10-Q 1 0001.txt 1 Form 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-13203 LNB Bancorp, Inc. (Exact name of the registrant as specified in its charter) Ohio 34-1406303 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 457 Broadway, Lorain, Ohio 44052 - 1769 (Address of principal executive offices) (Zip Code) (440) 244 - 6000 Registrant's telephone number, including area code Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at October 25, 2000: 4,210,847 shares Class of Common Stock: $1.00 par value 2 LNB Bancorp, Inc. Quarterly Report on Form 10-Q Quarter Ended September 30, 2000 Part I - Financial Information Item 1 - Financial Statements Interim financial information required by Regulation 210.01-01 of Regulation S-X is included in this Form 10-Q as referenced below: Page Number(s) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 5 Condensed Consolidated Statements 9 of Cash Flows Notes to the Condensed Consolidated Financial Statements 11 Item 2 - Management's Discussion and Analysis 17 of Financial Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures 23 About Market Risk Part II - Other Information Item 1 - Legal Proceedings 24 Item 2 - Changes in Securities 24 Item 3 - Defaults upon Senior Securities 24 Item 4 - Submission of matters to a Vote of 24 Security Holders Item 5 - Other Information 24 Item 6 - Exhibits and Reports on Form 8-K 24 Signatures 24 Appendix Index 25 3 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SEPTEMBER 30, DECEMBER 31, CONDENSED CONSOLIDATED BALANCE SHEETS 2000 1999 ------------- ------------- (Unaudited) ASSETS: Cash and due from banks $ 27,897,000 $ 28,023,000 Federal funds sold and short-term investments 3,077,000 9,320,000 Securities: Available for sale, at fair value 79,193,000 75,728,000 Held to maturity, at cost (fair value $42,014,000 and $41,819,000, respectively) 44,529,000 44,642,000 Federal Home Loan Bank and Federal Reserve Bank Stock, at cost 3,098,000 2,949,000 ------------- ------------- Total Securities 126,820,000 123,319,000 ------------- ------------- Loans: Portfolio loans 440,803,000 409,971,000 Loans available for sale 9,174,000 9,545,000 ------------- ------------- Total loans 449,977,000 419,516,000 Reserve for loan losses (5,184,000) (4,667,000) ------------- ------------- Net loans 444,793,000 414,849,000 ------------- ------------- Bank premises and equipment, net 11,257,000 11,253,000 Intangible assets 3,946,000 4,245,000 Accrued interest receivable 3,934,000 4,057,000 Other assets 4,216,000 4,449,000 Other foreclosed assets 47,000 96,000 ------------- ------------- TOTAL ASSETS $625,987,000 $599,611,000 ============= ============= STATEMENT CONTINUED ON NEXT PAGE 4 STATEMENT CONTINUED FROM PREVIOUS PAGE LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Demand and other noninterest-bearing deposits $ 84,426,000 $ 80,654,000 Savings and passbook accounts 204,377,000 191,928,000 Certificates of deposit 211,577,000 184,429,000 ------------- ------------- Total deposits 500,320,000 456,831,000 ------------- ------------- Securities sold under repurchase agreements and other short-term borrowings 33,540,000 52,122,000 Federal Home Loan Bank advances, short-term 13,360,000 15,000,000 Federal Home Loan Bank advances, long-term 18,985,000 19,345,000 Accrued interest payable 1,722,000 1,510,000 Accrued taxes, expenses and other liabilities 3,416,000 3,750,000 ------------- ------------- Total Liabilities 571,343,000 548,558,000 ------------- ------------- Shareholders' equity: Preferred stock, no par value: Shares authorized 1,000,000, and shares outstanding, none Common stock $1.00 par: Shares authorized 15,000,000, Shares issued 4,312,847 and 4,227,161, respectively and Shares outstanding 4,210,847 and 4,127,161, respectively 4,312,000 4,227,000 Additional capital 24,333,000 22,685,000 Retained earnings 29,593,000 28,057,000 Accumulated other comprehensive (loss) (655,000) (1,016,000) Treasury Stock at cost, 102,000 and 100,000 shares, respectively (2,939,000) (2,900,000) ------------- ------------- Total Shareholders' Equity 54,644,000 51,053,000 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $625,987,000 $599,611,000 ============= ============= See notes to unaudited condensed consolidated financial statements. 5 FORM 10-Q LNB BANCORP, INC. PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NINE MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS SEPTEMBER 30, OF INCOME (UNAUDITED) ------------------------- 2000 1999 INTEREST INCOME: ------------ ------------ Interest and fees on loans: Taxable $28,737,000 $25,169,000 Tax-exempt 14,000 20,000 Interest and dividends on securities: U.S. Government agencies and corporations 4,827,000 4,018,000 U.S. Treasury securities 340,000 1,027,000 States and political subdivisions 187,000 162,000 Other debt and equity securities 176,000 124,000 Interest on Federal funds sold and other interest-bearing instruments 171,000 250,000 ------------ ------------ TOTAL INTEREST INCOME 34,452,000 30,770,000 ------------ ------------ INTEREST EXPENSE: Interest on Deposits: Time certificates of $100,000 and over 2,206,000 1,967,000 Other deposits 9,423,000 7,486,000 Interest on securities sold under repurchase agreements and other short-term borrowings 1,355,000 870,000 Interest on Federal Home Loan Bank advances 987,000 1,067,000 ------------ ------------ TOTAL INTEREST EXPENSE 13,971,000 11,390,000 ------------ ------------ NET INTEREST INCOME 20,481,000 19,380,000 Provision for loan losses 1,250,000 1,250,000 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,231,000 18,130,000 ------------ ------------ OTHER INCOME: Investment and Trust Services Division income 1,704,000 1,587,000 Service charges on deposit accounts 2,353,000 2,175,000 Other service charges, exchanges and fees 2,072,000 2,071,000 Gain on sale of bank premises and equipment -0- 162,000 Other operating income 40,000 68,000 ------------ ------------ TOTAL OTHER INCOME 6,169,000 6,063,000 STATEMENT CONTINUED ON NEXT PAGE 6 STATEMENT CONTINUED FROM PREVIOUS PAGE OTHER EXPENSES: Salaries and employee benefits 7,754,000 7,481,000 Furniture and equipment expenses 1,697,000 1,627,000 Net occupancy expense of premises 1,108,000 1,136,000 Supplies and postage 705,000 727,000 Ohio franchise tax 418,000 414,000 Credit card and merchant expenses 821,000 703,000 Other operating expenses 3,374,000 3,317,000 ------------ ------------ TOTAL OTHER EXPENSES 15,877,000 15,405,000 ------------ ------------ INCOME BEFORE INCOME TAXES 9,523,000 8,788,000 INCOME TAXES 3,262,000 3,001,000 ------------ ------------ NET INCOME $ 6,261,000 $ 5,787,000 ============ ============ PER SHARE DATA: BASIC EARNINGS PER SHARE $ 1.49 $ 1.37 ====== ====== DILUTED EARNINGS PER SHARE $ 1.49 $ 1.37 ====== ====== DIVIDENDS DECLARED PER SHARE $ .72 $ .66 ====== ====== See notes to unaudited condensed consolidated financial statements. 7 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THREE MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS SEPTEMBER 30, OF INCOME (UNAUDITED) -------------------------- 2000 1999 INTEREST INCOME ------------ ------------ Interest and fees on loans: Taxable $10,086,000 $ 8,740,000 Tax-Exempt 4,000 4,000 Interest and dividends on securities: U.S. Government agencies and corporations 1,650,000 1,435,000 U.S. Treasury securities 80,000 267,000 States and political subdivisions 63,000 54,000 Other debt and equity securities 67,000 46,000 Interest on Federal funds sold and other interest-bearing instruments 42,000 165,000 ------------ ------------ TOTAL INTEREST INCOME 11,992,000 10,711,000 ------------ ------------ INTEREST EXPENSE: Interest on Deposits: Time certificates of $100,000 and over 880,000 718,000 Other deposits 3,327,000 2,566,000 Interest on securities sold under repurchase agreements and other short-term borrowings 523,000 342,000 Interest on Federal Home Loan Bank advances 308,000 450,000 ------------ ------------ TOTAL INTEREST EXPENSE 5,038,000 4,076,000 ------------ ------------ NET INTEREST INCOME 6,954,000 6,635,000 Provision for loan losses 650,000 550,000 NET INTEREST INCOME AFTER PROVISION ------------ ------------ FOR LOAN LOSSES 6,304,000 6,085,000 ------------ ------------ OTHER INCOME: Investment and Trust Services Division income 587,000 513,000 Service charges on deposit accounts 807,000 773,000 Other service charges, exchanges and fees 716,000 754,000 Other operating income 14,000 12,000 ------------ ------------ TOTAL OTHER INCOME 2,124,000 2,052,000 STATEMENT CONTINUED ON NEXT PAGE 8 STATEMENT CONTINUED FROM PREVIOUS PAGE OTHER EXPENSES: Salaries and employee benefits 2,649,000 2,566,000 Furniture and equipment expenses 408,000 426,000 Net occupancy expense of premises 350,000 346,000 Supplies and postage 229,000 218,000 Ohio franchise tax 88,000 121,000 Credit card and merchant expenses 288,000 276,000 Other operating expenses 1,125,000 1,146,000 ------------ ------------ TOTAL OTHER EXPENSES 5,137,000 5,099,000 ------------ ------------ INCOME BEFORE INCOME TAXES 3,291,000 3,038,000 INCOME TAXES 1,130,000 1,047,000 ------------ ------------ NET INCOME $ 2,161,000 $ 1,991,000 ============ ============ PER SHARE DATA: BASIC EARNINGS PER SHARE $ .51 $ .47 ====== ====== DILUTED EARNINGS PER SHARE $ .51 $ .47 ====== ====== DIVIDENDS DECLARED PER SHARE $ .25 $ .23 ====== ====== See notes to unaudited condensed consolidated financial statements. 