent stock dividend in 2001 and 2000.
The shares of LNB Bancorp, Inc., common stock, par value $1.00 per
share, were historically traded on the over-the-counter bulletin board and on
February 9, 2000, began trading on The Nasdaq Stock Market@ under the ticker
symbol LNBB. The above prices through February 8, 2000, represent the high
and low closing prices reported on the over-the-counter bulletin board - and
as of February 9, 2000, the high and low closing prices reported on The
Nasdaq Stock Market@. All prices reflect inter-dealer prices without
markup, markdown or commission and may not necessarily represent actual
transactions.
LNB Bancorp, Inc. common stock is listed in the newspapers as "LNB Bancorp".
LNB Bancorp's common stock CUSIP is 502100100. As of December 31, 2001,
LNB Bancorp had 2,180 shareholders of record. Prospective shareholders
may contact our Investor Relations Department at (440) 244-7317 for more
information.
NASDAQ logo
106
LNB BANCORP, INC.
18-Year Cash Dividend Declared Per Share History
Dollars*
(A 18-year Cash Dividend Declared Per Share History graph with Dividends
Declared on the y-axis and years 1984 through 2001 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.)
Year Dividends
2001 $1.02
2000 $ .98
1999 $ .88
1998 $ .83
1997 $ .68
1996 $ .59
1995 $ .50
1994 $ .44
1993 $ .40
1992 $ .36
1991 $ .33
1990 $ .30
1989 $ .28
1988 $ .25
1987 $ .21
1986 $ .20
1985 $ .20
1984 $ .19
*Adjusted for stock dividends and splits
DIVIDEND INFORMATION
LNB Bancorp, Inc. has increased the cash dividend paid to shareholders
each year since becoming a Holding Company in 1984. LNB Bancorp, Inc.
has increased its quarterly cash dividend declared in the third quarter
of each year since 1988. In addition to the regular quarterly cash
dividends, the Board of Directors meets in the fourth quarter of each
year to determine whether to approve an extra cash dividend. The extra
cash dividend is discretionary and varies based on the Company's current
year and near-term profitability outlook.
DIVIDEND CALENDAR
Cash dividends on common stock, if approved by the Board of Directors,
are customarily paid to shareholders as follows:
RECORD DATES:
March 18, June 17, September 16, and December 16, 2002
DIVIDEND PAYABLE DATES:
April 1, July 1, October 1, 2002 and January 2, 2003
107
LNB BANCORP, INC. COMMON STOCK MARKET MAKERS
Friedman, Billings, Ramsey and Co., Inc.
Hill, Thompson, Magid & Company, Inc.
Howe Barnes Investments, Inc.
Knight Securities, L.P.
McDonald Investments Inc./Trident Securities, Inc.
Spear, Leeds and Kellogg
Sweney Cartwright and Company, Inc.
LNB BANCORP, INC. 5-YEAR HISTORIC DIVIDEND YIELDS
Yield*
(A LNB Bancorp, Inc. 5-Year Historic Dividend Yield graph with Dividend
Yields on the y-axis and years 1997 through 2001 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.)
Year Yield
2001 4.80%
2000 4.80%
1999 3.16%
1998 2.56%
1997 2.16%
*The dividend yield is based upon closing price at year-end and dividends
declared during that year
108
CONSOLIDATED FINANCIAL HIGHLIGHTS
All dollar amounts presented in thousands, except per share data and
corporate data
2000 to 2001
December 31, 2001 2000 % Change 1991
- ----------------------------------------------------------------------
FINANCIAL POSITION
Assets . . . . . . . . .$664,526 $622,110 6.8% $351,204
Investments. . . . . . . 138,401 127,101 8.9 95,600
Net loans. . . . . . . . 471,598 445,890 5.8 220,458
Deposits . . . . . . . . 518,267 496,091 4.5 301,953
Other borrowings . . . . 78,515 63,736 23.2 16,509
Shareholders' equity . . 62,138 56,525 9.9 30,138
-------------------------------------------
FINANCIAL RESULTS FOR THE YEAR
Interest income. . . . .$ 45,101 $ 46,645 (3.3)% $ 30,080
Interest expense . . . . 16,998 19,209 (11.5) 14,087
Net interest income. . . 28,103 27,436 2.4 15,993
Provision for loan losses 2,200 1,700 29.4 600
Noninterest income . . . 9,448 8,370 12.9 3,468
Noninterest expense. . . 22,738 21,276 6.9 14,020
Income taxes . . . . . . 4,048 4,400 (8.0) 1,329
Net income . . . . . . . 8,565 8,430 1.6 3,512
Revenue. . . . . . . . . 37,551 35,806 4.9 19,461
-------------------------------------------
PER SHARE DATA*
Basic earnings . . . . .$ 1.99 $ 1.96 1.5% $ 0.83
Diluted earnings . . . . 1.99 1.96 1.5 0.83
Cash dividends . . . . . 1.02 0.98 4.0 0.33
Book value (year-end). . 14.39 13.16 9.4 7.10
Market value (year-end). 21.81 21.38 6.9 14.07
-------------------------------------------
FINANCIAL PERFORMANCE RATIOS
Return on average assets
(ROAA). . . . . . . . . 1.35% 1.39% (2.9)% 1.02%
Return on average share-
holders' equity(ROAE) . 14.36% 15.83% (9.1) 12.06%
Net interest margin. . . 4.73% 4.85% (2.5) 5.15%
Efficiency ratio . . . . 60.96% 59.42% (2.6) 72.04%
Loans/deposits . . . . . 92.13% 90.94% 1.3 71.80%
Dividend payout. . . . . 50.96% 49.72% 2.5 39.98%
------------------------------------------
CAPITAL RATIOS
Core capital (Tier I)/
risk-adjusted assets. . 11.95% 11.88% 0.6% 14.03%
Total capital (Tier I
plus Tier II)/ risk-
adjusted assets . . . . 13.17% 13.06% 0.8 15.22%
109
Leverage ratio (Tier I/
Average assets) . . . . 9.08% 8.68% 4.6 8.77%
Equity/assets. . . . . . 9.35% 9.09% 2.9 8.58%
------------------------------------------
MARKET RATIOS
Price/earnings (X) . . . 10.71 10.60 1.0% 17.01
Price/book (%) . . . . . 147.65% 158.15% (6.6) 198.17%
Dividend yield (%) . . . 4.80% 4.80% (0.0) 2.35%
------------------------------------------
CORPORATE DATA
Bank offices . . . . . . 20 21 (4.8)% 16
Bank officers and staff. 298 298 -0- 295
Number of shareholders . 2,180 2,165 .7 1,595
-------------------------------------------
*All per share data have been adjusted for five-for-four stock splits in
1995 and 1993 and stock dividends.
END PUBLISHED PAGE 1
110
MESSAGE TO OUR SHAREHOLDERS
Top left column black and white photograph of Stanley G. Pijor, Chairman of
the Board
It's a pleasure to address you once again after the completion of
another successful year of operations even though the year's economy was
marked by adversity. 2001 will be remembered as a year of tragedy, market
correction, recession and refinancing. The Federal funds rate was reduced a
record 11 times during 2001. Thanks to your support and the efforts of our
employees, LNB Bancorp, Inc., remains a healthy, growing and viable financial
holding company. We are pleased to report the following highlights of our
financial performance for the year 2001 that brought us closer to our goal of
becoming a $1 billion financial holding company.
20 CONSECUTIVE YEARS OF EARNINGS GROWTH
We are proud to announce that we achieved our 20th consecutive year of
record earnings. This is an achievement that is matched only by a handful of
other financial holding companies in the United States. Net income for 2001
advanced 1.6 percent to $8,565,000 from 2000's $8,430,000.
Earnings per basic and diluted share for 2001, adjusted to reflect the two
percent stock dividend paid on July 2, 2001 reached $1.99, an increase of
$.03, or 1.5 percent from 2000's $1.96. Although still higher than the
average for banks of our size, the return on average assets for 2001
decreased slightly to 1.35 percent from 2000's 1.39 percent. The return on
average shareholders' equity decreased to 14.36 percent for 2001 compared
with 15.83 percent for 2000.
Contributing to the record earnings performance were higher net interest
income and noninterest income offset by higher noninterest expenses and loan
loss provision. Fueled by growth in commercial, mortgage and home equity
loans, net interest income rose 2.4 percent to $28,103,000. Excluding gains
on sales of securities, noninterest income grew by 9.9 percent for the year,
driven primarily by a 12.0 percent increase in service charges on deposit
accounts. Noninterest expenses grew by 6.9 percent, reflecting increases in
salaries and benefits, supplies and postage, Ohio franchise tax, consulting
expenses and loan collection expenses during 2001. The graphs on page 40
depict our consolidated annual earnings, cumulative cash dividends and book
value per share for the past 10 years.
Revenues for 2001 rose 4.9 percent to $37.6 million for an increase of $1.8
million from those of 2000. Net interest margin fell slightly to 4.73, from
4.85 percent a year earlier. This decrease is the result of earning assets
repricing faster than the rates on funding. Throughout 2001, we worked hard
toward our basic goals of reducing our cost of funds while expanding our
deposit franchise to support and grow a high quality earning asset portfilio.
Cash dividends declared in 2001 eclipsed the $4-million mark for the
111
second consecutive time in the history of LNB Bancorp, Inc. Cash dividends
declared per share in 2001 increased $.04, or 4.1 percent, to $1.02 per
share, up from $0.98 per share last year. In each of the last 14 years, the
Board of Directors has approved an increase in the regular cash dividend
per share. Total cash dividends declared in 2001, including the $.02
EXTRA dividend declared by the Board of Directors in November, rose to
$4,365,000. Total 2001 cash dividends declared represents a 210.9
percent increase, more than tripling those of 1991 when $1,404,000 in cash
dividends was declared. LNB Bancorp's dividend yield was 4.80% at year-end
2001 and 2000.
At 2001 year-end, LNB Bancorp, Inc. achieved significant growth in
assets, loans, deposits, borrowings, and shareholders' equity from one
year ago. Total assets climbed 6.8 percent to $664.5 million from $622.1
million, for an increase of $42.4 million from one year ago. At 2001 year-
end, earning assets increased 6.5 percent to $619.4 million-up $38.0 million
from the year-earlier level.
During 2001, net loans rose 5.8 percent to $471.6 million from $445.9
million. A 17.5 percent increase in the commercial loan portfolio and
increased mortgage loans and home equity lines of credit, were partially
offset by a reduction during the first half of 2001 in the indirect
automobile lending portion of the consumer loan portfolio.
112
LNB BANCORP, INC. AND LORAIN NATIONAL BANK
20-Year Basic Earnings Per Share History
Dollars*
(A 20-Year Basic Earnings Per Share History graph follows in printed
version with earnings on the y-axis and years 1982 through 2001 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 Earnings
Year Per Share
2001 $1.99
2000 $1.96
1999 $1.78
1998 $1.59
1997 $1.51
1996 $1.33
1995 $1.14
1994 $1.02
1993 $ .93
1992 $ .90
1991 $ .83
1990 $ .80
1989 $ .78
1988 $ .71
1987 $ .63
1986 $ .60
1985 $ .56
1984 $ .51
1983 $ .51
1982 $ .38
*Adjusted for stock dividends and splits
END OF PUBLISHED PAGE 2
113
Top right column black and white photograph of Executive Officers, Kevin W.
Nelson, Gary C. Smith, Thomas P. Ryan and Gregory D. Friedman
Commercial loans demonstrated robust growth in 2001 despite the downturn in
both the national and local economies for the manufacturing, steel, and
automotive industries. The commercial loan portfolio climbed to $219.5
million at December 31, 2001, for an increase of $32.6 million from one year
ago. The number of new loans booked in 2001 were 630 amounting to $124.4
million in new gross loans. This loan growth resulted from existing business
expanding their borrowings and obtaining new business relationships in our
geographic area.
During 2001, mortgage lending continued to benefit from the favorable drop in
mortgage interest rates reaching their lowest levels in 40 years, which
stimulated refinance activity and made the purchase of homes more affordable.
Despite heavy refinancing of mortgages, the mortgage loan portfolio showed an
increase in net loans from one year ago. Mortgage loans ended 2001 at
$158.2 million, up $0.6 million, from the 2000 year-end. New mortgage loans
booked during 2001 increase 26.7 percent to $41.7 for an increase of $8.8
million from last year. The number of new mortgage loans booked in 2001
totaled 340. Lorain National Bank was in the secondary mortgage market for
a full year for the first time in 2001 with sales of mortgage loans totaling
$5.8 million in 2001 compared with $0.6 million in 2000. Recorded gains were
$76,000 in 2001 and $7,000 in 2000.
Consumer loans decreased to $94.9 million at December 31, 2001, down
$6.6 million or 6.5 percent from one year ago. The number of new
consumer loans booked during 2001 was 2,215 totaling $31.9 million. The
decrease in consumer loans was attributable to a first-half 2001 decline in
indirect automobile lending offset in part by two successful home equity loan
acquisition campaigns. We are optimistic that 2002 will bring continued
growth in our commercial, mortgage and consumer portfolios from our existing
and new customers.
Retail deposits climbed 4.5 percent to $518.3 million, at December 31,
2001, from $496.1 million, for an increase of $22.2 million verses the
year-earlier level. Increases in retail deposits were attributable to
increases in Market Access, CheckInvest, and money market deposits
partially offset by decreases in savings and certificates of deposits.
Market Access accounts soared by $30.3 million or 55.3 percent to $85.1
million at December 31, 2001, with CheckInvest deposits increasing $2.7
million or 4.7 percent and money market deposits increasing by $4.9 million
or 42.3 percent from one year ago. The significant growth in the Market
Access deposits resulted from several deposit promotion campaigns during
2001.
Other borrowings rose $14.8 million to $78.5 million at December 31, 2001,
for an increase of 23.2 percent from one year ago. Increases in other
borrowings were attributable to increases in repurchase agreements and
114
Federal Home Loan Bank advances of $2.8 million and $16.0 million,
respectively, offset in part by decreases in short-term borrowings of Federal
funds purchased of $4.0 million during 2001. Federal Home Loan Bank advances
increased $16.0 million during 2001 to fund a portion of consumer and
commercial loan growth.
Shareholders' equity reached an all-time high of $62.1 million at
December 31, 2001, an increase of $5.6 million, or 9.9 percent, from
one year ago. The book value per share climbed to $14.39 at December
31, 2001, compared with $13.16 per share at the end of last year.
The 2001 year-end ratio of shareholders' equity-to-assets remained strong,
increasing to 9.4 percent from 9.1 percent one year ago.
LNB Bancorp, Inc.'s 2001 year-end risk based Tier 1 and total capital ratios
were strong at 11.95 percent and 13.17 percent, respectively. LNB Bancorp,
Inc., and its banking subsidiary, Lorain National Bank, exceed all applicable
regulatory capital requirements. Under Federal Deposit Insurance Corporation
(FDIC) guidelines, Lorain National Bank is categorized as "well capitalized"
- - the highest rating category available.
LOOKING AHEAD TO 2002
We anticipate that the weak economy of 2001 will continue into 2002. We
expect to see slow economic growth in the first part of 2002, but expect
growth to increase through the year.
Our business model for 2002 projects revenue growth of about four to five
percent. We expect earning asset growth of about six percent. Loan growth
is expected to remain in the six to seven percent range with increases lead
by our commercial loan division.
In order to support our earnings asset growth, we will implement strategies
to increase our deposit franchise by acquiring new customers with our low
cost deposits. We are expecting a five to six percent growth in deposits in
2002. We anticipate borrowing additional funds from the Federal Home Loan
Bank to fund fixed rate commercial and consumer loans. Net interest margin
should improve slightly due to the repricing of deposit products. Enhancing
our noninterest income through the growth initiatives designed to attract new
customers and prudently managing growth of our noninterest expenses remain
priorities.
We wish to thank our shareholders for their continuing support and our
customers for their confidence and business, as well as our talented
employees and the support of our Board for making 2001 a successful year. We
look forward to reviewing our progress with you as 2002 unfolds.
/s/Stanley G. Pijor
- -------------------
Stanley G. Pijor
Chairman of the Board
END PUBLISHED PAGE 3
115
MESSAGE TO OUR SHAREHOLDERS
Top left column black and white photograph of Gary C. Smith, President and
Chief Executive Officer
ANSWERING THE CHALLENGE
In looking back at 2001, it's safe to say that it was a year that will remain
in our memories for a long year. The recession, which was reported by some
to have begun as early as March, worsened with the events of September 11th,
leaving our nation's economy in turmoil for the balance of the year.
Despite these events, LNB Bancorp, Inc. still recorded its 20th consecutive
year of increased earnings, thanks in large part to the dedication of our
management.
PURSUING NEW OPPORTUNITIES
In 2001, we created the LNB Investment Center, a marketing framework through
which our customers can purchase non-traditional bank products and services.
Through an affiliation with Raymond James Financial Services, Inc. of St.
Petersburg, Florida, a wide range of investment products and services
including stock brokerage, mutual funds and variable annuities are available.
In addition to investments, insurance-related products are now available
through our newest subsidiary, Charleston Insurance Agency, Inc. Charleston
provides life insurance, accident and health insurance, and fixed-rate
annuity products. We also created Charleston Title, LLC, a joint venture
which is now bringing title insurance fee income to the organization.
Also in 2001, we began a relationship with G.E. Capital Assurance to make
long-term health care coverage available to individuals interested in
protecting their assets in the event they would require substantial health
care in later life.
The sale of these non-traditional investment and insurance products and
services complements our existing financial services menu. Through the bank,
its subsidiaries and their associations, one-stop-shopping convenience with
comprehensive solutions is afforded to our customers for virtually all types
of financial services.
PRODUCT ENHANCEMENTS
In 2001, LNB moved into the secondary mortgage market and in turn, introduced
fixed-rate mortgages for the first time. In addition, Lorain National Bank
hired a mortgage originator to help expand this burgeoning area of the bank.
Favorable mortgage interest rates have fueled substantial refinancing and new
first mortgages.
In other mortgage-related developments, home equity loans and lines of credit
remained a significant source of income in 2001. A $200 cash back offer in
116
the spring was well received and our fall home equity loan sale added revenue
heading into the fourth quarter.
Our Market Access Account continues to provide savers and investors alike
with a safe and secure place to deposit their funds during otherwise
uncertain times. Market Access deposits rose significantly throughout the
year, particularly in late spring and fall when the economy suffered most.
In 2001, LNB Bancorp, Inc. successfully introduced LNBB Direct, a new stock
purchase and dividend reinvestment plan. LNBB Direct enables new
shareholders to make an initial purchase of LNB Bancorp, Inc. common shares
with no entrance fee, and existing shareholders and participants in its
former dividend reinvestment plan to increase share ownership on a regular
basis without paying brokerage commissions. More than half of our
shareholders now participate in our dividend reinvestment plan.
TOTALLY FREE CHECKING
At year-end, acting upon feedback from our customers and staff to enhance
LNB's deposit product mix, we finalized plans to introduce an entirely new
lineup of high-performance checking accounts. As you may know, the checking
account is the core deposit relationship we have with our customers and it is
highly coveted by the competition.
The new checking product line will include totally free checking and six
other checking plans that pay interest. Early reaction to the various
checking account options has been extremely positive.
The seven new accounts are designed to fit the seven most common checking
product combinations sought by consumers. In addition to the new accounts is
the award of a free gift for each new account opened.
I feel that we have answered our customers and staff. We are truly excited
about the prospects of our new checking products in 2002.
END PUBLISHED PAGE 4
117
Top left column black and white photograph of Senior Vice Presidents Emma N.
Mason, Michael D. Ireland, James H. Weber, Debra R. Brown, Robert L. Cox
and Sandra L. Dubell
PRIVACY
We spent a significant amount of energy in 2001 enhancing our formal privacy
policy and procedures in the wake of recent federal legislation mandating
privacy compliance.
At issue is the illegal use, dissemination and sometimes, sale of
confidential customer information for uses other than that required to
maintain customer banking relationships. The new privacy legislation
mandated that financial institutions have a formal privacy plan in place and
in force by mid-year. I am pleased to report that our management team worked
diligently to ensure that our organization is in substantial compliance with
privacy regulation.
REDEPLOYMENT OF RESOURCES
In 2001 we continued the process of redeploying key members of our bank
management team and staff to optimize their talents and to increase operating
efficiencies.
Two years ago, the beginning steps were taken to consolidate all three loan
areas (Commercial, Retail and Mortgage). The first to be consolidated was
the Retail Loan support area. This step was critical as it established new
best practices, eliminated problematic issues and also established methods of
checks and balances to mitigate risk and ensure control over general ledger
accounts. The new Loan Center will be located at our corporate headquarters
in Lorain.
In addition to the Loan Center concept, we began the process of reassigning
bank branch management to other branches or departments where their talents
could be better utilized. That redeployment process will continue in 2002.
HOPES FOR A BRIGHTER ECONOMY
Despite a sluggish holiday retail season, there were indications in the
fourth quarter that the economy may be rebounding. Employment figures seem
to be stabilizing and housing rates appear to be on the increase. At year-
end, the national unemployment rate was hovering between five and six
percent. Optimistically, that means 94 to 95 percent of our workforce is
employed.
Locally, the automotive and steel industries are suffering. We are anxious
to learn what the Ford Motor Company plans to do with its plants in the
cities of Lorain and Avon Lake. We are hopeful that the auto giant will
recognize what an asset our workforce is to their operations.
