-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N5KSaelq/pypva3/Yg3vGhXo6DJMUDNz2U6qk4eiOqMDFjrOb11sj9HrTY/pFu/3 97og7aGI5nuLN/obTLyrXA== 0000737210-01-000002.txt : 20010409 0000737210-01-000002.hdr.sgml : 20010409 ACCESSION NUMBER: 0000737210-01-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LNB BANCORP INC CENTRAL INDEX KEY: 0000737210 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341406303 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13203 FILM NUMBER: 1590000 BUSINESS ADDRESS: STREET 1: 457 BROADWAY CITY: LORAIN STATE: OH ZIP: 44052-1769 BUSINESS PHONE: 4402446000 10-K 1 0001.txt 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, 2000 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 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 stock held by non-affiliates of the Registrant at February 28, 2001 was approximately $73,590,000. The number of shares of Registrant's Common Stock outstanding on February 28, 2001 was 4,211,047. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2000 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 19, 2001 (the Proxy Statement) are incorporated by reference in Part III of this report. 1 LNB Bancorp, Inc. Form 10-K Report Table of Contents 2000 Page PART I Item 1 Business a. General Development of Business 2 b. Financial Information About Industry Segments 3 c. Description of LNB Bancorp, Inc.'s Business 3 d. Financial Information About Foreign and Domestic Operations and Export Sales 8 e. Statistical Disclosure by Bank Holding Companies 8 I. Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential 9 II. Investment Portfolio 9 III. Loan Portfolio 11 IV. Summary of Loan Loss Experience 15 V. Deposits 17 VI. Return on Equity and Assets 18 VII. Short-Term Borrowings 18 Item 2 Properties 19 Item 3 Legal Proceedings 19 Item 4 Submission of Matters to a Vote of Shareholders 20 PART II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters 21 Item 6 Selected Financial Data 21 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7(a) Quantitative and Qualitative Disclosures about Market Risk 21 Item 8 Financial Statements and Supplementary Data 21 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22 PART III Item 10 Directors and Executive Officers of the Registrant 22 Item 11 Executive Compensation 22 Item 12 Security Ownership of Certain Beneficial Owners and Management 22 Item 13 Certain Relationships and Related Transactions 22 PART IV Item 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 23 SIGNATURES 24 EXHIBIT INDEX 26 2 PART 1 ITEM 1 - BUSINESS a) GENERAL DEVELOPMENT OF BUSINESS LNB Bancorp, Inc. received its financial holding company status on March 13, 2000. In the second half of 2000, LNB Bancorp, Inc. formed a wholly owned insurance subsidiary named Charleston Insurance Agency, Inc., which will initially offer life, accident and health insurance and fixed annuity products. Also, LNB Bancorp, Inc. entered into a joint venture owning a 49 percent interest in a title company named Charleston Title Insurance Agency, LLC offering traditional title services. In the first quarter of 2001, Lorain National Bank entered into an agreement with Raymond James Financial Services, Inc. for Raymond James to offer brokerage services including stock, mutual funds and variable annuity products at select Lorain National Bank offices. 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. 3 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. 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. LNB Bancorp, Inc. has broader corporate powers than the Bank. These corporate powers principally include the power to engage in certain non-banking businesses closely related to banking, to own capital stock of banks located in Ohio and certain other states and to own capital stock of business corporations (other than banks) located within or outside Ohio. The 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 are 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 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. b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Corporation and subsidiary companies are engaged in one line of business which is banking services. Reference is hereby made to Item 1e., Statistical Disclosure by Bank Holding Companies, and to Item 8 of this Form 10-K for financial information pertaining to the Corporation's business. c) DESCRIPTION OF LNB BANCORP, INC.'S BUSINESS LNB Bancorp, Inc. is a $622.1 million locally owned financial holding company headquartered in Lorain, Ohio. The predecessor of LNB Bancorp, Inc., 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, Lorain National Bank 4 became the wholly owned subsidiary of LNB Bancorp, Inc. LNB Bancorp, Inc. received its financial holding company status on March 13, 2000. In the second half of 2000, LNB Bancorp, Inc. formed a wholly owned insurance subsidiary named Charleston Insurance Agency, Inc., which will initially offer life, accident and health insurance and fixed annuity products. Also, LNB Bancorp, Inc. entered into a joint venture owning a 49 percent interest in a title company named Charleston Title Insurance Agency, LLC offering traditional title services. The Lorain National Bank operates 21 retail branches and 29 ATMs in the nine communities of Lorain, Elyria, Amherst, Avon Lake, LaGrange, Oberlin, Olmsted 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 plus indirect automobile loans. 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, 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, 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 5 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 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 $622.1 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 increased to 17.4% in 2000 compared to 15.9% in 1999, while ranking number two in market share in 2000 and 1999. 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 6 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 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 intercompany loans and investments. A substantial portion of the Corporation's cash revenues is derived from dividends paid by its subsidiary bank. These dividends are subject to various legal and regulatory restrictions as summarized in Note(14) on page 25 of the LNB Bancorp, Inc. 2000 Annual Report. This note is incorporated herein by reference. The Corporation and the Bank are subject to an extensive array of banking laws and regulations that are intended primarily for the protection of the customers and depositors of the Corporation's subsidiaries rather than holders of the Corporation's securities. These laws and regulations govern such areas as permissible activities, loans and investments, rates of interest that can be charged on loans and reserves. The Corporation and the Bank also are subject to general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio. Set forth below are brief descriptions of selected laws and regulations applicable to the Corporation and the Bank. The Bank is subject to the provisions of the National Bank Act. The Bank is subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (OCC). The Bank is also subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Under the BHC Act, as amended, and under Regulations of the Federal Reserve Board pursuant thereto, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. The Corporation's subsidiary bank is also subject to the state banking laws of Ohio. Ohio adopted nationwide reciprocal interstate banking effective October, 1988. However, banking laws of other states may restrict branching of banks to other counties within the state and acquisitions or mergers involving banks and bank holding companies located in other states. Federal regulators adopted risk-based capital guidelines and leverage standards for banks and bank holding companies. A discussion of the impact of risk-based capital guidelines and leverage standards is 7 presented in Note 15 on page 26 of the LNB Bancorp, Inc. 2000 Annual Report and is incorporated herein by reference. The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company and its controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of any FDIC assisted transaction involving an affiliated insured bank or savings association. 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 to 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 to laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis. Recent regulatory inspections and examinations of the Bancorp and the Bank have not disclosed any significant instances of noncompliance. The minor instances of noncompliance detected during these inspections and examinations were promptly corrected by Management and no action was taken by the regulators against the Corporation or the Bank. The earnings and growth of LNB Bancorp, Inc. are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board. Its policies influence the amount of bank loans and deposits and the interest rates charged and paid thereon, and thus have an effect on earnings. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Corporation and its subsidiary bank cannot be predicted. The discussion of "Impacts of Accounting and Regulatory Pronouncements" is incorporated herein by reference to page 43 of the LNB Bancorp, Inc. 2000 Annual Report. Employees As of December 31, 2000, the Corporation and the Bank employed 239 full-time employees and 59 part-time employees. The Corporation is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be very good. Employee benefits programs are considered by Management to be competitive with benefits programs provided by other financial institutions and major employers within the Bank's market area. 8 d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Corporation and the Bank do not have any offices located in foreign countries and they have no foreign assets, liabilities or related income and expense for the years presented. e) STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The following section contains certain financial disclosures related to the Corporation as required under the Securities and Exchange Commission's Industry Guide 3, "Statistical Disclosures by Bank Holding Companies", or a specific reference as to the location of the required disclosures in the LNB Bancorp, Inc. 2000 Annual Report, portions of which are incorporated in this Form 10-K by reference. 9 LNB BANCORP, INC.'S STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL A. & B. The average balance sheet information and the related analysis of net interest income for the years ending December 31, 2000, 1999, and 1998 are included in the Condensed Consolidated Average Balance Sheets, within Management's Discussion and Analysis found on page 37 of the LNB Bancorp, Inc. 2000 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, 2000 and 1999 are included in Rate/Volume Analysis of Net Interest Income within Management's Discussion and Analysis found on page 37 of the LNB Bancorp, Inc. 2000 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) 2000 1999 1998 - ------------------------------------------------------------------------ Securities available for sale: U.S. Treasury securities $ 2,090 $ 11,075 $ 27,416 Securities of other U.S. Government agencies and corporations 76,133 64,484 50,531 Equity securities 1,295 169 181 - ------------------------------------------------------------------------ Total securities available for sale 79,518 75,728 78,128 - ------------------------------------------------------------------------ Securities held to maturity: Securities of other U.S. Government agencies and corporations 39,566 39,848 33,719 States and political subdivisions 4,865 4,794 4,483 - ------------------------------------------------------------------------ Total securities held to maturity 44,431 44,642 38,202 - ------------------------------------------------------------------------ Federal Home Loan Bank and Federal Reserve Bank Stock $ 3,152 $ 2,949 $ 2,189 - ------------------------------------------------------------------------ Total securities $127,101 $123,319 $118,519 - ------------------------------------------------------------------------ 10 B. MATURITY DISTRIBUTION OF INVESTMENT SECURITIES Maturities of nonequity securities owned by the Corporation as of December 31, 2000 are presented below: Maturing ---------------------------------------------------- Within From 1 to From 5 to After 10 (Amounts in Thousands) 1 year 5 years 10 years years Total - ------------------------------------------------------------------------ Securities available for sale: U.S. Treasury securities $ 1,000 $ 1,090 $ -0- $ -0- $ 2,090 U.S. Government agencies and corporations 10,996 65,137 -0- -0- 76,133 - ------------------------------------------------------------------------ Total securities available for sale 11,996 66,227 -0- -0- 78,223 - ------------------------------------------------------------------------ Securities held to maturity: U.S. Government agencies and corporations -0- 5,022 34,544 -0- 39,566 States and political subdivisions 1,519 583 181 2,582 4,865 - ------------------------------------------------------------------------ Total securities held to maturity 1,519 5,605 34,725 2,582 44,431 - ------------------------------------------------------------------------ Total securities $13,515 $71,739 $34,725 $2,582 $122,561 - ------------------------------------------------------------------------ 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, 2000: 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 5.25% 6.37% 0.00% 0.00% 5.83% U.S. Government agencies and corporations 5.80 6.09 0.00 0.00 6.05 - ------------------------------------------------------------------------ Total securities available for sale 5.75 5.80 0.00 0.00 5.79 - ------------------------------------------------------------------------ Securities held to maturity: U.S. Government agencies and corporations 0.00 6.29 5.51 0.00 5.61 States and political subdivisions (1) 7.01 7.78 6.53 7.76 7.45 - ------------------------------------------------------------------------ Total securities held to maturity 7.01 6.17 5.56 7.76 5.81 - ------------------------------------------------------------------------ Total securities 5.62% 5.62% 5.50% 5.65% 5.80% 11 1) Yields on tax-exempt obligations are computed on a tax equivalent basis based upon a 34% statutory Federal income tax rate. C. Excluding those holdings of the securities portfolio in U.S. Treasury Securities and U.S. Government Agencies and Corporations, there were no investments in securities of any one issuer which exceeded 10% of the consolidated shareholders' equity of the Corporation at December 31, 2000. III. LOAN PORTFOLIO A. The following table summarized the distribution of the loan portfolio: December 31, --------------------------------------------------- (Amounts in Thousands) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------ Commercial $186,866 $157,897 $124,875 $120,892 $113,170 Mortgage 157,575 152,825 147,651 142,223 138,455 Installment 69,821 74,682 65,793 37,250 27,683 Consumer revolving lines of credit 36,878 34,112 31,547 30,666 22,765 - ------------------------------------------------------------------------ TOTAL LOANS 451,140 419,516 369,866 331,031 302,073 Reserve for loan losses(5,250) (4,667) (3,483) (4,168) (4,116) - ------------------------------------------------------------------------ NET LOANS $445,890 $414,849 $366,383 $326,863 $297,957 ======================================================================== B. COMMERCIAL LOAN MATURITY AND REPRICING ANALYSIS AS OF DECEMBER 31, 2000 (Amounts in Thousands) 2000 - --------------------------------------------------------- Maturing and repricing in one year or less $178,096 Maturing and repricing after one year but within five years 6,781 Maturing and repricing beyond five years 1,989 - --------------------------------------------------------- TOTAL COMMERCIAL LOANS $186,866 ========================================================= Loans repricing beyond one year: Fixed rate 965 Variable rate 7,805 - --------------------------------------------------------- TOTAL $ 8,770 ========================================================= 12 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) 2000 1999 1998 1997 1996 - ----------------------------------------------------------------- Nonaccrual loans: Real estate loans $1,652 $ 816 $ 980 $ 383 $ 641 Commercial loans 378 42 54 42 114 Consumer loans 189 385 53 0 10 - ----------------------------------------------------------------- Total nonaccrual loans 2,219 1,243 1,087 425 765 Restructured loans 0 0 0 0 0 Other Foreclosed Assets 98 96 1,400 90 39 - ----------------------------------------------------------------- Total nonperforming assets $2,317 $1,339 $2,487 $ 515 $ 804 - ----------------------------------------------------------------- Reserve for loan losses to nonperforming assets 226.6% 348.5% 140.1% 809.3% 511.9% ================================================================= Accruing loans past due 90 days $ 306 $ 555 $ 213 $ 461 $ 357 Potential problem loans 3,924 4,348 2,941 8,764 1,066 ================================================================= (1) The Corporation, through its subsidiary bank, grants commercial, residential, and consumer loans to customers located primarily in the northern Ohio counties of Lorain, Cuyahoga, Erie and Huron. Nonperforming assets consist of nonaccrual loans and loans which have been restructured, which are defined as follows: Nonaccrual loans are loans which are 90 days past due and with respect to which, in Management's opinion, collection of interest is doubtful. These loans no longer accrue interest and are accounted for on a cash basis. Loans are classified as restructured when, due to the deterioration of a customer's financial ability, the original terms have been favorably modified or either principal or interest has been forgiven. The level of nonperforming assets increasing 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. During 2000, non-accrual loans increased due to increases 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 13 times at 2000 year end. This ratio decreased in 2000 from the net of: increases in nonperforming assets in the amount of $978,000 and increases in the loan loss reserve of $583,000. The increase in other foreclosed assets relates to the net increase in repossessions of motor vehicles at December 31, 2000. The increase in nonaccrual loans is due to decreases in nonaccrual principal balances of $1,480,000 which have been paid off and brought current, loans charged-off in the amount of $325,000, liquidation of nonaccrual loans of $965,000 and increases in nonaccrual principal balances of $3,746,000. The 2000 increase in nonaccrual loans was due primarily to sixteen commercial loan customers and eight mortgage loan customers and several personal loan customers, particularly in the indirect automobile loan category. Management does not believe that changes in nonaccrual loans is indicative of a failing economy and that this change did not result from any change in underwriting standards. It is the Bank's policy to cease accruing interest on any loans where the principal and/or interest remains unpaid for 90 days or more, unless the loan is both well secured and in the process of collection. For the year ended December 31, 2000, the interest income that would have been earned on the nonaccrual loans in the loan portfolio would have been approximately $122,000; however, the interest income actually earned and reported as income in 2000 amounted to approximately $109,000. In addition to the nonperforming assets classified above, the loan review committee identifies accruing loans past due 90 days plus potential problem loans. These loans are closely monitored by the loan review committee to assess the borrowers' ability to comply with the terms of the loans. Management's year-end review indicated that a charge to the reserve for 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 12 of Form 10-K, at December 31, 2000, there are approximately $3,924,000 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. At December 31, 2000, potential problem loans totaled $3,924,000, a decrease of $424,000 from one year ago. The net decrease in potential problem loans is mainly due to five small to medium commercial credit customers added during 2000 in the amount of $1,328,000 less the liquidation of one large commercial credit in the amount of $1,060,000 and some small commercial credits. Potential problem loans at December 31, 2000 are primarily comprised of four large credits that the Bank is reviewing. Another $1,439,000 of these loans relates to the extension of credits to a recreational entertainment center. These credits are being monitored by Management. Another $669,000 of the potential problem loans relates to the extension of credit to a retail beverage store. About $415,000 in potential problem loans relates to credit 14 extended to a steel frame construction company. Another $1,109,000 of these loans relates to the extension of credits to a union industrial electrical contractor. These credits are being monitored by Management after the consolidation of loans. Management does not anticipate any charge-offs relative to these potential problem loans. The potential problem loans in 1999, and 1998 remained at a relatively moderate level. (3) Foreign Outstandings - There were no foreign loans outstandings at December 31, 2000, 1999 or 1998. (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, 2000, 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 (21) of the "Notes to Consolidated Financial Statements" which appears on page 30 of the LNB Bancorp, Inc. 2000 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, 2000, 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 $98,000 and $96,000 in Other Foreclosed Assets at December 31, 2000, and 1999, respectively. 15 IV. SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes activity relating to the Reserve for Loan Losses: December 31, ------------------------------------------- (Amounts in Thousands) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $ 4,667 $ 3,483 $ 4,168 $ 4,116 $ 4,002 Charge-offs: Commercial (25) (23) (3,060) (190) (296) Real Estate (59) (359) (147) (359) (185) Consumer (1,249) (668) (384) (300) (191) - ---------------------------------------------------------------------- Total charge-offs (1,333) (1,050) (3,591) (849) (672) Recoveries: Commercial 14 23 29 7 61 Real Estate 9 108 71 72 67 Consumer 193 103 81 72 58 - ---------------------------------------------------------------------- Total recoveries 216 234 181 151 186 - ---------------------------------------------------------------------- Net charge-offs (1,117) (816) (3,410) (698) (486) - ---------------------------------------------------------------------- PROVISION FOR LOAN LOSSES 1,700 2,000 2,725 750 600 - ---------------------------------------------------------------------- BALANCE AT END OF YEAR $ 5,250 $ 4,667 $ 3,483 $ 4,168 $ 4,116 ====================================================================== ANALYTICAL DATA BALANCES: Average total loans $437,593 $403,388 $346,161 $315,215 $287,809 Total loans at year end 451,140 419,516 369,866 331,031 302,073 Net charge-offs 1,117 816 3,410 698 486 Provision for loan losses 1,700 2,000 2,725 750 600 Reserve for loan losses at year end 5,250 4,667 3,483 4,168 4,116 RATIOS: Net charge-offs to: Average total loans 0.26% 0.20% 0.99% 0.22% 0.17% Total loans at year end 0.25 0.19 0.92 0.21 0.16 Provision for loan losses 65.71 40.80 125.14 93.07 81.00 Reserve for loan losses 21.28 17.48 97.90 16.75 11.81 Reserve for loan losses to: Average total loans 1.20 1.16 1.01 1.32 1.43 Total loans at year end 1.16 1.11 .94 1.26 1.36 The amount of 2000 net charge-offs resulted from increase indirect automobile credits and the lower provision for loan losses charged to expense resulted from decreases in net charge-offs, changes in the portfolio mix of commercial loans compared to historical levels of 16 charge-offs. Net charge-offs for 2000 showed increases in consumer loans due to increases in the consumer indirect automobile loans booked in late 1999 and early 2000. This was anticipated and reserved for in 1999. The increasing trend in the provision for loan losses charged to expense which occurred from 1995 through 1997 resulted from increases in the loan portfolio. 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, restructured, and other real estate owned); loans past due 90 days or more and potential problem loans; historical and present trends in loans charged-off; changes in the composition and level of various loan categories; and current economic conditions. Net charge-offs (recoveries) by portfolio type which are summarized from the analysis of the Reserve for Loan Losses on page 15 of the Form 10-K are presented in the following table: (Amounts in Thousands) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------ Commercial $ 11 $ -0- $3,031 $183 $235 Real estate 50 251 76 287 118 Consumer 1,056 565 303 228 133 - ------------------------------------------------------------------ Total net charge-offs $1,117 $ 816 $3,410 $698 $486 ================================================================== 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) 2000 1999 1998 1997 1996 ---------------------------------------------------------------- Commercial $2,729 $1,803 $1,398 $2,404 $1,429 Real estate 338 530 500 733 803 Consumer 1,738 1,236 704 515 381 Off-balance sheet risk 150 150 125 200 250 Unallocated 295 948 756 316 1,253 - ------------------------------------------------------------------ TOTAL $5,250 $4,667 $3,483 $4,168 $4,116 ================================================================== This allocation is made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. 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 1998 provision for loan losses was less than net charge-offs by $685,000. The allocated portion of the reserve for loan losses has changed during 1996 through 2000 due to the loan portfolio mix. The Bank allocates a portion of the reserve for loan 17 losses to off-balance sheet risks which consist primarily of commitments to extend credit. The allocated portion of the reserve to consumer loans increased in 2000 and 1999 due to increases in credit risk from purchases of indirect automobile lending plus increased consumer loan outstandings. The allocated portion of commercial loans increased in 2000 and increased in 1999 due to credit risk increases in 2000 and 1999. The following table shows the percentage of loans in each category to total loans at year end: 2000 1999 1998 1997 1996 - ------------------------------------------------------------- Commercial 41.4% 37.7% 33.8% 36.5% 37.5% Real estate 34.9 36.4 39.9 43.0 45.8 Consumer 23.7 25.9 26.3 20.5 16.7 ------------------------------------------ 100.0% 100.0% 100.0% 100.0% 100.0% ------------------------------------------ The loan portfolio mix has shifted during the past five years. Consumer loans as a percent of total loans remained relatively constant in 1997. 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 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%. The consumer loan portfolio is running off slightly due to the lack of quality indirect automobile paper. Commercial loans experienced fairly strong growth during 2000. This is the result of increased demand and not reduced credit standards. The commercial loan pending list is at a good level at year end. 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) 2000 1999 1998 - ---------------------------------------------------------------- Demand deposits $ 81,221 $ 81,348 $ 72,575 NOW accounts 54,332 55,145 51,910 Money market accounts 13,385 17,355 18,599 Market access accounts 33,464 6,646 -0- Savings deposits 101,276 107,654 103,863 Time deposits 205,877 195,563 178,989 - ---------------------------------------------------------------- Total $489,555 $463,711 $425,936 ================================================================ 18 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, ---------------------------------------- 2000 1999 1998 - --------------------------------------------------------------- NOW accounts 1.19% 1.19% 1.22% Money market accounts 2.06 2.05 2.11 Market access accounts 5.44 4.50 N/A Savings deposits 1.97 1.98 2.15 Time deposits 5.47 4.81 5.17 ======================================== 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, 2000. Maturing within 3 months $ 64,404 After 3 but within 6 months 33,470 After 6 but within 12 months 51,909 After 12 months 43,597 - ---------------------------------------------- Total $193,380 ============================================== VI. RETURN ON EQUITY AND ASSETS Information relating to key operating ratios for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 is presented in the tabular form below. December 31, 2000 1999 1998 1997 1996 - ---------------------------------------------------------------- Return on average assets 1.39% 1.33% 1.34% 1.41% 1.37% Return on average equity 15.83 15.29 14.46 14.51 13.70 Dividend payout ratio 49.72 49.65 52.00 45.26 44.28 Average equity to average assets 8.77 8.67 9.27 9.70 10.01 Net interest margin 4.85 4.88 5.17 5.20 5.33 VII. SHORT-TERM BORROWINGS Information relating to short-term borrowings for the years ended December 31, 2000, 1999 and 1998 appears on page 23 of the LNB Bancorp, Inc. 2000 Annual Report under footnote (10) "Securities Sold Under Repurchase Agreements and Other Short-Term Borrowings" and is incorporated herein by reference. 19 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 Office 1920 Cooper Foster Park Road, Lorain Midway Mall Office 6395 Midway Mall, Elyria Village of LaGrange Office 546 North Center Street, LaGrange Computer Operations Center 2130 West Park Drive, Lorain Maintenance Building 2140 West Park Drive, Lorain Purchasing Building 2150 West Park Drive, Lorain 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 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 subsidiary is a party to or which any of its property is subject. 