9 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NINE MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS SEPTEMBER 30, OF CASH FLOWS (UNAUDITED) ------------------------- 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: ------------ ------------ Interest received $34,516,000 $31,063,000 Other income received 6,218,000 5,926,000 Interest paid (13,759,000) (11,392,000) Cash paid for salaries and employee benefits (7,557,000) (7,131,000) Net occupancy expense of premises paid (865,000) (876,000) Furniture and equipment expenses paid (654,000) (626,000) Cash paid for supplies and postage (705,000) (727,000) Cash paid for other operating expenses (4,154,000) (3,401,000) Federal income taxes paid (3,227,000) (2,498,000) ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,813,000 10,338,000 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available for sale 8,000,000 19,500,000 Proceeds from maturities of securities held to maturity 502,000 181,000 Purchase of securities held to maturity (753,000) (7,080,000) Purchase of securities available for sale (11,126,000) (18,333,000) Net (increase) in loans made to customers (31,442,000) (44,266,000) Proceeds from sales of bank premises and equipment (18,000) -0- Purchases of bank premises and equipment and intangible assets (1,290,000) (1,052,000) Proceeds from liquidation of other foreclosed assets 296,000 1,400,000 Purchases of other foreclosed assets (247,000) -0- ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES (36,078,000) (49,650,000) ------------ ----------- STATEMENT CONTINUED ON NEXT PAGE 10 STATEMENT CONTINUED FROM PREVIOUS PAGE CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand and other noninterest-bearing deposits 3,772,000 (6,823,000) Net increase in savings and passbook deposits 12,409,000 734,000 Net increase in certificates of deposit 27,308,000 36,256,000 Net (decrease) in securities sold under repurchase agreements and other short-term borrowings (18,582,000) (250,000) Proceeds from Federal Home Loan Bank advances 8,000,000 12,300,000 Payment on Federal Home Loan advances (10,000,000) -0- Purchase of Treasury Stock (39,000) -0- Proceeds from exercise of stock options 62,000 2,000 Dividends paid (3,034,000) (2,845,000) ------------ ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 19,896,000 39,374,000 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,369,000) 62,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 37,343,000 32,801,000 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF QUARTER $30,974,000 $32,863,000 ============ ============ RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $6,261,000 $5,787,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,286,000 1,261,000 Amortization of intangible assets 298,000 316,000 Amortization of deferred loan fees and costs, net 248,000 (218,000) Provision for loan losses 1,250,000 1,250,000 (Increase) Decrease in accrued interest receivable 123,000 (16,000) (Increase) Decrease in other assets (213,000) 54,000 Increase in accrued interest payable 212,000 72,000 Increase in accrued taxes, expenses and other liabilities 43,000 1,729,000 Others, net 305,000 103,000 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 9,813,000 $10,338,000 ============ ============ See notes to unaudited condensed consolidated financial statements. 11 Form 10-Q LNB Bancorp, Inc. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTRODUCTION The following areas of discussion pertain to the unaudited condensed consolidated financial statements of LNB Bancorp, Inc. (The Parent Company) and its wholly-owned subsidiary, Lorain National Bank (The Bank), and Charleston Title Agency LLC at September 30, 2000, compared to December 31, 1999, and the results of its operations for the three and nine months ended September 30, 2000 and cash flows for the nine months ended September 30, 2000 compared to the same periods in 1999. The term "the Corporation" refers to LNB Bancorp, Inc. and its wholly-owned subsidiary. It is the intent of this discussion to provide the reader with a more thorough understanding of the unaudited condensed consolidated financial statements and supporting schedules, and should be read in conjunction with those unaudited condensed consolidated financial statements and schedules and the Corporation's December 31, 1999 Annual Report. In an effort to take advantage of the recently passed Gramm-Leach-Bliley Act, otherwise known as the financial modernization act, LNB Bancorp, Inc. has applied for, and received, one of the first charters as a financial holding company. The Act enables financial holding companies to engage in business activities previously unavailable to them. The Corporation will also be able to offer new products and services as they are developed and approved by regulators. LNB Bancorp, Inc. has a 49 percent interest in a newly formed company named "Charleston Title Agency LLC". The main function of Charleston Title Agency LLC is to provide real estate settlement services via a title insurance agency. Charleston Title Agency LLC began operations on September 1, 2000. LNB Bancorp, Inc. is currently expanding into additional new areas that have been opened up by the passage of the Financial Modernization Act. We look forward to further reporting to you on these matters in our year end 10K report. LNB Bancorp, Inc. achieved a significant milestone in its history by the listing of its common stock on the NASDAQ Stock Market in the second quarter of 2000. The NASDAQ listing will provide greater liquidity for our stock while enhancing our visibility in the investment community. BASIS OF PRESENTATION The unaudited condensed consolidated balance sheet as of September 30, 2000, the unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2000 and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2000 and 1999 are prepared in accordance with generally accepted accounting principles for interim financial information. The above mentioned statements reflect all normal and 12 recurring adjustments which are, in the opinion of Management, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The consolidated balance sheet at December 31, 1999 has been taken from the audited Financial Statements and condensed. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Corporation's December 31, 1999 Annual Report to Shareholders. The results of operations for the period ended September 30, 2000 are not necessarily indicative of the operating results for the full year. RESERVE FOR LOAN LOSSES Because some loans may not be repaid in full, a reserve for loan losses is recorded. This reserve is increased by provisions charged to earnings and is reduced by loan charge-offs, net of recoveries. Estimating the risk of loss on any loan is necessarily subjective. Accordingly, the reserve is maintained by Management at a level considered adequate to cover loan losses 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. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of the expected future cash flows discounted at the loans initial effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for loan losses or by a provision for loan losses, depending upon the adequacy of the reserve for loan losses. 13 RECLASSIFICATIONS Certain 1999 amounts have been reclassified to conform to the 2000 presentation. 14 2. EARNINGS PER SHARE Earnings per share is calculated as follows: For the 9 Months ended September 30, 2000 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $6,261,000 Basic EPS Income available to common shareholders $6,261,000 4,210,379 $1.49 Effect of Dilutive Securities Incentive Stock Options -0- 3,960 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $6,261,000 4,214,339 $1.49 ========== ========= ===== For the 9 Months ended September 30, 1999 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $5,787,000 Basic EPS Income available to common shareholders $5,787,000 4,205,171 $1.37 Effect of Dilutive Securities Incentive Stock Options -0- 8,380 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $5,787,000 4,213,551 $1.37 ========== ========= ===== 15 For the 3 Months ended September 30, 2000 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $2,161,000 Basic EPS Income available to common shareholders $2,161,000 4,210,762 $ .51 Effect of Dilutive Securities Incentive Stock Options -0- 2,822 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $2,161,000 4,214,224 $ .51 ========== ========= ===== For the 3 Months ended September 30, 1999 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $1,991,000 Basic EPS Income available to common shareholders $1,991,000 4,205,231 $ .47 Effect of Dilutive Securities Incentive Stock Options -0- 7,922 -0- ---------- --------- ----- Diluted EPS Income available to common