The Federal Reserve Board slashed interest rates 11 times in 2001, pushing
the prime lending rate down to its lowest level since late 1965. Many
118
economists believe the Fed's aggressive rate-cutting action will pave the way
for a solid rebound in 2002.
Our long term strategies of diversifying the revenue stream through risk
averse measures, in addition to our favorable reputation as a relationship
driven organization-focused on shareholder expectations, is beginning to be
recognized by investment bankers.
We are looking forward to the new year and the challenges that await. I
appreciate the patience of our shareholders, the dedication of our staff and
the loyalty of our tens of thousands of customers.
/s/Gary C. Smith
- ----------------
Gary C. Smith
President and
Chief Executive Officer
END PUBLISHED PAGE 5
119
Consolidated Balance Sheets
December 31, 2001 2000
- ----------------------------------------------------------------------
ASSETS:
Cash and due from banks (note 3). . . . . .$ 28,017,000 $ 22,011,000
Federal funds sold and short-term
investments . . . . . . . . . . . . . . . 3,488,000 3,125,000
Securities (note 5):
Available for sale, at fair value . . . . 117,628,000 79,518,000
Held to maturity, at cost (fair value
$17,485,000 and $43,982,000,respectively) 17,191,000 44,431,000
Federal Home Loan Bank and Federal Reserve
Bank stock, at cost . . . . . . . . . . . 3,582,000 3,152,000
---------------------------
Total securities. . . . . . . . . . . . . . 138,401,000 127,101,000
---------------------------
Loans (notes 6,7 and 11):
Portfolio loans . . . . . . . . . . . . . 465,029,000 442,010,000
Loans available for sale. . . . . . . . . 12,459,000 9,130,000
---------------------------
Total loans . . . . . . . . . . . . . . . . 447,488,000 451,140,000
Reserve for loan losses . . . . . . . . . (5,890,000) (5,250,000)
---------------------------
Net loans . . . . . . . . . . . . . . . . . 471,598,000 445,890,000
---------------------------
Bank premises and equipment, net (note 8) . 10,520,000 11,251,000
Intangible assets (note 4). . . . . . . . . 3,470,000 3,847,000
Accrued interest receivable . . . . . . . . 3,796,000 4,694,000
Other assets (note 12). . . . . . . . . . . 5,113,000 4,093,000
Foreclosed assets . . . . . . . . . . . . . 123,000 98,000
---------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . .$664,526,000 $622,110,000
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Deposits (note 9):
Demand and other noninterest-bearing
deposits. . . . . . . . . . . . . . . .$ 87,488,000 $ 83,093,000
Savings, Market Access
and passbook accounts . . . . . . . . . 253,506,000 219,618,000
Certificates of deposit . . . . . . . . . 177,273,000 193,380,000
---------------------------
Total deposits. . . . . . . . . . . . . . . 518,267,000 496,091,000
---------------------------
120
Securities sold under repurchase agreements
and other short-term borrowings (note 10) 48,170,000 39,391,000
Federal Home Loan Bank advances,
short-term (note 11). . . . . . . . . . . 10,750,000 16,095,000
Federal Home Loan Bank advances,
long-term (note 11) . . . . . . . . . . . 19,595,000 8,250,000
Accrued interest payable. . . . . . . . . . 1,131,000 1,901,000
Accrued taxes, expenses and other liabilities
(notes 12 and 16) . . . . . . . . . . . . 4,475,000 3,857,000
---------------------------
TOTAL LIABILITIES . . . . . . . . . . . . . 602,388,000 565,585,000
---------------------------
SHAREHOLDERS' EQUITY: (notes 13 and 14)
Preferred stock, no par value: Shares
authorized 1,000,000, and shares outstanding, none (note 13)
Common stock, $1.00 par: Shares authorized 15,000,000
Shares issued 4,417,558 and 4,313,047, respectively and
Shares outstanding 4,317,558 and 4,213,047,
respectively (notes 13, 17, 18 and 19) 4,418,000 4,313,000
Additional capital. . . . . . . . . . . . 26,238,000 24,336,000
Retained earnings (note 15) . . . . . . . 33,125,000 30,584,000
Accumulated other comprehensive
income . . . . . . . . . . . . . . . . . 1,257,000 192,000
Treasury stock at cost, 100,000
and 100,000 shares, respectively . . . . (2,900,000) (2,900,000)
---------------------------
TOTAL SHAREHOLDERS' EQUITY 62,138,000 56,525,000
---------------------------
Commitments and contingencies (notes 8 and 20)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $664,526,000 $ 622,110,000
---------------------------
See accompanying notes to consolidated financial statements
END PUBLISHED PAGE 6
121
Consolidated Statements of Income
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans:
Taxable . . . . . . . . .$ 37,557,000 $ 39,010,000 $ 34,034,000
Tax exempt . . . . . . . . 5,000 18,000 26,000
Interest and dividends on
securities:
U.S. Treasury securities . 91,000 379,000 1,236,000
U.S. Government agencies
and corporations. . . . . 6,451,000 6,518,000 5,505,000
States and political
subdivisions. . . . . . . 446,000 249,000 220,000
Other debt and equity
securities. . . . . . . . 405,000 249,000 172,000
Interest on Federal funds
sold and other short-term
investments. . . . . . . . 146,000 222,000 424,000
------------------------------------------
TOTAL INTEREST INCOME. . . . . 45,101,000 46,645,000 41,617,000
INTEREST EXPENSE:
Interest on deposits:
Certificates of deposit,
$100,000 and over . . . . 2,393,000 3,058,000 2,580,000
Other deposits . . . . . . 12,225,000 12,941,000 10,254,000
Interest on securities sold under
repurchase agreements and other
short-term borrowings. . . 1,120,000 1,889,000 1,242,000
Interest on Federal Home Loan
Bank advances. . . . . . . 1,260,000 1,321,000 1,517,000
------------------------------------------
TOTAL INTEREST EXPENSE . . . . 16,998,000 19,209,000 15,593,000
------------------------------------------
NET INTEREST INCOME. . . . . . 28,103,000 27,436,000 26,024,000
Provision for loan
losses (note 7). . . . . . 2,200,000 1,700,000 2,000,000
------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES. . . . . . . 25,903,000 25,736,000 24,024,000
------------------------------------------
122
NONINTEREST INCOME:
Investment and Trust Services
Division income. . . . . . 2,379,000 2,355,000 2,095,000
Service charges on deposit
accounts . . . . . . . . . 3,529,000 3,150,000 2,967,000
Other service charges,
exchanges and fees . . . . 3,056,000 2,804,000 2,798,000
Gains on sales of
securities (note 5). . . . 250,000 -0- -0-
Gains on sales of bank premises
and equipment. . . . . . . -0- 1,000 162,000
Other income . . . . . . . . 234,000 60,000 76,000
------------------------------------------
TOTAL OTHER INCOME . . . . . . 9,448,000 8,370,000 8,098,000
NONINTEREST EXPENSES:
Salaries and employee benefits
(notes 16, 17, 18 and 19) . 11,205,000 10,304,000 10,056,000
Net occupancy expense of
premises (note 8) . . . . . 1,471,000 1,576,000 1,521,000
Furniture and equipment
expenses (note 8) . . . . . 2,090,000 2,163,000 2,122,000
Card-related expenses. . . . 1,283,000 1,133,000 988,000
Supplies and postage . . . . 1,008,000 909,000 995,000
Outside services . . . . . . 899,000 673,000 690,000
Marketing and public
relations . . . . . . . . . 564,000 567,000 419,000
Ohio Franchise Tax . . . . . 622,000 553,000 573,000
Other expenses . . . . . . . 3,596,000 3,398,000 3,275,000
------------------------------------------
TOTAL OTHER EXPENSES . . . . . 22,738,000 21,276,000 20,639,000
------------------------------------------
INCOME BEFORE INCOME TAXES . . 12,613,000 12,830,000 11,483,000
------------------------------------------
INCOME TAXES (note 12) . . . . 4,048,000 4,400,000 3,842,000
------------------------------------------
NET INCOME . . . . . . . . . . $ 8,565,000 $ 8,430,000 $ 7,641,000
------------------------------------------
BASIC EARNINGS PER SHARE
(note 2)(*). . . . . . . . . $ 1.99 $ 1.96 $ 1.78
------------------------------------------
DILUTED EARNINGS PER SHARE
(note 2)(*). . . . . . . . . $ 1.99 $ 1.96 $ 1.78
------------------------------------------
DIVIDENDS DECLARED PER SHARE(*) $ 1.02 $ .98 $ .88
------------------------------------------
See accompanying notes to consolidated financial statements.
123
(*) All share and per share data has been adjusted to reflect the 2
percent stock dividends in 2001 and 2000.
END PUBLISHED PAGE 7
124
Consolidated Statements of Cash Flows
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Interest received . . . . . . $45,744,000 $45,978,000 $41,681,000
Other income received . . . . 9,008,000 8,504,000 7,873,000
Interest paid . . . . . . . . (17,768,000) (18,818,000) (15,570,000)
Cash paid for salaries
and employee benefits. . . . (11,517,000) (10,264,000) (10,013,000)
Net occupancy expense of
premises paid. . . . . . . . (1,159,000) (1,258,000) (1,184,000)
Furniture and equipment
expenses paid. . . . . . . . (777,000) (814,000) (847,000)
Cash paid for supplies and
postage. . . . . . . . . . . (1,008,000) (909,000) (995,000)
Cash paid for other
operating expenses . . . . . (5,654,000) (4,970,000) (5,521,000)
Federal income taxes paid . . (4,237,000) (4,499,000) (4,210,000)
------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES. . . . . 12,632,000 12,950,000 11,214,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of
securities held to maturity. 29,559,000 730,000 689,000
Proceeds from maturities of
securities available for sale 18,146,000 13,001,000 26,000,000
Proceeds from sales of securities
available for sale 28,064,000 -0- -0-
Purchases of securities
held to maturity . . . . . . (983,000) (1,022,000) (8,162,000)
Purchases of securities
available for sale (85,102,000) (15,650,000) (25,203,000)
Net (increase) in loans made
to customers . . . . . . . . (27,980,000) (33,053,000) (50,326,000)
Purchases of bank premises,
equipment and intangible
assets . . . . . . . . . . . (894,000) (1,703,000) (1,876,000)
Proceeds from sales of
bank premises and equipment. 35,000 23,000 164,000
Additions to other foreclosed
assets . . . . . . . . . . . (370,000) (247,000) (96,000)
Net proceeds from liquidations
of other foreclosed assets 296,000 296,000 1,400,000
------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES. . . . . . . . . . (39,229,000) (37,625,000) (57,410,000)
125
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
and other noninterest-
bearing deposits . . . . . . 4,395,000 2,439,000 (4,904,000)
Net increase in savings,
Market Access and passbook
deposits . . . . . . . . . . 33,888,000 27,690,000 9,917,000
Net increase (decrease) in
certificates of deposit. . . (16,107,000) 9,131,000 7,970,000
Net increase (decrease) in securities sold
under repurchase agreements and other
short-term borrowings. . . . 8,779,000 (21,731,000) 29,162,000
Proceeds from Federal Home
Loan Bank advances . . . . . 46,735,000 9,000,000 12,300,000
Cash paid on Federal Home
Loan Bank advances . . . . . (40,735,000) (10,000,000) -0-
Proceeds from exercise of
stock options and shares
issued under LNBB Direct
Stock Purchase and Dividend
Reinvestment Plan . . . . . 348,000 25,000 87,000
Dividends paid. . . . . . . . (4,337,000) (4,086,000) (3,794,000)
------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES . . . . . . . . . 32,966,000 12,468,000 50,738,000
------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS . . . . 6,369,000 (12,207,000) 4,542,000
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR. . . . . 25,136,000 37,343,000 32,801,000
------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR. . . . . . . . $31,505,000 $25,136,000 $37,343,000
------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
NET INCOME . . . . . . . . . . $ 8,565,000 $ 8,430,000 $ 7,641,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,625,000 1,667,000 1,612,000
Amortization of intangible
assets. . . . . . . . . . . 377,000 398,000 421,000
Amortization of deferred loan
fees and costs, net 72,000 312,000 (140,000)
Provision for loan losses. . 2,200,000 1,700,000 2,000,000
Decrease (increase) in accrued
interest receivable . . . . 898,000 (637,000) (372,000)
Others, net. . . . . . . . . (1,105,000) 1,080,000 52,000
------------------------------------------
126
NET CASH PROVIDED BY OPERATING
ACTIVITIES. . . . . . . . . . $12,632,000 $12,950,000 $11,214,000
------------------------------------------
See accompanying notes to consolidated financial statements.
END PUBLISHED PAGE 8
127
Consolidated Statements of Shareholders' Equity
Accumulated
Years Ended Other
December 31, 2001 Common Additional Retained Comprehensive
2000 and 1999 Stock Capital Earnings Income(Loss)
- ------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1998 $4,223,000 $22,602,000 $24,210,000 $ 541,000
------------------------------------------------
Comprehensive income:
Net income . . . . . . -0- -0- 7,641,000 -0-
Change in unrealized
loss on securities
available for
sale, net of tax. . . -0- -0- -0- (1,557,000)
Total comprehensive income
Cash dividends declared,
$.88 per share. . . . -0- -0- (3,794,000) -0-
Issuance of 4,586 shares
of common stock under
stock option plans. . 4,000 83,000 -0- -0-
------------------------------------------------
Balance at
December 31, 1999 $4,227,000 $22,685,000 $28,057,000 $(1,016,000)
-------------------------------------------------
Years Ended Total
December 31, 2001 Treasury Shareholders'
2000 and 1999 Stock Equity
- -------------------------------------------------
BALANCE AT
DECEMBER 31, 1998 (2,900,000) $48,676,000
----------------------------------
Comprehensive income:
Net income . . . . . . -0- 7,641,000
Change in unrealized
loss on securities
available for
sale, net of tax. . . -0- (1,557,000)
-----------
Total comprehensive income 6,084,000
Cash dividends declared,
$.88 per share. . . . -0- (3,794,000)
Issuance of 4,586 shares
of common stock under
stock option plans. . -0- 87,000
BALANCE AT ------------------------------
DECEMBER 31, 1999 $ (2,900,000) $51,053,000
------------------------------
128
Accumulated
Years Ended Other
December 31, 2001 Common Additional Retained Comprehensive
2000 and 1999 Stock Capital Earnings Income(Loss)
- ------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1999 $4,227,000 $22,685,000 $28,057,000 $(1,016,000)
------------------------------------------------
Comprehensive income:
Net income. . . . . . . -0- -0- 8,430,000 -0-
Change in unrealized
gain on securities
available for
sale, net of tax . . . -0- -0- -0- 1,208,000
Total comprehensive income
Cash dividends declared,
$.98 per share . . . . -0- -0- (4,191,000) -0-
Issuance of 1,324 shares
of common stock under
stock option plans . . 2,000 23,000 -0- -0-
Market value of stock
issued in payment of
2% stock dividend,
84,562 shares . . . . . 84,000 1,628,000 (1,712,000) -0-
BALANCE AT ------------------------------------------------
DECEMBER 31, 2000 $4,313,000 $24,336,000 $30,584,000 $ 192,000
------------------------------------------------
Years Ended Total
December 31, 2001 Treasury Shareholders'
2000 and 1999 Stock Equity
- -------------------------------------------------
BALANCE AT
DECEMBER 31, 1999 (2,900,000) $51,053,000
----------------------------------
Comprehensive income:
Net income. . . . . . . -0- 8,430,000
Change in unrealized
gain on securities
available for
sale, net of tax . . . -0- 1,208,000
-----------
Total comprehensive income 9,638,000
Cash dividends declared,
$.98 per share . . . . -0- (4,191,000)
Issuance of 1,324 shares
of common stock under
stock option plans . . -0- 25,000
129
Market value of stock
issued in payment of
2% stock dividend,
84,562 shares. . . . . -0- -0-
BALANCE AT ----------------------------------
DECEMBER 31, 2000 $ (2,900,000) $56,525,000
----------------------------------
Accumulated
Years Ended Other
December 31, 2001 Common Additional Retained Comprehensive
2000 and 1999 Stock Capital Earnings Income(Loss)
- ------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2000 $4,313,000 $24,336,000 $30,584,000 $ 192,000
------------------------------------------------
Comprehensive income:
Net income. . . . . . . -0- -0- 8,565,000 -0-
Change in unrealized
gain on securities
available for
sale, net of tax . . . -0- -0- -0- 1,065,000
Total comprehensive income
Cash dividends declared,
$1.02 per share. . . . -0- -0- (4,365,000) -0-
Issuance of 9,431 shares
of common stock under
stock option plans . . 10,000 123,000 -0- -0-
Issuance of 10,835 shares
of common stock under LNBB
Direct Stock Purchase and
Dividend Reinvestment
Plan . . . . . . . . . 11,000 204,000 -0- -0-
Market value of stock
issued in payment of
2% stock dividend,
84,225 shares . . . . . 84,000 1,575,000 (1,659,000) -0-
BALANCE AT ------------------------------------------------
DECEMBER 31, 2001 $4,418,000 $26,238,000 $33,125,000 $ 1,257,000
------------------------------------------------
Years Ended Total
December 31, 2001 Treasury Shareholders'
2000 and 1999 Stock Equity
- -------------------------------------------------
BALANCE AT
DECEMBER 31, 2000 (2,900,000) $56,525,000
----------------------------------
130
Comprehensive income:
Net income. . . . . . . -0- 8,565,000
Change in unrealized
gain on securities
available for
sale, net of tax . . . -0- 1,065,000
-----------
Total comprehensive income 9,630,000
Cash dividends declared,
$1.02 per share. . . . -0- (4,365,000)
Issuance of 9,431 shares
of common stock under
stock option plans . . -0- 133,000
Issuance of 10,835 shares
of common stock under LNBB
Direct Stock Purchase and
Dividend Reinvestment
Plan . . . . . . . . . -0- 215,000
Market value of stock
issued in payment of
2% stock dividend,
84,225 shares. . . . . -0- -0-
BALANCE AT ----------------------------------
DECEMBER 31, 2001 $ (2,900,000) $62,138,000
----------------------------------
See accompanying notes to consolidated financial statements.
All share and per share data has been adjusted to reflect the 2
percent stock dividend in 2001.
DISCLOSURE OF RECLASSIFICATION AMOUNT:
The following discloses the reclassification adjustments for Accumulated
Other Comprehensive Income:
Years ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------
Unrealized holding gains(losses)
arising during the year, net of tax. .$1,230,000 $1,208,000 $(1,557,000)
Reclassification adjustment for gains
included in net income, net
of tax of $85,000, $0 and $0 for
2001, 2000 and 1999, respectively . . 165,000 -0- -0-
---------------------------------
Change in unrealized gain(loss) on
securities available for sale, net
of tax . . . . . . . . . . . . . . . .$1,065,000 $1,208,000 $(1,557,000)
---------------------------------
END PUBLISHED PAGE 9
131
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of LNB Bancorp,
Inc. (the Parent Company) and its wholly owned subsidiaries, The Lorain
National Bank (the Bank) and Charleston Insurance Agency, Inc. Charleston
Title Agency, LLC., a 49% owned subsidiary, is accounted for under the equity
method. The term "the Corporation" refers to LNB Bancorp, Inc. and its wholly
owned subsidiaries, The Lorain National Bank and Charleston Insurance Agency,
Inc., and a 49% interest in Charleston Title Agency, LLC. 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 accounting
principles generally accepted in the United States of America 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
reserve 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 available for sale, the carrying value of
other real estate, depreciation of premises and equipment, the projected
benefit obligation, the actuarial present value of pension benefit
obligations, net periodic pension expense and accrued pension costs
recognized in the Corporation's financial statements. Estimates that are more
susceptible to change in the near term include the reserve 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 financial holding
company engaged in the business of commercial and retail banking, investment
management and trust services, title insurance, and insurance 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
and title insurance and insurance 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.
132
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
amortized cost based on the Corporation's intent and ability to hold until
maturity. 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, net of tax, 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. A decline in fair value of any available for
sale or held to maturity security below cost that is deemed other than
temporary is charged to earnings resulting in establishment of a new cost
basis for the security.
(f) LOANS AVAILABLE FOR SALE:
The Bank has identified certain mortgage and commercial 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. Net unrealized losses are recognized in a
valuation allowance and by charges to income.
(g) RESERVE FOR LOAN LOSSES:
Because some loans may not be repaid in full, a reserve for loan losses is
recorded. This reserve is increased by provisions charged to earnings and is
reduced by loan charge-offs, net of recoveries. Estimating the risk of loss
on any loan is necessarily subjective. Accordingly, the reserve is maintained
by Management at a level considered adequate to cover probable loan losses
inherent in the loan portfolio that are currently anticipated based on
Management's evaluation of several key factors including information about
specific borrower situations, their financial position and collateral values,
current economic conditions, changes in the mix and levels of the various
types of loans, past charge-off experience and other pertinent information.
The reserve for loan losses is based on estimates using currently available
information, and ultimate losses may vary from current estimates due to
changes in circumstances. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the periods in
which they become known. While Management may periodically allocate portions
of the reserve for specific problem situations, the entire reserve is
available for any charge-offs that may occur. Charge-offs are made against
the reserve for loan losses when Management concludes that it is probable
that all or a portion of a loan is uncollectible. After a loan is charged-
off, collection efforts continue and future recoveries may occur.