20 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the year ended December 31, 2000 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 BANK LNB BANCORP PRINCIPAL OCCUPATION DIRECTOR DIRECTOR NAME(AGE) DURING PAST 5 YEARS SINCE SINCE Debra R. Brown Senior Vice President, (Not a Director) (42) Branch Administration LNB Bancorp, Inc. and The Lorain National Bank Robert Cox Senior Vice President and (Not a Director) (45) Sales LNB Bancorp, Inc. and The Lorain National Bank Sandra L. Dubell Senior Vice President and (Not a Director) (55) Senior Lending Officer, LNB Bancorp, Inc. and The Lorain National Bank Mitchell J. Fallis Vice President and (Not a Director) (46) Chief Accounting Officer, LNB Bancorp, Inc. and The Lorain National Bank Gregory D. Friedman Executive Vice President and (Not a Director) (50) Chief Financial Officer, LNB Bancorp, Inc. and The Lorain National Bank Michael D. Ireland Senior Vice President and (Not a Director) (54) Senior Operations Officer, LNB Bancorp, Inc. and The Lorain National Bank Emma N. Mason Senior Vice President and (Not a Director) (63) Senior Trust Officer, LNB Bancorp, Inc. and The Lorain National Bank James H. Weber Senior Vice President and (Not a Director) (54) Senior Marketing Officer LNB Bancorp, Inc. and The Lorain National Bank 21 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. 2000 Annual Report and are incorporated herein by reference. HOLDERS The total number of shareholders was 2,200 as of February 28, 2001. 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 34 of the LNB Bancorp, Inc. 2000 Annual Report is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis" is incorporated herein by reference to pages 35 - 43 of the LNB Bancorp, Inc. 2000 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 40 - 41 of the LNB Bancorp, Inc. 2000 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. 2000 Annual Report (Appendix 13), pages 12 through 32. The supplementary financial information specified by Item 302 of Regulation S-K, selected unaudited quarterly financial data, is included on page 33 of the LNB Bancorp, Inc. 2000 Annual Report. Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 22 Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998 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 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 17, 2001, dated March 19, 2001, under the caption "Election of Directors" and is incorporated herein by reference to Form DEF 14.A filed by LNB Bancorp, Inc. dated March 16, 2001. 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 16, 2001, from the caption titled "Executive Compensation and Other Information" on pages 9 through 17 of the Proxy Statement of LNB Bancorp, Inc. and Notice for the Annual Meeting of Shareholders on April 17, 2001, dated March 19, 2001. 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 17, 2001, dated March 19, 2001, relating to "Ownership of Voting Shares" is incorporated herein by reference to Form DEF 14.A filed by LNB Bancorp, Inc. dated MArch 16, 2001. 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 16, 2001, from the caption titled "Compensation Committee Interlocks and Insider Participation in CompensationDecisions" and "Certain Transactions" on pages 16 and 20 of the Proxy Statement of LNB Bancorp, Inc. and Notice for the Annual Meeting of Shareholders on April 17, 2001, dated March 19, 2001. 23 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 23, 2001, appear on pages 12 through 32 of the LNB Bancorp, Inc. 2000 Annual Report and are incorporated herein by reference: (1) Financial Statements Consolidated Balance Sheets December 31, 2000 and 1999 Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements for the Years Ended December 31, 2000, 1999 and 1998 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 27 of this Form 10-K. (b) Reports on Form 8-K On January 4, 2001, LNB Bancorp, Inc. filed a Form 8-K with the Securities and Exchange Commission under Item 5 Other Events and under Item 7 Financial Statements and Exhibits. LNB Bancorp, Inc. reported: (1) Registrant's Common Shares, par value $1.00 per share, are registered under Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act"). The report updates the description of Registrant's Common Shares. 24 (2) Amended Code of Regulations of LNB Bancorp, Inc. (effective April 18, 2000) under Item 7 Exhibit 3. (c) Exhibits required by Item 601 Regulation S-K Reference is made to the Exhibit Index which is found on page 27 of this Form 10-K. (d) See Item 14(a)(2) above. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LNB Bancorp, Inc. (Registrant) By /s/Thomas P. Ryan ------------------------ Thomas P. Ryan Executive Vice President, Secretary/Treasurer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: /s/Daniel P. Batista DIRECTOR March 29, 2001 - ----------------------- Daniel P. Batista /s/Robert M. Campana DIRECTOR March 29, 2001 - ----------------------- Robert M. Campana /s/Terry D. Goode DIRECTOR March 29, 2001 - ----------------------- Terry D. Goode /s/Wellsley O. Gray DIRECTOR March 29, 2001 - ----------------------- Wellsley O. Gray /s/James R. Herrick DIRECTOR March 29, 2001 - ----------------------- James R. Herrick /s/David M. Koethe DIRECTOR March 29, 2001 - ----------------------- David M. Koethe 25 /s/Benjamin G. Norton DIRECTOR March 29, 2001 - ----------------------- Benjamin G. Norton /s/Jeffrey F. Riddell DIRECTOR March 29, 2001 - ----------------------- Jeffrey F. Riddell /s/Thomas P. Ryan DIRECTOR March 29, 2001 - ----------------------- Thomas P. Ryan /s/John W. Schaeffer, M.D. DIRECTOR March 29, 2001 - ----------------------- John W. Schaeffer, M.D. /s/Eugene M. Sofranko DIRECTOR March 29, 2001 - ----------------------- Eugene M. Sofranko ABSENT - EXCUSED DIRECTOR March 29, 2001 - ----------------------- Leo Weingarten /s/Stanley G. Pijor CHAIRMAN OF THE March 29, 2001 - ----------------------- BOARD AND DIRECTOR Stanley G. Pijor /s/James F. Kidd VICE CHAIRMAN OF March 29, 2001 - ----------------------- THE BOARD AND James F. Kidd DIRECTOR /s/Gary C. Smith PRESIDENT AND March 29, 2001 - ----------------------- CHIEF EXECUTIVE Gary C. Smith OFFICER AND DIRECTOR EXECUTIVE VICE /s/Gregory D. Friedman PRESIDENT AND March 29, 2001 - ----------------------- CHIEF FINANCIAL Gregory D. Friedman CPA OFFICER EXECUTIVE VICE /s/Kevin W. Nelson PRESIDENT AND March 29, 2001 - ----------------------- CHIEF OPERATIONS Kevin W. Nelson OFFICER /s/Mitchell J. Fallis VICE PRESIDENT AND March 29, 2001 - ----------------------- CHIEF ACCOUNTING Mitchell J. Fallis CPA OFFICER 26 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)Supplemental Retirement Benefits Agreement by and 30 between Gary C. Smith and LNB Bancorp, Inc, and The Lorain National Bank dated December 22, 2000. (b)Supplemental Retirement Benefits Agreement by and 42 between Thomas P. Ryan and LNB Bancorp, Inc. and The Lorain National Bank dated December 23, 2000. (c)Supplemental Retirement Benefits Agreement by and 54 between Gregory D. Freidman and LNB Bancorp, Inc. and The Lorain National Bank dated December 22, 2000. (d)Non-qualified Incentive Stock Option Agreement by 66 and between Gary C. Smith and LNB Bancorp, Inc. dated December 15, 2000. (e) 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. (f)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. (g)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 27 S-K Reference Page Number Exhibit Number by reference. (h)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 (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. (i)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. (j)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. (k)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. (l) 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. (m) 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. (n)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. (o)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 28 S-K Reference Page Number Exhibit Number Report on Form 10-Q (Commission File No. 0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference. (p)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. (q)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. (r)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. (s)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. (t)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. (u)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. (v)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. 29 S-K Reference Page Number Exhibit Number (w)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. 71 (13) LNB Bancorp, Inc. 2000 Annual Report to Shareholders. 72 (21) Subsidiaries of LNB Bancorp, Inc. 196 (23) Consent of Independent Accountants. 197 (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, 1999 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, 1999 to be filed as an amendment to this annual report on Form 10-K. 30 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 2000) S - K Reference Number (10a) Supplemental Retirement Benefits Agreement by and between Gary C. Smith and LNB Bancorp, Inc. and The Lorain National Bank dated December 22, 2000. 31 SUPPLEMENTAL RETIREMENT BENEFITS AGREEMENT FOR GARY C. SMITH This Supplemental Retirement Benefits Agreement (the "Agreement"), made as of this 15th day of December, 2000, by and among LNB BANCORP, INC. (an Ohio corporation) and THE LORAIN NATIONAL BANK (a national banking association organized and existing under the laws of the United States), which together with their respective successors and assigns are herein collectively called "Employer", and GARY C. SMITH, hereinafter called "Executive", is to EVIDENCE THAT: WHEREAS Executive has rendered valuable services to Employer and has performed Executive's duties in a capable and efficient manner and has generated substantial growth and progress to Employer; and WHEREAS Employer desires to retain the services of Executive and acknowledges that, if Executive were to leave Employer's employment, Employer could suffer a substantial financial loss; and WHEREAS Employer desires to provide Executive with certain supplemental retirement benefits (as defined in Section 3) in addition to the retirement benefits provided to Executive under The Lorain National Bank Retirement Pension Plan as restated on January 1, 1989 (herein called the "LNB Pension Plan"); and WHEREAS Employer further desires to provide Executive with certain benefits in the event of a "Change in Control" (as defined in Section 4); and WHEREAS Executive is willing to continue in the employ of Employer if Employer agrees to pay the benefits in accordance with the provisions and conditions of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants contained herein, Employer and Executive (herein collectively called the "Parties") agree as follows: 1. Employment of Executive. In accordance with Executive's employment agreement with Employer dated March 16, 1999, as may be amended (herein called the "Employment Agreement"), Executive shall continue to perform duties for Employer in such senior executive capacity as the Board of Directors of Employer may periodically designate. Executive shall devote Executive's best efforts to the performance of Executive's duties for Employer. Executive's employment with Employer shall continue until terminated pursuant to the Employment Agreement. 2. Compensation. Executive shall be compensated for the performance of Executive's duties in accordance with the Employment Agreement. 32 3. Supplemental Retirement Benefits. 3.1 Normal Retirement. If Executive remains in the continuous employ of Employer pursuant to the Employment Agreement and retires or is discharged by Employer (for any reason, with or without cause) from active employment with Employer on or after age 65 (herein called the "Normal Retirement Date"), Executive will be entitled to receive such supplemental retirement benefits (herein called the "Supplemental Retirement Benefits") which, when added to Executive's LNB Pension Plan benefits and the social security benefits (to which Executive is eligible on the date of Executive's employment termination), would equal seventy percent (70%) of Executive's Compensation (as defined herein). For purposes of this Agreement, the term "Compensation" is limited to the largest annual base salary and the largest annual bonuses paid to Executive by Employer and by any Subsidiary (as defined in Section 4.1[i] of this Agreement) for the two (2) full calendar years of employment immediately preceding the date of Executive's employment termination as reflected on Executive's combined W-2 Federal Income Tax Statements from Employer and from any Subsidiary for such years. The Supplemental Retirement Benefit shall be payable by Employer in one hundred twenty (120) equal monthly installments commencing on the first day of the calendar month immediately following the date of Executive's employment termination and continuing for one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. Executive shall be under no obligation to elect to receive Social Security benefits as a condition to entitlement to the Supplemental Retirement Benefits. For purposes of this Agreement, Executive's LNB Pension Plan benefits shall be calculated as though payable as a single life annuity for Executive's life expectancy. 3.2 Early Retirement. If Executive remains in the continuous employ of Employer pursuant to the Employment Agreement and retires or is discharged by Employer (for any reason, with or without cause) prior to the Normal Retirement Date but after attaining age 62 (herein called the "Early Retirement Date"), Executive shall be entitled to receive an applicable percentage of the Supplemental Retirement Benefits as follows: Early Retirement Ages: Applicable Percentage: 62 25% 63 50% 64 75% The Supplemental Retirement Benefits determined under this Section 3.2 shall be paid by Employer in one hundred twenty (120) equal monthly installments, commencing on the first day of the calendar month after the date of Executive's employment termination and continuing in one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. 3.3 Disability. If Executive incurs a Disability (as defined in this Section 3.3) while employed by Employer under the Employment Agreement and prior to the Normal Retirement Date, Executive will be entitled to receive the actuarial equivalent of the Supplemental Retirement Benefits but payable by Employer commencing on the first day 33 of the calendar month immediately following the date Executive's employment terminates because of such Disability and continuing for one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. For purposes of this Agreement, the term "Disability" shall mean physical or mental impairment which prevents Executive from engaging in further employment by Employer under the Employment Agreement as a senior executive on a full-time basis and which, on the basis of medical evidence satisfactory to the Board of Directors of Employer, is expected to continue for a period of at least six (6) months. 3.4 Death. If Executive dies while receiving Supplemental Retirement Benefits, any amounts due or remaining to be paid shall be paid in the same manner to such beneficiary or beneficiaries (herein called the "Designated Beneficiaries") as Executive may have designated by filing with Employer a written notice in a form acceptable to Employer. In the absence of any such designation, such unpaid amounts shall be paid to Executive's surviving spouse or, if Executive has no surviving spouse, to Executive's estate. If Executive dies prior to the Normal Retirement Date while employed by Employer under the Employment Agreement, Executive's Designated Beneficiaries will be entitled to receive the actuarial equivalent of the Supplemental Retirement Benefit but payable by Employer commencing on the first day of the calendar month immediately following the date of Executive's death and continuing for one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. 3.5 Discharge Without Cause. If Executive is discharged without cause (as defined in this Section 3.5) at any time after the date of this Agreement and before the Normal Retirement Date, Executive shall be entitled to receive the actuarial equivalent of the Supplemental Retirement Benefits but payable by Employer commencing on the first day of the calendar month immediately following the date of Executive's discharge and continuing in one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. For purposes of this Agreement, the term "discharged without cause" shall mean a termination of Executive's employment for any reason other than Executive's commission of any material act of dishonesty during the period of Executive's employment, or Executive's breach of any material term of the Employment Agreement which (in the good faith opinion of the Board of Directors of Employer) adversely affects the interests of Employer, or Executive's conviction by a court (whose decision is final, binding and not subject to appeal) of a felony committed during the period of Executive's employment. 3.6 No Duplication of Benefits. Notwithstanding any contrary provision in this Agreement, if Executive and Executive's Designated Beneficiaries become entitled to the payment of the Supplemental Retirement Benefits under any particular Section of this Agreement, such persons shall not be entitled to additional Supplemental Retirement Benefits under any other Section of this Agreement. 4. Change in Control Benefits. 4.1 Definitions. For purposes of solely this Section 4, the following terms shall have the respective meanings set forth below: 34 (a) "Company" means LNB Bancorp, Inc. and its successors. (b) "Cause" means any one or more of the following: (i) the willful and continued failure of Executive to perform substantially Executive's duties with Employer (other than any such failure resulting from Executive's Disability as defined in Section 4.1(e) or any such failure subsequent to Executive's being delivered a Notice of Termination without Cause by Employer or after Executive's delivering a Notice of Termination for Good Reason to Employer) after a written demand for substantial performance is delivered to Executive by Employer's Board of Directors which specifically identifies the manner in which the Board believes that Executive has not substantially performed Executive's duties and provides Executive with three (3) days to correct such failure, or (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is injurious to Company or its Subsidiaries, or (iii) the conviction of Executive of, or a plea by Executive of nolo contendere to, a felony, or (iv) Executive's breach of or failure to perform any material provision of the Employment Agreement (as defined in Section 1) which, in the good faith opinion of Employer's Board of Directors, adversely affects Employer's interests, or (v) Executive's commission of a material act of dishonesty. For purposes of this paragraph (b), no act or failure to act by Executive shall be considered "willful" unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive'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 Executive 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 Company's Board of Directors (the "Incumbent Directors") 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 35 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 paragraph (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 Company or any Subsidiary or by any employee stock benefit trust created by Company 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 Executive or any group of persons including Executive (or any entity controlled by Executive or by any group of persons including Executive), 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 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'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) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) if the shareholders of Company approve a plan of complete 36 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 (A) Executive'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, (B) Executive reasonably demonstrates that such termination (or event constituting Good Reason) 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 (C) 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 Executive's employment by Company and its Subsidiaries terminates as specified in a prior written notice by Company, a Subsidiary or Executive (as the case may be) to the other, or (2) if Executive's employment by Company terminates by reason of death, the date of death of Executive, or (3) if the Executive incurs a Disability (as defined in Section 4.1(e)), the date of such Disability as determined by a physician chosen by Company. For purposes of determining the timing of payments and benefits to Executive under this Section 4, the date of the actual Change in Control shall be treated as Executive's Date of Termination. (e) "Disability" means Executive's inability to perform Executive's then-existing duties with Company or its Subsidiaries on a full-time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to physical or mental illness. (f) "Good Reason" means, without Executive'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 Executive that is inconsistent in any material and adverse respect with Executive'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 Executive's titles or offices (including, if applicable, membership on Employer's Board of Directors) with Employer as existing immediately prior to such Change in Control; 37 (ii) (A) a reduction by Employer in Executive's rate of annual base salary as in effect immediately prior to such Change in Control (or as such annual base salary may be increased from time to time thereafter), or (B) the failure by Employer to pay Executive 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 Executive: (A) be based anywhere more than fifty (50) miles from the office where Executive 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 Executive immediately prior to such Change in Control; or (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 Executive is participating immediately prior to such Change in Control or the taking of any action by Employer which would materially and adversely affect Executive's participation in or reduce Executive's benefits under any such plan, unless Executive is permitted to participate in other plans providing Executive with substantially equivalent benefits in the aggregate, or (B) provide Executive with paid vacation in accordance with the most favorable vacation policies of Employer as in effect for Executive immediately prior to such Change in Control, including the crediting of all service for which Executive had been credited under such vacation policies prior to the Change in Control. Notwithstanding any contrary provision in this Agreement: (A) 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 Executive shall not constitute Good Reason; and (B) Executive's right to terminate employment for Good Reason shall not be affected by Executive's Disability; and (C) Executive'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 Executive must provide notice of termination of employment within thirty (30) days following Executive'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 Executive's employment after a Change in Control (i) by Employer other than for Cause, or (ii) by Executive for Good Reason. Termination of Executive's employment on account of death, Disability (as defined in Section 4(e)) or Retirement shall not constitute a Qualifying Termination. (h) "Retirement " means the termination of Executive's employment with Employer: (A) on or after the first of the month coincident with or next following Executive's attainment of age sixty-five (65), or (B) on such later date as may be provided in a written agreement between Employer and Executive. (i) "Subsidiary" means any corporation or other entity in which Company: (A) has a direct or indirect ownership interest of fifty 38 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 (B) 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. (j) "Termination Period" means the period of time beginning with a Change in Control and ending two (2) years following such Change in Control. 4.2 Obligation of Executive. 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, Executive agrees (as a condition to receiving any payments and benefits hereunder) not to voluntarily leave the employ of 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. 4.3 Benefits Upon Termination of Employment. If during the Termination Period Executive's employment with Employer terminates pursuant to a Qualifying Termination, then Employer shall pay to Executive the Supplemental Retirement Benefits commencing on Executive's Normal Retirement Date and payable pursuant to Section 3.1; provided, however, that Employer shall not be obligated under this Section 4.3 to pay the Supplemental Retirement Benefits if Executive is entitled to or is receiving the Supplemental Retirement Benefits under any other Section of this Agreement. 4.4 Withholding Taxes. Employer shall withhold from all payments due to Executive (or Executive's Designated Beneficiaries) under this Agreement all taxes which, by applicable federal, state, local or other law, Employer is required to withhold therefrom. 4.5 Reimbursement of Expenses. If any contest or dispute shall arise under this Section 4 involving the alleged failure or refusal of Employer to perform fully in accordance with the terms of Section 4, Employer shall reimburse Executive for all reasonable legal fees and expenses (if any) incurred by Executive with respect to such contest or dispute, together with interest in an amount equal to the prime rate of Lorain National Bank from time to time in effect (but, in no event, higher than the legal rate permissible under applicable law), such interest to accrue from the date Employer becomes obligated to pay such fees and expenses through the date of payment thereof; provided, however, that this Section 4.5 shall apply only if (and to the extent that) Employer is held to have breached or violated its duties and obligations hereunder to Executive. 4.6 Binding Agreement and Successors. (a) This Section 4 shall not be terminated by any Business Combination. In the event of any Business Combination, the provisions of this Section 4 shall be binding upon the Surviving Corporation and such Surviving Corporation shall be treated as Employer hereunder. 39 (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 guaranty), by written instrument delivered to Executive (or Executive's Designated Beneficiaries), all of the obligations of Employer under this Section 4. Failure of Employer to obtain such assumption or guaranty 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 under this Section 4. For purposes of implementing this Section 4.6(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 Executive. (c) This Section 4 shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 4.7 Employment with Subsidiaries. For purposes of this Section 4, any and all references to Executive's employment with Employer shall be deemed to include Executive's employment by any Subsidiary and, with respect to such employment by a Subsidiary, the term "Employer" as used in this Section 4 shall be deemed to include any Subsidiary which employs Executive. 5. Non-Alienation of Benefits. The right of Executive, the Designated Beneficiaries or any other person to the payment of benefits under this Agreement shall not be assigned, transferred, pledged or encumbered, and any attempt to do so shall be void. 6. Status of Rights to Benefits. The rights of Executive and the Designated Beneficiaries to any benefits under this Agreement shall be solely those of an unsecured general creditor of Employer. Nothing contained in this Agreement and no action taken pursuant to this Agreement shall create or be construed to create a trust of any kind or a fiduciary relationship between Employer and Executive or the Designated Beneficiaries. Any funds, insurance contracts or other assets of Employer (whether or not designated by Employer to provide the benefits contemplated herein) shall at all times continue to remain a part of the general funds of Employer and no person other than Employer shall have any interest in such funds or assets. 7. General Provisions. 7.1 This Agreement shall not be deemed to constitute a contract of employment between the Parties and no provisions hereof shall restrict the right of Employer to terminate the Executive's services or restrict the right of the Executive to terminate Executive's services in accordance with the Employment Agreement. 7.2 The Board of Directors of Employer shall have the full 40 power and authority to interpret, construe and administer this Agreement, and all actions taken by the Board of Directors of Employer in good faith shall be binding and conclusive on all Parties and other interested persons. No member of the Board of Directors of Employer shall be liable to any person for any action taken or omitted in connection with the interpretation or administration of this Agreement unless attributable to said member's own willful misconduct or lack of good faith. 7.3 This Agreement shall be binding upon and inure to the benefit of Employer, its successors and assigns, and Executive and Executive's Designated Beneficiaries, heirs, executors, administrators and legal representatives. 7.4 This Agreement shall be construed in accordance with and governed by the laws of the State of Ohio. All Parties hereby agree that exclusive venue for all litigation arising under this Agreement lies solely with the State Courts of Lorain County, Ohio, and each Party hereby submits to the personal jurisdiction of such Lorain County State Courts. 7.5 Except as otherwise expressly provided herein, this Agreement represents the entire agreement among the Parties regarding the subject matter hereof and all prior or contemporaneous written or oral statements, negotiations, representations, arrangements and/or agreements regarding the subject matter hereof are merged into and superseded by this Agreement. All Parties acknowledge that there are no oral or other written understandings, arrangements and/or agreements among the Parties relating to the subject matter of this Agreement. 