shareholders + assumed conversions $1,991,000 4,213,153 $ .47 ========== ========= ===== 3. COMPREHENSIVE INCOME The Corporation's comprehensive income for the nine months ended September 30, 2000 and 1999 are as follows: For the nine months ended September 30, 2000 1999 -------------------------------- Net income $6,261,000 $5,787,000 Other comprehensive income(loss): Unrealized gain (loss) on securities available for sale, net of tax (benefit) of ($186,000) and ($324,000) 361,000 (629,000) ----------- ----------- Comprehensive Income $6,622,000 $5,158,000 16 The Corporation's comprehensive income for the three months ended September 30, 2000 and 1999 are as follows: For the three months ended September 30 2000 1999 ------------------------------------ Net income $2,161,000 $1,991,000 Other comprehensive income(loss): Unrealized gain (loss) on securities available for sale, net of tax (benefit) of $268,000 and ($78,000) 520,000 (152,000) ----------- ----------- Comprehensive Income $2,681,000 $1,839,000 17 PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS When used in this Form 10Q, the words or phrases "are expected to", "will continue", "is anticipated", "estimate", "projected", or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Corporation's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans, and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. FINANCIAL CONDITION Total assets of the Corporation increased $26,376,000 during the first nine months in 2000, to $625,987,000. This growth was funded by increases in demand deposits, Market Access and certificates of deposit. Total earning assets increased 5.0% to $579,874,000 at September 30, 2000 from December 31, 1999. The ratio of earning assets to total assets increased from 92.1% at December 31, 1999 to 92.6% at September 30, 2000. The loan to deposit ratio has increased from 87.04% at 1999 year-end to 89.94% at September 30, 2000. Federal funds sold and short-term investments decreased by $6,243,000 during the first nine months of 2000. This decrease is the result of the bank eliminating its excess liquidity which was built up for Y2K purposes at 1999 year end. Total securities increased $3,501,000 ending the third quarter at $126,820,000. At September 30, 2000 gross unrealized gains (losses)in the investment securities portfolio were approximately $94,000 and ($3,246,000), respectively. The decrease in the market value of the securities portfolio is due to market interest rate fluctuations and not due to the deterioration of the credit worthiness of debt issuers. Net loans grew by $29,944,000 during the first nine months to $444,793,000 at September 30, 2000 for a 7.2% growth rate. Commercial loan growth was strong accounting for almost all of total loan growth during the nine months ended September 30, 2000. Loan increase was supported by spring and summer home equity loan sale programs which resulted in new loans totaling over $2 million. The reserve for loan losses ended the quarter at $5,184,000. Activity for the nine months ended September 30, 2000 included provision for loan losses of $1,250,000, recoveries of $162,000 and loan charge-offs of $895,000. The reserve for loan losses as a percentage of ending loans increased .04% from 1.11% at December 31, 1999 to 1.15% at September 30, 2000. Corporate management believes that the reserve for loan losses as a percentage of ending loans at September 30, 2000 remains at an appropriate level. The ratio of the reserve for loan losses to 18 nonperforming assets remained at an adequate level even though it decreased to 296.4% at September 30, 2000. Also, Corporate management believes that the current level of the reserve for loan losses is adequate based upon quantitative analysis of identified risks and analysis of historical trends, and probable losses inherent in the loan portfolio at September 30, 2000. The level of nonperforming assets increased by $410,000 during the first nine months of 2000. This increase is the result of an increase in non- accrual loans of $459,000 offset by a decrease in other foreclosed assets in the amount of $49,000. The decrease in other foreclosed assets results from the liquidation of assets. The increase in nonaccrual loans is due to decreases in nonaccrual principal balances of $1,114,000 which have been paid off and brought current, loans charged-off in the amount of $279,000, liquidation of non-accrual loans of $610,000 and increases in nonaccrual principal balances of $2,462,000. The increase in nonaccrual loans in the first nine months of 2000 was due primarily to sixteen commercial loan customers, five mortgage loan customers and several personal loans, particularly in the indirect automobile loan category. Management does not believe that this increase in non-accrual loans is indicative of a failing local economy and that this change did not result from any change in underwriting standards. Nonperforming assets at September 30, 2000 totaled $1,749,000, up from $873,000 at June 30, 2000. The third quarter increase in nonperforming assets of $1,236,000 resulted from loans being brought current in the amount of $7,000, loans charged-off in the amount of $109,000, liquidation of non-accrual loans of $310,000, decreases in other foreclosed assets of $200,000 and increases in nonaccrual loans of $1,502,000. The increase in nonaccrual loans in the third quarter of 2000 was due primarily to seven commercial loan customers, five mortgage loan customers and twenty seven consumer loan customers. The level of nonperforming assets at September 30, 2000 remains at relatively low levels and Corporate management believes nonperforming assets are well collateralized. The table below presents the level of nonperforming assets at the end of the last four calendar quarters. Amounts in thousands 09/30/00 06/30/00 03/31/00 12/31/99 -------- -------- -------- -------- Nonperforming Assets: Nonaccrual loans $1,702 $ 626 $1,439 $1,243 Restructured loans 0 0 0 0 Other Foreclosed Assets 47 247 0 96 -------- -------- -------- -------- Total Nonperforming Assets $1,749 $ 873 $1,439 $1,339 ======== ======== ======== ======== Reserve for possible loan losses to total nonperforming assets 296.4% 557.6% 332.8% 348.5% ======== ======== ======== ======== Accruing loans past due 90 days $ 197 $ 437 $ 781 $ 555 ======== ======== ======== ======== Potential problem loans are those loans identified on Management's watch 19 list in which Management has some doubt as to the borrower's ability to comply with the present repayment terms and loans which Management is actively monitoring due to changes in the borrower's financial condition. At September 30, 2000, potential problem loans totaled $4,241,000, a decrease of $107,000 from the December 31, 1999 balance of $4,348,000. LNB Bancorp, Inc. changed its policy on the timing of placing mortgage loans on non-accrual status during the third quarter of 2000. The policy changed from placing loans on non-accrual status based upon individual credit review to automatically placing loans on non-accrual status once they are 90 days past due. The sum of potential problem loans, accruing loans past 90 days and non-accrual loans has remained relatively constant at $6,078,000 and $6,140,000 on June 30, 2000 and September 30, 2000, respectively. The change during the third quarter of 2000 in the components of the watch list: potential problem loans, accruing loans past due 90 days and non-accrual loans has occurred as a result of the change in the mortgage loan policy as mentioned above. The Corporation's credit policies are reviewed and modified on an on-going basis in order to remain suitable for the management of credit risk within the loan portfolio as conditions change. At September 30, 2000, there are no significant concentrations of credit in the loan portfolio. The Corporation had outstanding loan and credit commitments to make loans totaling $112,872,000 and $87,614,000 at September 30, 2000 and December 31,1999, respectively. The increase in outstanding loan commitments results in part from an increase in the unused portion of home equity lines of credits from a home equity loan sale program in the second and third quarters of 2000. Mortgage and commercial construction loan demand increased in the second and third quarters of 2000 as seasonal weather conditions improved and the construction season moved forward. Consumer loan demand leveled off in the first, second and third quarters of 2000. Total deposits increased $43,489,000 during the first nine months to $500,320,000. Noninterest-bearing deposits increased to $84,426,000, at September 30, 2000 for an increase of $3,772,000, while interest-bearing deposits climbed to $415,954,000 for an increase of $39,597,000. Federal funds purchased and securities sold under agreements to repurchase decreased $18,582,000 during the first nine months of 2000 due to increases in deposit balances. Due to the volatility of customer repurchase agreements, most funds generated by repurchase activity enter the Corporation's earning assets as short-term