END PUBLISHED PAGE 10
133
Notes to Consolidated Financial Statements (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 investment in the loan, an
impairment reserve is established for the difference. The impairment reserve
is established by either an allocation of the reserve for loan losses or by a
provision for loan losses, depending upon the adequacy of the reserve for
loan losses. The provision for loan losses is determined based on
Management's evaluation of the loan portfolio and the adequacy of the reserve
for loan losses under current economic conditions and such other factors
which, in Management's judgment, 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. Upon the
sale or other disposition of assets, the cost and related accumulated
depreciation are retired and the resulting gain or loss is recognized.
Maintenance and repairs are charged to expense as incurred, while renewals
and improvements are capitalized. Software costs related to externally
developed systems are capitalized at cost less accumulated amortization.
Amortization is computed on the straight-line method over the estimated
useful life.
(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. 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.
(j) FORECLOSED ASSETS:
Foreclosed assets represents properties acquired through customer loan
default. The real estate and other tangible assets acquired through
foreclosure are carried as Foreclosed assets on the Balance Sheet at fair
value, net of estimated costs to sell, not to exceed the cost of property
acquired through foreclosure.
134
(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 is past
due 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) INVESTMENT AND TRUST SERVICES DIVISION'S 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 Investment and Trust
Services 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) INCOME TAXES:
The Corporation and its wholly owned subsidiaries file a consolidated Federal
income tax return. The provision for income taxes is based upon income in the
financial statements, rather than amounts reported on the Corporation's
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 1999 and 2000 amounts have been reclassified to conform to the 2001
presentation.
(q) EMPLOYEE STOCK OWNERSHIP PLAN AND 401(K) PROFIT SHARING PLAN AND TRUST:
These two qualified defined contribution plans are accounted for under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 87,
"Employers' Accounting for Pensions" and under the provisions of Statement of
135
Position 93-6 "Employers Accounting for Employee Stock Ownership Plans", as
applicable.
(r) RETIREMENT PENSION PLAN:
The qualified defined benefit pension plan is accounted for under the
provisions of Statement of Financial Accounting Standards No. 87 "Employers
Accounting for Pensions".
(s) REPORTING COMPREHENSIVE INCOME:
Effective January 1, 1999, 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 as a separate component of
shareholders' equity.
END PUBLISHED PAGE 11
136
Notes to Consolidated Financial Statements (Continued)
(2) EARNINGS PER SHARE:
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 and the earnings per share during each year presented has been
adjusted to reflect a two percent stock dividend in 2001. Basic and diluted
earnings per share is calculated as follows:
For the Years ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------
Weighted average shares outstanding used in
Basic Earnings Per Share calculation . .4,298,596 4,294,748 4,289,745
Dilutive effect of incentive stock options. 1,312 4,168 6,761
------------------------------------
Weighted average shares outstanding used in
Diluted Earnings Per Share calculation .4,299,908 4,298,916 4,296,506
------------------------------------
NET INCOME. . . . . . . . . . . . . . . . $8,565,000 $8,430,000 $7,641,000
------------------------------------
BASIC EARNINGS PER SHARE. . . . . . . . . $ 1.99 $ 1.96 $ 1.78
------------------------------------
DILUTED EARNINGS PER SHARE. . . . . . . . $ 1.99 $ 1.96 $ 1.78
------------------------------------
(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 $10,076,000 and $9,466,000 at
December 31, 2001 and 2000, 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
$10,078,000 and $8,965,000, during 2001 and 2000, respectively.
(4) INTANGIBLE ASSETS:
The Corporation accounts for intangible assets under the provisions of
Statement of Financial Accounting Standard No. 72 "Accounting for Certain
Acquisitions of Banking or Thrift Institutions". The following intangible
assets and related amortization arising from a 1997 branch acquisition and
included in the accompanying consolidated financial statements are summarized
137
as follows at December 31, net of accumulated amortization:
2001 2000
- ------------------------------------------------------------------------
Goodwill. . . . . . . . . . . . . . $ 2,827,000 $ 3,091,000
Core deposit intangible . . . . . . 643,000 756,000
-------------------------------------
Total intangible assets . . . . . . $ 3,470,000 $ 3,847,000
=====================================
Amortization expense for intangible assets totaled $377,000, $398,000 and
$421,000 in 2001, 2000 and 1999, respectively.
END PUBLISHED PAGE 12
138
Notes to Consolidated Financial Statements (Continued)
(5) SECURITIES:
The amortized cost, gross unrealized gains and losses and fair values of
securities at December 31, 2001 and 2000 follow:
Gross Gross
Amortized Unrealized Unrealized Fair
DECEMBER 31, 2001 Cost Gains Losses Value
- ------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury
securities. . . . . . $ 1,080,000 $ 5,000 $ -0- $ 1,085,000
U.S. Government agencies
and corporations. . . 103,308,000 1,907,000 (130,000) 105,085,000
States and political
subdivisions 7,245,000 51,000 (36,000) 7,260,000
Equity securities. . . 4,096,000 102,000 -0- 4,198,000
-----------------------------------------------
Total securities
available for sale. . . 115,729,000 2,065,000 (166,000) 117,628,000
-----------------------------------------------
Securities held to maturity:
U.S.Government agencies
and corporations. . . 13,386,000 265,000 -0- 13,651,000
States and political
subdivisions. . . . . 3,805,000 92,000 (63,000) 3,834,000
-----------------------------------------------
Total securities held
to maturity . . . . . . 17,191,000 357,000 (63,000) 17,485,000
-----------------------------------------------
Federal Home Loan Bank and
Federal Reserve Bank stock 3,582,000 -0- -0- 3,582,000
-----------------------------------------------
Total securities . . . . $136,502,000 $2,422,000 $(229,000) $138,695,000
-----------------------------------------------
DECEMBER 31, 2000
- ------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury
securities. . . . . . $ 2,079,000 $ 12,000 $ (1,000) $ 2,090,000
U.S. Government agencies
and corporations. . . 76,051,000 302,000 (220,000) 76,133,000
Equity securities. . . 1,096,000 199,000 -0- 1,295,000
-----------------------------------------------
Total securities
available for sale. . . 79,226,000 513,000 (221,000) 79,518,000
-----------------------------------------------
139
Securities held to maturity:
U.S.Government agencies
and corporations. . . 39,566,000 5,000 (449,000) 39,122,000
States and political
subdivisions. . . . . 4,865,000 63,000 (68,000) 4,860,000
-----------------------------------------------
Total securities held
to maturity . . . . . . 44,431,000 68,000 (517,000) 43,982,000
-----------------------------------------------
Federal Home Loan Bank and
Federal Reserve Bank stock 3,152,000 -0- -0- 3,152,000
-----------------------------------------------
Total securities . . . . $126,809,000 $581,000 $ (738,000) $126,652,000
-----------------------------------------------
The amortized cost, fair values and yields of debt securities by
contractual maturity date at December 31, 2001 follow:
Fully-Tax
Amortized Fair Equivalent
DECEMBER 31, 2001 Cost Value Yield
- ------------------------------------------------------------------------
Securities available for sale:
Due within 1 year. . . . . . .$ 10,558,000 $ 10,774,000 5.85%
After 1 but within 5 years . . 57,449,000 58,785,000 5.32
After 5 but within 10 years. . 14,168,000 14,352,000 6.05
After 10 years . . . . . . . . 33,554,000 33,717,000 5.42
----------------------------------------
Total securities available . . . 115,729,000 117,628,000 5.49
for sale ----------------------------------------
Securities held to maturity:
Due within 1 year. . . . . . . 702,000 709,000 7.13
After 1 but within 5 years . . 7,493,000 7,630,000 5.90
After 5 but within 10 years. . 6,445,000 6,593,000 5.52
After 10 years . . . . . . . . 2,551,000 2,553,000 7.74
----------------------------------------
Total securities held to maturity 17,191,000 17,485,000 6.09
----------------------------------------
Total securities . . . . . . . .$132,920,000 $135,113,000 5.57%
----------------------------------------
There were no sales of securities in 1999 or 2000. During 2001, proceeds from
the sale of securities were $32,842,000 resulting in gross realized gains of
$250,000. 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 $112,937,000 and $112,173,000 at December 31, 2001 and 2000,
140
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 $3,017,000 and $2,261,000 in
non-rated securities of states and political subdivisions at December 31,
2001 and 2000, respectively. Based upon yield, term to maturity and market
risk, the valuation service estimated the fair value of these securities to
be $3,035,000 and $2,288,000 at December 31, 2001 and 2000, 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, 2001 and 2000.
END PUBLISHED PAGE 13
141
Notes to Consolidated Financial Statements (Continued)
(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 non-related parties. An
analysis of loans outstanding to related parties follows:
Years ended December 31, 2001 2000
- -------------------------------------------------------------------------
Aggregate amount beginning of year $ 14,160,000 $ 11,434,000
Additions (deductions):
New loans 3,899,000 3,805,000
Repayments (1,705,000) (1,418,000)
Changes in directors and officers
and/or their affiliations, net 69,000 339,000
---------------------------------
Aggregate amount end of year $ 16,423,000 $ 14,160,000
---------------------------------
(7) LOANS AND RESERVE FOR LOAN LOSSES:
Loan balances at December 31, 2001 and 2000 are summarized as follows:
December 31, 2001 2000
- ------------------------------------------------------------------------
Real estate loans (includes loans secured primarily by real estate
only):
Construction and land development. . . . . $ 38,045,000 $ 36,030,000
One to four family residential . . . . . . 201,080,000 199,869,000
Multi-family residential . . . . . . . . . 3,930,000 7,829,000
Non-farm non-residential properties. . . . 142,248,000 109,536,000
Commercial and industrial loans. . . . . . . 43,220,000 39,609,000
Personal loans to individuals:
Auto, single payment and installment . . . 43,705,000 52,462,000
Credit card and related plans. . . . . . . 4,862,000 5,216,000
Obligations of states and political subdivisions -0- 196,000
All other loans. . . . . . . . . . . . . . . 398,000 393,000
---------------------------
TOTAL LOANS. . . . . . . . . . . . . . . . . 477,488,000 451,140,000
Reserve for loan losses . . . . . . . . . . (5,890,000) (5,250,000)
---------------------------
NET LOANS. . . . . . . . . . . . . . . . . . $471,598,000 $445,890,000
---------------------------
142
Activity in the reserve for loan losses for 2001, 2000 and 1999 is
summarized as follows:
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------
Balance at beginning of year. . $5,250,000 $4,667,000 $3,483,000
Provision for loan losses . . . 2,200,000 1,700,000 2,000,000
Loans charged-off . . . . . . . (1,739,000) (1,333,000) (1,050,000)
Recoveries on loans previously
charged-off. . . . . . . . . . 179,000 216,000 234,000
-----------------------------------------
BALANCE AT END OF YEAR. . . . . $5,890,000 $5,250,000 $4,667,000
-----------------------------------------
At December 31, 2001 and 2000, $8,868,000 and $9,008,000 respectively, of
commercial loans were available for sale in the secondary market. At December
31, 2001 and 2000 the market value of commercial loans available for sale
equaled or exceeded its carrying value. At December 31, 2001 and 2000,
$3,591,000 and $122,000, respectively of mortgage loans were available for
sale in the secondary market. At December 31, 2001, the market value of
mortgage loans available for sale was less than its carrying value and was
written down by $32,000. At December 31, 2000, the market value of mortgage
loans available for sale equaled or exceeded their carrying value. At
December 31, 2001, the Bank had no firm commitments for the sale of mortgage
loans.
Information regarding impaired loans is as follows:
Years ended December 31 2001 2000 1999
- ------------------------------------------------------------------------
Year-end impaired loans
with no allowance for
loan losses specifically
allocated. . . . . . . . . . $3,977,000 $1,109,000 $ -0-
Year-end impaired loans
with allowance for loan
losses specifically
allocated. . . . . . . . . . 7,664,000 3,918,000 $2,232,000
Amount of the allowance
allocated. . . . . . . . . . 1,909,000 847,000 190,000
Average of impaired loans
during the year. . . . . . . 978,000 1,230,000 2,925,000
Interest income recognized
during impairment. . . . . . 60,000 72,000 283,000
Cash-basis interest income
recognized . . . . . . . . . -0- -0- -0-
- ------------------------------------------------------------------------
END PUBLISHED PAGE 14
143
Notes to Consolidated Financial Statements (Continued)
(8)BANK PREMISES, EQUIPMENT AND LEASES:
Bank premises and equipment are summarized as follows:
December 31, 2001 2000
- ------------------------------------------------------------------------
Land . . . . . . . . . . . . . . . . . . . . .$ 1,896,000 $ 1,896,000
Buildings. . . . . . . . . . . . . . . . . . . 9,338,000 9,243,000
Equipment. . . . . . . . . . . . . . . . . . . 15,769,000 16,750,000
Leasehold improvements . . . . . . . . . . . . 688,000 688,000
--------------------------
Total Costs. . . . . . . . . . . . . . . . . . 27,691,000 28,577,000
--------------------------
Less accumulated depreciation
and amortization. . . . . . . . . . . . . . . 17,171,000 17,326,000
--------------------------
TOTAL. . . . . . . . . . . . . . . . . . . . .$10,520,000 $11,251,000
--------------------------
Depreciation and amortization of Bank premises and equipment charged to
noninterest expenses amounted to $1,368,000 in 2001, $1,440,000 in 2000 and
$1,407,000 in 1999. Amortization of purchased software charged to
noninterest expenses amounted to $257,000 in 2001, $227,000 in 2000 and
$205,000 in 1999.
At December 31, 2001, 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
-----------------------------------------------------------
2002. . . . . . . . . . . . .$195,000 $ 5,000
2003. . . . . . . . . . . . . 179,000 5,000
2004. . . . . . . . . . . . . 67,000 5,000
2005. . . . . . . . . . . . . 52,000 5,000
2006. . . . . . . . . . . . . 41,000 5,000
2007 and thereafter . . . . . 45,000 -0-
---------------------------
Total. . . . . . . . . . . . .$579,000 $25,000
---------------------------
Rentals paid under leases on branch offices and equipment, respectively,
amounted to $241,000 and $5,000 in 2001, $265,000 and $4,000 in 2000 and
$265,000 and $10,000 in 1999.
144
(9) DEPOSITS:
Deposit balances at December 31, 2001 and 2000 are summarized as
follows:
December 31, 2001 2000
- ------------------------------------------------------------------------
Demand and other noninterest-bearing deposits:
Individuals, partnerships
and corporations. . . . . . . . . . . . . .$ 77,991,000 $ 72,956,000
U.S. Government. . . . . . . . . . . . . . . 133,000 144,000
States and political subdivisions. . . . . . 4,318,000 5,458,000
Certified, official, travelers
checks and other. . . . . . . . . . . . . . 5,046,000 4,535,000
--------------------------
Total demand and other noninterest-
bearing deposits. . . . . . . . . . . . . . . 87,488,000 83,093,000
--------------------------
Savings and passbook accounts:
Individuals and non-profit organizations . . 209,265,000 190,570,000
Corporations and profit organizations. . . . 44,241,000 29,048,000
--------------------------
Total savings and passbook accounts. . . . . . 235,506,000 219,618,000
--------------------------
Certificates of deposit:
Individuals, partnerships and
corporations . . . . . . . . . . . . . . . 154,679,000 169,544,000
States and political subdivisions. . . . . . 22,594,000 23,836,000
--------------------------
Total certificates of deposit. . . . . . . . . 177,273,000 193,380,000
--------------------------
TOTAL DEPOSITS . . . . . . . . . . . . . . . .$518,267,000 $496,091,000
--------------------------
The aggregate amount of certificates of deposit in denominations of
$100,000 or more amounted to $40,690,000 and $42,238,000 at December 31,
2001 and 2000, respectively.
145
The maturity distribution of certificates of deposit as of December
31, 2001 and 2000 follows:
After 3 After 6
Months Months
Within 3 But Within But Within
Months 6 Months 1 Year
- ------------------------------------------------------------------------
December 31, 2001. . $51,135,000 $33,740,000 $36,387,000
---------------------------------------------------
December 31, 2000. . $64,404,000 $33,470,000 $51,909,000
---------------------------------------------------
After 1 After 2
Year But Years But
Within Within
2 Years 5 Years Total
- ------------------------------------------------------------------------
December 31, 2001. . $37,084,000 $18,927,000 $177,273,000
---------------------------------------------------
December 31, 2000. . $32,463,000 $11,134,000 $193,380,000
---------------------------------------------------
END PUBLISHED PAGE 15
146
Notes to Consolidated Financial Statements (Continued)
(10) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM
BORROWINGS:
Information relating to short-term borrowings for the years ended
December 31, 2001, 2000 and 1999 follows:
December 31, 2001 2000 1999
- ------------------------------------------------------------------------
Securities sold under repurchase agreements and other short-term
borrowings
At December 31:
Outstanding. . . . . . . . .$48,170,000 $39,391,000 $52,122,000
Interest rate. . . . . . . . 2.01% 5.41% 4.48%
Average for the year:
Outstanding. . . . . . . . .$32,989,000 $33,734,000 $28,892,000
Interest rate. . . . . . . . 3.36% 5.56% 4.27%
Maximum month-end outstanding.$48,170,000 $42,378,000 $52,122,000
The Bank maintains a $40,000,000 line of credit with the FHLB which matures
on August 2, 2002. At December 31, 2001, the Bank borrowed $19,000,000 under
this line of credit while having credit available in the amount of
$21,000,000.
The Bank maintains a line of credit for advances and discounts with the
Federal Reserve Bank of Cleveland. The amount of the line of credit varies on
a monthly basis. The level of the line is equal to 85% of the balances of
qualified home equity loans that are pledged as collateral for the line. At
December 31, 2001 the Bank had pledged approximately $35,335,000 resulting in
an available line of credit of approximately $30,000,000. The Bank has not
made a draw against this line of credit since December of 1999.
(11) FEDERAL HOME LOAN BANK ADVANCES,
SHORT-TERM:
Information relating to short-term Federal Home Loan Bank advances for
the years ended December 31, 2001, 2000 and 1999 follows:
December 31, 2001 2000 1999
- -----------------------------------------------------------------------
Federal Home Loan Bank advances, short-term
At December 31:
Outstanding. . . . . . . . . . .$10,755,000 $16,095,000 $15,000,000
Interest rate. . . . . . . . . . 4.27-6.31% 4.88-6.85% 4.76-5.53%
Average for the year:
Outstanding. . . . . . . . . . .$24,077,000 $ 8,941,000 $ 6,693,000
Interest rate. . . . . . . . . . 4.88% 5.16% 5.45%
Maximum month-end outstanding . . .$27,485,000 $16,095,000 $15,000,000
147
LONG-TERM:
Lorain National Bank is a voluntary member of the Federal Home Loan Bank
of Cincinnati (FHLB). Long-term advances from the FHLB with maturities
and fixed interest rates thereon at December 31, 2001 and 2000 are as
follows:
Maturity Interest Rate 2001 2000
---------------------------------------------------------------
2002 4.27-6.31%. . .$ -0- $ 8,250,000
2003 3.16-4.95%. . . 19,595,000 -0-
-------------------------
TOTAL . . . . . . . .$19,595,000 $ 8,250,000
-------------------------
At December 31, 2001, pledged as collateral for FHLB advances were all
of the shares of FHLB stock owned by the Bank, and qualified mortgage
loans totaling $66,616,000. At December 31, 2001, Lorain National Bank
was approved for $66,360,000 of FHLB advances. The Bank is required to
own FHLB stock equal to 5% of the FHLB advances outstanding and owned
$3,318,000 at December 31, 2001. At December 31, 2001, the amount of
credit available to the Bank from the FHLB was $17,015,000. The Bank is
eligible to purchase additional FHLB stock, if needed, and thereby
increase the amount of credit available.