7.6 This Agreement may be amended only by a written document signed by all Parties, which document must clearly indicate that it constitutes an amendment to this specific Agreement and/or to a specific provision or provisions herein. 7.7 No course of action by any Party and no refusal or neglect of any Party to exercise any right granted under this Agreement or to enforce compliance with any provision of this Agreement shall constitute a waiver of any provision of or right under this Agreement, unless such waiver is expressed in a written document which is clearly designated as a waiver to a specific provision or provisions of this Agreement and unless such document is signed by the waiving Party. 7.8 For purposes of this Agreement, the singular includes the plural and vice-versa and the feminine, masculine and neuter include each other. 7.9 All provisions of this Agreement are severable and neither this Agreement nor any provision herein shall be affected by the invalidity or inapplicability of any other provision of this Agreement. IN WITNESS WHEREOF, Employer has caused this Agreement to be executed by its duly authorized officers, and Executive has set Executive's hand as of the date first above written. 41 In The Presence Of: THE LORAIN NATIONAL BANK /s/Denise Harmych By:/s/Thomas P. Ryan /s/Ann Koler Title:Exec. V.P. & Secretary LNB BANCORP, INC. /s/Denise Harmych By:/s/Thomas P. Ryan /s/Ann Koler Title:Exec. V.P. & Secretary & Treas. "Employer" /s/Denise Harmych /s/Gary C. Smith Gary C. Smith, President and Chief Executive Officer /s/Ann Koler "Executive" 42 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 2000) S - K Reference Number (10b) Supplemental Retirement Benefits Agreement by and between Thomas P. Ryan and LNB Bancorp, Inc. dated December 23, 2000. SUPPLEMENTAL RETIREMENT BENEFITS AGREEMENT FOR THOMAS P. RYAN This Supplemental Retirement Benefits Agreement (the "Agreement"), made as of this 22nd day of December, 2000, by and among LNB BANCORP, INC. (an Ohio corporation) and THE LORAIN NATIONAL BANK (a national banking association organized and existing under the laws of the United States), which together with their respective successors and assigns are herein collectively called "Employer", and THOMAS P. RYAN, hereinafter called "Executive", is to EVIDENCE THAT: WHEREAS Executive has rendered valuable services to Employer and has performed Executive's duties in a capable and efficient manner and has generated substantial growth and progress to Employer; and WHEREAS Employer desires to retain the services of Executive and acknowledges that, if Executive were to leave Employer's employment, Employer could suffer a substantial financial loss; and WHEREAS Employer desires to provide Executive with certain supplemental retirement benefits (as defined in Section 3) in addition to the retirement benefits provided to Executive under The Lorain National Bank Retirement Pension Plan as restated on January 1, 1989 (herein called the "LNB Pension Plan"); and WHEREAS Employer further desires to provide Executive with certain benefits in the event of a "Change in Control" (as defined in Section 4); and WHEREAS Executive is willing to continue in the employ of Employer if Employer agrees to pay the benefits in accordance with the provisions and conditions of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants contained herein, Employer and Executive (herein collectively called the "Parties") agree as follows: 1. Employment of Executive. In accordance with Executive's employment agreement with Employer dated September 11, 1995, as may be amended (herein called the "Employment Agreement"), Executive shall continue to perform duties for Employer in such senior executive capacity as the Board of Directors of Employer may periodically designate. Executive shall devote Executive's best efforts to the performance of Executive's duties for Employer. Executive's employment with Employer shall continue until terminated pursuant to the Employment Agreement. 2. Compensation. Executive shall be compensated for the performance of Executive's duties in accordance with the Employment Agreement. 44 3. Supplemental Retirement Benefits. 3.1 Normal Retirement. If Executive remains in the continuous employ of Employer pursuant to the Employment Agreement and retires or is discharged by Employer (for any reason, with or without cause) from active employment with Employer on or after age 65 (herein called the "Normal Retirement Date"), Executive will be entitled to receive such supplemental retirement benefits (herein called the "Supplemental Retirement Benefits") which, when added to Executive's LNB Pension Plan benefits and the social security benefits (to which Executive is eligible on the date of Executive's employment termination), would equal seventy percent (70%) of Executive's Compensation (as defined herein). For purposes of this Agreement, the term "Compensation" is limited to the largest annual base salary, plus the largest annual bonuses, plus the largest annual Directors fees paid to Executive by Employer and by any Subsidiary (as defined in Section 4.1[i] of this Agreement) for the two (2) full calendar years of employment immediately preceding the date of Executive's employment termination as reflected on Executive's combined W-2 Federal Income Tax Statements and Form 1099s from Employer and from any Subsidiary for such years. The Supplemental Retirement Benefit shall be payable by Employer in one hundred twenty (120) equal monthly installments commencing on the first day of the calendar month immediately following the date of Executive's employment termination and continuing for one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. Executive shall be under no obligation to elect to receive Social Security benefits as a condition to entitlement to the Supplemental Retirement Benefits. For purposes of this Agreement, Executive's LNB Pension Plan benefits shall be calculated as though payable as a single life annuity for Executive's life expectancy. 3.2 Early Retirement. If Executive remains in the continuous employ of Employer pursuant to the Employment Agreement and retires or is discharged by Employer (for any reason, with or without cause) prior to the Normal Retirement Date but after attaining age 62 (herein called the "Early Retirement Date"), Executive shall be entitled to receive an applicable percentage of the Supplemental Retirement Benefits as follows: Early Retirement Ages: Applicable Percentage: 62 25% 63 50% 64 75% The Supplemental Retirement Benefits determined under this Section 3.2 shall be paid by Employer in one hundred twenty (120) equal monthly installments, commencing on the first day of the calendar month after the date of Executive's employment termination and continuing in one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. 3.3 Disability. If Executive incurs a Disability (as defined in this Section 3.3) while employed by Employer under the Employment Agreement and prior to the Normal Retirement Date, Executive will be entitled to receive the actuarial equivalent of the Supplemental 45 Retirement Benefits but payable by Employer commencing on the first day of the calendar month immediately following the date Executive's employment terminates because of such Disability and continuing for one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. For purposes of this Agreement, the term "Disability" shall mean physical or mental impairment which prevents Executive from engaging in further employment by Employer under the Employment Agreement as a senior executive on a full-time basis and which, on the basis of medical evidence satisfactory to the Board of Directors of Employer, is expected to continue for a period of at least six (6) months. 3.4 Death. If Executive dies while receiving Supplemental Retirement Benefits, any amounts due or remaining to be paid shall be paid in the same manner to such beneficiary or beneficiaries (herein called the "Designated Beneficiaries") as Executive may have designated by filing with Employer a written notice in a form acceptable to Employer. In the absence of any such designation, such unpaid amounts shall be paid to Executive's surviving spouse or, if Executive has no surviving spouse, to Executive's estate. If Executive dies prior to the Normal Retirement Date while employed by Employer under the Employment Agreement, Executive's Designated Beneficiaries will be entitled to receive the actuarial equivalent of the Supplemental Retirement Benefit but payable by Employer commencing on the first day of the calendar month immediately following the date of Executive's death and continuing for one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. 3.5 Discharge Without Cause. If Executive is discharged without cause (as defined in this Section 3.5) at any time after the date of this Agreement and before the Normal Retirement Date, Executive shall be entitled to receive the actuarial equivalent of the Supplemental Retirement Benefits but payable by Employer commencing on the first day of the calendar month immediately following the date of Executive's discharge and continuing in one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. For purposes of this Agreement, the term "discharged without cause" shall mean a termination of Executive's employment for any reason other than Executive's commission of any material act of dishonesty during the period of Executive's employment, or Executive's breach of any material term of the Employment Agreement which (in the good faith opinion of the Board of Directors of Employer) adversely affects the interests of Employer, or Executive's conviction by a court (whose decision is final, binding and not subject to appeal) of a felony committed during the period of Executive's employment. 3.6 No Duplication of Benefits. Notwithstanding any contrary provision in this Agreement, if Executive and Executive's Designated Beneficiaries become entitled to the payment of the Supplemental Retirement Benefits under any particular Section of this Agreement, such persons shall not be entitled to additional Supplemental Retirement Benefits under any other Section of this Agreement. 4. Change in Control Benefits. 4.1 Definitions. For purposes of solely this Section 4, 46 the following terms shall have the respective meanings set forth below: (a) "Company" means LNB Bancorp, Inc. and its successors. (b) "Cause" means any one or more of the following: (i) the willful and continued failure of Executive to perform substantially Executive's duties with Employer (other than any such failure resulting from Executive's Disability as defined in Section 4.1(e) or any such failure subsequent to Executive's being delivered a Notice of Termination without Cause by Employer or after Executive's delivering a Notice of Termination for Good Reason to Employer) after a written demand for substantial performance is delivered to Executive by Employer's Board of Directors which specifically identifies the manner in which the Board believes that Executive has not substantially performed Executive's duties and provides Executive with three (3) days to correct such failure, or (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is injurious to Company or its Subsidiaries, or (iii) the conviction of Executive of, or a plea by Executive of nolo contendere to, a felony, or (iv) Executive's breach of or failure to perform any material provision of the Employment Agreement (as defined in Section 1) which, in the good faith opinion of Employer's Board of Directors, adversely affects Employer's interests, or (v) Executive's commission of a material act of dishonesty. For purposes of this paragraph (b), no act or failure to act by Executive shall be considered "willful" unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive'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 Executive 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 Company's Board of Directors (the "Incumbent Directors") 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 47 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 paragraph (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 Company or any Subsidiary or by any employee stock benefit trust created by Company 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 Executive or any group of persons including Executive (or any entity controlled by Executive or by any group of persons including Executive), 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 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'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) above shall be deemed to be a "Non-Qualifying Transaction"); or 48 (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 (A) Executive'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, (B) Executive reasonably demonstrates that such termination (or event constituting Good Reason) 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 (C) 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 Executive's employment by Company and its Subsidiaries terminates as specified in a prior written notice by Company, a Subsidiary or Executive (as the case may be) to the other, or (2) if Executive's employment by Company terminates by reason of death, the date of death of Executive, or (3) if the Executive incurs a Disability (as defined in Section 4.1(e)), the date of such Disability as determined by a physician chosen by Company. For purposes of determining the timing of payments and benefits to Executive under this Section 4, the date of the actual Change in Control shall be treated as Executive's Date of Termination. (e) "Disability" means Executive's inability to perform Executive's then-existing duties with Company or its Subsidiaries on a full-time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to physical or mental illness. (f) "Good Reason" means, without Executive'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 Executive that is inconsistent in any material and adverse respect with Executive'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 Executive's titles or offices (including, if applicable, membership on Employer's Board of Directors) with Employer as existing immediately 49 prior to such Change in Control; (ii) (A) a reduction by Employer in Executive's rate of annual base salary as in effect immediately prior to such Change in Control (or as such annual base salary may be increased from time to time thereafter), or (B) the failure by Employer to pay Executive 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 Executive: (A) be based anywhere more than fifty (50) miles from the office where Executive 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 Executive immediately prior to such Change in Control; or (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 Executive is participating immediately prior to such Change in Control or the taking of any action by Employer which would materially and adversely affect Executive's participation in or reduce Executive's benefits under any such plan, unless Executive is permitted to participate in other plans providing Executive with substantially equivalent benefits in the aggregate, or (B) provide Executive with paid vacation in accordance with the most favorable vacation policies of Employer as in effect for Executive immediately prior to such Change in Control, including the crediting of all service for which Executive had been credited under such vacation policies prior to the Change in Control. Notwithstanding any contrary provision in this Agreement: (A) 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 Executive shall not constitute Good Reason; and (B) Executive's right to terminate employment for Good Reason shall not be affected by Executive's Disability; and (C) Executive'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 Executive must provide notice of termination of employment within thirty (30) days following Executive'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 Executive's employment after a Change in Control (i) by Employer other than for Cause, or (ii) by Executive for Good Reason. Termination of Executive's employment on account of death, Disability (as defined in Section 4(e)) or Retirement shall not constitute a Qualifying Termination. (h) "Retirement " means the termination of Executive's employment with Employer: (A) on or after the first of the month coincident with or next following Executive's attainment of age sixty-five (65), or (B) on such later date as may be provided in a written agreement between Employer and Executive. 50 (i) "Subsidiary" means any corporation or other entity in which Company: (A) 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 (B) 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. (j) "Termination Period" means the period of time beginning with a Change in Control and ending two (2) years following such Change in Control. 4.2 Obligation of Executive. 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, Executive agrees (as a condition to receiving any payments and benefits hereunder) not to voluntarily leave the employ of 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. 4.3 Benefits Upon Termination of Employment. If during the Termination Period Executive's employment with Employer terminates pursuant to a Qualifying Termination, then Employer shall pay to Executive the Supplemental Retirement Benefits commencing on Executive's Normal Retirement Date and payable pursuant to Section 3.1; provided, however, that Employer shall not be obligated under this Section 4.3 to pay the Supplemental Retirement Benefits if Executive is entitled to or is receiving the Supplemental Retirement Benefits under any other Section of this Agreement. 4.4 Withholding Taxes. Employer shall withhold from all payments due to Executive (or Executive's Designated Beneficiaries) under this Agreement all taxes which, by applicable federal, state, local or other law, Employer is required to withhold therefrom. 4.5 Reimbursement of Expenses. If any contest or dispute shall arise under this Section 4 involving the alleged failure or refusal of Employer to perform fully in accordance with the terms of Section 4, Employer shall reimburse Executive for all reasonable legal fees and expenses (if any) incurred by Executive with respect to such contest or dispute, together with interest in an amount equal to the prime rate of Lorain National Bank from time to time in effect (but, in no event, higher than the legal rate permissible under applicable law), such interest to accrue from the date Employer becomes obligated to pay such fees and expenses through the date of payment thereof; provided, however, that this Section 4.5 shall apply only if (and to the extent that) Employer is held to have breached or violated its duties and obligations hereunder to Executive. 4.6 Binding Agreement and Successors. (a) This Section 4 shall not be terminated by any Business Combination. In the event of any Business Combination, the provisions 51 of this Section 4 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 guaranty), by written instrument delivered to Executive (or Executive's Designated Beneficiaries), all of the obligations of Employer under this Section 4. Failure of Employer to obtain such assumption or guaranty 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 under this Section 4. For purposes of implementing this Section 4.6(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 Executive. (c) This Section 4 shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 4.7 Employment with Subsidiaries. For purposes of this Section 4, any and all references to Executive's employment with Employer shall be deemed to include Executive's employment by any Subsidiary and, with respect to such employment by a Subsidiary, the term "Employer" as used in this Section 4 shall be deemed to include any Subsidiary which employs Executive. 5. Non-Alienation of Benefits. The right of Executive, the Designated Beneficiaries or any other person to the payment of benefits under this Agreement shall not be assigned, transferred, pledged or encumbered, and any attempt to do so shall be void. 6. Status of Rights to Benefits. The rights of Executive and the Designated Beneficiaries to any benefits under this Agreement shall be solely those of an unsecured general creditor of Employer. Nothing contained in this Agreement and no action taken pursuant to this Agreement shall create or be construed to create a trust of any kind or a fiduciary relationship between Employer and Executive or the Designated Beneficiaries. Any funds, insurance contracts or other assets of Employer (whether or not designated by Employer to provide the benefits contemplated herein) shall at all times continue to remain a part of the general funds of Employer and no person other than Employer shall have any interest in such funds or assets. 7. General Provisions. 7.1 This Agreement shall not be deemed to constitute a contract of employment between the Parties and no provisions hereof shall restrict the right of Employer to terminate the Executive's services or restrict the right of the Executive to terminate Executive's 52 services in accordance with the Employment Agreement. 7.2 The Board of Directors of Employer shall have the full power and authority to interpret, construe and administer this Agreement, and all actions taken by the Board of Directors of Employer in good faith shall be binding and conclusive on all Parties and other interested persons. No member of the Board of Directors of Employer shall be liable to any person for any action taken or omitted in connection with the interpretation or administration of this Agreement unless attributable to said member's own willful misconduct or lack of good faith. 7.3 This Agreement shall be binding upon and inure to the benefit of Employer, its successors and assigns, and Executive and Executive's Designated Beneficiaries, heirs, executors, administrators and legal representatives. 7.4 This Agreement shall be construed in accordance with and governed by the laws of the State of Ohio. All Parties hereby agree that exclusive venue for all litigation arising under this Agreement lies solely with the State Courts of Lorain County, Ohio, and each Party hereby submits to the personal jurisdiction of such Lorain County State Courts. 7.5 Except as otherwise expressly provided herein, this Agreement represents the entire agreement among the Parties regarding the subject matter hereof and all prior or contemporaneous written or oral statements, negotiations, representations, arrangements and/or agreements regarding the subject matter hereof (including, but not limited to, a certain Supplemental Retirement Agreement dated July 30, 1999) are merged into and superseded by this Agreement. All Parties acknowledge that there are no oral or other written understandings, arrangements and/or agreements among the Parties relating to the subject matter of this Agreement. 7.6 This Agreement may be amended only by a written document signed by all Parties, which document must clearly indicate that it constitutes an amendment to this specific Agreement and/or to a specific provision or provisions herein. 7.7 No course of action by any Party and no refusal or neglect of any Party to exercise any right granted under this Agreement or to enforce compliance with any provision of this Agreement shall constitute a waiver of any provision of or right under this Agreement, unless such waiver is expressed in a written document which is clearly designated as a waiver to a specific provision or provisions of this Agreement and unless such document is signed by the waiving Party. 7.8 For purposes of this Agreement, the singular includes the plural and vice-versa and the feminine, masculine and neuter include each other. 7.9 All provisions of this Agreement are severable and neither this Agreement nor any provision herein shall be affected by the invalidity or inapplicability of any other provision of this Agreement. 53 IN WITNESS WHEREOF, Employer has caused this Agreement to be executed by its duly authorized officers, and Executive has set Executive's hand as of the date first above written. In The Presence Of: THE LORAIN NATIONAL BANK /s/Mary Ann Elmore By:Gary C. Smith /s/Denise M. Harmych Title: President & CEO LNB BANCORP, INC. /s/Mary Ann Elmore By:Gary C. Smith /s/Denise M. Harmych Title:President & CEO "Employer" /s/Mary Ann Elmore /s/Thomas P. Ryan Thomas P. Ryan, Executive Vice President and Secretary/Treasurer /s/Denise M. Harmych "Executive" 54 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 2000) S - K Reference Number (10c) Supplemental Retirement Benefits Agreement by and between Gregory D. Freidman and LNB Bancorp, Inc. and The Lorain National Bank dated December 22, 2000. 55 SUPPLEMENTAL RETIREMENT BENEFITS AGREEMENT FOR GREGORY D. FRIEDMAN Supplemental Retirement Benefits Agreement (the "Agreement"), made as of this 22nd day of December, 2000, by and among LNB BANCORP, INC. (an Ohio corporation) and THE LORAIN NATIONAL BANK (a national banking association organized and existing under the laws of the United States), which together with their respective successors and assigns are herein collectively called "Employer", and GREGORY D. FRIEDMAN, hereinafter called "Executive", is to EVIDENCE THAT: WHEREAS Executive has rendered valuable services to Employer and has performed Executive's duties in a capable and efficient manner and has generated substantial growth and progress to Employer; and WHEREAS Employer desires to retain the services of Executive and acknowledges that, if Executive were to leave Employer's employment, Employer could suffer a substantial financial loss; and WHEREAS Employer desires to provide Executive with certain supplemental retirement benefits (as defined in Section 3) in addition to the retirement benefits provided to Executive under The Lorain National Bank Retirement Pension Plan as restated on January 1, 1989 (herein called the "LNB Pension Plan"); and WHEREAS Employer further desires to provide Executive with certain benefits in the event of a "Change in Control" (as defined in Section 4); and WHEREAS Executive is willing to continue in the employ of Employer if Employer agrees to pay the benefits in accordance with the provisions and conditions of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants contained herein, Employer and Executive (herein collectively called the "Parties") agree as follows: 1. Employment of Executive. In accordance with Executive's employment agreement with Employer (herein called the "Employment Agreement"), Executive shall continue to perform duties for Employer in such senior executive capacity as the Board of Directors of Employer may periodically designate. Executive shall devote Executive's best efforts to the performance of Executive's duties for Employer. Executive's employment with Employer shall continue until terminated pursuant to the Employment Agreement. 2. Compensation. Executive shall be compensated for the performance of Executive's duties in accordance with the Employment Agreement. 56 3. Supplemental Retirement Benefits. 3.1 Normal Retirement. If Executive remains in the continuous employ of Employer pursuant to the Employment Agreement and retires or is discharged by Employer (for any reason, with or without cause) from active employment with Employer on or after age 65 (herein called the "Normal Retirement Date"), Executive will be entitled to receive such supplemental retirement benefits (herein called the "Supplemental Retirement Benefits") which, when added to Executive's LNB Pension Plan benefits and the social security benefits (to which Executive is eligible on the date of Executive's employment termination), would equal seventy percent (70%) of Executive's Compensation (as defined herein). For purposes of this Agreement, the term "Compensation" is limited to the largest annual base salary and the largest annual bonuses paid to Executive by Employer and by any Subsidiary (as defined in Section 4.1[i] of this Agreement) for the two (2) full calendar years of employment immediately preceding the date of Executive's employment termination as reflected on Executive's combined W-2 Federal Income Tax Statements from Employer and from any Subsidiary for such years. The Supplemental Retirement Benefit shall be payable by Employer in one hundred twenty (120) equal monthly installments commencing on the first day of the calendar month immediately following the date of Executive's employment termination and continuing for one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. Executive shall be under no obligation to elect to receive Social Security benefits as a condition to entitlement to the Supplemental Retirement Benefits. For purposes of this Agreement, Executive's LNB Pension Plan benefits shall be calculated as though payable as a single life annuity for Executive's life expectancy. 3.2 Early Retirement. If Executive remains in the continuous employ of Employer pursuant to the Employment Agreement and retires or is discharged by Employer (for any reason, with or without cause) prior to the Normal Retirement Date but after attaining age 62 (herein called the "Early Retirement Date"), Executive shall be entitled to receive an applicable percentage of the Supplemental Retirement Benefits as follows: Early Retirement Ages: Applicable Percentage: 62 25% 63 50% 64 75% The Supplemental Retirement Benefits determined under this Section 3.2 shall be paid by Employer in one hundred twenty (120) equal monthly installments, commencing on the first day of the calendar month after the date of Executive's employment termination and continuing in one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. 3.3 Disability. If Executive incurs a Disability (as defined in this Section 3.3) while employed by Employer under the Employment Agreement and prior to the Normal Retirement Date, Executive will be entitled to receive the actuarial equivalent of the Supplemental Retirement Benefits but payable by Employer commencing on the first day 57 of the calendar month immediately following the date Executive's employment terminates because of such Disability and continuing for one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. For purposes of this Agreement, the term "Disability" shall mean physical or mental impairment which prevents Executive from engaging in further employment by Employer under the Employment Agreement as a senior executive on a full-time basis and which, on the basis of medical evidence satisfactory to the Board of Directors of Employer, is expected to continue for a period of at least six (6) months. 