investments. Federal Home Loan Bank (FHLB) advances decreased to $32,345,000 at September 30, 2000, down $2,000,000 from 1999 year end. LIQUIDITY Liquidity measures a corporation's ability to generate cash or otherwise obtain funds at reasonable prices to fund commitments to borrowers as well as the demand of depositors and debt holders. Principal internal sources of liquidity for the Corporation and the Bank are cash and cash equivalents, Federal funds sold, and the maturity structures of investment securities and portfolio loans. Securities and loans 20 available for sale provide another source of liquidity through the cash flows of these interest-bearing assets as they mature or are sold. The Corporation continues to maintain a relatively high liquid position in order to take advantage of interest rate fluctuations. As of September 30, 2000, short-term security investments with maturities of one year or less totalled $11,830,000 which represented 9.3% of total securities. Adding cash and due from banks of $27,897,000 and Federal funds sold and short-term investments of $3,077,000, total liquid assets represented 6.8% of total assets. The Corporation's subsidiary bank has established short-term lines of credit at correspondent banks, Federal Home Loan Bank, and the Federal Reserve Bank of Cleveland in the amounts of $18,000,000, $30,000,000 and $25,621,000, respectively, with credit available in the amounts of $4,000,000. $22,000,000 and $25,621,000, respectively. CAPITAL RESOURCES LNB Bancorp, Inc. continues to maintain a strong capital position. Total shareholders' equity reached an all time high of $54,644,000, at September 30, 2000, an increase of $3,591,000, or 7% from one year ago. The increase resulted primarily from $6,261,000 of net income generated from the first nine months of operations less a cash dividend payable to shareholders of $3,054,000. The increase in interest rates experienced in the first three quarters of 2000 has caused a decrease in the market value of available for sale securities which resulted in a decrease in shareholders' equity within accumulated other comprehensive income of $361,000 for the nine months ended September 30, 2000. As of September 30, 2000, the LNB Bancorp, Inc. held 102,000 shares of common stock as treasury stock. LNB Bancorp, Inc. purchased 97,996 of these shares in 1997, 2,004 shares in 1998, and 2,000 shares in 2000 for a total cost of $2,939,000. The Corporation continues to monitor growth to stay within the constraints established by the regulatory authorities. Under Federal banking regulations, an institution is deemed to be well-capitalized if it has a Risk-based Tier 1 capital ratio of 6.00 percent or greater, a Risk-based Total capital ratio of 10.00 percent or greater and a Leverage ratio of 5.00 percent or greater. The Corporation's Risk-based capital and Leverage ratios have exceeded the ratios for a well-capitalized financial institution for all periods presented. The Corporation's capital and leverage ratios as of September 30, 2000 and 1999 follow together with those ratios required for the Corporation to be considered adequately capitalized . September 30 Minimum Required Minimum ----------------- To Be Well Required 2000 1999 Capitalized Capital ------ ------ ---------------- ---------- Total capital ratio 12.98% 12.81% 10.00% 8.00% Tier I capital ratio 11.79% 11.77% 6.00% 4.00% Leverage ratio 8.57% 8.26% 5.00% 4.00% The Corporation regularly evaluates acquisition opportunities and conducts due diligence activities in connection with possible acquisitions in markets near or within the Corporation's current geographic market. As a result, acquisition discussions and, in some cases negotiations, take place and future acquisitions could occur. 21 Corporate management believes that it's current capital resources are sufficient to support any foreseeable acquisition activity. RESULTS OF OPERATIONS Interest and fees on loans was $28,751,000 for the first nine months of 2000 for an increase of $3,562,000 when compared to the first nine months of 1999. Increased loan income resulted from net increases in the loan portfolio of $30,461,000 and increases in interest rates. Interest and dividends on securities was $5,530,000 for the first nine months of 2000 for an increase of $199,000 over the same period in 1999. Increased security income results from increase in the volume of securities and from increases in yields on those securities. Interest and dividends on securities represented 16.1% of total interest income at September 30, 2000 compared to 17.3% at September 30, 1999. Interest on Federal funds sold and short-term investments was $171,000 at September 30, 2000 compared to $250,000 at September 30, 1999. The decrease resulted from decreases in the average balances invested in these forms of financial instruments net of increases in interest rates. Total interest expense increased by $2,581,000 when compared to the first nine months of 1999. The interest expense increase was fueled by an increase in interest expense on deposits of $2,176,000 and repurchase agreement interest of $485,000, offset by decreases in Federal Home Loan Bank advances of $80,000. Also, total interest expense for the first nine months of 2000 was impacted by a net increase in deposits of $43,489,000, and by increases in interest rates paid on savings, Market Access and certificate of deposit accounts when compared to the first nine months of 1999. Total other income increased by $106,000 when compared to the first nine months of 1999. This increase resulted from increases in income from investment and trust services fees of $117,000, increases in service charges of $178,000 and increases in other charges, exchanges and fees of $1,000. The increase in service charges is due, in part, to reevaluating the assessment of transaction account charges plus increases in the volume of accounts. The Corporation reported a non-recurring gain on sale of a building in the second quarter of 1999 of $162,000. Other operating income decreased by $28,000. The Corporation continuously monitors noninterest expenses for greater profitability. The entire staff is geared to improving productivity at all levels. Noninterest expense for the nine months ended September 30, 2000 was $15,877,000, 3.1% above the first nine months of 1999. This increase was due primarily to increases in salaries and benefits, furniture and equipment expense and increases in credit card and merchant expenses. The effective tax rate remained constant at 34.2% during the first nine months of 2000 and 1999. Net income was $6,261,000 and $5,787,000 for the nine months ended September 30, 2000 and 1999, respectively. Net income per basic and diluted share was $1.49 and $1.37 for the nine months ended September 2000 and 1999, respectively. 22 IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS Corporate management is not aware of any current recommendations by the Financial Accounting Standards Board or by regulatory authorities which, if they were implemented, would have a material effect on the liquidity, capital resources or operations of the Corporation. LNB Bancorp, Inc. is not aware of any trends, events, or uncertainties that might have a material effect on the soundness of operations; neither is LNB Bancorp, Inc. aware of any proposed recommendations by regulatory authorities which would have a similar effect if implemented. LNB BANCORP, INC. SHAREHOLDERS' RIGHTS On October 24, 2000, the Board of Directors of LNB Bancorp, Inc. approved a shareholder rights plan. The rights plan provides to record owners of common shares at the close of business on November 6, 2000, a dividend distribution of rights to purchase shares of a new series of voting preferred stock ("rights"). The rights plan is designed to prevent a potential acquirer from exceeding a prescribed ownership level in the Corporation, other 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 to redeem the rights, allows shareholders, other that the acquirer that triggered the exercise of the rights, to purchase Preferred Share Units of the Corporation having characteristics comparable to the Corporation's Common Shares, at 50% of market value. This dramatically dilutes the acquirer's ownership level and voting power and makes it prohibitively expensive for the acquirer to complete its acquisition of the Corporation. The description and terms of the Rights are set forth in a Rights Agreement dated as of October 24, 2000, between LNB Bancorp, Inc. and Registrar and Transfer Corporation, as Rights Agent, as filed with the Securities and Exchange Commission on November 6, 2000. GRAMM-LEACH-BLILEY ACT OF 1999 In February of 2000, the Corporation filed an application with the Federal Reserve Bank of Cleveland to be regulated as a financial holding company. In March of 2000, LNB Bancorp, Inc. received approval to operate as a financial holding company. The Corporation is strategically reviewing its new business opportunities under the Gramm-Leach-Bliley Act. LNB Bancorp, Inc. is currently expanding into new areas that have been opened up by the passage of the Financial Modernization Act. We look forward to further reporting to you regarding these matters in our year end 10K report. 