END PUBLISHED PAGE 16
148
Notes to Consolidated Financial Statements (Continued)
(12) INCOME TAXES:
The annual provision for income taxes consists of the following:
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------
INCOME TAXES
Federal Current Expense. . . $4,361,000 $4,743,000 $4,448,000
Federal Deferred (Benefit) . (313,000) (348,000) (627,000)
State Current Expense. . . . -0- 5,000 21,000
------------------------------------------
TOTAL INCOME TAXES . . . . . . $4,048,000 $4,400,000 $3,842,000
------------------------------------------
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, 2001 2000 1999
- ------------------------------------------------------------------------
Computed "expected" tax
expense . . . . . . . . . . . $4,414,000 $4,491,000 $4,019,000
Increase (reduction) in income
taxes resulting from:
Tax exempt interest on
obligations of states
and political subdivisions (139,000) (82,000) (76,000)
State income taxes net of
Federal benefit. . . . . . -0- 3,000 14,000
Other, net. . . . . . . . . (227,000) (12,000) (115,000)
------------------------------------------
TOTAL INCOME TAXES . . . . . . $4,048,000 $4,400,000 $3,842,000
------------------------------------------
Net deferred Federal tax assets are included in Other Assets on the
Consolidated Balance Sheets. Management believes that it is more likely
than not that the deferred Federal tax assets will be realized. The tax
149
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, 2001 2000
- -----------------------------------------------------------------------
Deferred Federal tax assets:
Reserve for loan losses . . . . . . . . . . . $2,003,000 $1,608,000
Deferred compensation . . . . . . . . . . . . 352,000 288,000
Accrued vacation payable. . . . . . . . . . . 167,000 159,000
Intangible asset amortization . . . . . . . . 89,000 80,000
Accrued pension payable . . . . . . . . . . . 34,000 88,000
Other, net. . . . . . . . . . . . . . . . . . 39,000 20,000
------------------------
Total deferred Federal tax assets . . . . . . . 2,684,000 2,243,000
Deferred Federal tax liabilities:
Bank premises and equipment depreciation. . . (344,000) (315,000)
FHLB stock dividends. . . . . . . . . . . . . (297,000) (227,000)
Unrealized gain on securities available for sale(646,000) (99,000)
Accrued loan fees and costs . . . . . . . . . (141,000) (122,000)
Deferred charges. . . . . . . . . . . . . . . (89,000) (79,000)
------------------------
Total deferred Federal tax liabilities. . . . . (1,517,000) (842,000)
------------------------
NET DEFERRED FEDERAL TAX ASSETS . . . . . . . . $1,167,000 $1,401,000
------------------------
END PUBLISHED PAGE 17
150
Notes to Consolidated Financial Statements (Continued)
(13) SHAREHOLDERS' EQUITY:
PREFERRED STOCK
The Corporation is authorized to issue up to 1,000,000 shares of Voting
Preferred Stock, no par value. As of December 31, 2001, no such stock had
been issued. The Board of Directors of the Corporation is authorized to
provide for the issuance of one or more series of Voting Preferred Stock and
establish the dividend rate, dividend dates, whether dividends are
cumulative, liquidation prices, redemption rights and prices, sinking fund
requirements, conversion rights, and restrictions on the issuance of any
series of Voting Preferred Stock. The Voting Preferred Stock may be issued
with conversion rights to common stock and may rank prior to the common stock
in dividends, liquidation preferences, or both. The Corporation has
authorized 750,000 Series A Voting Preferred Shares none of which have been
issued.
COMMON STOCK:
The Corporation is authorized to issue up to 15,000,000 shares of common
stock. Common shares outstanding were 4,317,558 and 4,213,047 at December 31,
2001, and December 31, 2000, respectively.
The Board of Directors of LNB Bancorp, Inc. declared a two percent stock
dividend, paid on July 2, 2001, to shareholders of record on June 12, 2001.
The two percent stock dividend increased LNB Bancorp Inc.'s. common stock
outstanding by 84,225 shares. Cash was issued in lieu of fractional shares.
The Board of Directors of LNB Bancorp, Inc. declared a two percent stock
dividend, paid on July 1, 2000, to shareholders of record on June 12, 2000.
The two percent stock dividend increased LNB Bancorp Inc.'s. common stock
outstanding by 84,562 shares. Cash was issued in lieu of fractional shares.
COMMON STOCK REPURCHASE PLAN AND TREASURY STOCK:
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, 2001 and at December
31, 2000, LNB Bancorp, Inc. held 100,000 shares of common stock as Treasury
Stock under this plan for a total cost of $2,900,000. During 2001, 2000 and
1999, no shares were issued out of Treasury Stock.
SHAREHOLDER RIGHTS PLAN:
On October 24, 2000, the Board of Directors of LNB Bancorp, Inc. adopted a
Shareholder Rights Plan. The rights plan is designed to prevent a potential
acquirer from exceeding a prescribed ownership level in LNB Bancorp, Inc.,
other than in the context of a negotiated acquisition involving the Board of
Directors. If the prescribed level is exceeded, the rights become exercisable
and, following a limited period for the Board of Directors to redeem the
rights, allow shareholders, other than the potential acquirer that triggered
the exercise of the rights, to purchase Preferred Share Units of the
151
Corporation having characteristics comparable to the Corporation's Common
Shares, at 50% of market value. This would likely dramatically dilute the
potential acquirer's ownership level and voting power, making an acquisition
of the Corporation without prior Board approval prohibitively expensive.
The Shareholder Rights Plan provided for the distribution of one Preferred
Share Purchase Right as a dividend on each outstanding LNB Bancorp, Inc.
Common Share held as of the close of business on November 6, 2000. One
Preferred Share Purchase Right will also be distributed for each Common Share
issued after November 6, 2000. Each right entitles the registered holder to
purchase from LNB Bancorp, Inc. Units of a new series of Voting Preferred
Shares, no par value, at 50 percent of market value, if a person or group
acquires 15 percent or more of LNB Bancorp, Inc.'s Common Shares. Each Unit
of the new Preferred Shares has terms designed to make it the economic
equivalent of one Common Share. A complete description of the distribution,
exercise, and the terms of the rights are set forth in a Shareholder Rights
Agreement dated October 24, 2000 between LNB Bancorp, Inc. and Registrar and
Transfer Company as Rights Agent. The Shareholder Rights Agreement was filed
with the Securities and Exchange Commission in a Form 8-A Filing on November
6, 2000.
DIVIDENDS:
Total cash dividends declared per share for 2001 increased $.04 or four
percent, to $1.02 per share, up from $.98 per share in 2000. Total cash
dividends declared in 2001, including the $.02 EXTRA dividend declared by the
Board of Directors in November, rose to $4,365,000. In each of the last 14
years, the Board of Directors has approved an increase in the regular cash
dividend, with the 2001 dividend representing a 211% increase from 1991 when
$1,404,000 in total cash dividends were declared.
LNBB DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN:
The Board of Directors adopted the LNBB Direct Stock Purchase and Dividend
Reinvestment Plan (the Plan) effective June 2001, replacing the former LNB
Bancorp, Inc. Dividend Reinvestment Plan. The Plan authorized the sale of
500,000 shares of the Corporation's common shares to shareholders who choose
to invest all or a portion of their cash dividends plus additional cash
payments for LNB Bancorp, Inc. common stock. The Corporation issued 10,835
shares pursuant to the Plan in 2001 while 37,667 shares were purchased in the
open market at the current market price. During 2000, stock for the former
Plan was purchased in the open market at the current market price.
DIVIDEND RESTRICTIONS:
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 years'
retained earnings. At December 31, 2001, approximately $11,900,000 of the
Bank's retained earnings were available for dividends to the Corporation. In
152
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.
END PUBLISHED PAGE 18
153
Notes to Consolidated Financial Statements (Continued)
(14) REGULATORY CAPITAL:
The Corporation and the Bank are subject to risk-based capital guidelines
issued by the Board of Governors of the Federal Reserve Board and the Office
of Comptroller of Currency. These guidelines are used to evaluate capital
adequacy and include required minimums as discussed below. The Corporation
and the Bank are subject to an array of banking, Federal Deposit Insurance
Corporation, U.S. Federal, and State of Ohio laws and regulations, including
the FDIC Improvement Act. The FDIC Improvement Act established five capital
categories ranging from "well capitalized" to "critically undercapitalized".
These five capital categories are used by the Federal Deposit Insurance
Corporation to determine prompt corrective action and an institution's semi-
annual FDIC deposit insurance premium assessments.
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 I risk-
based capital ratio of at least 6 percent, and a total risk-based capital
ratio of at least 10 percent.
The Corporation continued to maintain a strong capital position during 2001.
Total capital (Tier 1 and Tier 2) amounted to $63.3 million at December 31,
2001, representing 13.17% of net risk-adjusted assets compared with $57.6
million and 13.06%, respectively, at December 31, 2000. Tier 1 capital of
$57.4 million at year-end 2001 represented 11.95% of risk weighted assets,
compared with $52.5 million and 11.88% at year-end 2000.
At December 31, 2001 and 2000, 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. The Comptroller of the Currency's most recent notification,
with an examination date of February 26, 2001, 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.
154
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
- ------------------------------------------------------------------------
2001 Total capital (to risk weighted assets)
Consolidated. .$63,252 13.17% $48,018 10.00% $38,414 8.00%
Bank. . . . . .$59,571 12.42% $47,935 10.00% $38,348 8.00%
2001 Tier 1 capital (to risk weighted assets)
Consolidated. .$57,362 11.95% $28,811 6.00% $19,207 4.00%
Bank. . . . . .$49,681 10.36% $28,761 6.00% $19,174 4.00%
2001 Tier 1 capital (to average assets)
Consolidated. .$57,362 9.08% $31,575 5.00% $25,260 4.00%
Bank. . . . . .$49,681 7.88% $31,541 5.00% $25,232 4.00%
2000 Total capital (to risk weighted assets)
Consolidated. .$57,637 13.06% $44,194 10.0% $35,355 8.0%
Bank. . . . . .$54,464 12.34% $44,127 10.0% $35,302 8.0%
2000 Tier 1 capital (to risk weighted assets)
Consolidated. .$52,486 11.88% $26,516 6.0% $17,677 4.0%
Bank. . . . . .$45,214 10.24% $26,476 6.0% $17,651 4.0%
2000 Tier 1 capital (to average assets)
Consolidated. .$52,486 8.68% $30,183 5.0% $24,146 4.0%
Bank. . . . . .$45,214 7.50% $30,156 5.0% $24,125 4.0%
END PUBLISHED PAGE 19
155
Notes to Consolidated Financial Statements (Continued)
(15)PARENT COMPANY:
Substantially all of the retained earnings of the Corporation represent
undistributed net income of its subsidiary. Condensed financial
information of LNB Bancorp, Inc. (Parent Company only) is as follows:
CONDENSED BALANCE SHEETS
December 31, 2001 2000
- ------------------------------------------------------------------------
ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . .$ 1,245,000 $ 1,177,000
Short-term investments. . . . . . . . . . . . 3,488,000 3,125,000
Investment in subsidiaries
at equity in underlying
value of its net assets. . . . . . . . . . . 54,464,000 49,263,000
Securities available for sale . . . . . . . . 152,000 88,000
Note receivable - subsidiary
(6.80% due 1/1/2007) . . . . . . . . . . . . 4,000,000 4,000,000
Other assets. . . . . . . . . . . . . . . . . 15,000 25,000
---------------------------
Totals assets . . . . . . . . . . . . . . . .$63,364,000 $57,678,000
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities . . . . . . . . . . . . . . . . .$ 1,226,000 $ 1,153,000
Shareholders' equity. . . . . . . . . . . . . 62,138,000 56,525,000
---------------------------
Total liabilities and shareholders' equity. .$63,364,000 $57,678,000
---------------------------
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------
INCOME:
Cash dividends from subsidiary $ 4,365,000 $ 4,191,000 $ 3,794,000
Interest and other income. . . 466,000 445,000 663,000
------------------------------------------
4,831,000 4,636,000 4,457,000
EXPENSES:
Other expenses . . . . . . . . 376,000 334,000 238,000
------------------------------------------
Income before income taxes and
equity in undistributed
net income of subsidiary. . . 4,455,000 4,302,000 4,219,000
Income tax expense . . . . . . 26,000 55,000 159,000
Equity in undistributed net
income of subsidiary. . . . . 4,136,000 4,183,000 3,581,000
------------------------------------------
NET INCOME . . . . . . . . . . $ 8,565,000 $ 8,430,000 $ 7,641,000
------------------------------------------
156
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Dividends from subsidiary. . . $ 4,365,000 $ 4,191,000 $ 3,794,000
Other, net . . . . . . . . . . 119,000 55,000 280,000
------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES. . . . . 4,484,000 4,246,000 4,074,000
------------------------------------------
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES:
Purchases of securities
available for sale (64,000) -0- -0-
Proceeds from subsidiary on
note receivable . . . . . . . -0- -0- 4,000,000
Proceeds from exercise of
stock options and shares
issued under LNBB Direct
Stock Purchase and Dividend
Reinvestment Plan . . . . . . 348,000 25,000 87,000
Dividends paid to subsidiary . -0- -0- (4,000,000)
Dividends paid to shareholders (4,337,000) (4,086,000) (3,794,000)
------------------------------------------
NET CASH USED IN INVESTING
AND FINANCING ACTIVITIES. . . (4,053,000) (4,061,000) (3,707,000)
------------------------------------------
NET INCREASE IN
CASH AND CASH EQUIVALENTS . . 431,000 185,000 367,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR . . . . . . 4,302,000 4,117,000 3,750,000
------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR . . . . . . . . . $ 4,733,000 $ 4,302,000 $ 4,117,000
------------------------------------------
END PUBLISHED PAGE 20
157
Notes to Consolidated Financial Statements (Continued)
(16) RETIREMENT PENSION PLAN:
The Bank's non-contributory defined benefit pension plan covers 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. At December 31, 2001,
approximately 59% of plan assets were invested in corporate equities and 35%
in U.S. Treasury securities, with the remaining in cash equivalents.
The net periodic pension costs charged to other expenses amounted to
$313,000 in 2001, $95,000 in 2000, and $33,000 in 1999. At December 31,
2000 there were 237 participants in the plan. The following table sets
forth the defined benefit pension plan's Change in Projected Benefit
Obligation and Change in Plan Assets and Funded Status including Prepaid
(Accrued) Liability for the years ended December 31, 2001, 2000 and
1999.
Years ended December 31, 2001 2009 1999
- ------------------------------------------------------------------------
Change in projected benefit obligation:
Projected benefit obligation
at beginning of year. . . .$(10,100,000) $ (9,672,000) $ (9,064,000)
Service cost . . . . . . . . (531,000) (474,000) (408,000)
Interest cost. . . . . . . . (636,000) (571,000) (553,000)
Actuarial gain(loss) . . . . 22,000 (399,000) 2,000
Benefits paid. . . . . . . . 395,000 1,016,000 351,000
-------------------------------------------
Projected benefit obligation
at end of year. . . . . . .$(10,850,000) $(10,100,000) $ (9,672,000)
-------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year . . . . .$ 10,101,000 $ 11,704,000 $ 10,659,000
Actual return (loss)
on plan assets. . . . . . . (512,000) (587,000) 1,396,000
Employer contributions . . . 471,000 -0- -0-
Benefits paid. . . . . . . . (395,000) (1,016,000) (351,000)
-------------------------------------------
Fair value of plan assets
at end of year. . . . . . .$ 9,665,000 $ 10,101,000 $ 11,704,000
-------------------------------------------
Funded status . . . . . . . .$ (1,185,000) $ 1,000 $ 2,032,000
Unrecognized net gain
subsequent to transition. . 1,207,000 (103,000) (2,006,000)
Unamortized prior service cost (122,000) (156,000) (190,000)
-------------------------------------------
Accrued Liability . . . . . .$ (100,000) $ (258,000) $ (164,000)
-------------------------------------------
158
Notes to Consolidated Financial Statements (Continued)
Net Periodic Pension Cost consisted of the following:
Years ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------
Service cost. . . . . . . . . $ 531,000 $ 474,000 $ 408,000
Interest cost on projected
benefit obligation . . . . . 636,000 571,000 553,000
Expected return on plan assets (819,000) (873,000) (838,000)
Amortization of transition
net asset. . . . . . . . . . -0- -0- (25,000)
Amortization of unrecognized
prior service liability. . . (35,000) (35,000) (35,000)
Recognized actuarial
(gain) or loss . . . . . . . -0- (42,000) (30,000)
-------------------------------------------
Net periodic pension cost . . $ 313,000 $ 95,000 $ 33,000
-------------------------------------------
The principal actuarial assumptions used follows:
Weighted average discount rate 6.00% 6.00% 5.95%
-------------------------------------------
Expected long-term rate of
return on plan assets. . . . 7.88% 8.00% 8.00%
-------------------------------------------
Assumed rate of future
compensation increases . . . 5.00% 5.25% 5.00%
-------------------------------------------
END PUBLISHED PAGE 21
159
Notes to Consolidated Financial Statements (Continued)
(17) STOCK OPTION PLAN:
The Corporation sponsors four nonqualified incentive stock option agreements
and two qualified stock option plans. In 2001, the Corporation entered into
one nonqualified incentive stock option agreement. Under the nonqualified
incentive stock option agreements, 10,000 shares were granted in 2001. The
incentive stock options must be exercised within 10 years from grant date and
with 100% vesting from grant date.
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
stock options in the financial statements. There were no stock options
granted or available for granting under any of the Corporation's qualified
incentive stock option plans during 2001, 2000 and 1999. SFAS No. 123,
"Stock-Based Compensation," allows a company to recognize stock-based
compensation using a fair-value based method of accounting if it so elects.
The Corporation has elected not to adopt the recognition provisions of SFAS
No. 123.
The Corporation's shareholders approved qualified 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 were 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 under the qualified
stock option plans during the three year period ended December 31, 2001.
All stock option shares granted are vested. Stock options exercised
under qualified plans were 9,431, 1,324 and 4,586 shares in 2001, 2000 and
1999, respectively.
An analysis of the qualified incentive stock option plans as of December
31, 2001 follows:
Incentive Stock Option Plan Year 1985 1982
----------------------------------------------------------------
Options outstanding:
Total. . . . . . . . . . . . . . . . . .12,299 -0-
Vested . . . . . . . . . . . . . . . . .12,299 -0-
Options available
for granting . . . . . . . . . . . . . . -0- -0-
Exercise price . . . . . . . . . . . . . .$18.84 $14.07
---------------------
160
Notes to Consolidated Financial Statements (Continued)
QUALIFIED AND NONQUALIFIED INCENTIVE STOCK OPTION PLANS
2001 2000 1999
--------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------------------------------------
Outstanding at
beginning of
year. . . . . . 44,158 $22.63 32,207 $21.37 26,793 $17.79
Granted. . . . . 10,000 21.55 12,500 26.80 10,000 30.00
------ ------ ------
Exercised. . . . (9,431) 14.07 (1,324) 18.01 (4,586) 19.26
Stock Dividend . 879 19.33 775 22.63 0 0 00
Outstanding at end
of year . . . . 45,606 23.73 44,158 22.63 32,207 21.37
========================================================
Exercisable at end
of year . . . . 45,606 23.73 44,158 22.63 32,207 21.37
========================================================
Exercise prices for qualified and nonqualified options outstanding as of
December 31, 2001, ranged from $18.84 to $28.84. The weighted average
remaining contractual life of the nonqualified incentive stock option
agreement is 9.1 years. The weighted average remaining contractual life
of the 1982 and 1985 incentive stock option plans are 0 and 2 years,
respectively.
The fair value of each option granted is estimated on the date of grant
using a Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2001: risk-free interest rate of
5.03%, dividend yield of 4.80%, volatility factors of the expected market
price of LNB Bancorp, Inc.'s common stock of 38.4%; and a weighted average
expected option life of 10 years. Weighted average fair value of options
granted during 2001 was $6.04.
The fair value of each option granted in 2000 is estimated on the date
of grant using a Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 2000: risk-free interest
rate of 5.46% AND 6.69%, dividend yield of 4.00%, volatility factors of the
expected market price of LNB Bancorp, Inc.'s common stock of 26.20%; and
a weighted average expected option life of 10 years. Weighted average
fair value of options granted during 2000 was $4.91 AND $2.87.
Had compensation cost for the Corporation's stock-based compensation
plans been determined consistent with SFAS No. 123, net income and net
income per share would have been as summarized below. Additionally, no
161
Notes to Consolidated Financial Statements (Continued)
stock-based compensation, as defined by the provisions of Statement of
Financial Accounting Standards No. 123, "Stock-Based Compensation" was
generated under any of the Corporation's stock-based benefit plans
during 1999.
Years ended December 31, 2001 2000
- ---------------------------------------------------------
Pro forma net income. . . . . . . $8,525,000 $8,400,000
Pro forma net income per share: .
Basic . . . . . . . . . . . . . $ 1.98 $ 1.96
Diluted . . . . . . . . . . . . $ 1.98 $ 1.95
------------------------
END PUBLISHED PAGE 22
162
Notes to Consolidated Financial Statements (Continued)
(18) 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 $0,$450,000, and $400,000 in
2001, 2000, and 1999, respectively. At December 31, 2001 there were 291
participants in the plan. Under the terms of the ESOP agreement, Corporation
common stock is to be the plan's primary investment.
Transactions by the ESOP, relating to activity in the Corporation's
common stock, are summarized below:
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------
Cash dividend income . . . .$ 172,000 $ 148,000 $ 124,000
Stock dividend shares. . . . 3,287 2,859 -0-
Shares purchased . . . . . . 22,953 17,337 7,912
Shares distributed . . . . . 2,690 6,298 990
Year end holdings:
Shares . . . . . . . . . . 176,484 152,934 139,036
Market value . . . . . . .$3,816,000 $3,336,000 $3,059,000
As a percentage of
total plan assets. . . . 97.4% 91.7% 89.0%
- ------------------------------------------------------------------------
(19) 401(K) PROFIT SHARING PLAN AND TRUST:
The Bank adopted the Lorain National Bank 401(k) Profit Sharing Plan and
Trust(the Plan) effective January 1, 2001. The Plan amended and restated the
Lorain National Bank Stock Purchase Plan. The Plan allows for the purchase
of up to 80,000 shares of LNB Bancorp, Inc. treasury shares. During 2001,
the Plan purchased LNB Bancorp, Inc. common stock on the open market.
Under provisions of the Plan, a participant can contribute from 1 percent to
6 percent of their compensation to the Plan. The Bank then makes a
contribution equal to 50 percent of each employee's contribution. The Plan
uses the contributions of the Corporation to purchase LNB Bancorp, Inc.
common stock. Effective January 1, 2001, the Plan permits the investment of
plan assets, contributed by employees, among different funds.