3.4 Death. If Executive dies while receiving Supplemental Retirement Benefits, any amounts due or remaining to be paid shall be paid in the same manner to such beneficiary or beneficiaries (herein called the "Designated Beneficiaries") as Executive may have designated by filing with Employer a written notice in a form acceptable to Employer. In the absence of any such designation, such unpaid amounts shall be paid to Executive's surviving spouse or, if Executive has no surviving spouse, to Executive's estate. If Executive dies prior to the Normal Retirement Date while employed by Employer under the Employment Agreement, Executive's Designated Beneficiaries will be entitled to receive the actuarial equivalent of the Supplemental Retirement Benefit but payable by Employer commencing on the first day of the calendar month immediately following the date of Executive's death and continuing for one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. 3.5 Discharge Without Cause. If Executive is discharged without cause (as defined in this Section 3.5) at any time after the date of this Agreement and before the Normal Retirement Date, Executive shall be entitled to receive the actuarial equivalent of the Supplemental Retirement Benefits but payable by Employer commencing on the first day of the calendar month immediately following the date of Executive's discharge and continuing in one hundred nineteen (119) equal installments on the first day of each calendar month thereafter. For purposes of this Agreement, the term "discharged without cause" shall mean a termination of Executive's employment for any reason other than Executive's commission of any material act of dishonesty during the period of Executive's employment, or Executive's breach of any material term of the Employment Agreement which (in the good faith opinion of the Board of Directors of Employer) adversely affects the interests of Employer, or Executive's conviction by a court (whose decision is final, binding and not subject to appeal) of a felony committed during the period of Executive's employment. 3.6 No Duplication of Benefits. Notwithstanding any contrary provision in this Agreement, if Executive and Executive's Designated Beneficiaries become entitled to the payment of the Supplemental Retirement Benefits under any particular Section of this Agreement, such persons shall not be entitled to additional Supplemental Retirement Benefits under any other Section of this Agreement. 4. Change in Control Benefits. 4.1 Definitions. For purposes of solely this Section 4, the following terms shall have the respective meanings set forth below: 58 (a) "Company" means LNB Bancorp, Inc. and its successors. (b) "Cause" means any one or more of the following: (i) the willful and continued failure of Executive to perform substantially Executive's duties with Employer (other than any such failure resulting from Executive's Disability as defined in Section 4.1(e) or any such failure subsequent to Executive's being delivered a Notice of Termination without Cause by Employer or after Executive's delivering a Notice of Termination for Good Reason to Employer) after a written demand for substantial performance is delivered to Executive by Employer's Board of Directors which specifically identifies the manner in which the Board believes that Executive has not substantially performed Executive's duties and provides Executive with three (3) days to correct such failure, or (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is injurious to Company or its Subsidiaries, or (iii) the conviction of Executive of, or a plea by Executive of nolo contendere to, a felony, or (iv) Executive's breach of or failure to perform any material provision of the Employment Agreement (as defined in Section 1) which, in the good faith opinion of Employer's Board of Directors, adversely affects Employer's interests, or (v) Executive's commission of a material act of dishonesty. For purposes of this paragraph (b), no act or failure to act by Executive shall be considered "willful" unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive'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 Executive 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 Company's Board of Directors (the "Incumbent Directors") 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 59 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 paragraph (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 Company or any Subsidiary or by any employee stock benefit trust created by Company 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 Executive or any group of persons including Executive (or any entity controlled by Executive or by any group of persons including Executive), 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 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'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) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) if the shareholders of Company approve a plan of complete 60 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 (A) Executive'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, (B) Executive reasonably demonstrates that such termination (or event constituting Good Reason) 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 (C) 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 Executive's employment by Company and its Subsidiaries terminates as specified in a prior written notice by Company, a Subsidiary or Executive (as the case may be) to the other, or (2) if Executive's employment by Company terminates by reason of death, the date of death of Executive, or (3) if the Executive incurs a Disability (as defined in Section 4.1(e)), the date of such Disability as determined by a physician chosen by Company. For purposes of determining the timing of payments and benefits to Executive under this Section 4, the date of the actual Change in Control shall be treated as Executive's Date of Termination. (e) "Disability" means Executive's inability to perform Executive's then-existing duties with Company or its Subsidiaries on a full-time basis for at least one hundred eighty (180) consecutive days as a result of Executive's incapacity due to physical or mental illness. (f) "Good Reason" means, without Executive'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 Executive that is inconsistent in any material and adverse respect with Executive'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 Executive's titles or offices (including, if applicable, membership on Employer's Board of Directors) with Employer as existing immediately prior to such Change in Control; 61 (ii) (A) a reduction by Employer in Executive's rate of annual base salary as in effect immediately prior to such Change in Control (or as such annual base salary may be increased from time to time thereafter), or (B) the failure by Employer to pay Executive 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 Executive: (A) be based anywhere more than fifty (50) miles from the office where Executive 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 Executive immediately prior to such Change in Control; or (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 Executive is participating immediately prior to such Change in Control or the taking of any action by Employer which would materially and adversely affect Executive's participation in or reduce Executive's benefits under any such plan, unless Executive is permitted to participate in other plans providing Executive with substantially equivalent benefits in the aggregate, or (B) provide Executive with paid vacation in accordance with the most favorable vacation policies of Employer as in effect for Executive immediately prior to such Change in Control, including the crediting of all service for which Executive had been credited under such vacation policies prior to the Change in Control. Notwithstanding any contrary provision in this Agreement: (A) 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 Executive shall not constitute Good Reason; and (B) Executive's right to terminate employment for Good Reason shall not be affected by Executive's Disability; and (C) Executive'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 Executive must provide notice of termination of employment within thirty (30) days following Executive'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 Executive's employment after a Change in Control (i) by Employer other than for Cause, or (ii) by Executive for Good Reason. Termination of Executive's employment on account of death, Disability (as defined in Section 4(e)) or Retirement shall not constitute a Qualifying Termination. (h) "Retirement " means the termination of Executive's employment with Employer: (A) on or after the first of the month coincident with or next following Executive's attainment of age sixty-five (65), or (B) on such later date as may be provided in a written agreement between Employer and Executive. (i) "Subsidiary" means any corporation or other entity in which Company: (A) has a direct or indirect ownership interest of fifty 62 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 (B) 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. (j) "Termination Period" means the period of time beginning with a Change in Control and ending two (2) years following such Change in Control. 4.2 Obligation of Executive. 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, Executive agrees (as a condition to receiving any payments and benefits hereunder) not to voluntarily leave the employ of 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. 4.3 Benefits Upon Termination of Employment. If during the Termination Period Executive's employment with Employer terminates pursuant to a Qualifying Termination, then Employer shall pay to Executive the Supplemental Retirement Benefits commencing on Executive's Normal Retirement Date and payable pursuant to Section 3.1; provided, however, that Employer shall not be obligated under this Section 4.3 to pay the Supplemental Retirement Benefits if Executive is entitled to or is receiving the Supplemental Retirement Benefits under any other Section of this Agreement. 4.4 Withholding Taxes. Employer shall withhold from all payments due to Executive (or Executive's Designated Beneficiaries) under this Agreement all taxes which, by applicable federal, state, local or other law, Employer is required to withhold therefrom. 4.5 Reimbursement of Expenses. If any contest or dispute shall arise under this Section 4 involving the alleged failure or refusal of Employer to perform fully in accordance with the terms of Section 4, Employer shall reimburse Executive for all reasonable legal fees and expenses (if any) incurred by Executive with respect to such contest or dispute, together with interest in an amount equal to the prime rate of Lorain National Bank from time to time in effect (but, in no event, higher than the legal rate permissible under applicable law), such interest to accrue from the date Employer becomes obligated to pay such fees and expenses through the date of payment thereof; provided, however, that this Section 4.5 shall apply only if (and to the extent that) Employer is held to have breached or violated its duties and obligations hereunder to Executive. 4.6 Binding Agreement and Successors. (a) This Section 4 shall not be terminated by any Business Combination. In the event of any Business Combination, the provisions of this Section 4 shall be binding upon the Surviving Corporation and such Surviving Corporation shall be treated as Employer hereunder. 63 (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 guaranty), by written instrument delivered to Executive (or Executive's Designated Beneficiaries), all of the obligations of Employer under this Section 4. Failure of Employer to obtain such assumption or guaranty 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 under this Section 4. For purposes of implementing this Section 4.6(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 Executive. (c) This Section 4 shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 4.7 Employment with Subsidiaries. For purposes of this Section 4, any and all references to Executive's employment with Employer shall be deemed to include Executive's employment by any Subsidiary and, with respect to such employment by a Subsidiary, the term "Employer" as used in this Section 4 shall be deemed to include any Subsidiary which employs Executive. 5. Non-Alienation of Benefits. The right of Executive, the Designated Beneficiaries or any other person to the payment of benefits under this Agreement shall not be assigned, transferred, pledged or encumbered, and any attempt to do so shall be void. 6. Status of Rights to Benefits. The rights of Executive and the Designated Beneficiaries to any benefits under this Agreement shall be solely those of an unsecured general creditor of Employer. Nothing contained in this Agreement and no action taken pursuant to this Agreement shall create or be construed to create a trust of any kind or a fiduciary relationship between Employer and Executive or the Designated Beneficiaries. Any funds, insurance contracts or other assets of Employer (whether or not designated by Employer to provide the benefits contemplated herein) shall at all times continue to remain a part of the general funds of Employer and no person other than Employer shall have any interest in such funds or assets. 7. General Provisions. 7.1 This Agreement shall not be deemed to constitute a contract of employment between the Parties and no provisions hereof shall restrict the right of Employer to terminate the Executive's services or restrict the right of the Executive to terminate Executive's services in accordance with the Employment Agreement. 64 7.2 The Board of Directors of Employer shall have the full power and authority to interpret, construe and administer this Agreement, and all actions taken by the Board of Directors of Employer in good faith shall be binding and conclusive on all Parties and other interested persons. No member of the Board of Directors of Employer shall be liable to any person for any action taken or omitted in connection with the interpretation or administration of this Agreement unless attributable to said member's own willful misconduct or lack of good faith. 7.3 This Agreement shall be binding upon and inure to the benefit of Employer, its successors and assigns, and Executive and Executive's Designated Beneficiaries, heirs, executors, administrators and legal representatives. 7.4 This Agreement shall be construed in accordance with and governed by the laws of the State of Ohio. All Parties hereby agree that exclusive venue for all litigation arising under this Agreement lies solely with the State Courts of Lorain County, Ohio, and each Party hereby submits to the personal jurisdiction of such Lorain County State Courts. 7.5 Except as otherwise expressly provided herein, this Agreement represents the entire agreement among the Parties regarding the subject matter hereof and all prior or contemporaneous written or oral statements, negotiations, representations, arrangements and/or agreements regarding the subject matter hereof (including, but not limited to, a certain Supplemental Retirement Agreement dated July 31, 1996) are merged into and superseded by this Agreement. All Parties acknowledge that there are no oral or other written understandings, arrangements and/or agreements among the Parties relating to the subject matter of this Agreement. 7.6 This Agreement may be amended only by a written document signed by all Parties, which document must clearly indicate that it constitutes an amendment to this specific Agreement and/or to a specific provision or provisions herein. 7.7 No course of action by any Party and no refusal or neglect of any Party to exercise any right granted under this Agreement or to enforce compliance with any provision of this Agreement shall constitute a waiver of any provision of or right under this Agreement, unless such waiver is expressed in a written document which is clearly designated as a waiver to a specific provision or provisions of this Agreement and unless such document is signed by the waiving Party. 7.8 For purposes of this Agreement, the singular includes the plural and vice-versa and the feminine, masculine and neuter include each other. 7.9 All provisions of this Agreement are severable and neither this Agreement nor any provision herein shall be affected by the invalidity or inapplicability of any other provision of this Agreement. IN WITNESS WHEREOF, Employer has caused this Agreement to be 65 executed by its duly authorized officers, and Executive has set Executive's hand as of the date first above written. In The Presence Of: THE LORAIN NATIONAL BANK /s/Ann E. Koler By:/s/Gary C. Smith /s/Mary Ann Elmore Title:President and Chief Executive Officer LNB BANCORP, INC. /s/Ann E. Koler By:/s/Gary C. Smith /s/Mary Ann Elmore Title:President and Chief Executive Officer "Employer" /s/Ann E. Koler /s/Gregory D. Friedman Gregory D. Friedman, Executive Vice President and Chief Financial Officer /s/Mary Ann Elmore "Executive" 66 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 2000) S - K Reference Number (10h) Non-qualified Incentive Stock Option Agreement by and between Gary C. Smith and LNB Bancorp, Inc. dated December 15, 2000. 67 NON-QUALIFIED INCENTIVE STOCK OPTION AGREEMENT FOR GARY C. SMITH This agreement (the "Agreement"), entered into as of this 15th day of December, 2000, by and between LNB BANCORP, INC., an Ohio corporation (the "Company"), and GARY C. SMITH ("Employee"), is to EVIDENCE THAT, in consideration of the mutual promises made herein and for other valuable consideration (the receipt and sufficiency of which are hereby acknowledged), Employee and Company (the "Parties") hereby agree as follows: 1. Grant of Non-qualified Options. Subject to the terms and conditions of this Agreement, Company hereby grants to Employee options (the "Options") to purchase a total of five thousand (5,000) of Company's common shares, One Dollar ($1.00) par value (the "Optional Shares"), at an exercise price of Twenty-Two Dollars ($22.00) per share. All Options granted hereunder are non-qualified. 2. Duration and Exercise of Options 2.1 Employee may exercise the Options at any time on or before the expiration of ten (10) years after December 15, 2000 (the "Exercise Period"); provided, however, that: (i) the Exercise Period shall be reduced in the event of death, disability, retirement, or other termination of Employee's employment in accordance with Section 2.4 of this Agreement, and (ii) the Exercise Period may be extended by mutual agreement of the Parties. 2.2 The exercise of any Option and the delivery of the Optioned Shares shall be contingent upon Company's receipt of written notice specifying the number of Optioned Shares to be purchased, accompanied by the full purchase price in cash or (at the discretion of Company) in whole or in part by common shares of the Company values at fair market value (as determined by the Company's Board of Directors). 2.3 No Option may be exercised after termination of employment of Employee except as provided in Section 2.4 of this Agreement. 2.4 Upon termination of Employee's employment with Company for any reason (including, but not limited to, by retirement under a retirement plan of Company), other than death, disability or Company's termination for cause, the Exercise Period shall end upon the expiration of three (3) months after the date of such employment termination. If Employee's employment is terminated for cause (as determined by Company's Board of Directors), all Employee's rights under this Agreement shall expire upon such termination. Upon the death or disability (as determined by Company's Board of Directors) of Employee during Employee's employment with Company, the Exercise Period shall end upon the expiration of twelve (12) months after the date of such death or disability. The Board of Directors of Company shall determine, for purposes of this Agreement, the reason for termination of Employee's employment and its determination shall be binding and conclusive. 2.5 Options may be exercised in whole or in part but only with respect to whole Optional Shares and a minimum of one hundred (100) Optioned Share lots. 2.6 Company shall not be required to issue or deliver any certificate for Optioned Shares upon the exercise of any of the Options prior to: (i) completion of any registration or other qualification of 68 such Optioned Shares under any State or Federal law or ruling or regulation of any governmental agency that Company, in its sole discretion, determines is necessary or advisable, and (ii) the Board of Directors of Company shall have been advised by counsel that all applicable legal requirements pertaining to the Optioned Shares have been satisfied. 3. Non-Transferability of Options. Without Company's prior written approval, the Options shall not be transferable otherwise than by will or by the law's of descent and distribution and may be exercised during the Employee's lifetime only by the Employee. 4. Effect of Changes on Capital Structure. The Board of Directors of Company make appropriate adjustments in the price of the Optioned Shares and the number allotted or subject to allottment if there are any changes in the outstanding common shares of Company by reason of share dividends, share splits, reverse share splits, recapitalizations, mergers or consolidations. 5. Authority to Withhold Tax. Employee hereby consents to the withholding of such employment and other taxes as are required by law and further agrees that, as a condition of exercise of the Options by Employee, Company may, (if in its sole discretion Company determines that such payroll withholding is impractical or insufficient) require that Employee advance all or a portion of such taxes to Company. 6. Representations and Warranties of Employee. 6.1 Employee represents and warrants that Employee is a resident of the State of Ohio, intends to remain a resident of Ohio, and is acquiring the Options for investment purposes and not with the intention of resale. 6.2 Employee represents and warrants that Employee and Employee's representatives (if any): (i) have been provided with the opportunity to obtain all financial and other information regarding Company, its business and financial status, and the Options as requested by Employee, and (ii) have been afforded the opportunity to ask questions regarding Company, its business and financial status, and the Options and all such questions have been answered to Employee's satisfaction; and (iii) are experienced in business and financial matters of the type in which Company is engaged and can evaluate the relative risks and merits of Employee's financial participation in Company, and (iv) have been given the opportunity to obtain independent legal and/or tax counsel regarding all aspects of this Agreement and all transactions contemplated by this Agreement. 6.3 Employee acknowledges and understands that: (i) no market exists for the resale of the Options and Employee is acquiring the Options as an investment and not for resale, transfer or other disposition; and (ii) Employee's acquisition of the Options involves a degree of risk and Employee is able to bear the loss of Employee's entire financial investment in Company. 6.4 Employee further understands and acknowledges that none of the Options has been registered under the Securities Act of 1933 (as amended) or under any applicable State securities laws and that, therefore, Employee may not sell, offer for sale, pledge, assign, transfer or otherwise dispose of the options unless Employee complies with all other provisions of this Agreement and: (a) The Options are registered under the Securities Act of 1933 (as amended) and under any applicable State securities laws; or (b) Company receives an opinion of legal counsel satisfactory to Company that the proposed sale, offer or other disposition of the 69 Options does not require the registration of the Options under the Securities Act of 1933 (as amended) or under any applicable State securities laws. 7. Miscellaneous. 7.1 This agreement is signed and executed in the City of Lorain, County of Lorain, State of Ohio, and Ohio's laws shall govern all disputes, controversies, matters of interpretation and litigation arising hereunder. Both Parties acknowledge and agree that, even if Employee becomes a resident of another State, exclusive venue for any disputes, controversies or litigation arising under this Agreement lies solely and exclusively with the State Courts located within Lorain County, Ohio and, further, agree to submit (jointly and individually) to the personal jurisdiction of the State Courts located within Lorain County, Ohio. 7.2 Except as otherwise expressly stated herein, this Agreement constitutes the entire agreement between the Parties regarding the Options and the Optioned Shares and all prior or contemporaneous written or verbal negotiations, statements, understandings, representations, arrangements, commitments and/or agreements regarding the subject matter hereof are superseded by and merged into this Agreement. All Parties acknowledge and agree that, except as expressly provided in this Agreement, there are no additional written or verbal understandings, arrangements, agreements or commitments regarding the subject matter of this Agreement. Employee acknowledges that, as an inducement to sign and comply with this Agreement, Employee has not relied upon any promises, statements or representations of Company which are not expressly stated in this Agreement. 7.3 For purposes of this Agreement, the singular includes the plural and vice-versa and the masculine, feminine and neuter include each other. 7.4 This Agreement may not be amended, altered or otherwise changed in any manner other than through a written document clearly designated as an amendment to this specific Agreement and signed by both Parties. 7.5 All provisions of this Agreement are severable and neither this Agreement no any provision hereof shall be affected by the invalidity or unenforceability of any other provision of this Agreement. 7.6 No course of action by any Party, and no refusal or neglect of any Party to exercise any right hereunder or to enforce compliance with the terms 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 of a specific provision of this Agreement and unless such document is signed by the waiving Party. 7.7 The headings and captions designated in this Agreement are for convenience only and shall not be used to enlarge, contract or otherwise interpret any provisions of this Agreement. 7.8 This Agreement is binding upon both Parties and their respective heirs, executors, administrators, successors and assigns. 70 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first set forth above. LNB BANCORP, INC. By:/s/Gregory D. Friedman "Company" /s/Gary C. Smith Gary C. Smith "Employee" 71 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 2000) 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 18 of the LNB Bancorp, Inc. 2000 Annual Report 72 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 2000) S - K Reference Number (13) LNB Bancorp, Inc. 2000 Annual Report to Shareholders. 73 COVER DESCRIPTION Three photos of Ohio Reads volunteers with their students 2000 Annual Report LNB BANCORP, INC. 74 Front of Cover Flap Corporate Profile LNB Bancorp, Inc. is a $622.1 million financial holding company headquartered in Lorain, Ohio. The predecessor of LNB Bancorp, Inc., The Lorain National Bank, was formed as a result of the merger of The Lorain Banking Company and The National Bank of Lorain on January 1, 1961. The Lorain Banking Company was a state chartered bank founded in 1905. The National Bank of Lorain was a national bank receiving its national charter in 1934. On March 30, 1984, The Lorain National Bank became the wholly owned subsidiary of LNB Bancorp, Inc. LNB Bancorp, Inc. received its financial holding company status on March 13, 2000. In the second half of 2000, LNB Bancorp, Inc. formed a wholly owned insurance subsidiary named Charleston Insurance Agency, Inc., which will initially offer life, accident and health insurance and fixed annuity products. Also, LNB Bancorp, Inc. entered into a joint venture owning a 49 percent interest in a title company named Charleston Title Insurance Agency, LLC offering traditional title services. In the first quarter of 2001, Lorain National Bank entered into an agreement with Raymond James Financial Services, Inc. for Raymond James to offer brokerage services including stock, mutual funds and variable annuity products at select Lorain National Bank offices. The Lorain National Bank specializes in personal, mortgage, and small business banking services along with investment management and trust services. Lorain National Bank operates 21 retail branches and 29 ATMs in the nine communities of Lorain, Elyria, Amherst, Avon Lake, LaGrange, Oberlin, Olmsted Township, Vermilion, and Westlake located in 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 product and service information on the internet at www.4LNB.com. 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, an Equal Employment Opportunity, Affirmative Action Employer and an Equal Housing Lender. 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. 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 75 Back of Cover Flap 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 Employee Pictorials. . . . . . . . . . . . . . . . . . . . 