23 PART I - OTHER INFORMATION ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market indices such as interest rates, foreign exchange rates and equity prices. The Corporation's principal market risk exposure is interest rate risk, with no material impact on earnings from changes in foreign exchange rates or equity prices. There have been no material changes in the asset and liability mix of the Corporation since December 31, 1999, which would impact the Corporation's level of market risk. Interest rate risk is the exposure to changes in market interest rates. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The Corporation monitors the interest rate sensitivity of its on - and - off balance sheet positions by examining its near-term sensitivity and its longer term gap position. Corporate management has determined no significant changes in the Corporation's interest rate risk profile since December 31, 1999. With the Federal Reserve Board's recent announcements to increase the prime lending rate by 25 basis points to 8.75% on February 3, 2000, and its subsequent increase by 25 basis points to 9.00% on March 22, 2000, and subsequent increase by 50 basis points to 9.50% on May 16, 2000, the Corporation does not anticipate any significant changes in the net interest margin. However, the Corporation does anticipate a slight compression in net interest margin in the 4th quarter of 2000 with increases in interest expense due to the repricing of certificates of deposit at higher rates. Also, Corporate management does not anticipate any significant changes in the Corporation's market risk of interest rate risk portfolio. 24 Part II - OTHER INFORMATION ITEM 1 - Legal Proceedings None ITEM 2 - Changes in Securities None ITEM 3 - Defaults Upon Senior Securities None ITEM 4 - Submission of Matters to a Vote of Security Holders None ITEM 5 - Other Information None ITEM 6 - Exhibits and Reports on Form 8-K: (a) Exhibit (3)(a) - LNB Bancorp, Inc. - Second Amended Articles of Incorporation of LNB Bancorp, Inc. (b) Exhibit (11) - Computation of Shares Used for Earnings Per Share Calculation. (c) Exhibit (13) - Third Quarter Report to Shareholders of LNB Bancorp, Inc., September 30, 2000 - EDGAR Version. (d) Exhibit (27) - Financial Data Schedule. (e) Reports on Form 8-K There were no reports on Form 8-K filed for the nine months ended September 30, 2000. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LNB BANCORP, INC. (registrant) Date: November 13, 2000 /s/ Gregory D. Friedman _________________________ Gregory D. Friedman, CPA Executive Vice President and Chief Financial Officer Date: November 13, 2000 /s/ Mitchell J. Fallis _________________________ Mitchell J. Fallis, CPA Vice President and Chief Accounting Officer 25 LNB Bancorp, Inc. Form 10-Q Exhibit Index Pursuant to Item 601 (a) of Regulation S-K S-K Reference Exhibit Number (3) (a)LNB Bancorp, Inc., - Second Amended Articles of Incorporation of LNB Bancorp, Inc. (11) Computation of Shares Used for Earnings Per Share Calculations Footnote 2 Earnings Per Share on pages 12- 13 of this Form 10Q is incorporated by reference. (13) Third Quarter Report to Shareholders of LNB Bancorp, Inc. September 30, 2000 - EDGAR Version. (27) Financial Data Schedule. 26 LNB Bancorp, Inc. Exhibit to Form 10 - Q (For the nine months ended September 30, 1999) S - K Reference Number (13) Third Quarter Report to Shareholders of LNB Bancorp, Inc. (dated September 30, 2000) EDGAR Version DESCRIPTION: Three sided pamphlet: Outside cover: white with picture showing pen on NASDAQ page Third Quarter Report LNB Bancorp, Inc. September 30, 2000 Inside contains: Message to shareholders, Unaudited EDGAR version Consolidated Balance Sheets for period ending September 30, 2000 and September 30, 1999, respectively, Unaudited EDGAR version Consolidated Statements of Income for the Nine Months ended September 30, 2000 and September 30, 1999, respectively, Executive Officers: Keeping LNBB in pace with the future Banking Offices and ATMS 27 Message to Our Shareholders It's a pleasure to report that we are well on our way to another successful year of operations at LNB Bancorp, Inc. and its wholly owned subsidiary, The Lorain National Bank. As of September 30, 2000, we have achieved significant growth in earnings, dividends, assets, loans, deposits and shareholders' equity. We are pleased to announce that earnings increased 8.2% in the first nine months of 2000 compared with the same period one year ago. Earnings for the first nine months of 2000 reached $6,261,000, up from $5,787,000 during the first nine months of 1999. Third quarter's earnings for 2000 significantly passed the $2-million mark for the second consecutive quarter in the history of LNB Bancorp, Inc. Earnings for the third quarter of 2000 were $2,161,000 compared with $1,991,000 for the third quarter of 1999. Basic earnings per share for the first nine months of 2000 reached $1.49, an 8.8% increase over the $1.37 per basic share reported for the same period in 1999. Earnings thus far in 2000 were higher than a year ago because of higher net interest income and other noninterest income, offset in part by higher operating expenses. Increases in net interest income for the nine months were fueled by strong loan growth. Cash dividends declared per share for the first nine months of 2000 increased 9% compared with the same period last year. The year-to-date cash dividends declared per share in 2000 increased by $.06 to $.72 per share, up from $.66 per share in 1999. Third quarter 2000 cash dividends declared surpassed the $1-million mark for the second consecutive quarter in the Bancorp's history. In addition to cash dividends, a 2% stock dividend was paid to shareholders on July 1, 2000. Asset growth remained solid. Total assets increased 6.6% to $626.0 million at September 30, 2000, up $38.5 million from September 30, 1999. Net loans grew by $35.4 million from one year ago to $444.8 million at September 30, 2000, for an 8.7% increase. Commercial loan growth was strong accounting for almost all of the loan growth during the 12 months ended September 30, 2000. Total deposits increased 5.3% to $500.3 million, up $25.2 million from one year ago. Increases in demand, Market Access and certificates of deposit accounted for most of the deposit increase. Lorain National Bank operates 21 retail branches and 28 Atms in nine local communities. Total shareholders' equity increased by $4.1 million during the 12 months ended September 30, 2000, for an 8.2% increase. Total shareholders' equity amounted to $54.6 million or $12.98 per share at September 30, 2000 compared with $50.5 million or $12.26 per share at September 30, 1999. The annualized return on average shareholders' equity rose to 15.86% for the nine months ended September 30, 2000, up from 15.58% return for the same period one-year ago. The Bancorp is currently expanding into new areas that have been opened up by the passage of the Financial Modernization Act. We look forward to further reporting to you regarding these matters in our 2000 Annual Report. We appreciate and thank you for your continuing support and 28 look forward to addressing you after the completion of another successful year of operations. Sincerely, /s/ Stanley G. Pijor /s/ Gary C. Smith --------------------- ------------------------ Stanley G. Pijor Gary C. Smith Chairman of the Board President and Chief Executive Officer NET INCOME millions of dollars (A Net Income graph follows in printed version with net income on the y- axis and years 1996 through 2000 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) DIVIDENDS PER SHARE dollars* (A Dividends Per Share graph follows in printed version with dividends per share on the y-axis and years 1996 through 2000 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 PER SHARE dollars* (A Basic Earnings Per Share graph follows in printed version with earnings per share on the y-axis and years 1996 through 2000 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) Dividends Basic Earnings Net Income Per Share Per Share Year Millions of Dollars Dollars* Dollars* 2000 $6,261 $ .72 $1.49 1999 $5,782 $ .66 $1.37 1998 $5,258 $ .60 $1.25 1997 $4,780 $ .48 $1.32 1996 $4,280 $ .42 $1.00 *Adjusted for stock dividends and splits 29 Consolidated Balance Sheets September 30 2000 1999 ------------------------------------------------------------------------ ASSETS: Cash and Due from Banks $ 27,897,000 $ 19,937,000 Federal Funds Sold and Short-Term Investments 3,077,000 12,926,000 Federal Home Loan Bank and Federal Reserve Bank Stock, at Cost 3,098,000 2,670,000 Securities Held to Maturity, at Cost 44,529,000 44,415,000 Securities Available for Sale, at Fair Value 79,193,000 75,756,000 Loans 449,977,000 413,544,000 Reserve for Loan Losses (5,184,000) (4,108,000) ------------------------------------------------------------------------ NET LOANS 444,793,000 409,436,000 ------------------------------------------------------------------------ Premises, Equipment and Intangible Assets, (net) 15,203,000 15,146,000 Accrued Interest Receivable and Other Assets 8,197,000 7,250,000 ------------------------------------------------------------------------ TOTAL ASSETS $625,987,000 $587,536,000 ------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY: Noninterest-Bearing Deposits $ 84,426,000 $ 79,861,000 Interest-Bearing Deposits 415,894,000 395,280,000 ------------------------------------------------------------------------ TOTAL DEPOSITS 500,320,000 475,141,000 ------------------------------------------------------------------------ Securities Sold under Repurchase Agreements and Other Short-Term Borrowings 33,540,000 22,710,000 Federal Home Loan Bank Advances 32,345,000 34,345,000 Accrued Interest, Taxes, Expenses and Other Liabilities 5,138,000 4,809,000 ------------------------------------------------------------------------ TOTAL LIABILITIES 571,343,000 537,005,000 ------------------------------------------------------------------------ Preferred Stock -0- -0- Common Stock 4,312,000 4,223,000 Additional Capital 24,333,000 22,604,000 Retained Earnings 29,593,000 27,233,000 Accumulated Other Comprehensive (Loss) (655,000) (629,000) Treasury Stock, at Cost (2,939,000) (2,900,000) ------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 54,644,000 50,531,000 ------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $625,987,000 $587,536,000 ------------------------------------------------------------------------ 30 TOTAL ASSETS millions of dollars (A Total Assets graph follows in printed version with earnings per share on the y-axis and years 1996 through 2000 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' EQUITY millions of dollars (A Total Shareholders' Equity graph follows in printed version with dividends per share on the y-axis and years 1996 through 2000 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) TOTAL DEPOSITS millions of dollars (A Total Deposits graph follows in printed version with earnings per share on the y-axis and years 1996 through 2000 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 Total Assets Equity Total Deposits Year Millions of Dollars Millions of Dollars Millions of Dollars 2000 $626.0 $ 54.6 $500.3 1999 $587.5 $ 50.5 $475.1 1998 $523.6 $ 48.2 $433.3 1997 $496.8 $ 44.4 $422.1 1996 $433.6 $ 43.3 $360.5 31 Consolidated Statements of Income Nine Months Ended September 30, 2000 1999 ----------------------------------------------------------------------- INTEREST INCOME: Interest and Fees on Loans $28,751,000 $25,189,000 Interest and Dividends on Securities 5,530,000 5,331,000 Interest on Federal Funds Sold and Short-term Investments 171,000 250,000 ------------------------------------------------------------------------ TOTAL INTEREST INCOME 34,452,000 30,770,000 ------------------------------------------------------------------------ INTEREST EXPENSE: Interest on Deposits 11,629,000 9,453,000 Interest on Securities Sold Under Repurchase Agreements and Other Short-term Borrowings 1,355,000 870,000 Interest on Federal Home Loan Bank Advances 987,000 1,067,000 ------------------------------------------------------------------------ TOTAL INTEREST EXPENSE 13,971,000 11,390,000 ------------------------------------------------------------------------ NET INTEREST INCOME 20,481,000 19,380,000 Provision for Loan Losses 1,250,000 1,250,000 ------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,231,000 18,130,000 ------------------------------------------------------------------------ OTHER INCOME: Investment and Trust Services Division Income 1,704,000 1,587,000 Fees and Service Charges 4,425,000 4,246,000 Gains From Sales of Loans, Securities, and Buildings -0- 158,000 Other Operating Income 40,000 72,000 ------------------------------------------------------------------------ TOTAL OTHER INCOME 6,169,000 6,063,000 ------------------------------------------------------------------------ OTHER EXPENSES: Salaries and Employee Benefits 7,754,000 7,481,000 Net Occupancy Expense of Premises 1,108,000 1,136,000 Furniture and Equipment Expenses 1,697,000 1,627,000 Supplies and Postage 705,000 727,000 Ohio Franchise Tax 418,000 414,000 Other Operating Expenses 4,195,000 4,020,000 ------------------------------------------------------------------------ TOTAL OTHER EXPENSES 15,877,000 15,405,000 ------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 9,523,000 8,788,000 ------------------------------------------------------------------------ Income Taxes 3,262,000 3,001,000 ------------------------------------------------------------------------ NET INCOME $6,261,000 $5,787,000 ------------------------------------------------------------------------ ------------------------------------------------------------------------ PER SHARE DATA: ------------------------------------------------------------------------ BASIC EARNINGS PER SHARE $ 1.49 $ 1.37 ------------------------------------------------------------------------ 32 DILUTED EARNINGS PER SHARE $ 1.49 $ 1.37 ------------------------------------------------------------------------ DIVIDENDS DECLARED PER SHARE $ .72 $ .66 ======================================================================== (LOGO) LNB Bancorp, Inc. and its subsidiary Lorain National Bank Logos LNBB NASDAQ Listed, FDIC Insured, Federal Home Loan Bank System, Equal Housing Lender 33 Executive Officers: Keeping LNBB in pace with the future As leaders of one of Ohio's rapidly-emerging financial holding companies, the executive management team of LNB Bancorp, Inc. is focusing its efforts on controlled growth of the organization. Now the parent company of two subsidiaries: The Lorain National Bank and the Charleston Insurance Agency, LNB Bancorp, Inc. is quickly taking advantage of new opportunities to diversify under the provisions of the Gramm-Leach-Bliley Act, popularly known as the Financial Modernization Act. In support of president and chief executive officer, Gary C. Smith, executive vice presidents Kevin W. Nelson, Thomas P. Ryan and Gregory D. Friedman, are optimistic about the organization's growth as it enters the new millennium. Color photo on left side of page of Kevin W. Nelson Kevin W. Nelson, Executive V.P., Chief Operating Officer In his first year of service to the organization as chief operating officer, Mr. Nelson is a 14-year banking veteran who oversees the daily function of the bank. He joined Lorain National in the first quarter, after most recently serving as President of the Dayton division of First National Bank of Zanesville, a subsidiary of BankFirst Ohio Corporation. He and his wife Lisa reside in Avon Lake. Color photo on left side of page of Thomas P. Ryan Thomas P. Ryan, Executive V.P., Secretary/Treasurer Mr. Ryan, an LNBB board member, is a 39-year veteran of Lorain National Bank, and serves as LNB Bancorp's shareholder relations officer. The bank's Investment Management and Trust Services division also reports to him. During Mr. Ryan's tenure, he has served in branch management and marketing and was most recently appointed president and chief executive officer of LNBB's newly-formed Charleston Insurance Agency, Inc. subsidiary. The agency can offer non-traditional investment and insurance products, such as annuities, mutual funds and life insurance. Tom and his wife Carole reside in Vermilion. Color photo on left side of page of Gregory D. Friedman Gregory D. Friedman, Executive V.P., Chief Financial Officer, CPA Mr. Friedman has served as a financial accountant for the past 30 years, including the past 15 years with LNB Bancorp, Inc. and Lorain National Bank. A veteran of the U.S. Navy and a former senior manager at Peat, Marwick, Mitchell & Co. (now KPMG LLP) and Mellon Financial Services, Inc., Mr. Friedman oversees the daily financial management of the organization. 34 Mr. Friedman also serves as vice president and treasurer of the Charleston Insurance Agency, Inc. and is an executive trustee and treasurer of the Cleveland Zoological Society. He and his wife Sharon and their two sons reside in Westlake. 