The Bank's 50% matching contributions are expensed in the year in which
the associated participant contributions are made and totaled $202,000,
$137,000 and $134,000 in 2001, 2000 and 1999, respectively. At December
31, 2001, there were 274 participants in the Plan.
163
Notes to Consolidated Financial Statements (Continued)
Transactions by the Plan relating to the activity in the Corporation's common
stock are summarized below:
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------
Cash dividend income. . . . $ 131,000 $ 120,000 $ 112,000
Stock dividend shares . . . 2,509 2,238 -0-
Shares purchased. . . . . . 12,543 19,504 16,046
Shares rolled over. . . . . 237
Shares distributed/sold . . 10,250 23,463 6,979
Year end holdings:
Shares. . . . . . . . . . 129,678 124,639 126,360
Market value. . . . . . . $2,804,000 $2,719,000 $2,780,000
As a percentage of
total plan assets . . . 84.9% 99.2% 94.4%
- ------------------------------------------------------------------------
(20) 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.
The Bank's maximum potential obligation to extend credit for financial
164
Notes to Consolidated Financial Statements (Continued)
instruments with off-balance sheet risk follows:
December 31, 2001 2000
- ----------------------------------------------------------------------
Commitments to extend credit. . . . $105,114,000 $ 91,054,000
Credit card arrangements. . . . . . 18,718,000 16,635,000
Standby letters of credit . . . . . 1,353,000 1,356,000
----------------------------------
Total. . . . . . . . . . . . . . $125,185,000 $109,045,000
----------------------------------
Most of the Bank's business activity is with customers located within
the Bank's defined market area. As of December 31, 2001, 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 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.
END PUBLISHED PAGE 23
165
Notes to Consolidated Financial Statements (Continued)
(21) 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 SHORT-TERM
INVESTMENTS 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.
166
Notes to Consolidated Financial Statements (Continued)
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 Investment and Trust Services Division that contributes net
fee income annually. The Investment and Trust Services 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, 2001 and 2000 are summarized as follows:
December 31, 2001 2000
- ------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- ------------------------------------------------------------------------
Financial assets:
Cash and due from
banks and Federal
funds sold and
short-term
investments $ 31,505,000 $ 31,505,000 $ 25,136,000 $ 25,316,000
============ ============ ============ ============
Securities . . . .$138,401,000 $138,695,000 $127,101,000 $126,652,000
============ ============ ============ ============
Portfolio loans,
net . . . . . . .$462,730,000 $464,058,000 $436,882,000 $441,250,000
============ ============ ============ ============
167
Notes to Consolidated Financial Statements (Continued)
Loans available
for sale, net . .$ 8,868,000 $ 8,868,000 $ 9,008,000 $ 9,008,000
============ ============ ============ ============
Accrued interest,
accounts receivable
and other financial
assets. . . . . .$ 7,013,000 $ 7,013,000 $ 7,303,000 $ 7,303,000
============ ============ ============ ============
Financial liabilities:
Deposits:
Demand deposits,
savings accounts
and money market
deposits. . . . .$340,994,000 $340,994,000 $302,711,000 $302,711,000
Certificates of
deposit . . . . . 177,273,000 178,774,000 193,380,000 193,382,000
------------ ------------ ------------ ------------
Total deposits. . .$518,267,000 $519,768,000 $496,091,000 $496,093,000
============ ============ ============ ============
Securities sold
under repurchase
agreements and
other short-term
borrowings . . . .$ 48,170,000 $ 48,170,000 $ 39,391,000 $ 39,391,000
============ ============ ============ ============
Federal Home Loan
Bank advances. . .$ 30,345,000 $ 30,981,000 $ 24,345,000 $ 24,235,000
============ ============ ============ ============
Accrued interest
payable and
other financial
liabilities. . . .$ 4,666,000 $ 4,666,000 $ 5,054,000 $ 5,054,000
============ ============ ============ ============
END PUBLISHED PAGE 24
168
Report of Management
To The Shareholders of LNB Bancorp, Inc.
January 22, 2002
The Management of LNB Bancorp, Inc. is responsible for the preparation,
integrity, and fair representation of its financial statements presented
in this annual report. The financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America and, as such, include amounts, some of which are based on
judgments and estimates of Management.
LNB Bancorp, Inc. maintains a system of internal control over financial
reporting designed to produce reliable financial statements. The system
contains self-monitoring mechanisms, and compliance is tested and
evaluated through an extensive program of internal audits. Actions are
taken to correct potential deficiencies as they are identified. Any
internal control system has inherent limitations, including the
possibility that controls can be circumvented or overridden. Further,
because of changes in conditions, internal control system effectiveness
may vary over time.
Management assessed the Corporation's internal control over financial
reporting presented in conformity with accounting principles generally
accepted in the United States of America as of December 31, 2001. Based on
this assessment, Management believes that, as of December 31, 2001, the
Corporation maintained effective internal control over financial reporting
presented in conformity with accounting principles generally accepted in the
United States of America.
The Audit Committee of the Board of Directors is composed entirely of
outside directors who are independent of Management and meets
periodically with Management, internal auditors and independent auditors
to review audit plans and the results and recommendations of their
audits. The Audit Committee selects the independent auditor. KPMG LLP,
independent auditors, and the internal auditors have direct and
confidential access to the Audit Committee at all times to discuss the
results of their examinations.
The accounting firm of KPMG LLP has been engaged by LNB Bancorp, Inc. to
audit its financial statements and their report follows.
/s/ Gary C, Smith /s/ Gregory D. Friedman
Gary C. Smith Gregory D. Friedman, CPA
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
168
Report of Independent Auditors
The Board of Directors
LNB Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of LNB
Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000, 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,
2001. 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 auditing standards generally
accepted in the United States of America. 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 subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2001, in conformity with
accounting principles, generally accepted in the United States of
America.
/s/ KPMG LLP
Cleveland, Ohio
January 22, 2002
END PUBLISHED PAGE 25
170
Selected Unaudited Quarterly Financial Data
Consolidated unaudited quarterly financial and per share data for the
years ended December 31, 2001, 2000 and 1998 are summarized as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Totals
- ------------------------------------------------------------------------
Total 2001$11,724,000 $11,485,000 $11,081,000 $10,811,000 $45,101,000
interest 2000 10,939,000 11,521,000 11,992,000 12,193,000 46,645,000
income 1999 9,778,000 10,281,000 10,711,000 10,847,000 41,617,000
- ------------------------------------------------------------------------
Total 2001 4,903,000 4,432,000 4,194,000 3,469,000 16,998,000
interest 2000 4,384,000 4,549,000 5,038,000 5,238,000 19,209,000
expense 1999 3,575,000 3,739,000 4,076,000 4,203,000 15,593,000
- ------------------------------------------------------------------------
Net 2001 6,821,000 7,053,000 6,887,000 7,342,000 28,103,000
interest 2000 6,555,000 6,972,000 6,954,000 6,955,000 27,436,000
income 1999 6,203,000 6,542,000 6,635,000 6,644,000 26,024,000
- ------------------------------------------------------------------------
Provision2001 450,000 450,000 450,000 850,000 2,200,000
for loan 2000 300,000 300,000 650,000 450,000 1,700,000
losses 1999 200,000 500,000 550,000 750,000 2,000,000
- ------------------------------------------------------------------------
Net 2001 6,371,000 6,603,000 6,437,000 6,492,000 25,903,000
interest 2000 6,255,000 6,672,000 6,304,000 6,505,000 25,736,000
income 1999 6,003,000 6,042,000 6,085,000 5,894,000 24,024,000
after provision for loan losses
- ------------------------------------------------------------------------
Non- 2001 2,043,000 2,383,000 2,537,000 2,485,000 9,448,000
interest 2000 1,933,000 2,112,000 2,124,000 2,201,000 8,370,000
income 1999 1,750,000 2,261,000 2,052,000 2,035,000 8,098,000
- ------------------------------------------------------------------------
Non- 2001 5,399,000 5,749,000 5,637,000 5,953,000 22,738,000
interest 2000 5,200,000 5,540,000 5,137,000 5,399,000 21,276,000
expenses 1999 5,008,000 5,298,000 5,099,000 5,234,000 20,639,000
- ------------------------------------------------------------------------
Income 2001 1,009,000 1,082,000 1,145,000 812,000 4,048,000
taxes 2000 1,008,000 1,124,000 1,130,000 1,138,000 4,400,000
1999 912,000 1,042,000 1,047,000 841,000 3,842,000
- ------------------------------------------------------------------------
Net 2001 $2,006,000 $2,155,000 $2,193,000 $2,211,000 $8,565,000
income 2000 1,980,000 2,120,000 2,161,000 2,169,000 8,430,000
1999 1,833,000 1,963,000 1,991,000 1,854,000 7,641,000
- ------------------------------------------------------------------------
Basic 2001 $ .47 $ .50 $ .51 $ .51 $1.99
earnings 2000 .47 .48 .50 .51 1.96
per 1999 .42 .46 .46 .44 1.78
share(1)
- ------------------------------------------------------------------------
171
Selected Unaudited Quarterly Financial Data(Continued)
Diluted 2001 $ .47 $ .50 $ .51 $ .51 $1.99
earnings 2000 .47 .48 .50 .51 1.96
per 1999 .42 .46 .46 .44 1.78
share(1)
- ------------------------------------------------------------------------
Dividends2001 $ .25 $ .25 $ .25 $ .27 $1.02
declared 2000 .23 .24 .25 .26 .98
per share1999 .21 .21 .22 .24 .88
(2)
- ------------------------------------------------------------------------
(1) Basic and Diluted earnings per share is computed using the weighted
average number of shares outstanding during each quarter and each year.
(2) All share and per share data have been adjusted to reflect the 2
percent stock dividend in 2001 and 2000.
LNB BANCORP, INC.
TOTAL ASSETS millions of dollars
(A Total Assets graph follows in printed version with assets on the
y-axis and years 1997 through 2001 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 1997 through 2001 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 millions of dollars
(A Net Income graph follows in printed version with income on the y-axis
and years 1997 through 2001 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 Net Income
Year Millions of Dollars Millions of Dollars Millions of Dollars
2001 $664.5 $471.6 $8,565
2000 $622.1 $445.9 $8,430
1999 $599.6 $419.5 $7,641
1998 $541.7 $369.9 $6,818
1997 $490.7 $330.1 $6,482
END PUBLISHED PAGE 26
172
Five Year Consolidated Financial Summary
CONDENSED STATEMENTS OF INCOME AND CASH DIVIDENDS DECLARED - YEARS ENDED
DECEMBER 31,
2001 2000 1999
- ------------------------------------------------------------------------
Total interest income. . . . . $45,101,000 $46,645,000 $41,617,000
Total interest expense . . . . 16,998,000 19,209,000 15,593,000
------------------------------------------
Net interest income . . . . . 28,103,000 27,436,000 26,024,000
Provision for loan losses. . . 2,200,000 1,700,000 2,000,000
Other income . . . . . . . . . 9,122,000 8,369,000 7,936,000
Gains on sales of assets . . . 326,000 1,000 162,000
Other expenses . . . . . . . . 22,738,000 21,276,000 20,639,000
------------------------------------------
Income before income taxes . . 12,613,000 12,830,000 11,483,000
Income taxes . . . . . . . . . 4,048,000 4,400,000 3,842,000
------------------------------------------
Net income . . . . . . . . . . $ 8,565,000 $ 8,430,000 $ 7,641,000
------------------------------------------
Cash dividends declared. . . . $ 4,365,000 $ 4,191,000 $ 3,794,000
------------------------------------------
CONDENSED BALANCE SHEETS - DECEMBER 31,
2001 2000 1999
- ------------------------------------------------------------------------
Cash and cash equivalents . .$ 31,505,000 $ 25,136,000 $ 37,343,000
Securities . . . . . . . . . . 138,401,000 127,101,000 123,319,000
Net loans. . . . . . . . . . . 471,598,000 445,890,000 414,849,000
Other assets . . . . . . . . . 23,022,000 23,983,000 24,100,000
------------------------------------------
Total assets . . . . . . . . .$664,526,000 $622,110,000 $599,611,000
------------------------------------------
Total deposits . . . . . . . .$518,267,000 $496,091,000 $456,831,000
Other borrowings . . . . . . . 78,515,000 63,736,000 86,467,000
Other liabilities. . . . . . . 5,606,000 5,758,000 5,260,000
------------------------------------------
Total liabilities. . . . . . . 602,388,000 565,585,000 548,558,000
------------------------------------------
Total shareholders' equity . . 62,138,000 56,525,000 51,053,000
------------------------------------------
Total liabilities
and shareholders' equity. . .$664,526,000 $622,110,000 $599,611,000
------------------------------------------
PER SHARE DATA
2001 2000 1999
- ------------------------------------------------------------------------
Basic earnings(1). . . . . . . $ 1.99 $ 1.96 $ 1.78
Diluted earnings(1). . . . . . $ 1.99 $ 1.96 $ 1.78
Cash dividends declared(2). . $ 1.02 $ .98 $ .88
Book value per share(2). . . . $14.39 $13.16 $11.89
173
Five Year Consolidated Financial Summary(Continued)
Shares outstanding at end
of year(2). . . . . . . . . . 4,317,558 4,295,268 4,293,898
------------------------------------------
FINANCIAL RATIOS
2001 2000 1999
- ------------------------------------------------------------------------
Return on average
assets (ROAA)(4) . . . . . . 1.35% 1.39% 1.33%
Return on average
shareholders' equity(ROAE)(4) 14.36 15.83 15.29
Net interest margin(3) . . . . 4.72 4.85 4.88
Efficiency ratio(3). . . . . . 60.96 59.42 60.61
Loans to deposits. . . . . . . 92.13 90.94 91.83
Dividend Payout. . . . . . . . 50.96 49.72 49.65
Shareholders' equity to assets(4) 9.39 8.77 8.67
------------------------------------------
ASSET QUALITY RATIOS
2001 2000 1999
- ------------------------------------------------------------------------
Net charge-offs to year
end loans. . . . . . . . . . .33% .25% .19%
Reserve for loan losses to
total loans . . . . . . . . . 1.23 1.16 1.11
Non-performing loans to total
loans . . . . . . . . . . . . .30 .51 .33
Reserve for loan losses to
nonperforming loans. . . . . 409.30 226.60 348.50
------------------------------------------
CONDENSED STATEMENTS OF INCOME AND CASH DIVIDEND DECLARED - YEARS ENDED
DECEMBER 31,
1998 1997
- ----------------------------------------------------------
Total interest income . . . . $38,178,000 $35,156,000
Total interest expense . . . . 13,999,000 12,990,000
---------------------------
Net interest income . . . . . 24,179,000 22,166,000
Provision for loan losses. . . 2,275,000 750,000
Other income . . . . . . . . . 6,997,000 5,803,000
Gains on sales of assets . . . 655,000 -0-
Other expenses . . . . . . . . 18,861,000 17,387,000
---------------------------
Income before income taxes . . 10,245,000 9,832,000
Income taxes . . . . . . . . . 3,427,000 3,350,000
---------------------------
Net income . . . . . . . . . . $ 6,818,000 $ 6,482,000
---------------------------
Cash dividends declared. . . . $ 3,545,000 $ 2,934,000
---------------------------
174
Five Year Consolidated Financial Summary(Continued)
CONDENSED BALANCE SHEETS - DECEMBER 31,
1998 1997
- ----------------------------------------------------------
Cash and cash equivalents. . .$ 32,801,000 $ 24,407,000
Securities . . . . . . . . . . 118,519,000 115,374,000
Net loans. . . . . . . . . . . 366,383,000 326,863,000
Other assets . . . . . . . . . 24,043,000 24,084,000
----------------------------
Total assets . . . . . . . . .$541,746,000 $490,728,000
----------------------------
Total deposits . . . . . . . .$443,848,000 $410,655,000
Other borrowings . . . . . . . 45,005,000 30,995,000
Other liabilities. . . . . . . 4,217,000 4,093,000
----------------------------
Total liabilities. . . . . . . 493,070,000 445,743,000
----------------------------
Total shareholders' equity . . 48,676,000 44,985,000
----------------------------
Total liabilities
and shareholders' equity. . .$541,746,000 $490,728,000
----------------------------
PER SHARE DATA
1998 1997
- ----------------------------------------------------------
Basic earnings(1). . . . . . . $ 1.59 $ 1.51
Diluted earnings(1). . . . . . $ 1.59 $ 1.51
Cash dividends declared(2) . . $ .83 $ .68
Book value per share(2). . . . $11.35 $10.48
Shares outstanding at end
of year(2). . . . . . . . . . 4,289,127 4,291,004
- -----------------------------------------------------------
FINANCIAL RATIOS
1998 1997
- -----------------------------------------------------------
Return on average
assets(ROAA)(4). . . . . . . 1.34% 1.41%
Return on average
shareholders' equity(ROAE)(4) 14.46 14.51
Net interest margin(3) . . . . 5.17 5.20
Efficiency ratio(3). . . . . . 60.33 62.01
Loans to deposits. . . . . . . 83.33 80.61
Dividend Payout. . . . . . . . 52.00 45.26
Shareholders' equity to assets(4) 9.27 9.70
- -----------------------------------------------------------
175
Five Year Consolidated Financial Summary(Continued)
ASSET QUALITY RATIOS
1998 1997
- ----------------------------------------------------------
Net charge-offs to year
end loans . . . . . . . . . . .99% .22%
Reserve for loan losses to
total loans . . . . . . . . . .94 1.26
Non-performing loans to
total loans . . . . . . . . . .35 .27
Reserve for loan losses to
nonperforming loans . . . . . 140.10 809.30
- -----------------------------------------------------------
(1) Basic and diluted earnings per share is computed using the weighted
average number of shares outstanding during each year.
(2) All share and per share data has been adjusted to reflect the 2
percent stock dividend in 2001, 2000 and 1997.
(3) Tax Equivalent Basis.
(4) Ratios based on average annual balances.
END PUBLISHED PAGE 27
176
Glossary of Key Terms
ALLOWANCE FOR LOAN LOSSES - Valuation reserve representing the amount
considered by management to be adequate to cover estimated losses inherent in
the loan portfolio.
BASIS POINT - The equivalent of one-hundredth of one percent (0.01). One
hundred basis points equal one percent. This unit is generally used to
measure movements in interest yields and rates.
BOOK VALUE PER SHARE - A ratio determined by dividing shareholders' equity at
the end of a period by the number of common shares outstanding at the end of
that period.
CHARGE-OFFS - The amount charged against the allowance for loan losses to
reduce specific loans to their collectible amount.
CLASSIFIED LOAN - A loan that has caused management to have serious doubts
about the borrower's ability to comply with present repayment terms. In
compliance with the standards established by the Office of the Comptroller of
the Currency (OCC), these loans are classified as substandard, doubtful and
loss depending on the severity of the loan's deterioration.
COMMERCIAL AND STANDBY LETTERS OF CREDIT - Commercial letters of credit are
issued or confirmed by an entity to ensure the payment of its customers'
payables and receivables. Standby letters of credit are issued by an entity
to ensure its customers' performance in dealing with others.
COMMITMENT TO EXTEND CREDIT - Agreements to make or acquire a loan or lease
as long as agreed-upon terms (e.g., expiration date, covenants, or notice)
are met. Generally these commitments have fixed expiration dates or other
termination clauses and may require payment of a fee.
COMMON STOCK - A security that represents ownership In a company but gives no
legal claim to a definite dividend or to a return of capital.
CORE DEPOSITS - Core deposits consist of all interest-bearing and
noninterest-bearing deposits, except certificates of deposit over $100,000.
They include checking interest deposits, money market deposit accounts, time
and other savings, plus demand deposits.
DILUTED EARNINGS PER SHARE - Net income, divided by average shares
outstanding plus the number of shares that would be outstanding if all
dilutive common shares had been issued. Dilutive common shares, for example,
would be outstanding options where the average stock price exceeds the price
at which the option was granted.
DIVIDEND PAYOUT RATIO - Cash dividends per share paid as a percent of net
income per share.
177
EARNING ASSETS - Assets that generate interest or dividend income or yield-
related fee income, such as loans and investment securities.
BASIC EARNINGS PER SHARE (EPS) - The net earnings of a corporation over a
period of time, divided by the average number of shares of its common stock
outstanding during that same period. A common method of expressing a
corporation's profitability.
EFFICIENCY RATIOS - Net Interest Income (FTE) plus Noninterest Income
(excluding non-recurring income) divided by Noninterest Expense (excluding
non-recurring expenses).
FDIC - The Federal Deposit Insurance Corporation's mission is to maintain the
stability of and public confidence in the nation's financial system. To
achieve this goal, the FDIC has insured Lorain National Bank's and the other
national bank deposits to certain levels and promotes safe and sound banking
practices since 1933.
FEDERAL FUNDS SOLD/PURCHASED - Excess balances of depository institutions
which are loaned to each other, generally on an overnight basis.
FRB - The Federal Reserve System is comprised of twelve regional Reserve
Banks along with the Board of Governors in Washington D.C. As the U.S.
central bank, the Federal Reserve System formulates monetary policy,
regulates financial and bank holding companies and provides banking services
to financial institutions and the U.S. government. LNB Bancorp, Inc. and
nonbanking subsidiaries Charleston Insurance Agency, Inc. and Charleston
Title Agency, LLC are regulated under the Federal Reserve Bank of Cleveland
(Fourth Region).