6 Consolidated Balance Sheets . . . . . . . . . . . . . . .12 Consolidated Statements of Income . . . . . . . . . . . .13 Consolidated Statements of Cash Flows . . . . . . . . . .14 Consolidated Statements of Shareholders' Equity . . . . .15 Notes to Consolidated Financial Statements . . . . . . . .16 Report of Management . . . . . . . . . . . . . . . . . . .32 Report of Independent Auditors . . . . . . . . . . . . . .32 Selected Unaudited Quarterly Financial Data . . . . . . .33 Five Year Consolidated Financial Summary . . . . . . . . .34 Management's Discussion & Analysis . . . . . . . . . . . .35 Directors and Officers of LNB Bancorp, Inc.. . . . . . . .44 Directors Emeritii of Lorain National Bank . . . . . . . .44 Directors and Officers of Charleston Insurance Agency, Inc. . . . . . . . . . . . . . . . . . . . . . .44 Officers of Lorain National Bank . . . . . . . . . . . . .45 Banking Offices and ATMs . . . . . . . . . . . . . . . . .46 Investments and Trust Services . . . . . . . . . . . . . .47 Earnings, Dividend and Book Value per Share Performance . . . . . . . . . . . . . . . . . .48 76 Corporate and Investor Information Corporate Headquarters If you need to contact the corporate headquarters of LNB Bancorp, Inc., call or write to: LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052-1739 (800) 860-1007 Annual Meeting The 2001 Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 10:00 a.m., Eastern Daylight Savings Time, on Tuesday, April 17, 2001 at Lorain National Bank, 521 Broadway, Lorain, Ohio 44052. Financial Publication Requests Copies of the LNB Bancorp, Inc.'s Annual or Quarterly Reports or the Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be furnished to shareholders upon written request to: Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052-1739 Independent Auditors KPMG LLP Once Cleveland Center 1375 East 9th Street, Suite 2600 Cleveland, Ohio 44114-1796 Quarterly Earnings Reporting For 2001, LNB Bancorp, Inc.'s quarterly earnings are anticipated to be announced on or about the fourth Tuesday of April, July, October 2001 and January 2002. Any investor desiring a copy of an earnings release can obtain one by calling (800) 860-1007. Stock Transfer Agent and Registrar Shareholders that 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 (800) 368-5948 Dividend Reinvestment and Cash Stock Purchase Plan LNB Bancorp, Inc. shareholders who wish to apply quarterly cash dividends or optional cash payments toward the purchase of additional LNB Bancorp, Inc. common stock may take advantage of a dividend 77 reinvestment plan available through Registrar and Transfer Company. Inquiries or requests for a description of the dividend reinvestment plan should be made to: Registrar and Transfer Company Dividend Reinvestment Plans 10 Commerce Drive Cranford, New Jersey 07016-3572 (800) 368-5948 Investor Relations Analysts and investors seeking financial information about LNB Bancorp, Inc. should call our Investor Relations Department at (440) 244-7317 or (800) 860-1007. You may also request financial information on LNB Bancorp, Inc. by completing the postage paid card titled "LNB Bancorp, Inc. - Common Stock" located at the end of this Annual Report. Either way, we would be happy to respond to your requests for information. Information on LNB Bancorp, Inc.'s financial results and its subsidiaries' products and services can be accessed on the Internet at www.4LNB.com. LNB Bancorp, Inc. Logo 78 Inside front cover LNB Bancorp, Inc. Common Stock and Dividend Information Common Stock Trading Ranges and Cash Dividends Declared 2000 1999 - --------------------------------------------- Closing Price* Closing Price* High Low High Low - --------------------------------------------- First Quarter $24.25 $18.75 $28.25 $25.25 Second Quarter 25.69 20.00 27.25 25.00 Third Quarter 21.47 18.00 26.25 23.25 Fourth Quarter 23.25 20.50 26.50 22.00 - --------------------------------------------- *All closing prices and cash dividend amounts have been adjusted to reflect the two percent stock dividend in 2000. 2000 1999 - ------------------------------------------------------------- Cash Cash Dividend Dividend Amount* Amount* - ------------------------------------------------------------- First Quarter - regular . . . . .$ .24 $ .21 Second Quarter - regular. . . . . .24 .21 Third Quarter - regular . . . . . .25 .23 Fourth Quarter - regular. . . . . .25 .23 Fourth Quarter - EXTRA. . . . . . .02 .02 ----- ----- Total Dividends . . . . . . . . .$1.00 $ .90 The shares of LNB Bancorp, Inc., common stock, par value $1.00 per share, were traded in 1999 and early 2000 on the over-the-counter bulletin board and on February 9, 2000, began trading on The Nasdaq Stock Market under the 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 traded under the ticker symbol LNBB and listed in the newspapers as "LNB Bancorp". LNB Bancorp's CUSIP is 502100 10 0. As of December 31, 2000 LNB Bancorp Inc. had 2,165 shareholders of record. NASDAQ logo 17-YEAR CASH DIVIDEND DECLARED PER SHARE HISTORY Dollars* (A 17-year Cash Dividend Declared Per Share History graph with Dividends Declared on the y-axis and years 1984 through 2000 on the x-axis. The 79 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 2000 $1.00 1999 $ .90 1998 $ .84 1997 $ .70 1996 $ .60 1995 $ .51 1994 $ .45 1993 $ .41 1992 $ .37 1991 $ .34 1990 $ .31 1989 $ .28 1988 $ .25 1987 $ .22 1986 $ .21 1985 $ .20 1984 $ .19 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. Shareholders may reinvest their dividends and make optional cash purchases of LNB Bancorp, Inc. common stock by participating in the Dividend Reinvestment and Cash Stock Purchase Plan. Please see the card insert at the end of this Annual Report to request more information. Dividend Calendar Cash dividends on common stock, if approved by the Board of Directors, are customarily paid to shareholders as follows: Record Dates: March 12, June 11, Sept. 10, and Dec. 10, 2001 Dividend Payable Dates: April 1, July 1, October 2, 2001 and January 2, 2002 LNB Bancorp, Inc. Common Stock Market Makers Hill, Thompson, Magid & Company, Inc., Jersey City, New Jersey McDonald Investments Inc., Cleveland, Ohio Monroe Securities, Inc., Rochester, New York Spear, Leeds and Kellogg, Jersey City, New Jersey Sweney Cartwright and Company, Inc., Columbus, Ohio 80 Consolidated Financial Highlights All dollar amounts presented in thousands, except per share data 1999 to 2000 DECEMBER 31, 2000 1999 % Change 1990 - ---------------------------------------------------------------------- FINANCIAL POSITION Assets . . . . . . . . .$622,110 $599,611 3.8% $336,224 Investments. . . . . . . 127,101 123,319 3.1 82,498 Net loans. . . . . . . . 445,890 414,849 7.5 219,244 Deposits . . . . . . . . 496,091 456,831 8.6 285,907 Other borrowings . . . . 63,736 86,467 (26.3) 19,762 Shareholders' equity . . 56,525 51,053 10.7 27,858 ------------------------------------------- RESULTS FOR THE YEAR Interest income. . . . .$ 46,645 $ 41,617 12.1% $ 31,046 Interest expense . . . . 19,209 15,593 23.2 15,968 Provision for loan losses 1,700 2,000 (15.0) 500 Net interest income. . . 27,436 26,024 5.4 15,078 Noninterest income . . . 8,370 8,098 3.4 3,548 Noninterest expense. . . 21,276 20,639 3.1 13,789 Income taxes . . . . . . 4,400 3,842 14.5 1,030 Net income . . . . . . . 8,430 7,641 10.3 3,343 Revenue. . . . . . . . . 35,806 34,122 4.9 18,662 ------------------------------------------- FINANCIAL RATIOS Return on average assets 1.39% 1.33% 4.5% 1.01% Return on average shareholders' equity. . 15.83 15.29 3.5 12.54 Net interest margin. . . 4.85 4.88 (0.6) 5.11 Efficiency ratio . . . . 59.42 60.61 -2.0 70.52 ------------------------------------------ PER SHARE DATA* Basic earnings . . . . .$ 2.00 $ 1.81 10.5% $ 0.81 Diluted earnings . . . . 2.00 1.81 10.5 0.81 Cash dividends . . . . . 1.00 0.90 11.1 0.31 Book value (year-end). . 13.42 12.13 10.6 6.76 Market value (year-end). 21.81 20.16 8.2 13.11 ------------------------------------------- CORPORATE DATA Bank offices . . . . . . 21 21 0.0% 16 Bank officers and staff. 298 303 (1.7) 297 Number of shareholders . 2,165 2,128 1.7 1,565 ------------------------------------------- *All per share data have been adjusted for five-for-four stock splits in 1995 and 1993 and stock dividends. TOTAL ASSETS millions of dollars (A Total Assets graph follows in printed version with assets 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.) 81 TOTAL LOANS millions of dollars (A Total Loans graph follows in printed version with loans 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.) NET INCOME millions of dollars (A Net Income graph follows in printed version with 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.) Total Assets Total Loans Net Income Year Millions of Dollars Millions of Dollars Millions of Dollars 2000 $622.1 $445.9 $8,430 1999 $599.6 $419.5 $7,641 1998 $541.7 $369.9 $6,818 1997 $490.7 $331.0 $6,482 1996 $438.2 $302.1 $5,852 END PUBLISHED PAGE 1 82 Message To Our Shareholders Top left column color 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. Thanks to your support and the efforts of our staff, LNB Bancorp, Inc. and its subsidiary companies, is a healthy, growing and viable organization. I am pleased to report the following highlights of our financial performance for the year 2000. 19 Consecutive Years of Earnings Growth We are proud to announce that we posted our 19th consecutive year of record annual earnings. This is an achievement that is matched only by a handful of other financial institutions in the United States. Year 2000 net income advanced 10.3 percent to $8,430,000 from 1999's $7,641,000. Earnings per basic and diluted share for 2000 reached $2.00 for the first time in the history of LNB Bancorp, Inc., an increase of $.19, or 10.5 percent from 1999's $1.81. Per-share amounts for 1999 and 2000 have been adjusted to reflect the two percent stock dividend paid on July 1, 2000. The return on average assets for 2000 improved to 1.39 percent from 1999's 1.33 percent. The return on average shareholders' equity climbed 54 basis points to 15.83 percent for 2000 compared with 15.29 percent for 1999. Contributing to the record performance were higher net interest income and noninterest income and lower loan loss provision offset by slightly higher noninterest expenses. Fueled by growth in commercial and mortgage lending and home equity loans, net interest income rose 5.4 percent to $27,436,000. Excluding gains on sales of securities and buildings, noninterest income grew by 5.4 percent for the year, driven primarily by a 12.4 percent increase in Investment and Trust Services Division income. Noninterest expenses grew by a modest 3.1 percent during 2000. The graphs on page 48 depict our consolidated earnings, dividends and book value per share for the past 10 years. Cash dividends declared in 2000 eclipsed the $4-million mark for the first time in the history of LNB Bancorp, Inc. Cash dividends declared per share in 2000 increased $.10, or 11.1 percent, to $1.00 per share, up from $0.90 per share last year. In each of the last 13 years, the Board of Directors has approved an increase in the regular cash dividend per share. Total cash dividends declared in 2000, including the $.02 EXTRA dividend declared by the Board of Directors in November, rose to $4,191,000. Total 2000 cash dividends declared represents a 232.6 percent increase from 1990 when $1,260,000 in cash dividends were declared. In addition to cash dividends declared, the Board also approved a two percent stock dividend in July 2000. At 2000 year-end, LNB Bancorp, Inc. achieved significant growth in assets, loans, deposits, dividends and shareholders' equity from one year ago while other borrowings decreased from one year ago. Total assets climbed 3.8 percent to $622.1 million from $599.6 million, for an increase of $22.5 million from one year ago. At 2000 year-end, earning 83 assets increased 5.3 percent to $581.4 million, for a $29.2 million increase from one year ago. 19-YEAR BASIC EARNINGS PER SHARE HISTORY Dollars* (A 19-Year Basic Earnings Per Share History graph follows in printed version with earnings on the y-axis and years 1982 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 Year Per Share 2000 $2.00 1999 $1.82 1998 $1.62 1997 $1.54 1996 $1.36 1995 $1.17 1994 $1.04 1993 $ .95 1992 $ .91 1991 $ .84 1990 $ .81 1989 $ .79 1988 $ .72 1987 $ .65 1986 $ .61 1985 $ .58 1984 $ .53 1983 $ .52 1982 $ .39 *Adjusted for stock dividends and splits END OF PUBLISHED PAGE 2 84 Top left column color photograph of Executive Officers, Kevin W. Nelson, Gary C. Smith, Thomas P. Ryan and Gregory D. Friedman During 2000, net loans rose 7.5 percent to $445.9 million from $414.9 million. Led by an 18.4 percent increase in its commercial loan portfolio and increased mortgage loans, The Bancorp's loan growth was partially offset by a planned reduction in indirect automobile lending. Commercial loans experienced robust growth in 2000, fueled by a strong economy. The commercial loan portfolio climbed to $186.9 million at December 31, 2000, for an increase of $29.0 million or 18.4 percent from one year ago. The number of new loans booked in 2000 was 587, amounting to $95.3 million in new gross loans. The commercial loan growth in 2000 results from existing customers expanding their borrowings and new loan customers. During the first part of 2000, mortgage lending continued to benefit from favorable interest rates and a strong national economy. Higher mortgage rates and lower demand created less robust lending activity in the second half of the year. Mortgage loans ended the 2000-year at $157.6 million, up $4.8 million, or 3.1 percent from the 1999 year-end. New mortgage loans booked during 2000 totaled $32.9 million on 258 new loans. Consumer loans decreased to $106.7 million at December 31, 2000, down $2.1 million or 1.9 percent from one year ago. The number of new consumer loans booked during 2000 was 2,533 for a total amount of $38.3 million. The decrease in Consumer loans was attributable to planned decreases in our indirect automobile lending program offset in part by a successful home equity loan campaign. We are optimistic that 2001 will bring continued growth in our commercial, mortgage and consumer portfolios from our existing and new customers. Retail deposits climbed 8.6 percent to $496.1 million, at December 31, 2000, from $456.8 million, for an increase of $39.3 million from one year ago. Increases in retail deposits were attributable to increases in Market Access, CheckInvest, and public fund certificates of deposit partially offset by decreases in savings and money market accounts. Market Access accounts soared by $37.5 million or 217.1 percent to $54.8 million at December 31, 2000, with public fund certificates of deposit increasing $9.4 million or 65.3 percent and CheckInvest accounts increasing by $3.7 million or 6.9 percent from one year ago. The significant growth in the Market Access deposits resulted from a successful deposit acquisition campaign during 2000. The Bancorp's other borrowings decreased by $22.8 million to $63.7 million at December 31, 2000, for a decrease of 26.3 percent from one year ago. Decreases in other borrowings were attributable to decreases in repurchase agreements, short-term borrowings of Federal funds purchased, and Federal Home Loan Bank advances of $1.7 million, $20.0 million, and $1.0 million, respectively, during 2000. Federal funds purchased decreased $20.0 million during 2000, largely attributable to reversing last year's cash and short-term investments buildup associated with liquidity funding for Y2K. Shareholders' equity reached an all-time high of $56.5 million at 85 December 31, 2000, an increase of $5.5 million, or 10.7 percent, from one year ago. The book value per share climbed to $13.42 at December 31, 2000, compared with $12.13 per share at the end of last year. Capital ratios remained strong during 2000, with average equity to average assets of 8.8 percent. The 2000 year-end ratio of shareholders' equity-to-assets remained strong, increasing to 9.1 percent from 8.5 percent one year ago. LNB Bancorp, Inc.'s 2000 year-end risk based Tier 1 and total capital ratios were strong at 11.88 percent and 13.06 percent, respectively. LNB Bancorp, Inc., and its 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. /s/Stanley G. Pijor - ------------------- Stanley G. Pijor Chairman of the Board END PUBLISHED PAGE 3 86 Message to Our Shareholders Top left column color photograph of Gary C. Smith, President and Chief Executive Officer As LNB Bancorp, Inc. and its subsidiary companies enter 2001, I am very optimistic about meeting the challenges that a new millennium brings. Throughout our organization, I sense a heightened level of awareness about who we are and what we mean to our market as a progressive and dynamic financial services provider. Emerging Products and Services In late 1999, the U.S. Congress passed the Gramm, Leach Bliley Act, also known as the Financial Modernization Act, which, among other things, provided for the creation of financial holding companies. One of the key purposes for doing so is to help level the playing field among financial services providers of all types, including banks, stock brokers, insurance underwriters and others. Upon passage of the Act, LNB Bancorp, Inc. was one of the first financial institutions of our size to request and receive approval to become a financial holding company, allowing LNB Bancorp, Inc. to engage in a variety of new business opportunities. Among those opportunities are the sales of investment and insurance products such as annuities, mutual funds, brokerage services and life insurance to existing and new customers of the Bancorp's banking subsidiary, Lorain National Bank. As a growing financial holding company, we will continue to seek complementary new business opportunities like those mentioned, to increase shareholder value and further develop relationships with our bank customers. These initiatives provide LNBB new sources of noninterest income in a period of shrinking interest margins - it's a great fit for us. At mid-year of 2001, Lorain National will introduce Internet banking to a broad new market as a natural progression in the evolution of alternative delivery systems. Customers will be able to perform a variety of banking transactions from the comfort of their homes or offices. Our plan calls for a broadening of marketing efforts on the Internet, including the participation in new ventures such as SchoolOne.com, an online school communications website that allows for regular dialog between parents and teachers via the Internet at a growing number of schools in our area. SchoolOne.com is a fledgling Internet company that recently set up operations in Lorain County. Using a more traditional form of electronic media, we developed a series of television commercials in the fall of 2000, the first of which will begin running on broadcast and cable television during the first quarter of 2001. Our commercials feature our true-to-life, high-quality customer service, using many of our own employees on-camera. 87 Community Bank Model We have spent a considerable amount of time and effort in the past year enhancing our bank's role as one of the few remaining independent community providers in northern Ohio. While other larger institutions have focused on volume-based strategies, Lorain National is positioning itself as a bank of choice among its four "publics": our shareholders, customer, employees and communities. Considering the wild swings that have occurred on Wall Street during the past year, we feel we've done a very good job of enhancing shareholder value. While many of the dot-coms of 2000 were skyrocketing in stock price, LNBB continued on its successful course of long-term performance, highlighted by its record 19th consecutive year of earnings growth. Since then, several of the tech stocks have retreated significantly and many are no longer with us. END OF PUBLISHED PAGE 4 88 Top left column color photograph of Senior Vice Presidents Emma N. Mason, Michael D. Ireland, James H. Weber, Debra R. Brown, Robert L. Cox and Sandra L. Dubell Our customers will continue to benefit from the diversification of our product and service menu. Soon, customers will choose from new alternative investment products, attractive retail banking products, and a variety of investments and trust services. It is our goal to make LNB Bancorp, Inc. and its subsidiaries "one-stop-shopping" places for all financial service needs. There will be no need for customers to look anywhere else for financial services. Of course, our community bank model could not function without the dedication and quality service provided by our staff. Our employees have truly embraced the concept of maintaining high-quality service while recognizing the need for increased sales. Their consultative selling techniques help meet the financial needs of our customers while providing the bank with all important fee-based noninterest income, thereby creating a win-win scenario. In addition to outstanding efforts inside the bank, our officers and staff also devote a significant amount of time and energy to the communities we serve. On the pages that follow, you will find the faces of virtually all of our 290 employees, many of whom regularly volunteer or maintain seats on area board of directors. In this special section we'd like you to see some of the faces behind the scenes that make our operation run so smoothly. Privacy While we have always held the matter of customer confidentiality and information privacy in high regard, we are re-doubling our efforts in 2001 to guarantee the safe care of our customer records as mandated by Federal regulators. Due to the national increase in the use of consumer information of all kinds by direct markets and third-party companies, Federal regulators are mandating that all financial services providers must have a detailed written privacy policy and procedure in place this year. We have never sold or provided our customers' information to other parties, nor would we consider doing so. We look forward to working with our regulators to help protect vital customer information from misuse by others. An Exciting Year Ahead I am truly excited about bringing new products and services to Lorain National customers via our new Bancorp subsidiary business ventures. Our success in 2000 was the tangible result of an unwavering commitment to our vision - to be recognized as the most progressive, dynamic, independent provider of financial services in our market. We are optimistic about 2001, despite signs of a slowing national economy. Locally, housing starts are steady and unemployment levels are 89 currently represented in very modest, single-digit numbers. In closing, we wish to thank you for your continued support of our activities and we look forward to an exciting 2001. /s/Gary C. Smith - ---------------- Gary C. Smith President and Chief Executive Officer END PUBLISHED PAGE 5 90 Faces of LNBB Two color photographs of LNB Bancorp, Inc. employees. On this page and those that follow you will find the many faces of LNB Bancorp, Inc. and its subsidiaries. One of our organization's greatest strengths lies in the generosity and selflessness of our officers and staff. Backed by the support of Management, virtually all of our officers serve as directors, officers, committee members or volunteers for dozens of civic groups and non-profit agencies across three counties. The same can be said for the majority of our front-line and clerical staff. As a function of LNB Bancorp, Inc.'s mission, our people contribute thousands of hours each year on company and personal time to help raise quality-of-life standards for those around us. In addition, we contributed more than $150,000 to charitable and non-profit organizations throughout our market area in 2000. END PUBLISHED PAGE 6 91 Two color photographs of LNB Bancorp, Inc. employees. Though Lorain National Bank's philanthropy is far-reaching in scope, each year it focuses on a few major civic projects in order to heighten their immediate impact. One such project in 2000 was the Lorain County Reads program. Last year, Governor Robert Taft established Ohio Reads as a volunteer tutorial program to assist school districts in improving the reading abilities of children in need of remedial skills. LNB Bancorp, Inc. Vice Chairman James F. Kidd accepted Taft's challenge on a local level and assumed chairmanship of Lorain County Reads. END PUBLISHED PAGE 7 92 Faces of LNBB Two color photographs of Lorain National Bank employees. Nearly 40 Lorain National volunteers spent at least on hour per week in the classrooms of Meister Road and Lincoln Elementary schools in compliance with the all-volunteer program. We'd like to offer special thanks to Karen Mahan, Principal of Meister Road Elementary School, who offered us space for a photograph of our volunteers and a handful of her Lorain County Reads students. Our participation in the program made a difference in the lives of our volunteers as well as those of the children. Despite past economic prosperity, there remains a segment of our population that remains in need. Fortunately for them, Second Harvest Food Bank of North Central Ohio, led by Executive Director Jim Kastro, is working overtime to keep up with the demand. END PUBLISHED PAGE 8 93 Two color photographs of Lorain National Bank employees. On a regular basis, volunteers from across the county, including those from Lorain National, donate their time on "Corporate Night" to help sort and package food and other necessities so those less fortunate can get a foothold on a better future. In the wake of the Columbine High School tragedy, and other firearms-related incidents involving children, Lorain National Bank's timely KidSafe trigger lock program provided 4,500 free firearms trigger locks to the general public last year on a "no questions asked" basis in 2000. END PUBLISHED PAGE 9 94 Faces of LNBB Two color photographs of Lorain National Bank employees. In conjunction with its distribution partners - the Lorain County Urban League, Lorain County Community Action Agency and the South Lorain Community Development Corporation, the KidSafe program helped add some measure of firearms safety for many. Contributions to the program can still be made to our funding partner, the Community Foundation of Greater Lorain County. Taking neither a pro-gun or anti-gun political stance, Lorain National and its community partners succeeded in placing at least 4,500 trigger locks into the hands of residents who recognized their need. END PUBLISHED PAGE 10 95 Two color photographs of Lorain National Bank employees. Space does not permit us to list all of the agencies and organizations we support with our contributions and employee involvement. However, it's safe to say that the "faces of LNBB" can be seen volunteering wherever you find one of our facilities. These are just a few of the dozens of volunteer projects the people of LNB remain involved with throughout the year in addition to taking care of our customers. END PUBLISHED PAGE 11 96 Consolidated Balance Sheets December 31, 2000 1999 - ---------------------------------------------------------------------- ASSETS: Cash and due from banks (note 3). . . . . .$ 22,011,000 $ 28,023,000 Federal funds sold and short-term investments . . . . . . . . . . . . . . . 3,125,000 9,320,000 Securities (note 5): Available for sale, at fair value . . . . 79,518,000 75,728,000 Held to maturity, at cost (fair value $43,982,000 and $41,819,000,respectively) 44,431,000 44,642,000 Federal Home Loan Bank and Federal Reserve Bank stock, at cost . . . . . . . . . . . 3,152,000 2,949,000 --------------------------- Total securities. . . . . . . . . . . . . . 127,101,000 123,319,000 --------------------------- Loans (notes 6,7 and 12): Portfolio loans . . . . . . . . . . . . . 442,132,000 409,971,000 Loans available for sale. . . . . . . . . 9,008,000 9,545,000 --------------------------- Total loans . . . . . . . . . . . . . . . . 451,140,000 419,516,000 Reserve for loan losses . . . . . . . . . (5,250,000) (4,667,000) --------------------------- Net loans . . . . . . . . . . . . . . . . . 445,890,000 414,849,000 --------------------------- Bank premises and equipment, net (note 8) . 11,251,000 11,253,000 Intangible assets (note 4). . . . . . . . . 3,847,000 4,245,000 Accrued interest receivable . . . . . . . . 4,694,000 4,057,000 Other assets (note 13). . . . . . . . . . . 4,093,000 4,449,000 Other foreclosed assets . . . . . . . . . . 98,000 96,000 --------------------------- TOTAL ASSETS. . . . . . . . . . . . . . . .$622,110,000 $599,611,000 --------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits (note 9): Demand and other noninterest-bearing deposits. . . . . . . . . . . . . . . .$ 83,093,000 $ 80,654,000 Savings, Market Access and passbook accounts . . . . . . . . . 219,618,000 191,928,000 Certificates of deposit . . . . . . . . . 193,380,000 184,249,000 --------------------------- Total deposits. . . . . . . . . . . . . . . 496,091,000 456,831,000 --------------------------- Securities sold under repurchase agreements and other short-term borrowings (note 10) 39,391,000 52,122,000 Federal Home Loan Bank advances, short-term (note 11). . . . . . . . . . . 16,095,000 15,000,000 Federal Home Loan Bank advances, long-term (note 12) . . . . . . . . . . . 8,250,000 19,345,000 Accrued interest payable. . . . . . . . . . 1,901,000 1,510,000 Accrued taxes, expenses and other liabilities (notes 13 and 17) . . . . . . . . . . . . 3,857,000 3,750,000 --------------------------- Total liabilities . . . . . . . . . . . . . 565,585,000 548,558,000 --------------------------- 97 Shareholders' equity: (notes 14 and 15) Preferred stock, no par value: Shares authorized 1,000,000, and shares outstanding, none (note 14) Common stock, $1.00 par: Shares authorized 15,000,000 Shares issued 4,313,047 and 4,227,161, respectively and Shares outstanding 4,211,047 and 4,127,161, respectively (notes 14, 18, 19 and 20) 4,313,000 4,227,000 Additional capital. . . . . . . . . . . . 24,336,000 22,685,000 Retained earnings (note 16) . . . . . . . 30,584,000 28,057,000 Accumulated other comprehensive income(loss) . . . . . . . . . . . . . . 192,000 (1,016,000) Treasury stock at cost, 100,000 and 100,000 shares, respectively . . . . (2,900,000) (2,900,000) --------------------------- Total shareholders' equity 56,525,000 51,053,000 --------------------------- Commitments and contingencies (notes 8 and 21) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $622,110,000 $ 599,611,000 --------------------------- See accompanying notes to consolidated financial statements END PUBLISHED PAGE 12 98 Consolidated Statements of Income Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ INTEREST INCOME: Interest and fees on loans: Taxable . . . . . . . . .