35 Back Cover: White background with blue and black lettering, four column format Banking Offices and ATMS ATM service available wherever you see this symbol ** Lorain Banking Offices Elyria Banking Offices **Main Office **Ely Square Office 457 Broadway 124 Middle Avenue Lorain, Ohio 44052 Elyria, Ohio 44035 (440) 244-7185 (440) 323-4621 **Sixth Street Drive-In Office **Cleveland Street Office 200 Sixth Street 801 Cleveland Street Lorain, Ohio 44052 Elyria, Ohio 44035 (440) 244-7242 (440) 365-8397 **Cooper-Foster Park **Lake Avenue Office Road Office 42935 North Ridge Road 1920 Cooper-Foster Elyria Township, Park Road Ohio 44035 Lorain, Ohio 44053 (440) 233-7196 (440) 282-1252 **Midway Mall Office **Kansas Avenue Office 6395 Midway Mall Blvd. 1604 Kansas Avenue Elyria, Ohio 44035 Lorain, Ohio 44052 (440) 324-6530 (440) 288-9151 Village of LaGrange **Oberlin Avenue Office Banking Office 3660 Oberlin Avenue **Village of LaGrange Office Lorain, Ohio 44053 546 North Center Street (440) 282-9196 Village of LaGrange Ohio 44050 **Pearl Avenue Office (440) 355-6734 2850 Pearl Avenue Lorain, Ohio 44055 Oberlin Banking Offices (440) 277-1103 **Kendal at Oberlin Office* 600 Kendal Drive **West Park Drive Office Oberlin, Ohio 44074 2130 West Park Drive (440) 774-5400 Lorain, Ohio 44053 (440) 989-3131 **Oberlin Office 40 East College Street Amherst Banking Office Oberlin, Ohio 44074 **Amherst Office (440) 775-1361 1175 Cleveland Avenue Amherst, Ohio 44001 Olmsted Township (440) 988-4423 Banking Offices **Olmsted Township Office Avon Lake Banking Office 27095 Bagley Road **Avon Lake Office Olmsted Township, 240 Miller Road Ohio 44138 Avon Lake, Ohio 44012 (440) 235-4600 (440) 933-2186 36 The Renaissance Office **Oberlin IGA Foodliner 26376 John Road 331 East Lorain Olmsted Township, Ohio 44138 Oberlin, Ohio (440) 427-0041 Other Offices Vermilion Banking Office Executive Offices **Vermilion Office 457 Broadway 4455 East Liberty Avenue Lorain, Ohio 44052 Vermilion, Ohio 44089 (440) 244-7123 (440) 967-3124 Branch Administration Westlake Banking Offices 457 Broadway **Crossings of Lorain, Ohio 44052 Westlake Office (440) 244-7253 30210 Detroit Road Westlake, Ohio 44145 Commercial, Consumer (440) 892-9696 and Mortgage Loans 457 Broadway Westlake Village Office Lorain, Ohio 44052 28550 Westlake (440) 244-7220 Village Drive (440) 244-7272 Westlake, Ohio 44145 (440) 244-7216 (440) 808-0229 Credit Cards ATMs 2130 West Park Drive **Captain Larry's Marathon Lorain, Ohio 44053 1317 State Route 60 (440) 989-3348 Vermilion, Ohio Customer Service **Dad's Sunoco 2130 West Park Drive 7580 Leavitt Road Lorain, Ohio 44053 State Route 58 (440) 989-3348 Amherst, Ohio (800) 860-1007 **Fligner's Supermarket Human Resources 1846 Broadway 2130 West Park Drive Lorain, Ohio Lorain, Ohio 44053 (440) 989-3139 **Gateway Plaza 3451 Colorado Avenue Operations Lorain, Ohio 2130 West Park Drive Lorain, Ohio 44053 **Lakeland Medical Center (440) 989-3315 3700 Kolbe Road Lorain, Ohio Purchasing 2150 West Park Drive **Lorain County Lorain, Ohio 44053 Community College (440) 989-3327 1005 North Abbe Road Elyria, Ohio Investments and Trust Services 457 Broadway **Lowe'a Home Lorain, Ohio 44052 Improvement Warehouse (440) 244-7226 620 Midway Boulevard Elyria, Ohio 37 All Other Departments & Information Not Listed Telebanker (440) 245-4562 Telebanker (800) 610-9033 Toll Free (800) 860-1007 Lorain (440) 244-6000 Internet www.4LNB.com *Access restricted to residents, their visitors and employees (LOGO) LNB Bancorp, Inc. and its subsidiary Lorain National Bank 38 LNB Bancorp, Inc. Exhibit to Form 10 - Q (For the nine months ended September 30, 2000) S - K Reference Number (3a) LNB Bancorp, Inc., - Second Amended Articles Of Incorporation of LNB Bancorp, Inc. 39 Exhibit A SECOND AMENDED ARTICLES OF INCORPORATION OF LNB BANCORP, INC. These Second Amended Articles of Incorporation (the "Articles") of LNB Bancorp, Inc. ("Corporation") hereby supersede Corporation's existing Amended Articles of Incorporation and shall read as follows: FIRST. The name of Corporation shall be LNB Bancorp, Inc. SECOND. The place in Ohio where Corporation's principal office is to be located is the City of Lorain, Lorain County. THIRD. The purpose for which Corporation is formed is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 through 1701.98, inclusive, of the Ohio Revised Code, including (but not limited to) to qualify and act as a "financial holding company" as defined by the Gramm-Leach-Bliley Act of 1999. FOURTH. The number of shares (collectively, the "Shares") which Corporation is authorized to have outstanding is 16,000,000 Shares consisting of: (i) 15,000,000 of common Shares, One Dollar ($1.00) par value (the "Common Shares"); and (ii) 1,000,000 of voting preferred Shares, no par value (the "Voting Preferred Shares") as follows: A. Common Shares: The holders of the Common Shares are entitled at all times to one (1) vote for each Share and to such dividends as the Board of Directors (herein called the "Board") may in its discretion periodically declare, subject, however, to the voting and dividend rights of the holders of the Voting Preferred Shares. In the event of any liquidation, dissolution or winding up of Corporation, the remaining assets of Corporation after the payment of all debts and necessary expenses shall be distributed among the holders of the Common Shares pro rata in accordance with their respective Share holdings, subject, however, to the rights of the holders of the Voting Preferred Shares then outstanding. The Common Shares are subject to all of the terms and provisions of the Voting Preferred Shares as established by the Board in accordance with this Article FOURTH. B. Voting Preferred Shares: The Board is hereby expressly authorized in its discretion to adopt amendments to the Articles to provide for the issuance of one (1) or more series of Voting Preferred Shares; to establish periodically the number of Shares to be included in each such series; and to fix the designation, powers, preferences, dividend rights and other rights of the Voting Preferred Shares of each such series and any qualifications, limitations or restrictions thereof, to the fullest extent permitted by law. When voting as a class, the holders of the Voting Preferred Shares shall be entitled at all times to one (1) vote for each Voting Preferred Share. Voting Preferred Shares redeemed or otherwise acquired by 40 Corporation shall become authorized but unissued Voting Preferred Shares, shall be unclassified as to series, and may thereafter be reissued in the same manner as other authorized but unissued Voting Preferred Shares. C. Series A Voting Preferred Shares: From the authorized number of Voting Preferred Shares of Corporation, a series of Voting Preferred Shares designated as "Series A Voting Preferred Shares" is hereby created and shall consist of 750,000 Shares, without par value, of which the preferences, relative and other rights, and the qualifications, limitations or restrictions thereof shall be (in addition to those set forth elsewhere in these Articles) as follows: 1. Dividends and Distribution. (a) In preference to the holders of Common Shares and of any outstanding junior Shares of Corporation, but subject to the prior and superior rights of the holders of any Shares of any series of Voting Preferred Shares ranking prior and superior to the Shares of Series A Voting Preferred Shares with respect to dividends, the holders of Series A Voting Preferred Shares shall be entitled to receive (when, as and if declared by the Board) from funds legally available for the purpose, quarterly dividends payable in cash on the first Business Day of January, April, July and October in each year (each such date being referenced herein as a "Quarterly Dividend Payment Date", and "Business Day" meaning any day other than a Saturday, Sunday or a day on which banking institutions in the State of Ohio are authorized or obligated by law or executive order to close), commencing on the first Quarterly Dividend Payment Date after the first issuance of a Share or fraction of a Share of Series A Voting Preferred Shares. Such dividends shall be in an amount per Share (rounded to the nearest cent) equal to the greater of: (a) One Dollar ($1.00), or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per Share amount of all cash dividends and 100 times the aggregate per Share amount (payable in kind) of all non-cash dividends or other distributions (other than a dividend payable in Common Share or other subdivision of the outstanding Common Shares, by reclassification or otherwise, declared on the Common Shares) since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any Share or fraction of a Share of Series A Voting Preferred Shares. If Corporation shall, on or after November 6, 2000 (the "Rights Declaration Date"), (i) declare any dividend on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of Shares, then (in each such case) the amount to which holders of Series A Voting Preferred Shares were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares outstanding immediately prior to such event. (b) The Board shall declare a dividend or 41 distribution on the Series A Voting Preferred Shares as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Shares (other than a dividend payable in Shares of Common Shares); provided that, subject to the requirements of applicable law, in the event no dividend or distribution has been declared on the Common Shares during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of One Dollar ($1.00) per Share on the Series A Voting Preferred Shares shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall accrue and be cumulative on outstanding Series A Voting Preferred Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such Shares of Series A Voting Preferred Shares, unless: (i) the date of issue of such Shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such Shares shall accrue from the date of issue of such Shares, or (ii) the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series A Voting Preferred Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on Series A Voting Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such Shares shall be allocated pro rata on a Share-by-Share basis among all such Shares at the time outstanding. The Board may fix a record date for the determination of holders of Series A Voting Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than sixty (60) days prior to the date fixed for the payment thereof. 