FULLY TAXABLE - Equivalent Income (FTE) Income which has been adjusted by
increasing tax-exempt income to a level that would yield the same after-tax
income had that income been subject to taxation.
INTEREST RATE SENSITIVITY - The relationship of changes in interest income
and interest expense to fluctuations in interest rates over a defined period
of time.
INTEREST SENSITIVITY GAP - The difference between interest-rate sensitive
assets and interest-rate sensitive liabilities over a designated time period.
A net asset exists when interest-rate sensitive assets exceed interest-rate
sensitive liabilities. A net liability position exists when liabilities
exceed assets.
LEVERAGE RATIO - Tier 1 capital divided by quarterly average assets excluding
any adjustments for available for sale securities unrealized gains/(losses),
goodwill and certain other intangible assets.
178
LIQUIDITY - The ability of a corporation to generate adequate funds to meet
its cash flow requirements. It is measured by the ability to quickly convert
assets into cash with minimal exposure to interest rate risk, by the size and
stability of the core deposit base, and by additional borrowing capacity
within the money markets.
MARKET CAPITALIZATION - Market value of a firm computed by multiplying the
number of shares outstanding by the current stock price.
MORTGAGE - A legal document that pledges property to a lender as security for
the repayment of the loan. The term also is used to refer to the loan itself.
NET INTEREST INCOME (NII) - Interest income less interest expense.
NET INTEREST MARGIN - A measurement of how effectively the bank utilizes its
earning assets in relationship to the interest cost of funding them. It is
computed by dividing the fully taxable-equivalent net interest income by
average earning assets.
NET INTEREST SPREAD - The difference between the average yield earned on
earning assets on a fully taxable equivalent basis and the average rate paid
for interest-bearing liabilities.
NONACCRUAL LOANS - Loans on which interest accruals have been discontinued
due to the borrower's financial difficulties. Interest income on these loans
is reported on a cash basis as it is collected after recovery of principal.
NONPERFORMING ASSETS - Interest earnings assets on which interest income is
not being accrued, restructured loans on which interest rates or terms of
repayment have been materially revised, real estate properties acquired
through foreclosure, and repossessed assets.
OCC - The Office of the Comptroller of the Currency charters, regulates, and
supervises Lorain National Bank and national banks to ensure a safe, sound,
and competitive banking system that support the citizens, communities, and
economy of the United States.
PRICE/EARNINGS RATIO - The relationship of the market price of a share of
common stock to the diluted earnings per share of the stock., expressed as a
multiple.
PROVISION FOR LOAN LOSSES - The periodic charge to earnings for potential
losses in the loan portfolio.
RECOVERIES - The amount added to the allowance for loan losses when funds are
received on a loan which was previously charged off.
REPURCHASE AGREEMENT - A method of short-term financing where one party
agrees to buy back, at a future date (generally overnight) and an agreed-upon
179
price, a security it sells to another party.
RESTRUCTURED LOANS - Loans where the institution, for economic or legal
reasons related to the debtor's financial difficulties, grants a concession
to the debtor that it would not otherwise consider.
RETURN ON AVERAGE ASSETS (ROAA) - A measure of profitability that indicates
how effectively an institution utilized its assets. It is calculated by
dividing annualized net income by total average assets.
RETURN ON AVERAGE EQUITY (ROAE) - A measure of profitability that indicates
what an institution earned on its shareholders' investment. ROAE is
calculated by dividing net income by total average shareholders' equity.
REVENUE - The sum of net interest income and noninterest income. Securities
gains/losses are included in revenue.
RISK ADJUSTED ASSETS - A regulatory risk-based calculation that takes into
account the broad differences in risks among a banking organizations' assets
and off-balance sheet instruments.
SECURITY - A financial instrument showing ownership of equity (such as
common stock, indebtedness (such as debt security) a group of mortgages (such
as MBS), or potential ownership (such as an option).
SHAREHOLDER RETURN, ALSO CALLED TOTAL RETURN - The sum of dividend income and
price appreciation of an equity security for a given period of time divided
by the price of the security at the beginning of the period.
STOCKHOLDERS' EQUITY - the sum of proceeds from the issuance of stock and
retained earnings less amounts paid to repurchase common or preferred shares.
TIER 1 CAPITAL RATIO - Ratio consisting of shareholders' equity before any
adjustments for available for sale securities unrealized gains/(losses),
reduced by goodwill, certain other intangible assets and the disallowable
portion of mortgage servicing rights divided by risk-adjusted assets.
TOTAL CAPITAL RATIO - Tier 1 capital plus the allowable portion of the
allowance for loan losses and qualifying subordinated debt divided by risk-
adjusted assets.
END PUBLISHED PAGE 28
180
Management's Discussion and Analysis
INTRODUCTION:
The following is Management's discussion and analysis of the financial
condition and results of operations of LNB Bancorp, Inc. and its
subsidiaries. It is intended to amplify certain financial information
regarding LNB Bancorp, Inc.(the Corporation) and should be read in
conjunction with the Consolidated Financial Statements, related Notes, and
other financial information and discussions included in the 2001 Annual
Report to Shareholders.
FORWARD-LOOKING STATEMENTS:
Certain statements contained herein are not based on historical facts
and are "forward-looking statements" within the meaning of Section 21A
of the Securities Exchange Act of 1934. Forward-looking statements
which are based on various assumptions (some of which are beyond the
Corporation's control), may be identified by reference to a future
period or periods, or by the use of forward-looking terminology, such as
"may," "will," "believe," "expect," "estimate," "anticipate,"
"continue," or similar terms or variations on those terms, or the
negative of these terms. Actual results could differ materially from
those set forth in forward-looking statements due to a variety of
factors, including, but not limited to, those related to the economic
environment, particularly in the market areas in which the company
operates, competitive products and pricing, fiscal and monetary policies
of the U. S. Government, changes in government regulations affecting
financial institutions, including regulatory fees and capital
requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
The Corporation does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of
such statements.
EARNINGS SUMMARY:
LNB Bancorp, Inc. posted its twentieth consecutive year of increased
earnings. LNB Bancorp, Inc.'s consolidated 2001 net income reached a
record high of $8,565,000, compared to $8,430,000 in 2000 and $7,614,000
in 1999. Net income for 2001, 2000 and 1999 was favorably affected by
an increase in net interest income and increased noninterest income
offset in part by higher noninterest expenses. Net income for 2001 and 1999
was unfavorably affected by increased loan loss provisions.
Basic earnings per share totaled $1.99 for 2001 compared to $1.96 for
2000 and $1.78 for 1999. Diluted earnings per share totaled $1.99 for
181
2001, compared to $1.96 for 2000 and $1.78 for 1999. Prior period
earnings per share data has been restated to reflect the 2% stock
dividend of July 2, 2001 and July 1, 2000. The return on average assets, a
measure of profitability, remained relatively stable at 1.35% in 2001, 1.39%
in 2000 and 1.33% in 1999. Return on average shareholders' equity measures
how profitable the shareholders' invested capital is employed. Return on
average equity decreased to 14.36% for 2001 compared to 15.83% and 15.29% in
2000 and 1999, respectively.
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, noninterest-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 page 31. 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 2001 increased by $634,000 to $28,156,000 in
2000 from $27,522,000 in 2000. This increase was affected by increases in the
volume of interest-bearing assets and liabilities net of decreases in market
interest rates. The cost of funds decreased tom 3.48% in 2001 from 4.11% in
2000, or a total of 63 basis points. During the same period, the yield on
earning assets decreased 66 basis points to 7.58% in 2001, compared to 8.24%
in 2000, resulting in a decrease in the net interest spread by 3 basis points
in 2001. The increase in net interest income during
BASIC EARNINGS PER SHARE Dollars*
(A Basic Earnings Per Share graph follows in printed version with basic
earnings on the y-axis and years 1997 through 2001 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.)
182
RETURN ON AVERAGE ASSETS percent
(A Return On Average Assets graph follows in printed version with return
percent on the y-axis and years 1997 through 2001 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 1997 through 2001 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
2001 $1.99 1.35% 14.36%
2000 $1.96 1.39% 15.83%
1999 $1.78 1.33% 15.29%
1998 $1.59 1.34% 14.46%
1997 $1.51 1.41% 14.51%
*Adjusted for stock dividends and splits
END PUBLISHED PAGE 29
183
NET INTEREST INCOME (continued):
2001 resulted from increases in the volume of earning assets, which were
greater than the increases in the volume of interest-bearing liabilities,
partially offset by decreases in market rates on interest-bearing liabilities
and decreases in market rates on interest-bearing assets. The increase in
net interest income in 2000 resulted from increases in the volume of earning
assets, which were greater than the increases in the volume of interest-
bearing liabilities, partially offset by increases in market rates on
interest-bearing liabilities which was greater than the increase in market
rates on interest-bearing assets.
Net interest income (FTE) in 2000 increased by $1,406,000 to $27,522,000 in
2000 from $26,116,000 in 1999. This increase was affected by increases in
the volume of interest-bearing assets and liabilities plus increases in
market interest rates. The cost of funds increased to 4.11% in 2000 from
3.53% in 1999, or a total of 58 basis points. During the same period, the
yield on earning assets increased 45 basis points to 8.24% in 2000, compared
to 7.79% in 1999, resulting in a decrease in the net interest spread by 13
basis points in 2000.
The net yield on earning assets in 2001 was 4.72% compared to 4.85% in
2000 and 4.88% in 1999. The decrease in the net yield on earning assets
during 2001 results primarily from increases in volume of loans and
investment securities with market rates lower than in previous years
partially offset by increases in volume of interest-bearing demand accounts
and shot-term borrowings with interest rates lower than in previous years.
This relatively constant yield on earning assets in 2001, 2000 and 1999
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 83.1% and 83.5% in 2001 and 2000, respectively.
Interest and dividends on securities and Federal funds sold, as a
percentage of total interest income, on a fully-tax equivalent basis,
was 16.9% and 16.5% in 2001 and 2000, respectively.
The cost of interest-bearing liabilities in 2001 was $16,998,000
compared to $19,209,000 and $15,584,000 in 2000 and 1999, respectively.
The favorable impact of decreases in rates plus increases in volume
caused interest expense to decrease from 2000 to 2001. The net
unfavorable impact of increases in deposit rates plus increases in
volume caused interest expense to increase from 1999 to 2000. Decreases
in the average rates paid on savings accounts, certificates of deposit,
interest-bearing demand, short-term and long-term borrowings offset in part
the 2001 increase in the cost of interest-bearing liabilities due to volume
184
increases.
Total noninterest income, excluding gains on the sale of securities, grew
9.9% in 2001 driven primarily by a 12.0 percent increase in service charges
on deposit accounts. Total noninterest income in 2001 increased to
$9,448,000 compared to $8,370,000 in 2000 for an increase of $1,078,000.
This increase results from increases from Investment and Trust Services
Division income of $24,000, increases in service charges on deposit
accounts of $379,000, increases in gains on the sale of assets of
$250,000, and increases in other service charges of $252,000. 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 noninterest income, excluding gains on the sale of securities, grew
5.4% in 2000 driven primarily by a 12.4 percent increase in Investment and
Trust Services Division income. Total noninterest income in 2000 increased
to $8,370,000 compared to $8,098,000 in 1999 for an increase of $272,000.
This increase results from increases from Investment and Trust Services
Division income of $260,000, increases in service charges on deposit accounts
of $183,000, decreases in gains on the sale of assets of $161,000 and
increases in other service charges of $6,000. The increase in 2000
Investment and Trust Services Division income results in part by the
realization of increases in the volume of 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.
The Corporation continuously monitors noninterest expenses for greater
efficiency and profitability. The entire staff is geared to mimimizing
increases in expenses and to improve efficiency and productivity at all
levels. The Corporation's efficiency ratio was 60.62% in 1999, 59.42% in
2000 and 60.96% in 2001.
Total noninterest expenses increased 6.9% in 2001 compared to 2000 after a
3.1% increase for 2000 compared to 1999. The 2001 increase in other
expenses resulted from increases in salaries and benefits, supplies and
postage, Ohio Franchise Tax, consulting expenses and loan collection
expenses. The 2000 increase in other expenses resulted from increases in
salaries and benefits, net occupancy expenses, furniture and equipment
expenses, credit card and merchant expenses, and marketing expenses.
The effective tax rate of the Corporation was 32.1%, 34.3%, and 33.5% in
2001, 2000, and 1999, respectively. The decrease in the effective tax
rate in 2001 was primarily due to the increase in tax-exempt interest
income. A detailed analysis of income taxes is presented on page 17.
185
The Corporation's Consolidated Statements of Income reflect the effects
of inflation. During the past three years the general rate of inflation has
been relatively low. 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 unaudited quarterly financial data for 2001, 2000 and 1999 is
presented on page 26. There were significant intra-quarter fluctuations
during the fourth quarter of 2001 from increases in the provision for loan
losses. The increase in the provision for loan losses in the fourth quarter
of 2001 resulted from anticipated loan charge-offs and the Bank's desire to
rebuild the level of the reserve for loan losses. The 2001 second and third
quarters noninterest income reflects gains on sales of securities. There
were significant intra-quarter fluctuations during the third and fourth
quarters of 2000 and 1999 from increases in the provision for loan losses.
The increase in the provision for loan losses in the third and fourth
quarters of 2000 resulted from anticipated charge-offs of indirect automobile
lending and the Bank's desire to rebuild the level of the reserve for loan
losses. The 1999 second quarter increase in other income reflects gains on
sales of buildings and equipment of $162,000.
END PUBLISHED PAGE 30
176
CONDENSED CONSOLIDATED AVERAGE BALANCE SHEETS
Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax
Equivalent (FTE) Basis
December 31, 2001
- ------------------------------------------------------------------------
(Dollars in Thousands) Balance Interest Rate
ASSETS:
Securities. . . . . . . . . . . .$121,179 $ 6,948 5.73%
Securities-tax exempt . . . . . . 9,691 498 5.14%
Federal funds sold and
short-term investments . . . . . 3,811 146 3.83%
Commercial loans. . . . . . . . . 202,642 16,487 8.14%
Commercial loans-tax exempt . . . 65 6 9.23%
Mortgage loans. . . . . . . . . . 156,724 12,298 7.85%
Consumer loans. . . . . . . . . . 101,326 8,771 8.66%
---------------------------------------
TOTAL EARNING ASSETS . . . . . . 595,438 45,154 7.58%
---------------------------------------
Reserve for loan losses . . . . . (5,437)
Cash and due from banks . . . . . 21,923
Other assets. . . . . . . . . . . 22,997
---------------------------------------
TOTAL ASSETS . . . . . . . . . .$635,011
---------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Certificates of deposit . . . . .$195,656 $ 9,800 5.01%
Savings deposits. . . . . . . . . 93,272 1,260 1.35%
Interest-bearing demand . . . . . 141,134 3,558 2.52%
Short-term borrowings . . . . . . 57,066 2,294 4.02%
Long-term borrowings. . . . . . . 1,846 86 4.66%
---------------------------------------
TOTAL INTEREST-
BEARING LIABILITIES.. . . . . 488,974 16,998 3.48%
---------------------------------------
Noninterest-bearing deposits. . . 81,097
Other liabilities . . . . . . . . 5,311
Shareholders' equity. . . . . . . 59,629
---------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY. . . . . .$635,011
---------------------------------------
NET INTEREST INCOME (FTE) . . . . $28,156 4.73
Taxable equivalent adjustment (53) (.01)
---------------------------------------
NET INTEREST INCOME PER
FINANCIAL STATEMENTS . . . . . . $28,103
---------------------------------------
NET YIELD ON EARNING ASSETS . . . 4.72%
---------------------------------------
187
Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax
Equivalent (FTE) Basis
December 31, 2000
- ------------------------------------------------------------------------
(Dollars in Thousands) Balance Interest Rate
ASSETS:
Securities. . . . . . . . . . . .$120,532 $ 7,146 5.93%
Securities-tax exempt . . . . . . 5,007 329 6.57%
Federal funds sold and
short-term investments . . . . . 3,887 222 5.72%
Commercial loans. . . . . . . . . 172,951 16,811 9.72%
Commercial loans-tax exempt . . . 267 24 8.99%
Mortgage loans. . . . . . . . . . 155,753 11,968 7.68%
Consumer loans. . . . . . . . . . 108,622 10,231 9.42%
---------------------------------------
TOTAL EARNING ASSETS . . . . . . 567,019 46,731 8.24%
---------------------------------------
Reserve for loan losses . . . . . (4,979)
Cash and due from banks . . . . . 21,589
Other assets. . . . . . . . . . . 23,876
---------------------------------------
TOTAL ASSETS . . . . . . . . . .$607,505
---------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Certificates of deposit . . . . .$205,877 $11,256 5.47%
Savings deposits. . . . . . . . . 101,276 1,999 1.97%
Interest-bearing demand . . . . . 101,180 2,744 2.71%
Short-term borrowings . . . . . . 51,059 2,782 5.45%
Long-term borrowings. . . . . . . 8,250 428 5.19%
---------------------------------------
TOTAL INTEREST-
BEARING LIABILITIES.. . . . . 467,642 19,209 4.11%
---------------------------------------
Noninterest-bearing deposits. . . 81,221
Other liabilities . . . . . . . . 5,379
Shareholders' equity. . . . . . . 53,263
---------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY. . . . . .$607,505
---------------------------------------
NET INTEREST INCOME (FTE) . . . . $27,522 4.85%
Taxable equivalent adjustment (86) (.01)
---------------------------------------
NET INTEREST INCOME PER
FINANCIAL STATEMENTS . . . . . . $27,436
---------------------------------------
NET YIELD ON EARNING ASSETS . . . 4.84%
---------------------------------------
188
Condensed Consolidated Average Balance Sheets
Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax
Equivalent (FTE) Basis
December 31, 1999
- ------------------------------------------------------------------------
(Dollars in Thousands) Balance Interest Rate
ASSETS:
Securities. . . . . . . . . . . .$118,267 $ 6,913 5.85%
Securities-tax exempt . . . . . . 4,547 294 6.47%
Federal funds sold and
short-term investments . . . . . 8,796 424 4.82%
Commercial loans. . . . . . . . . 141,124 12,638 8.96%
Commercial loans-tax exempt . . . 430 35 8.14%
Mortgage loans. . . . . . . . . . 151,487 11,505 7.59%
Consumer loans. . . . . . . . . . 110,347 9,891 8.96%
---------------------------------------
TOTAL EARNING ASSETS . . . . . . 534,998 41,700 7.79%
---------------------------------------
Reserve for loan losses . . . . . (3,770)
Cash and due from banks . . . . . 22,709
Other assets. . . . . . . . . . . 22,576
---------------------------------------
TOTAL ASSETS . . . . . . . . . .$576,513
---------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Certificates of deposit . . . . .$195,563 $ 9,397 4.81%
Savings deposits. . . . . . . . . 107,654 2,128 1.98%
Interest-bearing demand . . . . . 79,146 1,309 1.65%
Short-term borrowings . . . . . . 35,585 1,597 4.49%
Long-term borrowings. . . . . . . 22,911 1,153 5.03%
---------------------------------------
TOTAL INTEREST-
BEARING LIABILITIES. . . . . . . 440,859 15,584 3.53%
---------------------------------------
Noninterest-bearing deposits. . . 81,348
Other liabilities . . . . . . . . 4,326
Shareholders' equity. . . . . . . 49,980
---------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY. . . . . .$576,513
---------------------------------------
NET INTEREST INCOME (FTE) . . . . $26,116 4.88%
Taxable equivalent adjustment . . (92) (.02)
---------------------------------------
NET INTEREST INCOME PER
FINANCIAL STATEMENTS . . . . . . $26,024
---------------------------------------
NET YIELD ON EARNING ASSETS . . . 4.86%
---------------------------------------
189
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
Years ended December 31, 2001 and 2000
- -----------------------------------------------------------------------
(Dollars in Thousands) INCREASE (DECREASE) IN
INTEREST INCOME/EXPENSE
---------------------------------------------
VOLUME RATE TOTAL
---------------------------------------------
Securities . . . . . . . . $ 38 $ (236) $ (198)
Securities-tax exempt. . . 308 (139) 169
Federal funds sold and
short-term investments. . (5) (71) (76)
Commercial loans . . . . . 2,886 (3,210) (324)
Commercial loans-tax exempt (18) -0- (18)
Mortgage loans . . . . . . 74 256 330
Consumer loans . . . . . . (687) (773) (1,460)
---------------------------------------------
TOTAL INTEREST INCOME . . 2,598 (4,173) (1,577)
---------------------------------------------
Certificates of deposit. . (559) (897) (1,456)
Savings deposits . . . . . (158) (581) (739)
Interest-bearing demand. . 1,084 (270) 814
Short-term borrowings. . . 327 (815) (488)
Long-term borrowings . . . (332) (10) (342)
---------------------------------------------
TOTAL INTEREST EXPENSE. . 362 (2,573) (2,211)
---------------------------------------------
NET INTEREST INCOME. . . . $2,234 $(1,600) $ 634
---------------------------------------------
190
Years ended December 31, 2000 and 1999
- -----------------------------------------------------------------------
(Dollars in Thousands) Increase (Decrease) In
Interest Income/Expense
---------------------------------------------
Volume Rate Total
---------------------------------------------
Securities . . . . . . . . $ 132 $ 101 $ 233
Securities-tax exempt. . . 30 5 35
Federal funds sold and
short-term investments. . (250) 48 (202)
Commercial loans . . . . . 2,850 1,323 4,173
Commercial loans-tax exempt (13) 2 (11)
Mortgage loans . . . . . . 324 139 463
Consumer loans . . . . . . (155) 495 340
---------------------------------------------
TOTAL INTEREST INCOME . . 2,918 2,113 5,031
---------------------------------------------
Certificates of deposit. . 496 1,363 1,859
Savings deposits . . . . . (126) (3) (129)
Interest-bearing demand. . 364 1,071 1,435
Short-term borrowings. . . 694 491 1,185
Long-term borrowings . . . (738) 13 (725)
---------------------------------------------
TOTAL INTEREST EXPENSE. . 690 2,935 3,625
---------------------------------------------
NET INTEREST INCOME. . . . $2,228 $ (822) $1,406
---------------------------------------------
END PUBLISHED PAGE 31
191
PROVISION AND RESERVE FOR LOAN LOSSES:
The reserve for loan losses is maintained by Management at a level
considered adequate to cover probable losses. The amount of the
provision for loan losses charged to operating expenses is the amount
necessary, in the opinion of Management, to maintain the reserve for
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 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 loan losses on December 31, 2001, was $5,890,000, or
1.23% of outstanding loans, compared to $5,250,000, or 1.16% at year-end
1999. The provision for loan losses charged to operating expense was
$2,200,000 and $1,700,000 in 2001 and 2000, respectively.