$ 39,010,000 $ 34,034,000 $ 30,664,000 Tax exempt . . . . . . . . 18,000 26,000 42,000 Interest and dividends on securities: U.S. Treasury securities . 379,000 1,236,000 3,684,000 U.S. Government agencies and corporations. . . . . 6,518,000 5,505,000 3,194,000 States and political subdivisions. . . . . . . 249,000 220,000 204,000 Other debt and equity securities. . . . . . . . 249,000 172,000 152,000 Interest on Federal funds sold and other short-term investments. . . . . . . . 222,000 424,000 238,000 ------------------------------------------ TOTAL INTEREST INCOME. . . . . 46,645,000 41,617,000 38,178,000 INTEREST EXPENSE: Interest on deposits: Certificates of deposit, $100,000 and over . . . . 3,058,000 2,580,000 2,327,000 Other deposits . . . . . . 12,941,000 10,254,000 10,196,000 Interest on securities sold under repurchase agreements and other short-term borrowings. . . 1,889,000 1,242,000 1,107,000 Interest on Federal Home Loan Bank advances. . . . . . . 1,321,000 1,517,000 369,000 ------------------------------------------ TOTAL INTEREST EXPENSE . . . . 19,209,000 15,593,000 13,999,000 ------------------------------------------ NET INTEREST INCOME. . . . . . 27,436,000 26,024,000 24,179,000 Provision for loan losses (note 7). . . . . . 1,700,000 2,000,000 2,725,000 ------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. . . . . . . 25,736,000 24,024,000 21,454,000 ------------------------------------------ OTHER INCOME: Investment and Trust Services Division income. . . . . . 2,355,000 2,095,000 1,887,000 Service charges on deposit accounts . . . . . . . . . 3,150,000 2,967,000 2,533,000 Other service charges, exchanges and fees . . . . 2,804,000 2,798,000 2,515,000 Gains on sales of securities (note 5). . . . -0- -0- 256,000 Gains on sales of bank premises and equipment. . . . . . . 1,000 162,000 -0- Other operating income . . . 60,000 76,000 62,000 ------------------------------------------ TOTAL OTHER INCOME . . . . . . 8,370,000 8,098,000 7,253,000 99 OTHER EXPENSES: Salaries and employee benefits (notes 17, 18, 19 and 20) . 10,304,000 10,056,000 9,153,000 Net occupancy expense of premises (note 8) . . . . . 1,576,000 1,521,000 1,359,000 Furniture and equipment expenses (note 8) . . . . . 2,163,000 2,122,000 2,020,000 Supplies and postage . . . . 909,000 995,000 1,037,000 Ohio Franchise Tax . . . . . 553,000 573,000 467,000 Other operating expenses . . 5,771,000 5,372,000 4,825,000 ------------------------------------------ TOTAL OTHER EXPENSES . . . . . 21,276,000 20,639,000 18,861,000 ------------------------------------------ INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. . . 12,830,000 11,483,000 9,846,000 ------------------------------------------ INCOME TAXES (note 13) 4,400,000 3,842,000 3,291,000 ------------------------------------------ INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. . . . . . . . . . 8,430,000 7,641,000 6,555,000 ------------------------------------------ CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF RELATED INCOME TAXES OF $-0-,$-0- and $136,000(note 5) -0- -0- 263,000 ------------------------------------------ NET INCOME . . . . . . . . . . $ 8,430,000 $ 7,641,000 $ 6,818,000 ------------------------------------------ BASIC EARNINGS PER SHARE (note 2)(1). . . . . . . . . $ 2.00 $ 1.81 $ 1.62 ------------------------------------------ DILUTED EARNINGS PER SHARE (note 2)(1). . . . . . . . . $ 2.00 $ 1.81 $ 1.62 ------------------------------------------ DIVIDENDS DECLARED PER SHARE(1) $ 1.00 $ .90 $ .84 ------------------------------------------ See accompanying notes to consolidated financial statements. (1) All share and per share data have been adjusted to reflect the 2 percent stock dividend in 2000. END PUBLISHED PAGE 13 100 Consolidated Statements of Cash Flows Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Interest received . . . . . . $45,978,000 $41,681,000 $38,031,000 Other income received . . . . 8,504,000 7,873,000 6,228,000 Interest paid . . . . . . . . (18,818,000) (15,570,000) (13,891,000) Cash paid for salaries and employee benefits. . . . (10,264,000) (10,013,000) (8,556,000) Net occupancy expense of premises paid. . . . . . . . (1,258,000) (1,184,000) (1,011,000) Furniture and equipment expenses paid. . . . . . . . (814,000) (847,000) (680,000) Cash paid for supplies and postage. . . . . . . . . . . (909,000) (995,000) (1,037,000) Cash paid for other operating expenses . . . . . (4,970,000) (5,521,000) (4,185,000) Federal income taxes paid . . (4,499,000) (4,210,000) (3,869,000) Proceeds from sales of trading securities . . . . . -0- -0- 7,386,000 ------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . 12,950,000 11,214,000 18,416,000 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities held to maturity. 730,000 689,000 23,447,000 Proceeds from maturities of securities available for sale 13,001,000 26,000,000 29,891,000 Proceeds from sales of securities available for sale -0- -0- 17,782,000 Purchases of securities held to maturity . . . . . . (1,022,000) (8,162,000) (30,611,000) Purchases of securities available for sale (15,650,000) (25,203,000) (49,960,000) Net (increase) in loans made to customers . . . . . . . . (33,053,000) (50,326,000) (43,489,000) Purchases of bank premises, equipment and intangible assets . . . . . . . . . . . (1,703,000) (1,876,000) (815,000) Proceeds from sales of bank premises and equipment. 23,000 164,000 4,000 Additions to other foreclosed assets . . . . . . . . . . . (247,000) (96,000) -0- Net proceeds from liquidations of other foreclosed assets 296,000 1,400,000 -0- ------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . . (37,625,000) (57,410,000) (53,751,000) 101 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease)in demand and other noninterest- bearing deposits . . . . . . 2,439,0000 (4,904,000) 16,993,000 Net increase in savings, Market Access and passbook deposits . . . . . . . . . . 27,690,000 9,917,000 9,075,000 Net increase in certificates of deposit . . . . . . . . . 9,131,000 7,970,000 7,125,000 Net increase (decrease) in securities sold under repurchase agreements and other short-term borrowings. . . . (21,731,000) 29,162,000 (3,790,000) Proceeds from Federal Home Loan Bank advances . . . . . 9,000,000 12,300,000 20,000,000 Cash paid on Federal Home Loan Bank advances . . . . . (10,000,000) -0- -0- Cash paid on line of credit . -0- -0- (2,200,000) Purchase of treasury stock. . -0- -0- (57,000) Proceeds from exercise of stock options. . . . . . . . 25,000 87,000 4,000 Dividends paid. . . . . . . . (4,086,000) (3,794,000) (3,421,000) ------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . 12,468,000 50,738,000 43,729,000 ------------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . (12,207,000) 4,542,000 8,394,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR. . . . . 37,343,000 32,801,000 24,407,000 ------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR. . . . . . . . $25,136,000 $37,343,000 $32,801,000 ------------------------------------------ RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME . . . . . . . . . . $ 8,430,000 $ 7,641,000 $ 6,818,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,667,000 1,612,000 1,688,000 Amortization of intangible assets. . . . . . . . . . . 398,000 421,000 448,000 Amortization of deferred loan fees and costs, net 312,000 (140,000) 1,244,000 Provision for loan losses. . 1,700,000 2,000,000 2,725,000 (Increase) in accrued interest receivable . . . . (637,000) (372,000) (530,000) Fair value of trading securities transferred from held to maturity . . . . . . . . -0- -0- 7,386,000 Others, net. . . . . . . . . 1,080,000 52,000 (1,363,000) ------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . $12,950,000 $11,214,000 $18,416,000 ------------------------------------------ See accompanying notes to consolidated financial statements. END PUBLISHED PAGE 16 102 Consolidated Statements of Shareholders' Equity Accumulated Years Ended Other December 31, 2000 Common Additional Retained Comprehensive 1999 and 1998 Stock Capital Earnings Income(Loss) - ------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 $4,222,000 $22,599,000 $20,937,000 $ 70,000 ------------------------------------------------ Comprehensive income: Net income . . . . . . -0- -0- 6,818,000 -0- Change in unrealized gain on securities available for sale, net of tax. . . -0- -0- -0- 471,000 Total comprehensive income Cash dividends declared, $.84 per share. . . . -0- -0- (3,545,000) -0- Issuance of 200 shares of common stock under stock option plans. . 1,000 3,000 -0- -0- Purchase of 2,004 shares treasury stock . . . . -0- -0- -0- -0- ------------------------------------------------- BALANCE AT DECEMBER 31, 1998 $4,223,000 $22,602,000 $24,210,000 $541,000 ------------------------------------------------- Years Ended Total December 31, 2000 Treasury Shareholders' 1999 and 1998 Stock Equity - -------------------------------------------------- BALANCE AT DECEMBER 31, 1997 (2,843,000) $44,985,000 --------------------------- Comprehensive income: Net income -0- 6,818,000 Change in unrealized gain on securities available for sale, net of tax. . . -0- 471,000 ---------- Total comprehensive income 7,289,000 Cash dividends declared, $.84 per share. . . . -0- (3,545,000) Issuance of 200 shares of common stock under stock option plans. . -0- 4,000 Purchase of 2,004 shares treasury stock. . . . (57,000) (57,000) ------------------------------- BALANCE AT DECEMBER 31, 1998 $(2,900,000) $48,676,000 ------------------------------- 103 Accumulated Years Ended Other December 31, 2000 Common Additional Retained Comprehensive 1999 and 1998 Stock Capital Earnings Income - ------------------------------------------------------------------------ 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, $.90 per share. . . . -0- -0- (3,794,000) -0- Issuance of 200 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, 2000 Treasury Shareholders' 1999 and 1998 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, $.90 per share. . . . -0- (3,794,000) Issuance of 200 shares of common stock under stock option plans. . -0- 87,000 BALANCE AT ------------------------------ DECEMBER 31, 1999 $ (2,900,000) $51,053,000 ------------------------------ 104 Accumulated Years Ended Other December 31, 2000 Common Additional Retained Comprehensive 1999 and 1998 Stock Capital Earnings Income - ------------------------------------------------------------------------ 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, $1.00 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, 2000 Treasury Shareholders' 1999 and 1998 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, $1.00 per share. . . . -0- (4,191,000) Issuance of 1,324 shares of common stock under stock option plans . . -0- 25,000 Market value of stock issued in payment of 2% stock dividend, 84,562 shares. . . . . -0- -0- BALANCE AT ---------------------------------- DECEMBER 31, 2000 $ (2,900,000) $56,525,000 ---------------------------------- See accompanying notes to consolidated financial statements. All share and per share data have been adjusted to reflect the 2 105 percent stock dividend in 2000. Disclosure of Reclassification Amount The following discloses the reclassification adjustments for Accumulated Other Comprehensive Income: Years ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------- Unrealized holding gains(losses) arising during the year, net of tax. .$ 1,208,000 $(1,557,000) $640,000 Reclassification adjustment for gains (losses) included in net income, net of tax of $0, $0 and $87,000 for 2000, 1999 and 1998, respectively . . -0- -0- 169,000 --------------------------------- Change in unrealized gains(loss) on securities available for sale, net of tax . . . . . . . . . . . . . . . .$ 1,208,000 $(1,557,000) $471,000 --------------------------------- END PUBLISHED PAGE 15 106 Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998 (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. and a 49% interest in Charleston Title Insurance Agency, LLC. 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 Insurance 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 Generally Accepted Accounting Principles (GAAP) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas involving the use of Management's estimates and assumptions include the 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. Generally, Federal funds sold and securities purchased under resale agreements are for one day periods. 107 (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 atamortized cost based on the Corporations'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, commercial and student loans which may be sold prior to maturity. These loans are carried at the lower of amortized cost or estimated fair value, determined on an aggregate basis for each type of loan available for sale. 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. The 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 16 108 (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 judgement, deserve current recognition. (h) Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed generally on the straight-line method over the estimated useful lives of the assets. 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 expenses 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) Other Foreclosed Assets: Other foreclosed assets represents properties acquired through customer loan default. The real estate and other tangible assets acquired through foreclosure is carried in other 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. (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. 109 (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 1998 and 1999 amounts have been reclassified to conform to the 2000 presentation. (q) Employee Stock Ownership Plan and Stock Purchase Plan: These two qualified defined contribution plans are accounted for under the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions". (r) Retirement Pension Plan: The qualified defined benefit pension plan is accounted for under the provisions of Statement of Financial Accounting Standards Co. 35 "Accounting and Reporting by Defined Benefit Pension Plans". (s) Reporting Comprehensive Income: Effective January 1, 1998, the Corporation adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income". This statement requires companies to report all items that are recognized as components of comprehensive income under accounting standards. As required, the Corporation displays the accumulated balance of other comprehensive 110 income as a separate component of shareholders' equity. The adoption of SFAS No. 130 required the reclassification of prior years' financial statements. END PUBLISHED PAGE 17 111 (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 2000. Basic and diluted earnings per share is calculated as follows: For the Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ Weighted average shares outstanding used in Basic Earnings Per Share calculation . . . . . . . . . . . 4,210,537 4,205,632 4,205,314 Dilutive effect of incentive stock options . . . . . . . . . . 4,086 6,628 9,753 -------------------------------------- Weighted average shares outstanding used in Diluted Earnings Per Share calculation . . . . . . . . . . . 4,214,623 4,212,260 4,215,067 -------------------------------------- Net income from operations before cumulative effect . . . . . . . .$8,430,000 $7,641,000 $6,555,000 Cumulative effect of a change in accounting principle, net of tax. -0- -0- 263,000 -------------------------------------- NET INCOME . . . . . . . . . . . .$8,430,000 $7,641,000 $6,818,000 BASIC EARNINGS PER SHARE: Net income from operations before cumulative effect. . . . . . . . $2.00 $1.81 $1.56 Cumulative effect of a change in accounting principle, net of tax 0.00 0.00 0.06 -------------------------------------- BASIC EARNINGS PER SHARE . . . . . $2.00 $1.81 $1.62 -------------------------------------- DILUTED EARNINGS PER SHARE: Net income from operations before cumulative effect. . . . . . . . $2.00 $1.81 $1.56 Cumulative effect of a change in accounting principle, net of tax 0.00 0.00 0.06 -------------------------------------- DILUTED EARNINGS PER SHARE . . . . $2.00 $1.81 $1.62 -------------------------------------- (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 $9,466,000 and $8,667,000 at December 31, 2000 and 1999, respectively, to meet these deposit reserve requirements. 112 The average balances maintained in cash on hand and in reserve balances at the Federal Reserve Bank to meet deposit reserve requirements approximated $8,965,000 and $9,197,000, during 2000 and 1999, respectively. (4) Acquisition and Intangible Assets: The intangible assets arising from the KeyBank branch acquisition and included in the accompanying Consolidated Balance Sheets are summarized as follows at December 31, net of accumulated amortization: 2000 1999 - ----------------------------------------------------------- Goodwill. . . . . . . . . . . $3,091,000 $3,355,000 Core deposit intangible . . . 756,000 890,000 ----------------------------- Total intangible assets . . . $3,847,000 $4,245,000 ============================= Amortization expense for intangible assets totaled $398,000, $421,000 and $448,000 in 2000, 1999 and 1998, respectively. END PUBLISHED PAGE 18 113 (5) Securities: The amortized cost, gross unrealized gains and losses and fair values of securities at December 31, 2000 and 1999 follow: Gross Gross Amortized Unrealized Unrealized Fair December 31, 2000 Cost Gains Losses Value - ------------------------------------------------------------------------ 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 ----------------------------------------------- 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 ----------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 1999 Cost Gains Losses Value - ------------------------------------------------------------------------ Securities available for sale: U.S. Treasury securities. . . . . . $ 11,077,000 $ 14,000 $ (16,000) $ 11,075,000 U.S. Government agencies and corporations. . . 66,106,000 -0- (1,622,000) 64,484,000 Equity securities. . . 86,000 83,000 -0- 169,000 ------------------------------------------------ Total securities available for sale. . . 77,269,000 97,000 (1,638,000) 75,728,000 ------------------------------------------------ Securities held to maturity: U.S.Government agencies and corporations. . . 39,848,000 -0- (2,707,000) 37,141,000 States and political subdivisions. . . . . 4,794,000 33,000 (149,000) 4,678,000 ------------------------------------------------ Total securities held to maturity . . . . . . 44,642,000 33,000 (2,856,000) 41,819,000 ------------------------------------------------ 114 Federal Home Loan Bank and Federal Reserve Bank stock 2,949,000 -0- -0- 2,949,000 ----------------------------------------------- Total securities. . . . .$124,860,000 $130,000 $(4,494,000) $120,496,000 ----------------------------------------------- The amortized cost, fair values and yields of debt securities by contractual maturity date at December 31, 2000 follow: Fully-Tax Amortized Fair Equivalent December 31, 2000 Cost Value Yield - ------------------------------------------------------------------------ Securities available for sale: Due within 1 year. . . . . . .$ 11,996,000 $ 11,995,000 5.75% After 1 but within 5 years . . 66,134,000 66,228,000 5.80 ---------------------------------------- Total securities available . . . 78,130,000 78,223,000 5.79 for sale ---------------------------------------- Securities held to maturity: Due within 1 year. . . . . . . 1,519,000 1,522,000 7.01 After 1 but within 5 years . . 5,605,000 5,593,000 6.17 After 5 but within 10 years. . 34,725,000 34,306,000 5.56 After 10 years . . . . . . . . 2,582,000 2,561,000 7.76 ---------------------------------------- Total securities held to maturity 44,431,000 43,982,000 5.81 ---------------------------------------- Total securities . . . . . . . .$122,561,000 $122,205,000 5.80% ---------------------------------------- END PUBLISHED PAGE 19 115 (5) Securities (continued): There were no sales of securities in 2000 or 1999. During 1998, proceeds from the sale of securities were $25,168,000 resulting in gross realized gains of $655,000. 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 $112,173,000 and $113,334,000 at December 31, 2000 and 1999, respectively. The fair value of securities is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments. The securities portfolio contained approximately $2,261,000 and $2,343,000 in non-rated securities of state and political subdivisions at December 31, 2000 and 1999, respectively. Based upon yield, term to maturity and market risk, the valuation service estimated the fair value of these securities to be $2,288,000 and $2,380,000 at December 31, 2000 and 1999, 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, 2000 and 1999. The Corporation adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) on October 1, 1998. The Corporation did not have any hedging activity or derivative instruments prior to September 30, 1998. However, the Corporation elected to reclassify approximately $7 million of held to maturity securities to trading securities and approximately $41 million in held to maturity securities to available for sale securities. The total amount of securities transferred to trading securities were sold during the quarter, resulting in a transition gain of $399,000, which is recorded as a change in accounting principle in the Consolidated Statements of Income. The above-mentioned security transfers from the held to maturity category at the initial date of adoption shall not call into question the Corporation's intent to hold other debt securities to maturity in the future. The unrealized holding gain on held to maturity securities transferred at the initial adoption of SFAS No. 133 was reported as a transition adjustment to net income and Accumulated Other Comprehensive Income. The cumulative effect of adoption of SFAS No. 133 is as follows: 116 Transfers of Debt Securities from the Held to Maturity to the Trading and Available for Sale Categories as Part of the Transition to SFAS No. 133 as of October 1, 1998: Before Transition Adjustment After Transition Adjustment - ------------------------------------------------------------------------ Statement Balance Sheet Balance Sheet of Income - ------------------------------------------------------------------------ Carrying Fair Asset Stockholders' Gain Amount Value (Liability) Equity (Loss) - ------------------------------------------------------------------------ Transfer to the trading category: Debt security $ 6,987,000 $ 7,386,000 $ 7,386,000 N/A $399,000 Transfer to available for sale category: Debt security $40,979,000 $41,696,000 $41,696,000 N/A $-0- Accumulated other comprehensive income N/A N/A N/A $473,000 $-0- - ------------------------------------------------------------------------ END PUBLISHED PAGE 20 117 (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, 2000 1999 - ------------------------------------------------------------------------ Aggregate amount beginning of year. . . . . . $11,434,000 $ 4,495,000 Additions (deductions): New loans . . . . . . . . . . . . . . . . . 3,805,000 7,237,000 Repayments. . . . . . . . . . . . . . . . . (1,418,000) (801,000) Changes in directors and officers and/or their affiliations, net . . . . . . 339,000 503,000 -------------------------- Aggregate amount end of year. . . . . . . . . $14,160,000 $11,434,000 --------------------------- (7) Loans and Reserve for Loan Losses: Loan balances at December 31, 2000 and 1999 are summarized as follows: December 31, 2000 1999 - ------------------------------------------------------------------------ Real estate loans (includes loans secured primarily by real estate only): Construction and land development. . . . . $ 36,030,000 $ 28,236,000 One to four family residential . . . . . . 199,869,000 189,672,000 Multi-family residential . . . . . . . . . 7,829,000 8,716,000 Non-farm non-residential properties. . . . 109,536,000 97,478,000 Commercial and industrial loans. . . . . . . 39,609,000 28,646,000 Personal loans to individuals: Auto, single payment and installment . . . 52,462,000 60,683,000 Credit card and related plans. . . . . . . 5,216,000 5,111,000 Obligations of states and political subdivisions 196,000 349,000 All other loans. . . . . . . . . . . . . . . 393,000 625,000 --------------------------- TOTAL LOANS. . . . . . . . . . . . . . . . . 451,140,000 419,516,000 Reserve for loan losses . . . . . . . . . . (5,250,000) (4,667,000) --------------------------- NET LOANS. . . . . . . . . . . . . . . . . . $445,890,000 $414,849,000 --------------------------- Activity in the reserve for loan losses for 2000, 1999 and 1998 is summarized as follows: Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ Balance at beginning of year. . $4,667,000 $3,483,000 $4,168,000 Provision for loan losses . . . 1,700,000 2,000,000 2,725,000 Loans charged-off . . . . . . . (1,333,000) (1,050,000) (3,591,000) Recoveries on loans previously charged-off. . . . . . . . . . 216,000 234,000 181,000 ----------------------------------------- BALANCE AT END OF YEAR. . . . . $5,250,000 $4,667,000 $3,483,000 ----------------------------------------- 118 At December 31, 2000 and 1999, $9,008,000 and $9,545,000 respectively, of mortgage, commercial and student loans were available for sale in the secondary market. At December 31, 2000, the market value of commercial and mortgage loans available for sale equaled or exceeded its carrying value. At December 31, 2000, there were no student loans available for sale. At December 31, 1999, the market value of commercial and student loans available for sale equaled or exceeded their carrying value and the carrying value of the only mortgage loan available for sale was written down to its market value. At December 31, 2000, the Bank had firm commitments for the sale of approximately $122,000 of mortgage loans. Information regarding impaired loans is as follows: Years ended December 31 2000 1999 1998 - ------------------------------------------------------------------------ Year-end impaired loans with no allowance for loan losses allocated. . . . $ -0- $ -0- $ -0- Year-end impaired loans with allowance for loan losses allocated . . . . . . 5,027,000 2,232,000 $2,089,000 Amount of the allowance allocated. . . . . . . . . . 847,000 190,000 139,000 Average of impaired loans during the year. . . . . . . 1,230,000 2,925,000 1,130,000 Interest income recognized during impairment. . . . . . 72,000 283,000 82,000 Cash-basis interest income recognized . . . . . . . . . -0- -0- 26,000 - ------------------------------------------------------------------------ END PUBLISHED PAGE 21 119 (8) Bank Premises, Equipment and Leases: Bank premises and equipment are summarized as follows: December 31, 2000 1999 - ------------------------------------------------------------------------ Land . . . . . . . . . . . . . . . . . . . . .$ 1,896,000 $ 1,896,000 Buildings. . . . . . . . . . . . . . . . . . . 9,243,000 9,194,000 Equipment. . . . . . . . . . . . . . . . . . . 16,750,000 15,250,000 Leasehold improvements . . . . . . . . . . . . 688,000 688,000 -------------------------- Total Costs. . . . . . . . . . . . . . . . . . 28,577,000 27,028,000 -------------------------- Less accumulated depreciation and amortization. . . . . . . . . . . . . . . 17,326,000 15,775,000 -------------------------- TOTAL. . . . . . . . . . . . . . . . . . . . .$11,251,000 $11,253,000 -------------------------- Depreciation and amortization of Bank premises and equipment charged to other expenses amounted to $1,440,000 in 2000, $1,407,000 in 1999 and $1,472,000 in 1998. Amortization of purchased software charged to other operating expenses amounted to $227,000 in 2000, $205,000 in 1999 and $216,000 in 1998. At December 31, 2000, 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 ----------------------------------------------------------- 2001. . . . . . . . . . . . .$213,000 $ 4,000 2002. . . . . . . . . . . . . 190,000 -0- 2003. . . . . . . . . . . . . 175,000 -0- 2004. . . . . . . . . . . . . 64,000 -0- 2005. . . . . . . . . . . . . 48,000 -0- 2006 and thereafter . . . . . 84,000 -0- --------------------------- Total. . . . . . . . . . . . .$774,000 $ 4,000 --------------------------- Rentals paid under leases on branch offices and equipment, respectively, amounted to $265,000 and $4,000 in 2000, $265,000 and $10,000 in 1999 and $142,000 and $12,000 in 1998. (9) Deposits: Deposit balances at December 31, 2000 and 1999 are summarized as follows: December 31, 2000 1999 - ------------------------------------------------------------------------ Demand and other noninterest-bearing deposits: Individuals, partnerships and corporations. . . . . . . . . . . . . .$ 72,956,000 $ 68,049,000 U.S. Government. . . . . . . . . . . . . . . 144,000 170,000 120 States and political subdivisions. . . . . . 5,458,000 8,521,000 Certified, official, travelers checks and other. . . . . . . . . . . . . . 4,535,000 3,914,000 -------------------------- Total demand and other noninterest- bearing deposits. . . . . . . . . . . . . . . 83,093,000 80,654,000 -------------------------- Savings and passbook accounts: Individuals and non-profit organizations . . 190,570,000 171,315,000 Corporations and profit organizations. . . . 29,048,000 20,613,000 -------------------------- Total savings and passbook accounts. . . . . . 219,618,000 191,928,000 -------------------------- Certificates of deposit: Individuals, partnerships and corporations . . . . . . . . . . . . . . . 169,544,000 169,791,000 States and political subdivisions. . . . . . 23,836,000 14,458,000 -------------------------- Total certificates of deposit. . . . . . . . . 193,380,000 184,249,000 -------------------------- TOTAL DEPOSITS . . . . . . . . . . . . . . . .