2. Voting Rights. The holders of Series A Voting Preferred Shares shall have the following voting rights, in addition to those set forth elsewhere in this Article FOURTH: (a) Subject to the provision for adjustment hereinafter set forth, each Series A Voting Preferred Share shall entitle the holder thereof to one hundred (100) votes on all matters submitted to a vote of the shareholders of Corporation. If Corporation shall at any time on or after the Rights Declaration Date: (i) declare any dividend on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a small number of Shares, then (in each such case) the number of votes per Share to which holders of Series A Voting Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares outstanding immediately prior to such event. (b) Except as otherwise provided herein or by law, the holders of Series A Voting Preferred Shares and the holders of Common Shares shall vote together as one class on all matters submitted to a vote of shareholders of Corporation. 42 (c) Except as set forth herein, the holders of Series A Voting Preferred Shares shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote as set forth in these Articles or by law) for taking any corporate action. 3. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Voting Preferred Shares as provided in Section 1 of paragraph C. (Series A Voting Preferred Shares) of Article FOURTH are in arrears, thereafter and until all accrued and unpaid dividends and distributions (whether or not declared) on Series A Voting Preferred Shares outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends or make any other distributions on Shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Voting Preferred Shares; (ii) declare or pay dividends or make any other distributions on any Shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Voting Preferred Shares, except dividends paid ratably on the Series A Voting Preferred Shares and all such parity Shares on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such Shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration Shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Voting Preferred Shares; provided, however, that Corporation may at any time redeem, purchase or otherwise acquire any such junior Shares in exchange for any Shares of Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Voting Preferred Shares; and (iv) purchase or otherwise acquire for consideration any Series A Voting Preferred Shares or any Shares ranking on a parity with the Series A Voting Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board) to all holders of such Shares upon such terms as the Board, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, determines in good faith will result in fair and equitable treatment among the respective series or classes. (b) Corporation shall not permit any subsidiary of Corporation to purchase or otherwise acquire for consideration any Shares of Corporation unless, pursuant to paragraph (a) of this Section 3, Corporation could purchase or otherwise acquire such Shares at such time and in such manner. 4. Reacquired Shares. Any Series A Voting Preferred Shares purchased or otherwise acquired by Corporation in any manner whatsoever shall be retired and cancelled promptly after such acquisition. All such Shares, upon their cancellation, shall become 43 authorized but unissued Voting Preferred Shares, without designation as to series, and may be reissued as part of any series of Voting Preferred Shares created by the Board (including Series A Voting Preferred Shares) subject to the condition and restrictions on issuance set forth herein. 5. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of Corporation, no distribution shall be made to: (a) The holder of Shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Voting Preferred Shares, unless (prior thereto) the holders of Series A Voting Preferred Shares have received the greater of: (i) One Dollar ($1.00) per Share ($0.001 per one one-hundredth of a Share), plus an amount equal to accrued and unpaid dividends and distributions thereon (whether or not declared) to the date of such payment, or (ii) an aggregate amount per Share, subject to the provision for adjustment herein set forth, equal to 100 times the aggregate amount to be distributed per Share to holders of Common Shares; or (b) The holders of Shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Voting Preferred Shares, except distributions made ratably on the Series A Voting Preferred Shares and all other such parity Shares in proportion to the total amounts to which the holders of all such Shares are entitled upon such liquidation, dissolution or winding up. If Corporation shall at any time declare or pay any dividend on Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then (and in each such event) the aggregate amount to which the holder of each Share of Series A Voting Preferred Shares was entitled immediately prior to such event under paragraph (a) of this Section 5 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. 6. Combination. If Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other stock, securities, cash or any other property, then (in each such event) the Series A Voting Preferred Shares shall at the same time be similarly exchanged or changed in an amount per Share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. If, at any time on or after the Rights Declaration Date, Corporation (i) declares any dividend on Common Shares payable in Common Shares, (ii) subdivides the outstanding Common Shares; or (iii) combines the outstanding Common Shares into a smaller number of Shares, then (in each such case) the amount set forth in the preceding sentence with respect to the exchange or change of Series A Voting Preferred Shares shall be adjusted by multiplying such amount by a fraction, the 44 numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event. 7. No Redemption. The Series A Voting Preferred Shares shall not be redeemable; provided, however, that Corporation may acquire Series A Voting Preferred Shares in any other manner permitted by law or these Articles. 8. Ranking. Unless otherwise provided in these Articles or any subsequent amendment of these Articles relating to a subsequent series of preferred Shares of Corporation, the Series A Voting Preferred Shares shall rank junior to all other series of Corporation's Voting Preferred Shares as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and shall rank senior to the Common Shares. 9. Amendment. These Articles shall not be further amended in any manner which would materially and adversely alter or change the powers, preference or special rights of the Series A Voting Preferred Shares without the affirmative vote of the holders of at least a majority of the outstanding Series A Voting Preferred Shares, voting together as a single series. 10. Fractional Shares. Series A Voting Preferred Shares may be issued in fractions of a Share (in one one-hundredth (1/100) of a Share and integral multiples thereof) that shall entitle the holder (in proportion to such holder's fractional Shares) to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Voting Preferred Shares. FIFTH. Except as otherwise provided in these Articles, Corporation is hereby authorized to purchase through action of the Board, without the approval of the holders of any Shares of any class and upon such terms and conditions as the Board determines: (1) Shares of any class or series issued by Corporation, subject to express terms of such Shares; (2) any security or other obligation of the Corporation which may confer upon the holder thereof the right to convert such security or obligation into Shares of any class or series authorized by these Articles; (3) any security or other obligation which may confer upon the holder thereof the right to purchase Shares of any class or series authorized by these Articles; and (4) Shares of any class issued by Corporation if and when any holder of such Shares desires to (or, upon the happening of any event, is required to) sell such Shares. SIXTH. No holder of any Shares of any class shall have the right to vote cumulatively in the election of Directors to the Board. SEVENTH. No holder of the Shares of any class shall have any preemptive right to subscribe for or to purchase any Shares of any class whether now or hereafter authorized. 45 LNB Bancorp, Inc. Exhibit to Form 10 - Q (For the nine months ended September 30, 2000) S - K Reference Number (27) Financial Data Schedule (Follows as a separate document)