Net charge-offs for 2001 were $1,560,000, as compared to $1,117,000 for
2000, while net charge-offs as a percentage of average loans outstanding
for 2001 was .33%, compared to 0.26% for 2000.
Non-performing loans at year-end 2001 were $1,439,000 compared to
$2,315,000 at year-end 2000. Non-performing loans consist of loans past
due 90 days or more and loans which have been placed on non-accrual
status and other foreclosed assets. As of December 31, 2001, 4% of
non-performing loans were commercial loans, 16% were personal loans and
80% were residential mortgage loans. This compares to 16% for commercial
loans, 12% for personal loans and 71% for mortgage loans at year-end
2000. Non-performing loans did not have a material impact on interest
income during 2001, 2000 or 1999. The overall quality of the loan
portfolio remains high, as the ratio of non-performing loans to total
loans remains at low levels of 0.51% at year-end 2000 and 0.30% at
year-end 2001.
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, 2001,
there were no significant concentrations of credit risk in the loan
portfolio. More information about the loan portfolio is presented on
page 14.
FINANCIAL CONDITION:
Total assets of the Corporation rose 6.8% to $664,526,000 for the year
ended December 31, 2001. The asset growth was funded by increases in
deposits and Federal Home Loan Bank advances. Total earning assets
192
increased 6.7% to $618,061,000 at year end 2001 from 2000's
$579,147,000. The ratio of earning assets to total assets decreased
from 93.5% at December 31, 2000 to 93.2% at December 31, 2001. The loan
to deposit ratio has increased from 90.9% at 2000 year-end to 92.1% at
December 31, 2001. During 2001, Federal funds sold and other short-term
investments increased by $363,000 to $3,448,000. Securities rose
$11,300,000 to $138,401,000, and gross loans grew by $26,348,000 to
$477,488,000.
The maturity distribution of debt securities which appears on page 13 of
this report, indicates that $76,202,000, or 57.3%, of debt securities
mature within the next five year period with $15,260,000, or 11.5%
maturing during 2002. At the end of 2001, the fair market value of the
securities debt portfolio was greater than the book value due to decreases in
short-and mid-term interest rates from the beginning of 2001 to its close.
The fair value of the debt securities portfolio was greater than its cost by
$2,193,000 or 1.6% at the close of 2001. during 2001 the Corporation
diversified ins investment portfolio by reinvesting proceeds from bonds into
high quality mortgaged-backed securities. At the close of 2000, 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 $356,000 or .3%, at the close of 2000.
During the 2001 year, net loans rose 5.8 percent to $471,598,000 from
$445,890,000. Commercial loan growth was robust, accounting for 123.9
percent of total loan growth, mortgage loan growth accounted for 2.4
percent and consumer loan had negative growth of 26.3 percent, of total
loan growth for 2001. The substantial commercial loan growth was the
result of the Bank's increased focus on commercial lending.
Complementing this internal initiative was the strong economy, which
stimulated new commercial loan demand as well as prompting existing
customers to expand their borrowings. During 2001, mortgage loan growth was
slow due to the offsetting impact of low interest rates and economic
uncertainty. The decrease in consumer loans results from a decrease in
indirect automobile lending.
DEPOSITS:
Total deposits held by the Corporation increased $22,176,000 during 2001
compared to an increase of $39,260,000 during 2000. Interest-bearing
deposits represented 83.1% and 83.2% of total deposits at December 31,
2001 and 2000, respectively. Noninterest-bearing deposits increased by
$4,395,000 while interest-bearing deposits increased by $17,781,000
during 2001. Increases in balances of Market Access, CheckInvest and money
market accounts accounted for the deposit increase. Market Access deposits
soared by $30.3 million or 55.2 percent to $85.1 million at December 31,
2001. The significant growth in Market Access deposits results from several
deposit promotion campaigns during 2001. Noninterest-bearing deposits
increased by $2,439,000 while interest-bearing deposits increased by
$36,821,000 during 2000. Increases in balances of Market Access accounts,
193
Checkinvest, Market Access accounts soared by $37.5 million or 217 percent
To $54.8 million at December 31, 2000. The significant growth in Market
Access deposits results from a deposit promotion campaign during 2000.
During 1999, noninterest-bearing deposits increased by $4,904,000 while
interest-bearing deposits increased by $17,887,000. In both 2000 and 1999,
as long-term deposits matured and new funds were deposited, these funds were
primarily placed in short-term deposits.
Securities sold under repurchase agreements and other short-term
borrowings include repurchase agreements and Federal funds purchased.
These balances increased by $8,779,000 during 2001, following a decrease of
$21,731,000 in 2000. 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 $16,000,000 to $49,345,000 at December 31, 2001.
END PUBLISHED PAGE 32
164
CAPITAL RESOURCES:
Shareholder's equity reached an all-time high of $62,138,000 at December
31, 2001 compared to $56,525,000 at December 31, 2000, an increase of
$5,613,000, or 9.9%. This increase was primarily attributable to net
income of $8,565,000, less dividends declared to shareholders of
$4,365,000, less the change in unrealized gain on securities available
for sale in the amount of $1,065,000. The book value per share of
common stock climbed to $14.39 at year-end 2001 compared to $13.16 per
share at year-end 2000, a 9.4% increase. Capital ratios remained
strong during 2001, with average equity to average assets of 9.4%. The
return on average shareholders equity during 2001 decreased to 14.36%,
from $15.83% and 15.29% during 2000 and 1999, respectively. As discussed in
Note 13 to the Consolidated Financial Statements, the Corporation's primary
source of funds for the payment of dividends is its Bank subsidiary.
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 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, 2001, LNB Bancorp, Inc. had a total risk-based capital ratio of
13.17%, with a Tier 1 capital ratio of 11.95% compared to 13.06% and 11.88%,
respectively, at December 31, 2000. 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, 2001, LNB Bancorp, Inc.'s leverage ratio was
9.08%, which substantially exceeds the Corporation's minimum regulatory
requirement. For additional information on the Corporation and Bank's
capital ratios, refer to Note 14, Regulatory Capital on page 19.
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
195
requirements and to fund future growth opportunities. A part of future
growth depends upon capital expenditure programs. Capital expenditures
of approximately $2,900,000 are projected for 2002.
TOTAL SHAREHOLDERS' EQUITY millions of dollars
(A Total Shareholders' Equity graph follows in printed version with
total equity on the y-axis and years 1997 through 2001 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 1997 through 2001 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 1997 through 2001 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*
2001 $62.1 9.39% $14.39
2000 $56.5 8.77% $13.16
1999 $51.1 8.67% $11.89
1998 $48.7 9.27% $11.35
1997 $45.0 9.70% $10.48
*Adjusted for stock dividends and splits
END PUBLISHED PAGE 33
196
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. This was particularly true
during 2001 when the Banks base lending rate decreased 450 basis points and
197
the net yield on earning assets decreased only 12 basis points. The
Corporation's net yield on earning assets remains at the high levels of 4.73%
and 4.85% for the years ended December 31, 2001 and 2000, 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 16.35% at December 31, 2001, 2.83% at
December 31, 2000 and (2.81)% at December 31, 1999. The increase in
the Corporation's one year gap at December 31, 2001 compared to December
31, 2000, was due to an increase in assets maturing or otherwise
repricing in one year or less totaling $68,950,000 (due to increases in
loans and in securities repricing during that period) offset by an
increase in liabilities maturing or otherwise repricing in one year or
less totaling $1,044,000 (due primarily to decreases in certificates of
deposit and savings deposits partially offset by increases in interest-
bearing demand deposits and short-term borrowings during that period). The
increase in the Corporation's one year gap at December 31, 2000 compared
to December 31, 1999 was due to an increase in assets maturing or
otherwise repricing in one year or less totaling $54,514,000 (due to
increases in loans and in securities repricing during that period) offset by
an increase in liabilities maturing or otherwise repricing in one year or
less totaling $7,987,000 (due primarily to increases in certificates of
deposit and interest-bearing demand deposits offset by decreases in savings
deposits and short-term borrowings during that period). Corporate management
does not anticipate any significant changes in the Corporation's market risk
198
or interest rate risk profiles in 2002. The table on the page 35 sets forth
the repricing dates of the Corporation's interest-earning assets and
interest-bearing liabilities at December 31, 2001 and the interest rate
sensitivity "gap" percentages at the dates indicated.
END PUBLISHED PAGE 34
199
GAP ANALYSIS (DOLLARS IN THOUSANDS)
EXPECTED MATURITY/REPRICING DATE
2002 2003 2004 2005
- ------------------------------------------------------------------------
Commercial loans . . . . . . . . .$214,993 $ 444 $ 3,473 $ 82
Weighted average yield . . . . . . 6.54% 7.42% 6.41% 6.50%
Mortgage loans(1). . . . . . . . . 54,269 30,114 23,268 20,710
Weighted average yield . . . . . . 7.50% 7.12% 6.66% 7.44%
Consumer loans . . . . . . . . . . 20,187 15,797 10,017 5,732
Weighted average yield . . . . . . 8.53% 8.50% 8.30% 9.21%
Home equity lines of credit. . . . 37,018 -0- -0- -0-
Weighted average yield . . . . . . 5.27% 0.00% 0.00% 0.00%
Credit Card loans. . . . . . . . . 4,927 -0- -0- -0-
Weighted average yield . . . . . . 7.51% 0.00% 0.00% 0.00%
Securities and other(2). . . . . . 63,915 54,646 9,704 9,296
Weighted average yield . . . . . . 5.42% 5.49% 5.56% 5.59%
--------------------------------------
Total interest-earning assets . . 395,309 101,001 46,462 29,820
--------------------------------------
Certificates of deposit. . . . . . 133,706 27,087 7,498 8,940
Weighted average yield . . . . . . 3.76% 4.24% 5.04% 5.22%
Savings deposits . . . . . . . . . 36,794 36,794 18,396 -0-
Weighted average yield . . . . . . 1.00% 1.00% 1.00% 0.00%
Interest-bearing demand. . . . . . 64,609 64,609 21,304 -0-
Weighted average yield . . . . . . 1.89% 1.89% 1.89% 0.00%
Short-term borrowings. . . . . . . 48,170 -0- -0- -0-
Weighted average yield . . . . . . 2.02% 0.00% 0.00% 0.00%
Federal Home Loan Bank advances. . 10,750 19,595 -0- -0-
Weighted average yield . . . . . . 4.97% 3.26% 0.00% 0.00%
--------------------------------------
Total interest-bearing liabilities 294,029 148,085 58,198 8,940
--------------------------------------
Interest-earning assets less
Interest-bearing liabilities. . . 101,280 (47,084) (11,736) 20,880
--------------------------------------
Cumulative interest-rate
sensitive gap . . . . . . . . . .$101,280 $ 54,196 $ 42,460 $ 63,340
--------------------------------------
Cumulative interest-rate gap as a
percentage of total earning assets at
December 31, 2001 16.35%
Cumulative interest-rate gap as a
percentage of total earning assets at
December 31, 2000 5.38%
Cumulative interest-rate gap as a
percentage of total earning assets at
December 31, 1999 (2.81)%
--------------------------------------
200
GAP ANALYSIS (DOLLARS IN THOUSANDS)
EXPECTED MATURITY/REPRICING DATE FAIR
2006 THEREAFTER TOTAL VALUE(3)
- ------------------------------------------------------------------------
Commercial loans . . . . . . . . .$ 67 $ 357 $219,416 $219,605
Weighted average yield . . . . . . 6.50% 6.54% 6.54%
Mortgage loans(1). . . . . . . . . 23,711 6,180 158,252 158,685
Weighted average yield . . . . . . 7.09% 7.23% 7.23%
Consumer loans . . . . . . . . . . 2,603 3,539 57,875 58,571
Weighted average yield . . . . . . 8.99% 8.59% 8.59%
Home equity lines of credit. . . . -0- -0- 37,018 37,028
Weighted average yield . . . . . . 0.00% 0.00% 5.27%
Credit Card loans. . . . . . . . . -0- -0- 4,927 4,927
Weighted average yield . . . . . . 0.00% 0.00% 7.51%
Securities and other(2). . . . . . 1,371 8,957 141,889 142,183
Weighted average yield . . . . . . 7.09% 7.09% 5.58%
--------------------------------------
Total interest-earning assets . . 27,752 19,033 619,377 620,999
--------------------------------------
Certificates of deposit. . . . . . 28 14 177,273 178,774
Weighted average yield . . . . . . 5.11% 5.21% 3.96%
Savings deposits . . . . . . . . . -0- -0- 91,984 91,984
Weighted average yield . . . . . . 0.00% 0.00% 1.00%
Interest-bearing demand. . . . . . -0- -0- 161,522 161,522
Weighted average yield . . . . . . 0.00% 0.00% 1.89%
Short-term borrowings. . . . . . . -0- -0- 48,170 48,170
Weighted average yield . . . . . . 0.00% 0.00% 2.02%
Federal Home Loan Bank advances. . -0- -0- 30,345 30,981
Weighted average yield . . . . . . 0.00% 0.00% 3.87%
--------------------------------------
Total interest-bearing liabilities 28 14 509,294 510,431
--------------------------------------
Interest-earning assets less
Interest-bearing liabilities. . . 27,724 19,019
----------------------------
Cumulative interest-
rate sensitive gap. . . . . . . .$91,064 $110,083
----------------------------
(1)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 costs and
allowance for loan losses.
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
201
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, 2001, cash and cash equivalents equaled $31,505,000 or
4.7% of total assets. The change in cash and cash equivalents is shown
in the Consolidated Statement of Cash Flows on page 1 and arises from
operating, investing, and financing activities.
The adjustments to reconcile 2001 net income to net cash provided by
operating activities primarily consists of depreciation and amortization
of $1,625,000, amortization of intangible assets of $377,000,
amortization of deferred loan fees and costs of $72,000 and a provision
for loan losses of $2,200,000. 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 $39,229,000. Cash used in investing activities resulted
from the purchases in securities of $86,085,000 offset by proceeds from
sales and maturities of securities of $75,769,000. Cash used in investing
activities included net loan increases of $27,980,000 and purchases of
capital assets of $894,000.
END PUBLISHED PAGE 35
202
Net cash provided by financing activities was $32,966,000. Cash
provided by financing activities included increases in deposits of
$22,176,000, increases in securities sold under repurchase agreements
and other short-term borrowings of $8,779,000, proceeds from Federal
Home Loan Bank advances of $46,735,000 less cash paid on Federal Home
Loan Bank advances of $40,735,000 and proceeds from stock options
exercised of $348,000. Cash used by financing activities includes
dividends paid of $4,337,000. These cash flows resulted in a
$6,369,000 increase in cash and cash equivalents from December 31, 2000
to December 31, 2001.
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 December
31, 2001 the Bank had pledged as collateral $35,335,000 in second mortgages
with the Federal Reserve Bank of Cleveland to secure advances and discounts
up to $30,035,000. At December 31, 2001, the Bank had available credit at the
Federal Reserve Bank discount window of $30,035,000. At year-end, the Bank
had approved Federal funds facilities of $18,000,000 at three correspondent
banks. At December 31, 2001, the Bank borrowed $10,000,000 under these
arrangements. Additionally, the Bank has a $40,000,000 cash management
advance line of credit with the Federal Home Loan Bank of Cincinnati. At
December 31, 2001 the Bank had borrowed $19,000,000 from the Federal Home
Loan Bank under this line of credit. 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. 141, "Accounting for Business Combinations"
SFAS No. 142, "Accounting for Goodwill and other
Intangible Assets"
SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets"
Implementation date by the Corporation and Impact on the Corporation:
On July 20, 2001, The Financial Accounting Standards Board issued
Statements SFAS No. 141, "Accounting for Business Combinations" SFAS No.
142, "Accounting For Goodwill and Other Intangible Assets." SFAS No. 141
203
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Poolings initiated prior to June
30, 2001 are grandfathered. SFAS No. 142 eliminates amortization of
goodwill associated with business combinations completed after June 30,
2001. During a transition period from July 1, 2001 through December 31,
2001, goodwill associated with business combinations completed prior to
July 1, 2001 will continue to be amortized through the income statement.
Effective January 1, 2002, all goodwill amortization expenses will cease
and goodwill will be assessed (at least annually) for impairment at the
reporting unit level by applying a fair-value-based test. SFAS No. 142 also
provides additional guidance on acquired core deposit intangible requiring
separate disclosure and amortization with impairment testing at least
annually. A Corporation must adopt SFAS No. 142 at the beginning of the
fiscal year. LNB Bancorp, Inc. adopted SFAS No. 141 as of July 1, 2001 and
will adopt SFAS No. 142 as of January 1, 2002. The Corporation has
determined that the provisions of SFAS No. 142 will have no effect on our
financial position, results of operation or liquidity. In August 2001, the
Financial Accounting Standards Board issued Statement SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 addresses the accounting and reporting for the impairment or disposal
of long-lived assets. The statement provides a single accounting model for
long-lived assets to be disposed of. New criteria must be met to classify
the asset as an asset held-for-sale. This statement also focuses on
reporting the effects of a disposal of a segment of a business. The
provisions of SFAS No. 144 are effective for the Corporation January 1,
2002 and are not expected to have a material impact on our financial
position, results of operation or liquidity.
All other applicable Statements of Financial Accounting Standards that
have been issued and have effective sates impacting 2001 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.
Significant actions by the Federal government and its agencies,
affecting the financial institutions industry in general, are currently
having and will continue to have an impact on the Corporation. A
discussion of these actions follows:
"THE GRAMM,LEACH BLILEY ACT OF 1999":
The enactment of the Gramm,Leach Bliley Act of 1999 (the "GLB Act")
represents a pivotal point in the history of the financial services
industry. The GLB Act sweeps away large parts of a regulatory framework
that had its origins in the Depression Era of the 1930s. Effective
March 11, 2000, new opportunities were available for banks, other
depository institutions, insurance companies and securities firms to
enter into combinations that permit a single financial services
204
organization to offer customers a more complete array of financial
products and services. The GLB Act provides a new regulatory framework
for regulation through the financial holding company, which will have as
its umbrella regulator the Federal Reserve Board. Functional regulation
of the financial holding company's separately regulated subsidiaries
will be conducted by their primary functional regulator. The GLB Act
makes satisfactory or above Community Reinvestment Act compliance for
insured depository institutions and their financial holding companies
necessary in order for them to engage in new financial activities.
The GLB Act provides a federal right to privacy of non-public personal
information of individual customers. Specifically, Title V of GLB Act
requires financial institutions to issue privacy notices and provide
consumers with an opportunity to opt out of certain types of
information sharing. The FDIC developed and adopted a final regulation
with other financial institution regulators to implement the GLB Act
privacy provisions. Although the privacy rule's effective date is
November 13, 2000, compliance is not mandatory until July 1, 2001. LNB
Bancorp, Inc. and its wholly owned subsidiaries successfully implemented the
privacy provisions. The adoption of these privacy provisions did not have a
significant impact on the financial position or results of operation in 2001.
END PUBLISHED PAGE 36
205
Lorain National Bank Investment and Trust Services
Our Investment and Trust Services division continues to grow and develop the
capabilities of its staff, and to enhance services available to the bank's
customers. In spite of the financial markets' downturn for the second
consecutive year, Investment and Trust Services increased its revenues by one
percent to $2,379,000. This contribution is particularly valuable to the
bank and LNB Bancorp's shareholders because our revenues are not generated by
the balance sheet and do not require specifically allocated capital.
Capitalizing on the strength and personal service of our experienced trust
officers, the year was spent strengthening relationships with our clients.
Frequent communication, reminding them of our basic philosophy of investing
high quality securities and longer-term perspective, helped to allay concerns
about volatility in the financial markets.
We worked closely with retail areas of the bank to introduce a referral plan
and to develop closer ties with the bank's sales officers and representatives
of the bank's LNB Investment Center. As a result of its focus on customer
needs, the confidence of our clients is reflected in referrals of their
friends. Each trust officer worked directly with the branch officers to make
certain that the bank's customer had ready access to investment products and
trusted financial advice.