$496,091,000 $456,831,000 -------------------------- The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $42,238,000 and $36,336,000 at December 31, 2000 and 1999, respectively. The maturity distribution of time certificates of deposit as of December 31, 2000 and 1999 follows: After 3 After 6 Months Months Within 3 But Within But Within Months 6 Months 1 Year - ------------------------------------------------------------------------ December 31, 2000. . $64,404,000 $33,470,000 $51,909,000 --------------------------------------------------- December 31, 1999. . $61,248,000 $43,009,000 $38,935,000 --------------------------------------------------- After 1 After 2 Year But Years But Within Within 2 Years 5 Years Total - ------------------------------------------------------------------------ December 31, 2000. . $32,463,000 $11,134,000 $193,380,000 --------------------------------------------------- December 31, 1999. . $29,232,000 $11,825,000 $184,249,000 --------------------------------------------------- END PUBLISHED PAGE 22 121 (10) Securities Sold Under Repurchase Agreements and Other Short-Term Borrowings: Information relating to short-term borrowings for the years ended December 31, 2000, 1999 and 1998 follows: December 31, 2000 1999 1998 - ------------------------------------------------------------------------ Securities sold under repurchase agreements and other short-term borrowings At December 31: Outstanding. . . . . . . . .$39,391,000 $52,122,000 $22,960,000 Interest rate. . . . . . . . 5.41% 4.48% 3.80% Average for the year: Outstanding. . . . . . . . .$33,734,000 $28,892,000 $22,719,000 Interest rate. . . . . . . . 5.56% 4.27% 4.36% Maximum month-end outstanding.$42,378,000 $52,122,000 $34,622,000 Line of credit At December 31: Outstanding. . . . . . . . .$ -0- $ -0- $ -0- Interest rate. . . . . . . . N/A N/A N/A Average for the year: Outstanding. . . . . . . . .$ -0- $ -0- $ 1,688,000 Interest rate. . . . . . . . N/A N/A 6.46% Maximum month-end outstanding.$ -0- $ -0- $ 2,200,000 - ------------------------------------------------------------------------ In May of 1997, the Corporation obtained a $4,100,000 line of credit from a commercial bank to fund the purchase of treasury stock. The interest rate was based upon the current Eurodollar rate plus fifty basis points and was adjustable every six months. Interest was paid on a quarterly basis. When there were outstanding balances on the line of credit, they were collateralized with U.S. Treasury securities or certificates of deposit. The line of credit expired in May of 1999 and was not renewed. The Bank maintains a $30,000,000 line of credit with the FHLB which matures on September 7, 2001. At December 31, 2000, the Bank borrowed $9,000,000 under this line of credit while having credit available in the amount of $21,000,000. (11) Federal Home Loan Bank Advances, Short-Term: Information relating to short-term Federal Home Loan Bank advances for the years ended December 31, 2000, 1999 and 1998 follows: December 31, 2000 1999 1998 - ----------------------------------------------------------------------- Federal Home Loan Bank advances, short-term At December 31: Outstanding. . . . . . . . . . .$16,095,000 $15,000,000 $-0- Interest rate. . . . . . . . . . 4.88-6.85% 4.76-5.53% N/A Average for the year: Outstanding. . . . . . . . . . .$ 8,941,000 $ 6,693,000 $-0- Interest rate. . . . . . . . . . 5.16% 5.45% N/A Maximum month-end outstanding . . .$16,095,000 $15,000,000 $-0- 122 (12) Federal Home Loan Bank Advances, Long-Term: Lorain National Bank is a voluntary member of the Federal Home Loan Bank of Cincinnati (FHLB). Long-term advances from the FHLB with maturities and fixed interest rates thereon at December 31, 2000 and 1999 are as follows: Maturity Interest Rate 1999 1998 --------------------------------------------------------------- 2001 4.88-6.85%. . .$ -0- $11,095,000 2002 4.86-6.31%. . . 8,250,000 8,250,000 ------------------------- Total . . . . . . . .$ 8,250,000 $19,345,000 ------------------------- At December 31, 2000, pledged as collateral for FHLB advances were all of the shares of FHLB stock owned by the Bank, and qualified mortgage loans totaling $45,016,000. At December 31, 2000, Lorain National Bank was approved for $57,748,000 of FHLB advances. The Bank is required to own FHLB stock equal to 5% of the FHLB advances outstanding and owned $2,887,600 at December 31, 2000. At December 31, 2000, the amount of credit available to the Bank from the FHLB was $24,403,000. The Bank is eligible to purchase additional FHLB stock, if needed, and thereby increase the amount of credit available. END PUBLISHED PAGE 23 123 (13) Income Taxes: The annual provision for income taxes consists of the following: Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ INCOME TAXES Federal Current. . . . . . . $4,743,000 $4,448,000 $3,083,000 Federal Deferred . . . . . . (348,000) (627,000) 192,000 State. . . . . . . . . . . . 5,000 21,000 16,000 Cumulative effect adjustment -0- -0- 136,000 ------------------------------------------ TOTAL INCOME TAXES . . . . . . $4,400,000 $3,842,000 $3,427,000 ------------------------------------------ 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, 2000 1999 1998 - ------------------------------------------------------------------------ Computed "expected" tax expense . . . . . . . . . . . $4,491,000 $4,019,000 $3,586,000 Increase (reduction) in income taxes resulting from: Tax exempt interest on obligations of states and political subdivisions (82,000) (76,000) (75,000) State income taxes net of Federal benefit. . . . . . 3,000 14,000 10,000 Other, net. . . . . . . . . (12,000) (115,000) (94,000) ------------------------------------------ TOTAL INCOME TAXES . . . . . . $4,400,000 $3,842,000 $3,427,000 ------------------------------------------ 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 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, 2000 1999 - ----------------------------------------------------------------------- Deferred Federal tax assets: Reserve for loan losses . . . . . . . . . . . $1,608,000 $1,276,000 Deferred compensation . . . . . . . . . . . . 288,000 289,000 Accrued vacation payable. . . . . . . . . . . 159,000 165,000 Intangible asset amortization . . . . . . . . 80,000 64,000 Accrued pension payable . . . . . . . . . . . 88,000 56,000 Unrealized loss on securities available for sale -0- 523,000 Other, net. . . . . . . . . . . . . . . . . . 20,000 23,000 ------------------------ Total deferred Federal tax assets . . . . . . . 2,243,000 2,396,000 124 Deferred Federal tax liabilities: Bank premises and equipment depreciation. . . (315,000) (300,000) Deferred charges. . . . . . . . . . . . . . . (79,000) (159,000) FHLB stock dividends. . . . . . . . . . . . . (227,000) (158,000) Unrealized gain on securities available for sale (99,000) -0- Accrued loan fees and costs . . . . . . . . . (122,000) (103,000) ------------------------ Total deferred Federal tax liabilities. . . . . (842,000) (720,000) ------------------------ NET DEFERRED FEDERAL TAX ASSETS . . . . . . . . $1,401,000 $1,676,000 ------------------------ END PUBLISHED PAGE 24 125 (14) 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, 2000, 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. Common Stock The Corporation is authorized to issue up to 15,000,000 shares of common stock. Common shares outstanding were 4,211,047 and 4,127,161 at December 31, 2000, and December 31, 1999, respectively. 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 102,000 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, 2000, LNB Bancorp, Inc. held 102,000 shares of common stock as Treasury Stock. LNB Bancorp, Inc. purchased 2,000 shares in 2000, 2,004 shares in 1998 and 97,996 shares in 1997 under this plan for a total cost of $2,940,000. During 2000, 1999 and 1998, 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 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. 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 acquiror 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 would likely dramatically dilute the potential acquiror's ownership level and voting power, making an acquisition of the Corporation without prior Board approval prohibitively expensive. 126 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 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 2000 increased $.10, or 11.1 percent, to $1.00 per share, up from $.90 per share in 1999. Total cash dividends declared in 2000, including the $.02 EXTRA dividend declared by the Board of Directors in November, rose to $4,191,000. In each of the last 13 years, the Board of Directors has approved an increase in the regular cash dividend, with the 2000 dividend representing a 232.6% increase from 1990 when $1,260,000 in total cash dividends were declared. In February 2001, the Corporation announced that the Board of Directors raised the 2001 first quarter cash dividend declared on common stock by $.01 to $.25 per share. This represents an increase of 4.2% from last year's first-quarter dividend of $.24 per share. Dividend Reinvestment and Cash Stock Purchase Plan The Board of Directors adopted a dividend reinvestment and cash stock purchase plan on November 18, 1997. Under the plan, the first dividend reinvestment and cash stock purchase date was April 1, 1998. The plan allows shareholders to elect to use their quarterly cash dividends to purchase shares of LNB Bancorp, Inc. common stock. Additionally, cash can be contributed directly to the plan for the purchase of shares of common stock with a quarterly limit of $5,000. The dividend reinvestment plan authorized the sale of 150,000 shares of the Corporation's authorized but previously unissued common shares to shareholders who choose to invest all or a portion of their cash dividends plus additional cash payments. No shares were issued by the Corporation pursuant to the plan in 2000 and 1999. During 2000 and 1999, stock for the dividend reinvestment 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 127 of Currency. These restrictions generally limit dividends to the current and prior two year's retained earnings. At December 31, 2000, approximately $10,857,000 of the Bank's retained earnings were available for dividends to the Corporation. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below the Corporation's regulatory capital requirements and minimum regulatory guidelines. These restrictions do not presently limit the Corporation from paying normal dividends. END PUBLISHED PAGE 25 128 (15) 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 1 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 2000. Total capital (Tier 1 and Tier 2) amounted to $57.6 million at December 31, 2000, representing 13.06% of net risk-adjusted assets compared with $52.5 million and 12.84%, respectively, at December 31, 1999. Tier 1 capital of $52.5 million at year-end 2000 represented 11.88% of risk weighted assets, compared with $47.8 million and 11.70% at year-end 1999. At December 31, 2000 and 1999, 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 September 30, 1999, 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. 129 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 - ------------------------------------------------------------------------ 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. .$52,387 8.68% $30,183 5.0% $24,146 4.0% Bank. . . . . .$45,214 7.50% $30,156 5.0% $24,125 4.0% 1999 Total capital (to risk weighted assets) Consolidated. .$52,491 12.84% $40,872 10.0% $32,698 8.0% Bank. . . . . .$48,284 11.82% $40,807 10.0% $32,646 8.0% 1999 Tier 1 capital (to risk weighted assets) Consolidated. .$47,824 11.70% $24,523 6.0% $16,349 4.0% Bank. . . . . .$39,617 9.70% $24,484 6.0% $16,323 4.0% 1999 Tier 1 capital (to average assets) Consolidated. .$47,824 8.36% $28,613 5.0% $22,891 4.0% Bank. . . . . .$39,617 6.96% $28,446 5.0% $22,756 4.0% END PUBLISHED PAGE 26 130 (16)Parent Company: Substantially all of the retained earnings of the Corporation represent undistributed net income of its subsidiary. Condensed financial information of LNB Bancorp, Inc. (Parent Company only) is as follows: Condensed Balance Sheets December 31, 2000 1999 - ------------------------------------------------------------------------ ASSETS: Cash. . . . . . . . . . . . . . . . . . . . .$ 1,177,000 $ 1,047,000 Short-term investments. . . . . . . . . . . . 3,125,000 3,070,000 Investment in subsidiaries at equity in underlying value of its net assets. . . . . . . . . . . 49,263,000 43,862,000 Securities available for sale . . . . . . . . 88,000 87,000 Note receivable - subsidiary. . . . . . . . . 4,000,000 4,000,000 Other assets. . . . . . . . . . . . . . . . . 25,000 46,000 --------------------------- Totals assets . . . . . . . . . . . . . . . .$57,678,000 $52,112,000 --------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities . . . . . . . . . . . . . . . . .$ 1,153,000 $ 1,059,000 Shareholders' equity. . . . . . . . . . . . . 56,525,000 51,053,000 --------------------------- Total liabilities and shareholders' equity. .$57,678,000 $52,112,000 --------------------------- Condensed Statements of Income Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ INCOME: Cash dividends from subsidiary $ 4,191,000 $ 3,794,000 $ 3,381,000 Interest and other income. . . 445,000 663,000 773,000 ------------------------------------------ 4,636,000 4,457,000 4,154,000 EXPENSES: Other expenses . . . . . . . . 334,000 238,000 240,000 ------------------------------------------ Income before income taxes and equity in undistributed net income of subsidiary. . . 4,302,000 4,219,000 3,914,000 Income tax expense . . . . . . 55,000 159,000 189,000 Equity in undistributed net income of subsidiary. . . . . 4,183,000 3,581,000 3,093,000 ------------------------------------------ NET INCOME . . . . . . . . . . $ 8,430,000 $ 7,641,000 $ 6,818,000 ------------------------------------------ 131 Condensed Statements of Cash Flows Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Dividends from subsidiary. . . $ 4,191,000 $ 3,794,000 $ 3,381,000 Other, net . . . . . . . . . . 55,000 280,000 392,000 ------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . 4,246,000 4,074,000 3,773,000 ------------------------------------------ CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES: Proceeds from maturities of securities available for sale -0- -0- 4,569,000 Cash paid on line of credit. . -0- -0- (2,200,000) Proceeds from subsidiary on note receivable . . . . . . . -0- 4,000,000 -0- Purchase of treasury stock . . -0- -0- (57,000) Proceeds from exercise of stock options . . . . . . . . 25,000 87,000 4,000 Dividends paid to subsidiary . -0- (4,000,000) -0- Dividends paid to shareholders (4,086,000) (3,794,000) (3,421,000) ------------------------------------------ NET CASH USED IN INVESTING AND FINANCING ACTIVITIES. . . (4,061,000) (3,707,000) (1,105,000) ------------------------------------------ NET INCREASE IN CASH AND CASH EQUIVALENTS . . 185,000 367,000 2,668,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . 4,117,000 3,750,000 1,082,000 ------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . $ 4,302,000 $ 4,117,000 $ 3,750,000 ------------------------------------------ END PUBLISHED PAGE 27 132 (17) Retirement Pension Plan: The Corporation adopted SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" on January 1, 1998. The Bank maintains a non-contributory defined benefit pension plan covering substantially all of its employees. In general, benefits are based on years of service and the employee's level of compensation. The Bank's funding policy is to contribute annually an actuarially determined amount to cover current service cost plus amortization of prior service costs. The net periodic pension costs charged to other expenses amounted to $95,000 in 2000, $33,000 in 1999 and $163,000 in 1998. At December 31, 2000 there were 285 participants in the plan. The following table sets forth the defined benefit pension plan's Change in Projected Benefit Obligation and Change in Plan Assets and Funded Status including Prepaid (Accrued) Liability for the years ended December 31, 2000, 1999 and 1998. Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ Change in projected benefit obligations: Projected benefit obligation at beginning of year. . . .$ (9,672,000) $ (9,064,000) $ (7,952,000) Service cost . . . . . . . . (474,000) (408,000) (408,000) Interest cost. . . . . . . . (571,000) (553,000) (538,000) Employer contributions . . . -0- -0- -0- Actuarial gain(loss) . . . . (399,000) 2,000 (653,000) Benefits paid. . . . . . . . 1,016,000 351,000 487,000 ------------------------------------------- Projected benefit obligation at end of year. . . . . . .$(10,100,000) $ (9,672,000) $ (9,064,000) ------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year . . . . .$ 11,704,000 $ 10,659,000 $ 8,773,000 Actual return on plan assets (587,000) 1,396,000 2,373,000 Employer contributions . . . -0- -0- -0- Benefits and expenses paid . (1,016,000) (351,000) (487,000) ------------------------------------------- Fair value of plan assets at end of year. . . . . . .$ 10,101,000 $ 11,704,000 $ 10,659,000 ------------------------------------------- Funded status . . . . . . . .$ 1,000 $ 2,032,000 $ 1,595,000 Unrecognized net gain subsequent to transition. . (103,000) (2,006,000) (1,476,000) Unamortized prior service cost (156,000) (190,000) (225,000) Unamortized net asset at transition . . . . . . . -0- -0- (25,000) ------------------------------------------- (Accrued) Pension Liability .$ (258,000) $ (164,000) $ (131,000) ------------------------------------------- 133 Net Periodic Pension Cost consisted of the following: Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ Service cost. . . . . . . . . $ 474,000 $ 408,000 $ 408,000 Interest cost on projected benefit obligation . . . . . 571,000 553,000 538,000 Expected return on plan assets (873,000) (838,000) (717,000) Amortization of transition net asset. . . . . . . . . . -0- (25,000) (31,000) Amortization of unrecognized prior service liability. . . (35,000) (35,000) (35,000) Recognized actuarial (gain) or loss . . . . . . . (42,000) (30,000) -0- ------------------------------------------- Net periodic pension cost . . $ 95,000 $ 33,000 $ 163,000 ------------------------------------------- The principal actuarial assumptions used follows: Weighted average discount rate 6.00% 5.95% 5.95% ------------------------------------------- Expected long-term rate of return on plan assets. . . . 8.00% 8.00% 8.00% ------------------------------------------- Assumed rate of future compensation increases . . . 5.25% 5.00% 5.00% ------------------------------------------- END PUBLISHED PAGE 28 134 (18) Stock Option Plan: The Corporation sponsors two qualified incentive stock option plans. In 2000, the Corporation entered into two nonqualified incentive stock option agreements. Under the nonqualified incentive stock option agreements, 12,500 shares were granted in 2000. 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 incentive 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 2000, 1999 and 1998. 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 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, 2000. All stock option shares granted are vested. Stock options exercised were 1,324, 4,586 and 200 shares in 2000, 1999 and 1998, respectively. An analysis of the qualified incentive stock option plans as of December 31, 2000 follows: Plan Year 1985 1982 ---------------------------------------------------------------- Options outstanding: Total. . . . . . . . . . . . . . . . . .12,058 9,250 Vested . . . . . . . . . . . . . . . . .12,058 9,250 Options available for granting . . . . . . . . . . . . . . -0- -0- Exercise price . . . . . . . . . . . . . .$19.21 $14.35 --------------------- 135 2000 1999 1998 -------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------------------------------------------------------- Outstanding at beginning of year. . . . . . 32,207 $21.37 26,793 $17.79 26,993 $17.77 Granted. . . . . 12,500 26.80 10,000 30.00 0 0.00 Exercised. . . . (1,324) 18.01 (4,586) 19.28 (200) 14.64 Stock Dividend . 775 22.63 0 0.00 0 0 00 -------------------------------------------------------- Outstanding at end of year . . . . 44,158 22.63 32,207 21.37 26,793 17.79 ======================================================== Exercisable at end of year . . . . 44,158 22.63 32,207 21.37 26,793 17.79 ======================================================== Exercise prices for qualified and nonqualified options outstanding as of December 31, 2000, ranged from $14.35 to $29.41. 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 1 and 3 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 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. The fair value of each option granted in 1999 is estimated on the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999: risk-free interest rate of 5.84%, dividend yield of 4.00%, volatility factors of the expected market price of LNB Bancorp, Inc.'s common stock of 50.00%; and a weighted average expected option life of 10 years. Weighted average fair value of options granted during 1999 was $9.83. 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 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 1998. 136 Years ended December 31, 2000 1999 - --------------------------------------------------------- Pro forma net income. . . . . . . $8,400,000 $7,576,000 Pro forma net income per share: . Basic . . . . . . . . . . . . . $ 1.99 $ 1.84 Diluted . . . . . . . . . . . . $ 1.99 $ 1.83 ------------------------ END PUBLISHED PAGE 29 137 (19) 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 $450,000, $400,000 and $200,000 in 2000, 1999, and 1998, respectively. At December 31, 2000 there were 288 participants in the plan. Under the terms of the ESOP agreement, Corporation common stock is to be the plan's primary investment. Transactions by the ESOP, relating to activity in the Corporation's common stock, are summarized below: Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ Cash dividend income . . . .$ 148,000 $ 124,000 $ 113,000 Stock dividend shares. . . . 2,859 -0- -0- Shares purchased . . . . . . 17,337 7,912 6,823 Shares distributed . . . . . 6,298 990 2,266 Year end holdings: Shares . . . . . . . . . . 152,934 139,036 132,114 Market value . . . . . . .$3,336,000 $3,059,000 $3,666,000 As a percentage of total plan assets. . . . 91.7% 89.0% 94.4% - ------------------------------------------------------------------------ (20) Stock Purchase Plan: The Bank sponsors The Lorain National Bank Stock Purchase Plan (the Plan). Under provisions of the Plan, a participating employee can contribute up to 6% of their compensation. The Bank then makes a contribution equal to 50% of each participant's contribution. The Plan uses the contributions to purchase Corporation common stock at fair market value. The common stock is distributed to plan participants, under provisions of the Plan, based upon the participant's cumulative prorata share of plan assets. The Bank's 50% matching contributions are expensed in the year in which the associated participant contributions are made and totaled $137,000, $134,000 and $127,000 in 2000, 1999 and 1998, respectively. At December 31, 2000, there were 228 participants in the Plan. Transactions by the Stock Purchase Plan relating to the activity in the Corporation's common stock are summarized below: Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------ Cash dividend income. . . . $ 120,000 $ 112,000 $ 104,000 Stock dividend shares . . . 2,238 -0- -0- Shares purchased. . . . . . 19,504 16,046 8,028 Shares distributed/sold . . 23,463 6,979 15,557 Year end holdings: Shares. . . . . . . . . . 124,639 126,360 117,293 Market value. . . . . . . $2,719,000 $2,780,000 $3,255,000 138 As a percentage of total plan assets . . . 99.2% 94.4% 95.9% - ------------------------------------------------------------------------ Lorain National Bank converted the Lorain National Bank Stock Purchase Plan to the Lorain National Bank 401(k) Plan on January 1, 2001. (21) 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 instruments with off-balance sheet risk follows: December 31, 2000 1999 - ---------------------------------------------------------------------- Commitments to extend credit. . . . $ 91,054,000 $ 82,402,000 Credit card arrangements. . . . . . 16,635,000 17,380,000 Standby letters of credit . . . . . 1,356,000 1,521,000 ---------------------------------- Total. . . . . . . . . . . . . . $109,045,000 $101,303,000 ---------------------------------- Most of the Bank's business activity is with customers located within the Bank's defined market area. As of December 31, 2000, 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. 139 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 30 140 (22) 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. 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 141 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, 2000 and 1999 are summarized as follows: December 31, 2000 1999 - ------------------------------------------------------------------------ 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 $ 25,136,000 $ 25,136,000 $ 37,343,000 $ 37,343,000 ============ ============ ============ ============ Securities . . . .$127,101,000 $126,652,000 $123,319,000 $120,496,000 ============ ============ ============ ============ Portfolio loans, net . . . . . . .$436,882,000 $441,250,000 $405,304,000 $407,358,000 ============ ============ ============ ============ Loans available for sale, net . .$ 9,008,000 $ 9,008,000 $ 9,545,000 $ 9,825,000 ============ ============ ============ ============ Accrued interest, accounts receivable and other financial assets. . . . . .$ 7,303,000 $ 7,303,000 $ 6,824,000 $ 6,824,000 ============ ============ ============ ============ Financial liabilities: Deposits: Demand deposits, savings accounts and money market deposits. . . . .$302,711,000 $302,711,000 $272,582,000 $272,582,000 Certificates of deposit . . . . . 193,380,000 193,382,000 184,249,000 185,051,000 ------------ ------------ ------------ ------------ Total deposits. . .$496,091,000 $496,093,000 $456,831,000 $457,633,000 ============ ============ ============ ============ 142 Securities sold under repurchase agree- ments and other short-term borrowings . . . .$ 39,391,000 $ 39,391,000 $ 52,122,000 $ 52,122,000 ============ ============ ============ ============ Federal Home Loan Bank advances. . .$ 24,345,000 $ 24,235,000 $ 34,345,000 $ 33,402,000 ============ ============ ============ ============ Accrued interest payable and other financial liabilities. . . .$ 5,054,000 $ 5,054,000 $ 3,930,000 $ 3,930,000 ============ ============ ============ ============ END PUBLISHED PAGE 31 143 Report of Management To The Shareholders of LNB Bancorp, Inc. January 23, 2001 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 generally accepted accounting principles 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 generally accepted accounting principles as of December 31, 2000. Based on this assessment, Management believes that, as of December 31, 2000, the Corporation maintained effective internal control over financial reporting presented in conformity with generally accepted accounting principles. 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 President and Executive Vice President and Chief Executive Officer Chief Financial Officer 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, 2000 and 1999, and the related consolidated statements of income, cash flows and shareholders' 144 equity for each of the years in the three-year period ended December 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles, generally accepted in the United States of America. /s/ KPMG LLP Cleveland, Ohio January 23, 2001 END PUBLISHED PAGE 32 145 Selected Unaudited Quarterly Financial Data Consolidated unaudited quarterly financial and per share data for the years ended December 31, 2000, 1999 and 1998 are summarized as follows: First Second Third Fourth Quarter Quarter Quarter Quarter Totals - ------------------------------------------------------------------------ Total 2000$10,939,000 $11,521,000 $11,992,000 $12,193,000 $46,645,000 interest 1999 9,778,000 10,281,000 10,711,000 10,847,000 41,617,000 income 1998 9,126,000 9,377,000 9,830,000 9,845,000 38,178,000 - ------------------------------------------------------------------------ Total 2000 4,384,000 4,549,000 5,038,000 5,238,000 19,209,000 interest 1999 3,575,000 3,739,000 4,076,000 4,203,000 15,593,000 expense 1998 3,435,000 3,415,000 3,578,000 3,571,000 13,999,000 - ------------------------------------------------------------------------ Net 2000 6,555,000 6,972,000 6,954,000 6,955,000 27,436,000 interest 1999 6,203,000 6,542,000 6,635,000 6,644,000 26,024,000 income 1998 5,691,000 5,962,000 6,252,000 6,274,000 24,179,000 - ------------------------------------------------------------------------ Provision2000 300,000 300,000 650,000 450,000 1,700,000 for loan 1999 200,000 500,000 550,000 750,000 2,000,000 losses 1998 187,000 238,000 838,000 1,462,000 2,725,000 - ------------------------------------------------------------------------ Net 2000 6,255,000 6,672,000 6,304,000 6,505,000 25,736,000 interest 1999 6,003,000 6,042,000 6,085,000 5,894,000 24,024,000 income 1998 5,504,000 5,724,000 5,414,000 4,812,000 21,454,000 after provision for loan losses - ------------------------------------------------------------------------ Other 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 1998 1,622,000 1,831,000 1,658,000 2,541,000 7,652,000 - ------------------------------------------------------------------------ Other 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 1998 4,582,000 4,909,000 4,314,000 5,056,000 18,861,000 - ------------------------------------------------------------------------ Income 2000 1,008,000 1,124,000 1,130,000 1,138,000 4,400,000 taxes 1999 912,000 1,042,000 1,047,000 841,000 3,842,000 1998 866,000 892,000 932,000 601,000 3,291,000 - ------------------------------------------------------------------------ Net 2000 $1,980,000 $2,120,000 $2,161,000 $2,169,000 $8,430,000 income 1999 1,833,000 1,963,000 1,991,000 1,854,000 7,641,000 1998 1,678,000 1,754,000 1,826,000 1,560,000 6,818,000 - ------------------------------------------------------------------------ Basic 2000 $ .48 $ .49 $ .51 $ .52 $2.00 earnings 1999 .43 .47 .47 .44 1.81 per 1998 .40 .41 .43 .38 1.62 share(1) - ------------------------------------------------------------------------ Diluted 2000 $ .48 $ .49 $ .51 $ .52 $2.00 earnings 1999 .43 .47 .47 .44 1.81 per 1998 .40 .41 .43 .38 1.62 share(1) - ------------------------------------------------------------------------ 146 Dividends2000 $ .24 $ .24 $ .25 $ .27 $1.00 declared 1999 .21 .21 .23 .25 .90 per share1998 .19 .19 .21 .25 .84 (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 2000. END PUBLISHED PAGE 33 147 Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME AND CASH DIVIDENDS DECLARED - YEARS ENDED DECEMBER 31, 2000 1999 1998 - ------------------------------------------------------------------------ Total interest income. . . . . $46,645,000 $41,617,000 $38,178,000 Total interest expense . . . . 