Internally, the four core units of the division, which include Personal,
Employee Benefits, Investment and Operations, continued to develop procedures
and policies to assure superior service to our clients. The Account
Administrative Review and the Trust Investment committees monitored the set-
up of accounts and the investment of portfolios to ensure that clients'
objectives were achieved. This monitoring, coupled with strong policies and
procedures, also aids compliance with applicable laws and minimizing the risk
of providing fiduciary services. The work of these units and committees will
ensure smooth, orderly growth of the division in the coming years.
As Lorain National Bank adds value through electronic banking, the Investment
and Trust Services Division provides similar opportunities for its clients.
Investment portfolio information is available 24 hours a day at TrustWeb,
accessible through the bank's Internet web site at WWW.4LNB.COM In addition
to Internet access, 401(k) retirement accounts may also be accessed by
telephone.
Last year's discouraging economic news, unprecedented homeland terrorists'
attacks, corporate bankruptcies and other uncertainties upset investors.
Such news fuels both the uncertainties in the financial markets and the
anxieties in the minds of investors.
In today's uncertain world, managing finances involves more than merely
watching investments. Now more than ever, customers need a trusted financial
advisor, dedicated to serving their needs with high quality deposit and
206
investment products. Customers know that expert, honest and trustworthy
advise is a rarity these days, Fortunately, our customers recognize that
Lorain National Bank, a solid local financial institution, regulated by the
Office of the Comptroller of the Currency is well positioned to provide the
kind of guidance they need today.
/s/Emma N. Mason
Emma N. Mason
Sr. Vice President and
Senior Trust Officer
LNB Investment Center
In 2001, LNB Bancorp, Inc. announced the availability of non-traditional bank
investments and insurance products and services through its subsidiaries to
be marketed under the brand LNB Investment Center.
Raymond James Financial Services, member NASD/SPIC, of St. Petersburg,
Florida, through an affiliation with Lorain National Bank, is able to make
available a wide range of investment products and brokerage services,
including stocks and bonds, mutual funds, IRAs (traditional and Roth), Simple
IRAs & SEPs, 401(k) plans, college educational planning (UGMAs & 529 plans),
tax free and tax deferred investments.
Charleston Insurance Agency, Inc., a subsidiary of LNB Bancorp, Inc. provides
clients with insurance-related products including life, accident and health,
and annuities.
In February of 2001, Charleston Insurance Agency announced the hiring of
financial advisor Robert A. Carino to administer the sale of investment and
insurance products. Mr. Carino is a 17-year veteran of the financial
services industry. Working with Bob as financial advisor is Keith Kapanke,
formerly Lorain National Bank main office manager and employee of 22 years.
Together they offer the personal service and expert financial advice that our
customers have grown to expect from Lorain National Bank.
Founded in 1974, Raymond James Financial Services has grown to a network of
nearly 4,200 financial advisors in more than 1,850 offices across the
country. Since that time, they have provided financial expertise and
guidance to hundreds of thousands of investors.
The first year for LNB Investment Center was filled with challenges, such as
the 11 Federal Reserve interest rate cuts and the effects of a declining
stock market. LNB Investment Center contributed more than $67,000 in
noninterest income to the Corporation in 2001. Through referrals from inside
the bank and aggressive sales efforts outside of the bank, we anticipate
increased client awareness and a substantial resulting contribution of
207
noninterest income to the Corporation.
/s/Thomas P. Ryan
Thomas P. Ryan
President and Chief Executive Officer
Charleston Insurance Agency
END PUBLISHED PAGE 37
208
Directors of LNB Bancorp, Inc. and Lorain National Bank
DIRECTORS
Stanley G. Pijor
Chairman of the Board
LNB Bancorp, Inc. and
Lorain National Bank
James F. Kidd
Vice Chairman of the Board
LNB Bancorp, Inc. and
Lorain National Bank
Daniel P. Batista
Chairman of the Board
Wickens, Herzer, Panza,
Cook & Batista 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 R. Herrick
President
Liberty Auto Group, Inc.
Lee C. Howley
President
Howley and Company
David M. Koethe
Retired, former
Chairman of the Board
The Lorain Printing Company
Benjamin G. Norton
Human Resource Consultant
LTI Power Systems
209
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. and
Lorain National Bank
John W. Schaeffer, M.D.
President
North Ohio Heart Center, Inc.
Gary C. Smith
President and
Chief Executive Officer
LNB Bancorp, Inc. and
Lorain National Bank
Eugene M. Sofranko
Chairman of the Board
Lorain Glass Company, Inc.
Leo Weingarten
Retired
Officers of LNB Bancorp, Inc.
OFFICERS
Stanley G. Pijor
Chairman of the Board
James F. Kidd
Vice Chairman of the Board
Gary C. Smith
President and
Chief Executive Officer
Thomas P. Ryan
Executive Vice President
and Secretary/Treasurer
210
Gregory D. Friedman, CPA
Executive Vice President and
Chief Financial Officer
Kevin W. Nelson
Executive Vice President and
Chief Operating Officer
Debra R. Brown
Senior Vice President
Robert L. Cox
Senior Vice President
Sandra L. Dubell
Senior Vice President
Michael D. Ireland
Senior Vice President
Emma N. Mason
Senior Vice President
James H. Weber
Senior Vice President
Mitchell J. Fallis, CPA
Vice President and
Chief Accounting Officer
James W. Manning
Director of Audit
Directors Emeriti of Lorain National Bank
DIRECTORS
James L. Bardoner
Retired, Former President
Dorn Industries, Inc.
T.L. Smith, M.D.
Retired Physician
Paul T. Stack
Retired
Directors and Officers of Charleston Insurance Agency, Inc.
211
DIRECTORS
Gary C. Smith
Chairman of the Board
Charleston Insurance
Agency, Inc.
Thomas P. Ryan
President and
Chief Executive Officer
Charleston Insurance
Agency, Inc.
Stanley G. Pijor
Chairman of the Board
LNB Bancorp, Inc. and
Lorain National Bank
James R. Herrick
President
Liberty Auto Group, Inc.
Jeffrey F. Riddell
President and
Chief Executive Officer
Consumeracq, Inc. and
Consumers Builders Supply Co.
OFFICERS
Gary C. Smith
Chairman of the Board
Thomas P. Ryan
President and
Chief Executive Officer
Gregory D. Friedman, CPA
Vice President and Treasurer
Kevin W. Nelson
Secretary
END PUBLISHED PAGE 38
212
Management of Lorain National Bank
EXECUTIVE AND
SENIOR OFFICERS
Gary C. Smith
President and
Chief Executive Officer
Thomas P. Ryan
Executive Vice President
and Secretary
Gregory D. Friedman, CPA
Executive Vice President
and Chief Financial Officer
Kevin W. Nelson
Executive Vice President
and Chief Operating Officer
Debra R. Brown
Senior Vice President
Branch Administration
Robert L. Cox
Senior Vice President
Retail Lending
Sandra L. Dubell
Senior Vice President and
Senior Lending Officer
Michael D. Ireland
Senior Vice President and
Senior Operations Officer
Emma N. Mason
Senior Vice President
and Senior Trust Officer
James H. Weber
Senior Vice President and
Senior Marketing Officer
213
BRANCH OFFICERS
Teresa E. George
Vice President
Branch Administration
MAIN OFFICE & SIXTH
STREET DRIVE-IN OFFICE
Charles A. DeAngelis
Vice President
AMHERST OFFICE
G. Dale Rosenkranz
Vice President
AVON LAKE OFFICE
Diana L. Schmittgen
Assistant Vice President
CLEVELAND STREET OFFICE
Timothy J. Gallagher
Vice President
ELY SQUARE OFFICE
James E. Schmittgen
Vice President
KANSAS AVENUE OFFICE
Linda Buehner
Assistant Vice President
VILLAGE OF LAGRANGE OFFICE
Carrie Hartman
Assistant Vice President
LAKE AVENUE OFFICE
Christine M. Weber
Assistant Vice President
MIDWAY MALL OFFICE
Susan M. Neiding
Vice President
OBERLIN AVENUE OFFICE
Jennifer M. Nickolls
Assistant Vice President
214
OBERLIN & KENDAL
AT OBERLIN OFFICES
Marilyn R. Krasienko
Assistant Vice President
OLMSTED TOWNSHIP &
THE RENAISSANCE OFFICES
Carol Snyder
Assistant Cashier
PEARL AVENUE OFFICE
Patricia A. Wolanczyk
Assistant Cashier
VERMILION OFFICE
Robert B. White
Vice President
Barbara M. Beres-Clark
Assistant Branch Manager
WEST PARK DRIVE OFFICE
Kara L. Odom
Senior Customer
Service Representative
THE CROSSINGS OF WESTLAKE &
WESTLAKE VILLAGE OFFICES
Lora M. Graves
Senior Customer
Service Representative
LOAN OFFICERS
COMMERCIAL LOANS
John A. Funderburg
Vice President
Lee C. Myers
Vice President
Ellen M. Walsh
Vice President
Kenneth P. Wayton
Vice President
RETAIL LENDING
Bruce Diso
Vice President
215
Kimberly S. Plzak
Assistant Vice President
VISA/ELECTRONIC BANKING
Jeanne Maschari
Vice President
MORTGAGE LOANS
Edwin F. Klenz
Vice President
Joel A. Krueck
Vice President and
CRA Officer
CREDIT ANALYSIS
Denise M. Kosakowski
Vice President
COLLECTIONS
Kelly A. Dunfee
Assistant Cashier
LOAN REVIEW
Richard P. Vieritz
Vice President
LOAN SERVICES
Laura Campbell
Mortgage Loan
Administrative Officer
Joan M. Raymond
Assistant Vice President
Joyce L. Wasela
Assistant Cashier
ADMINISTRATION AND OPERATIONS OFFICERS
ACCOUNTING
Mitchell J. Fallis, CPA
Vice President and
Chief Accounting Officer
Mary L. Scaff
Fiscal Operations Officer
216
AUDITING
James W. Manning
Director of Audit
Randy E. Lottman
Network and Information
Security Officer
COMPLIANCE
Donna Jean Phillips
Vice President,
Compliance, BSA
And OFAC Officer
DEPOSIT OPERATIONS
Patricia L. Cole
Assistant Vice President
E.D.P. SERVICES
Larry R. Johnson
Vice President
Larry A. Hill
Assistant Vice President
Rita M. Hoyt
Assistant Cashier
HUMAN RESOURCES
Carol A. Mesko
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
PROFESSIONAL DEVELOPMENT
Marianne Kocak
Assistant Vice President
217
PURCHASING
Susan I. Tuttle
Assistant Vice President
SECURITY
James E. Long
Assistant Vice President
LNB INVESTMENTS AND TRUST SERVICES OFFICERS
Neal A. Conger
Vice President
Gerald S. Falcon
Vice President
David Nocjar
Vice President
Patrick E. Sheridan
Vice President
Jason Born
Investment Officer
Georgia Bour
Assistant Vice President
Carol A. Cavanaugh
Assistant Vice President
Thomas H. Eschke
Assistant Vice President
Trust Operations Officer
Mario Ruano
Assistant Vice President
LNB INVESTMENT CENTER OFFICERS
Robert A. Carino
Senior Financial Advisor
Keith H. Kapanke
Financial Advisor
END PUBLISHED PAGE 39
218
LNB Bancorp, Inc. Annual Earnings, Dividend and Book Value per Share
Performance
10 YEAR ANNUAL EARNINGS 1992 THROUGH 2001
(10 Year Earnings History graph follows in printed version with years
1992 through 2001 on the y-axis and earnings on the x-axis in
$2,500,000.00 increments ranging from $0 to $10,000,000.00. 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
1992 through 2001. The Corporation's management team is proud of its
record of continuously increasing annual earnings over this ten year
period.
Cumulative Cash Dividends Declared
Total Cash Dividends Declared 1992 - 2001: $1,229.00
(Cumulative Cash Dividends Declared graph follows in printed version
with years 1992 through 2001 on the y-axis and Dividends Declared on the
x-axis in $300.00 increments ranging from $0 to $1,200.00. 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 $1,229.00.
Book Value Per Share 1992 through 2001
(Book Value Per Share graph follows in printed version with years 1992
through 2001 on the y-axis and book values on the x-axis in $4.00
increments ranging from $0.00 to $16.00. 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 1992 through 2001. Executive and senior management has worked
diligently to cause the rapid increase in the book value per share over the
past ten years.
219
The data points used to plot the three (3) graphs previously described
follows:
10 YEAR ANNUAL CUMULATIVE CASH BOOK VALUE
YEAR EARNINGS DIVIDENDS DECLARED PER SHARE
2001 $8,565,000.00 $1,229.00 $14.40
2000 $8,430,000.00 $1,048.00 $13.16
1999 $7,641,000.00 $ 867.00 $11.89
1998 $6,818,000.00 $ 704.00 $11.35
1997 $6,480,000.00 $ 552.00 $10.48
1996 $5,852,000.00 $ 426.00 $10.06
1995 $5,003,000.00 $ 317.00 $ 9.33
1994 $4,432,000.00 $ 225.00 $ 8.66
1993 $4,029,000.00 $ 142.00 $ 8.12
1992 $3,826,000.00 $ 68.00 $ 7.61
END PUBLISHED PAGE 40
220
LNB Bancorp, Inc. Subsidiary Locations
LORAIN NATIONAL BANK
457 Broadway
Lorain, Ohio 44052
(440)244-6000
(800)860-1007
CHARLESTON INSURANCE
AGENCY, INC.
457 Broadway
Lorain, Ohio 44052
(440)244-7158
(800)845-2152
CHARLESTON TITLE
AGENCY, LLC
424 Middle Avenue
Elyria, Ohio 44035
(440)244-5212
(440)284-5165
Banking Centers, ATMs, LNB Investment and Trust Services and LNB Investment
Center
LORAIN NATIONAL BANK
LORAIN BANKING CENTERS
**Main
457 Broadway
Lorain, Ohio 44052
(440)244-7185
**Sixth Street Drive-In
200 Sixth Street
Lorain, Ohio 44052
(440)244-7242
**Kansas Avenue
1604 Kansas Avenue
Lorain, Ohio 44052
(440)288-9151
**Oberlin Avenue
3660 Oberlin Avenue
Lorain, Ohio 44053
(440)282-9196
221
**Pearl Avenue
2850 Pearl Avenue
Lorain, Ohio 44055
(440)277-1103
**West Park Drive
2130 West Park Drive
Lorain, Ohio 44053
(440))989-3131
AMHERST BANKING CENTER
**Amherst
1175 Cleveland Avenue
Amherst, Ohio 44001
(440)988-4423
AVON LAKE BANKING CENTER
**Avon Lake
240 Miller Road
Avon Lake, Ohio 44012
(440)933-2186
ELYRIA BANKING CENTERS
**Ely Square
124 Middle Avenue
Elyria, Ohio 44035
(440)323-4621
**Cleveland Street
801 Cleveland Street
Elyria, Ohio 44035
(440)365-8397
**Lake Avenue
42935 North Ridge Road
Elyria Township, Ohio 44035
(440)233-7196
**Midway Mall
6395 Midway Mall Blvd.
Elyria, Ohio 44035
(440)324-6530
222
VILLAGE OF LAGRANGE
BANKING CENTER
**Village of LaGrange
546 North Center Street
Village of LaGrange,
Ohio 44050
(440)355-6734
OBERLIN BANKING CENTERS
**Kendal at Oberlin*
600 Kendal Drive
Oberlin, Ohio 44074
(440)774-5400
**Oberlin
40 East College Street
Oberlin, Ohio 44074
(440)775-1361
OLMSTED TOWNSHIP
BANKING CENTERS
**Olmsted Township
27095 Bagley Road
Olmsted Township,
Ohio 44138
(440)235-4600
The Renaissance
26376 John Road
Olmsted Township,
Ohio 44138
(440)427-0041
VERMILION BANKING CENTER
**Vermilion
4455 East Liberty Avenue
Vermilion, Ohio 44089
(440)967-3124
WESTLAKE BANKING OFFICES
**Crossings of Westlake
30210 Detroit Road
Westlake, Ohio 44145
(440)892-9696
Westlake Village
28550 Westlake Village Drive
Westlake, Ohio 44145
(440)808-0229
223
ATMS
**Captain Larry's Marathon
1317 State Route 60
Vermilion, Ohio 44089
**City Center Building
300 Broadway
Lorain, Ohio 44052
**Cooper-Foster Park Road
1920 Cooper-Foster
Park Road
Lorain, Ohio 44053
**Dad's Sunoco
7580 Leavitt Road
State Route 58
Amherst, Ohio 44001
**Gateway Plaza
3451 Colorado Avenue
Lorain, Ohio 44052
**Lakeland Medical Center
3700 Kolbe Road
Lorain, Ohio 44053
**Lorain County
Community College
1005 North Abbe Road
Elyria, Ohio 44035
**Lowe's Home
Improvement Warehouse
620 Midway Boulevard
Elyria, Ohio 44035
OTHER OFFICES
Executive
457 Broadway
Lorain, Ohio 44052
(440)244-7123
Branch Administration
457 Broadway
Lorain, Ohio 44052
(440)244-7253
224
Commercial, Consumer
and Mortgage Loans
457 Broadway
Lorain, Ohio 44052
(440)244-7220
(440)244-7272
(440)244-7216
Customer Service
2130 West Park Drive
Lorain, Ohio 44053
(440)989-3348
(800)860-1007
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)989-3327
VISA/Electronic Banking
2130 West Park Drive
Lorain, Ohio 44053
(440)989-3348
LNB INVESTMENT AND
TRUST SERVICES
457 Broadway
Lorain, Ohio 44052
(440)244-7226
LNB INVESTMENT CENTER
457 Broadway
Lorain, Ohio 44052
(440)244-7158
(800)845-2152
225
ALL OTHER OFFICES NOT LISTED
Toll Free (800)860-1007
Lorain (440)244-6000
TELEBANKER
Telebanker (440)245-4562
Telebanker (800)610-9033
Internet:www.4LNB.com
ATM service available wherever you see this symbol**
*Restricted to residents, their visitors and employees
END INSIDE BACK COVER
226
Half page insert front side
Two postage paid postcards
Left side card reads as follows:
Lorain National Bank
Attn: Mitchell J. Fallis
457 Broadway
Lorain, Ohio 44052-9986
Right side card reads as follows:
Lorain National Bank
Attn: Gary C. Smith
457 Broadway
Lorain, Ohio 44052-9986
Half page insert back side
Left side card reads as follows:
2001 ANNUAL REPORT SURVEY
Thank you for reading the 2001 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:
5-Excellent;4-Good;3-Fair;2-Poor;1-Very Poor
- ------------------------------------------------------------------------
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 Profile
_____ Corporate and Investor Information
_____ Stock and Dividend Information
_____ Earnings and Dividend History
_____ LNBB Direct Purchase Plan
_____ Financial Highlights
_____ Message to Shareholders
_____ Financial Statements and Notes
_____ Glossary of Key Terms
_____ Management's Discussion and Analysis
_____ LNB Investment & Trust Services
_____ LNB Investment Center
227
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.
Right side card reads as follows:
LNBB DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
Yes, I am interested in learning more about LNBB Direct. Please send me a
Plan prospectus at the following address:
Name___________________________________________________
Street Address_________________________________________
City,State & Zip_______________________________________
Phone________
228
COVER DESCRIPTION
Outside back cover
White background
(Logo)LNB
Bancorp, Inc.
Blue lettering
Mail: LNB Bancorp, Inc. 457 Broadway . Lorain, Ohio 44052-1739
E-Mail: INVESTORRELATIONS@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. 2001 ANNUAL REPORT
229
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 2001)
S - K Reference Number (21)
Corporate Organization Structure
..............................
. LNB Bancorp, Inc. .
. Financial Holding Company .
. an Ohio Corporation (1) .
..............................
.
.....................................................
. . .
.................. ............................. ......................
.Charleston Title. . The Lorain National Bank . .Charleston Insurance.
. Agency, LLC. . . Wholly-Owned Subsidiary . . Agency, Inc. .
. 49% Owned . . an Ohio Corporation (1) . . Wholly-owned .
. Ohio LLC (2) . ............................. . Subsidiary .
.................. . .Ohio Corporation(1) .
. ......................
.
.................................
. LNB Financial Services, Inc. .
. Wholly-Owned Subsidiary .
. an Ohio Corporation (1) .
. (dormant) .
.................................
(1) The physical location and legal mailing address is:
457 Broadway
Lorain, Ohio 44052
(2) The physical location and legal mailing address is:
424 Middle Avenue
Elyria, Ohio 44035
230
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 2001)
S - K Reference Number (23)
Consent of Independent Accountants.
231
Exhibit 23
Consent of Independent Accountants
The Board of Directors
LNB Bancorp, Inc.:
We consent to incorporation by reference in the registration statements
No. 33-53210 on Form S-8 and No.33-64034 on Form S-8 and No. 333-58414
on Form S-3 of LNB Bancorp, Inc. of our report dated January 22, 2002,
relating to the consolidated balance sheets of LNB Bancorp, Inc. and
subsidiaries as of December 31, 2001 and 2000, 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, 2001,
which report appears in the December 31, 2001 annual report on Form 10-K
of LNB Bancorp, Inc.
/s/ KPMG LLP
Cleveland, Ohio
March 29, 2002