19,209,000 15,593,000 13,999,000 ------------------------------------------ Net interest income . . . . . 27,436,000 26,024,000 24,179,000 Provision for loan losses. . . 1,700,000 2,000,000 2,725,000 Other income . . . . . . . . . 8,369,000 7,936,000 6,997,000 Gains (losses) on sales of assets . . . . . . . . . . 1,000 162,000 655,000 Other expenses . . . . . . . . 21,276,000 20,639,000 18,861,000 ------------------------------------------ Income before income taxes . . 12,830,000 11,483,000 10,245,000 Income taxes . . . . . . . . . 4,400,000 3,842,000 3,427,000 ------------------------------------------ Net income . . . . . . . . . . $ 8,430,000 $ 7,641,000 $ 6,818,000 ------------------------------------------ Cash dividends declared. . . . $ 4,191,000 $ 3,794,000 $ 3,545,000 ------------------------------------------ CONDENSED BALANCE SHEETS - DECEMBER 31, 2000 1999 1998 - ------------------------------------------------------------------------ Cash and cash equivalents . .$ 25,136,000 $ 37,343,000 $ 32,801,000 Securities . . . . . . . . . . 127,101,000 123,319,000 118,519,000 Net loans. . . . . . . . . . . 445,890,000 414,849,000 366,383,000 Other assets . . . . . . . . . 23,983,000 24,100,000 24,043,000 ------------------------------------------ Total assets . . . . . . . . .$622,110,000 $599,611,000 $541,746,000 ------------------------------------------ Total deposits . . . . . . . .$496,091,000 $456,831,000 $443,848,000 Other borrowings . . . . . . . 63,736,000 86,467,000 45,005,000 Other liabilities. . . . . . . 5,758,000 5,260,000 4,217,000 ------------------------------------------ Total liabilities. . . . . . . 565,585,000 548,558,000 493,070,000 ------------------------------------------ Total shareholders' equity . . 56,525,000 51,053,000 48,676,000 ------------------------------------------ Total liabilities and shareholders' equity. . .$622,110,000 $599,611,000 $541,746,000 ------------------------------------------ PER SHARE DATA 2000 1999 1998 - ------------------------------------------------------------------------ Basic earnings(1). . . . . . . $ 2.00 $ 1.81 $ 1.62 Diluted earnings(1). . . . . . $ 2.00 $ 1.81 $ 1.62 Cash dividends(2). . . . . . . $ 1.00 $ .90 $ .84 Book value per share(2). . . . $13.42 $12.13 $11.58 Shares outstanding at end of year(2). . . . . . . . . . 4,211,047 4,209,704 4,205,027 - ------------------------------------------------------------------------ 148 FINANCIAL RATIOS 2000 1999 1998 - ------------------------------------------------------------------------ Net interest margin(3) . . . . 4.85% 4.88% 5.17% Return on assets(4). . . . . . 1.39 1.33 1.34 Return on shareholders' equity(4) 15.83 15.29 14.46 Shareholders' equity to assets(4) 8.77 8.67 9.27 Cash dividends to net income . 49.72 49.65 52.00 Efficiency ratio(3). . . . . . 59.42 60.61 60.33 Gross loans to deposits. . . . 90.94 91.83 83.33 Reserve for loan losses to total loans . . . . . . . . . 1.16 1.11 .94 Non-performing loans to total loans . . . . . . . . . . . . .51 .33 .35 - ------------------------------------------------------------------------ Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME AND CASH DIVIDEND DECLARED - YEARS ENDED DECEMBER 31, 1997 1996 - ---------------------------------------------------------- Total interest income . . . . $35,156,000 $32,470,000 Total interest expense . . . . 12,990,000 11,478,000 --------------------------- Net interest income . . . . . 22,166,000 20,992,000 Provision for loan losses. . . 750,000 600,000 Other income . . . . . . . . . 5,803,000 4,926,000 Gains (losses) on sales of assets . . . . . . . . . . -0- (1,000) Other expenses . . . . . . . . 17,387,000 16,565,000 --------------------------- Income before income taxes . . 9,832,000 8,752,000 Income taxes . . . . . . . . . 3,350,000 2,900,000 --------------------------- Net income . . . . . . . . . . $ 6,482,000 $ 5,852,000 --------------------------- Cash dividends declared. . . . $ 2,934,000 $ 2,591,000 --------------------------- CONDENSED BALANCE SHEETS - DECEMBER 31, 1997 1996 - ---------------------------------------------------------- Cash and cash equivalents. . .$ 24,407,000 $ 18,993,000 Securities . . . . . . . . . . 115,374,000 104,960,000 Net loans. . . . . . . . . . . 326,863,000 297,957,000 Other assets . . . . . . . . . 24,084,000 16,690,000 ---------------------------- Total assets . . . . . . . . .$490,728,000 $438,600,000 ---------------------------- Total deposits . . . . . . . .$410,655,000 $366,380,000 Other borrowings . . . . . . . 30,995,000 24,481,000 Other liabilities. . . . . . . 4,093,000 3,541,000 ---------------------------- Total liabilities. . . . . . . 445,743,000 394,402,000 ---------------------------- Total shareholders' equity . . 44,985,000 44,198,000 ---------------------------- 149 Total liabilities and shareholders' equity. . .$490,728,000 $438,600,000 ---------------------------- PER SHARE DATA 1997 1996 - ---------------------------------------------------------- Basic earnings(1). . . . . . . $ 1.53 $ 1.36 Diluted earnings(1). . . . . . $ 1.53 $ 1.36 Cash dividends(2). . . . . . . $ .70 $ .60 Book value per share(2). . . . $10.69 $10.26 Shares outstanding at end of year(2). . . . . . . . . . 4,206,867 4,305,730 - ----------------------------------------------------------- FINANCIAL RATIOS 1997 1996 - ----------------------------------------------------------- Net interest margin(3) . . . . 5.20% 5.33% Return on assets(4). . . . . . 1.41 1.37 Return on shareholders' equity(4) 14.51 13.70 Shareholders' equity to assets(4) 9.70 10.01 Cash dividends to net income . 45.26 44.28 Efficiency ratio(3). . . . . . 62.01 63.65 Gross loans to deposits. . . . 80.61 82.45 Reserve for loan losses to total loans . . . . . . . . . 1.26 1.36 Non-performing loans to total loans . . . . . . . . . .27 .37 - ----------------------------------------------------------- (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 2000, 1997 and 1996. (3) Tax Equivalent Basis. (4) Ratios based on average annual balances. END PUBLISHED PAGE 34 150 Management's Discussion & Analysis Introduction: The following is Management's discussion and analysis of the financial condition and results of operations of LNB Bancorp, Inc. (the Corporation). It is intended to amplify certain financial information regarding LNB Bancorp, Inc. and should be read in conjunction with the Consolidated Financial Statements, related Notes, and other financial information and discussions included in the 2000 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 nineteenth consecutive year of increased earnings. LNB Bancorp, Inc.'s consolidated 2000 net income reached a record high of $8,430,000, compared to $7,641,000 in 1999 and $6,818,000 in 1998. Net income for 2000, 1999 and 1998 was favorably affected by an increase in net interest income and increased noninterest income offset in part by higher operating expenses. Basic earnings per share totaled $2.00 for 2000 compared to $1.81 for 1999 and $1.62 for 1998. Diluted earnings per share totaled $2.00 for 2000, compared to $1.81 for 1999 and $1.62 for 1998. Prior period earnings per share data has been restated to reflect the 2% stock dividend of July 1, 2000. The return on average assets, a measure of profitability, increased to 1.39% in 2000 from 1.33% in 1999 and 1.34% in 1998. Return on average shareholders' equity measures how profitable 151 the shareholders' invested capital is employed. Return on average equity increased to 15.83% for 2000 compared to 15.29% and 14.46% in 1999 and 1998, 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 37. 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 2000 increased by $1,406,000 from $26,116,000 in 1999 to $27,522,000 in 2000. 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 from 3.53% in 1999 to 4.11% in 2000, 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 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 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.) RETURN ON AVERAGE ASSETS percent (A Return On Average Assets graph follows in printed version with return percent 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.) 152 RETURN ON AVERAGE EQUITY percent (A Return On Average Equity graph follows in printed version with return percent 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 Return on Return on Earnings Per Share Average Assets Average Equity Year Dollars* Percent Percent 2000 $2.00 1.39% 15.83% 1999 $1.85 1.33% 15.29% 1998 $1.65 1.34% 14.46% 1997 $1.56 1.41% 14.51% 1996 $1.39 1.37% 13.70% *Adjusted for stock dividends and splits END PUBLISHED PAGE 35 153 Net Interest Income (continued): 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 1999 increased by $1,850,000 from $24,266,000 in 1998 to $26,116,000 in 1999. This increase was affected by increases in the volume of interest-bearing assets and liabilities plus decreases in market interest rates. The cost of funds decreased from 3.64% in 1998 to 3.53% in 1999, or a total of 11 basis points. During the same period, the yield on earning assets decreased 36 basis points to 7.79% in 1999, compared to 8.15% in 1998, resulting in a decrease in the net interest spread by 25 basis points in 1999. The net yield on earning assets in 2000 was 4.85% compared to 4.88% in 1999 and 5.17% in 1998. The slight decrease in the net yield on earning assets during 2000 results primarily from increases in volume of loans with market rates greater than in previous years and increases in the volume and market rates of investment securities partially offset by increases in volume and rates on certificate of deposits and interest- bearing demand accounts. This relatively constant yield in 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 83.5% and 80.3% in 2000 and 1999, respectively. Interest and dividends on securities and Federal funds sold, as a percentage of total interest income, on a fully-tax equivalent basis, was 16.5% and 19.7% in 2000 and 1999, respectively. The cost of interest-bearing liabilities in 2000 was $19,209,000 compared to $15,584,000 and $13,999,000 in 1999 and 1998, respectively. The unfavorable impact of increases in rates plus increases in volume caused interest expense to increase from 1999 to 2000. The net unfavorable impact of decreases in deposit rates plus increases in volume caused interest expense to increase from 1998 to 1999. Decreases in the average rates paid on savings accounts, certificates of deposit, and long-term borrowings offset in part the 1999 increase in the cost of interest-bearing liabilities due to volume increases. Total other 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 other 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 154 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. Total other income in 1999 increased by $845,000 to $8,098,000 as compared to 1998. This increase resulted from increases in Investment and Trust Services Division income of $208,000 and service charges of $434,000 and other service charges, commissions and fees of $283,000. The increase in 1999 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 other expenses for greater efficiency and profitability. The entire staff is geared to improve efficiency and productivity at all levels. The Corporation has made progress in this area as evidenced by improvement in the efficiency ratio from 60.33% in 1998 to 60.62% in 1999 while decreasing 119 basis points to 59.42% in 2000. Total other expenses increased 3.1% in 2000 compared to 1999 after a 9.4% increase for 1999 compared to 1998. 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 1999 increase in other expenses resulted from increases in salaries and benefits, net occupancy expenses, furniture and equipment expenses, credit card and merchant expenses, and certain one time loan collection expenses. Some of these additional expenses arose from the relocation of our Second Street office to Ely Square, Elyria in 1999. The effective tax rate of the Corporation was 34.3%, 33.5%, and 33.4% in 2000, 1999, and 1998, respectively. The increase in the effective tax rate in 2000 was primarily due to the decrease in tax-exempt interest income and nondeductible stock issuance expenses. A detailed analysis of income taxes is presented on page 24. The Corporation's Consolidated Statements of Income reflect the effects of inflation. Since interest rates, loan demand and deposit levels are related to inflation, the resulting changes in interest sensitive assets and liabilities are reflected in net interest income. Similarly, operating expenses such as salaries, rents and maintenance are affected by inflation. The only major expense items which do not reflect inflation are depreciation and amortization, as these expenses are based on original purchase costs. Selected unaudited quarterly financial data for 2000, 1999 and 1998 is presented on page 33. 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 155 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. The 1998 fourth quarter increase in other income reflects gains on sales of securities of $256,000. END PUBLISHED PAGE 36 156 Condensed Consolidated Average Balance Sheets 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 Taxable equivalent adjustment (86) --------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS . . . . . . $27,436 --------------------------------------- NET YIELD ON EARNING ASSETS . . . 4.85% --------------------------------------- 157 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 Taxable equivalent adjustment . . (92) --------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS . . . . . . $26,024 --------------------------------------- NET YIELD ON EARNING ASSETS . . . 4.88% --------------------------------------- 158 Condensed Consolidated Average Balance Sheets Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax Equivalent (FTE) Basis December 31, 1998 - ------------------------------------------------------------------------ (Dollars in Thousands) Balance Interest Rate ASSETS: Securities. . . . . . . . . . . .$114,839 $ 7,030 6.12% Securities-tax exempt . . . . . . 4,066 274 6.74% Federal funds sold and short-term investments . . . . . 4,422 238 5.38% Commercial loans. . . . . . . . . 124,415 11,555 9.29% Commercial loans-tax exempt . . . 600 59 9.83% Mortgage loans. . . . . . . . . . 144,393 11,307 7.83% Consumer loans. . . . . . . . . . 76,753 7,802 10.17% --------------------------------------- TOTAL EARNING ASSETS . . . . . . 469,488 38,265 8.15% --------------------------------------- Reserve for loan losses . . . . . (4,514) Cash and due from banks . . . . . 20,175 Other assets. . . . . . . . . . . 23,414 --------------------------------------- TOTAL ASSETS . . . . . . . . . .$508,563 --------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Certificates of deposit . . . . .$178,989 $ 9,261 5.17% Savings deposits. . . . . . . . . 103,863 2,236 2.15% Interest-bearing demand . . . . . 70,509 1,026 1.46% Short-term borrowings . . . . . . 24,407 991 4.06% Long-term borrowings. . . . . . . 7,031 485 6.90% --------------------------------------- TOTAL INTEREST- BEARING LIABILITIES. . . . . . . 384,799 13,999 3.64% --------------------------------------- Noninterest-bearing deposits. . . 72,575 Other liabilities . . . . . . . . 4,048 Shareholders' equity. . . . . . . 47,141 --------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . .$508,563 --------------------------------------- NET INTEREST INCOME (FTE) . . . . $24,266 Taxable equivalent adjustment . . (87) --------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS . . . . . . $24,179 --------------------------------------- NET YIELD ON EARNING ASSETS . . . 5.17% --------------------------------------- 159 Rate/Volume Analysis of Net Interest Income 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 --------------------------------------------- 160 Years ended December 31, 1999 and 1998 - ----------------------------------------------------------------------- (Dollars in Thousands) Increase (Decrease) In Interest Income/Expense --------------------------------------------- Volume Rate Total --------------------------------------------- Securities . . . . . . . . $ 210 $ (327) $ (117) Securities-tax exempt. . . 32 (12) 20 Federal funds sold and short-term investments. . 223 (37) 186 Commercial loans . . . . . 1,552 (469) 1,083 Commercial loans-tax exempt (17) (7) (24) Mortgage loans . . . . . . 556 (358) 198 Consumer loans . . . . . . 3,415 (1,326) 2,089 --------------------------------------------- TOTAL INTEREST INCOME . . 5,971 (2,536) 3,435 --------------------------------------------- Certificates of deposit. . 858 (722) 136 Savings deposits . . . . . 82 (190) (108) Interest-bearing demand. . 126 157 283 Short-term borrowings. . . 454 152 606 Long-term borrowings . . . 1,095 (427) 668 --------------------------------------------- TOTAL INTEREST EXPENSE. . 2,615 (1,030) 1,585 --------------------------------------------- NET INTEREST INCOME. . . . $3,356 $(1,506) $1,850 --------------------------------------------- END PUBLISHED PAGE 37 161 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, 2000, was $5,250,000, or 1.16% of outstanding loans, compared to $4,667,000, or 1.11% at year-end 1999. The provision for loan losses charged to operating expense was $1,700,000 and $2,000,000 in 2000 and 1999, respectively. During the third and fourth quarters of 1998, a special provision for loan losses of $1,800,000 was added to the reserve for loan losses. The special provision was required because of a nonrecurring loan loss from a single, but significant commercial loan relationship. Net charge-offs for 2000 were $1,117,000, as compared to $816,000 for 1999, while net charge-offs as a percentage of average loans outstanding for 2000 was 0.26%, compared to 0.20% for 1999. Net charge-offs for 1998 included a nonrecurring $3,200,000 loss from the above mentioned single commercial loan relationship. The remaining balance due to the Bank of $1,300,000 was reclassified from loans to other assets at the end of 1998 when the Bank took the creditor's assets under management. The assets were subsequently sold for $1,300,000 in January of 1999. Non-performing loans at year-end 2000 were $2,315,000 compared to $1,339,000 at year-end 1999. 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, 2000, 16% of non-performing loans were commercial loans, 12% were personal loans and 71% were residential mortgage loans. This compares to 3% for commercial loans, 29% for personal loans and 68% for mortgage loans at year-end 1999. Non-performing loans did not have a material impact on interest income during 2000, 1999 or 1998. The overall quality of the loan portfolio remains high, as the ratio of non-performing loans to total loans remains at low levels of 0.33% at year-end 1999 and 0.51% at year-end 2000. 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, 2000, there were no significant concentrations of credit risk in the loan portfolio. More information about the loan portfolio is presented on page 21. 162 Financial Condition: Total assets of the Corporation rose 3.8% to $622,110,000 for the year ended December 31, 2000. The asset growth was funded by increases in deposits and Federal Home Loan Bank advances. Total earning assets increased 5.3% to $581,366,000 at year end 2000 from 1999's $552,115,000. The ratio of earning assets to total assets increased from 92.1% at December 31, 1999 to 93.5% at December 31, 2000. The loan to deposit ratio has decreased from 91.8% at 1999 year-end to 90.9% at December 31, 2000. During 2000, Federal funds sold and other short-term investments decreased by $6,195,000 to $3,125,000. Securities rose $3,782,000 to $127,101,000, and gross loans grew by $31,624,000 to $451,140,000. The maturity distribution of debt securities which appears on page 19 of this report, indicates that $85,254,000, or 69.9%, of debt securities mature within the next five year period with $13,515,000, or 11.0% maturing during 2001. 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. At the end of 1999, the fair market value of the securities debt portfolio was less than the book value due to an increase in short-and-mid-term interest rates from the beginning of 1999 to its close. The fair value of the debt securities portfolio was less than its cost by $4,364,000 or 3.6%, at the close of 1999. During the 2000 year, net loans rose 7.5 percent to $445,890,000 from $414,849,000. Commercial loan growth was robust, accounting for 91.6 percent of total loan growth, mortgage loan growth accounted for 15.0 percent and consumer loan had negative growth of 6.6 percent, of total loan growth for 2000. 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. The growth in mortgage loans was spurred by a healthy economy. The decrease in consumer loans results from a planned decrease in indirect automobile lending. Total deposits held by the Corporation increased $39,260,000 during 2000 compared to an increase of $12,983,000 during 1999. Interest-bearing deposits represented 83.2% and 82.3% of total deposits at December 31, 2000 and 1999, respectively. 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, CheckInvest and public fund certificates of deposit accounted for the deposit increase. 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 acquisition 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 163 borrowings include repurchase agreements and Federal funds purchased. These balances decreased by $21,731,000 during 2000, following an increase of $29,162,000 in 1999. 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 decreased by $10,000,000 to $24,345,000 at December 31, 2000. END PUBLISHED PAGE 38 164 Capital Resources: Shareholder's equity reached an all-time high of $56,525,000 at December 31, 2000 compared to $51,053,000 at December 31, 1999, an increase of $5,472,000, or 10.7%. This increase was primarily attributable to net income of $8,430,000, less dividends declared to shareholders of $4,191,000, less the change in unrealized gain on securities available for sale in the amount of $1,208,000. The book value per share of common stock climbed to $13.42 at year-end 2000 compared to $12.13 per share at year-end 1999, a 10.6% increase. Capital ratios remained strong during 2000, with average equity to average assets of 8.8%. The return on average shareholders equity during 2000 climbed to 15.83%, from $15.29% and 14.46% during 1999 and 1998, respectively. As discussed in Note 14 to the Consolidated Financial Statements, the Corporation's primary source of funds for the payment of dividends is its Bank subsidiary. During December of 1996, the Bank paid an additional $8,000,000 in dividends to the Corporation in order for it to have sufficient equity capital to take advantage of future acquisition opportunities and to pay future dividends. In order for the Bank to fund its balance sheet and remain well capitalized, the Corporation and the Bank entered into a subordinated debt agreement on December 30, 1996 for $8,000,000, payable on January 1, 2007 at an interest rate of 6.80%. In December 1999, The Bank paid off $4,000,000 of its subordinated debt to the Corporation. Subsequently, the Corporation paid dividends to the Bank of $4,000,000. 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, 2000, LNB Bancorp, Inc. had a total risk-based capital ratio of 13.06%, with a Tier 1 capital ratio of 11.88% compared to 12.84% and 11.70%, respectively, at December 31, 1999. 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, 2000, LNB Bancorp, Inc.'s leverage ratio was 8.68%, which substantially exceeds the Corporation's minimum regulatory requirement. For additional information on the Corporation and Bank's capital ratios, refer to Note 15, Regulatory Capital on page 26. On an ongoing basis the Corporation analyzes acquisition opportunities in markets which are adjacent to or within the Corporation's current 165 geographical market. Corporate management believes that its current capital resources are sufficient to support any foreseeable acquisition activity. The Corporation also retains a portion of the net income it earns to accommodate current operational and regulatory capital requirements and to fund future growth opportunities. A part of future growth depends upon capital expenditure programs. Capital expenditures of approximately $2,700,000 are projected for 2001. TOTAL SHAREHOLDERS' EQUITY millions of dollars (A Total Shareholders' Equity graph follows in printed version with total equity 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.) 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 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.) BOOK VALUE PER SHARE dollars* (A Book Value Per Share graph follows in printed version with book value 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' Average Equity to Book Value Equity Average Assets Per Share Year Millions of Dollars Percent Dollars* 2000 $56.5 8.77% $13.42 1999 $51.1 8.67% $12.13 1998 $48.7 9.27% $11.58 1997 $45.0 9.70% $10.69 1996 $44.2 10.00% $10.26 *Adjusted for stock dividends and splits END PUBLISHED PAGE 39 166 Quantitative and Qualitative Disclosures about Market Risk: Market risk is the risk of loss in a financial instrument arising from adverse changes in market indices such as interest rates, foreign exchange rates and equity prices. The Corporation's principal market risk exposure is interest rate risk, with no material impact on earnings from changes in foreign exchange rates or equity prices. Interest rate risk is the exposure to changes in market interest rates. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The Corporation monitors the interest rate sensitivity of its on-and-off balance sheet positions by examining its near-term sensitivity and its longer term gap position. The mission of the Asset/Liability Management Committee of Lorain National Bank is to effectively monitor and manage the Bank's exposure to interest rate risk, liquidity risk, and repricing risk and thereby provide the Bank with a stable net interest margin. Asset/liability management is the measurement and analysis of the Bank's exposure to changes in the interest rate environment. The Bank is subject to interest rate risk to the extent its liabilities reprice more rapidly than its assets. The Bank manages this risk on a continuing basis through the use of a number of objectives and strategies as an ongoing part of its strategic financial plan. The Bank's Asset/Liability Management Committee, which includes executive and senior management representatives, meets monthly. Objectives include monitoring and methods of managing the rate sensitivity and repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of net interest income. The Bank's asset and liability management program defined by the Board of Directors is designed to minimize the impact of significant changes in interest rates on net interest income. Strategies include attempting to market variable-rate loans, growth in the consumer loan portfolio which tend to have shorter terms to maturity, match fixed rate commercial loans with Federal Home Loan Bank advances, and utilizing deposit promotions in an effort to extend the term to maturity of its liabilities. Management may, at times, place greater emphasis on maximizing net interest margin rather than merely concentrating on interest rate risk depending on the relationship between short-and long-term interest rates, market conditions and consumer preference. Management believes that increased net income resulting from a moderate contrast between the maturity of its assets and liabilities can provide high enough returns to justify the increased risk exposure during periods of stable interest rates. The effectiveness of Management's administration of the Asset/Liability function is demonstrated by the Corporation's consistently high net yield on earning assets. The Corporation's net yield on earning assets remains at the high levels of 4.85% and 4.88% for the years ended December 31, 2000 and 1999, 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. 167 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 5.83% at December 31, 2000, (2.81)% at December 31, 1999 and 4.22% at December 31, 1998. 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 sort-term borrowings during that period). The decrease in the Corporation's one year gap at December 31, 1999 compared to December 31, 1998 was due to a decrease in assets maturing or otherwise repricing in one year or less totaling $24,080,000 (due to an increase in loans and securities repricing during that period) partially offset by an increase in liabilities maturing or otherwise repricing in one year or less totaling $59,933,000 (due primarily to an increase in certificates of deposit and short-term borrowings during that period). Corporate management does not anticipate any significant changes in the Corporation's market risk or interest rate risk profiles in 2000. The table on the page 41 sets forth the repricing dates of the Corporation's interest-earning assets and interest-bearing liabilities at December 31, 2000 and the interest rate sensitivity "gap" percentages at the dates indicated. END PUBLISHED PAGE 40 168 Gap Analysis (Dollars in Thousands) Expected Maturity/Repricing Date 2001 2002 2003 2004 - ------------------------------------------------------------------------ Commercial loans . . . . . . . . .$178,096 $ 1,159 $ 1,241 $ 4,006 Weighted average yield . . . . . . 9.86% 8.02% 7.85% 7.40% Mortgage loans(1). . . . . . . . . 60,299 21,310 29,534 24,847 Weighted average yield . . . . . . 7.96% 7.65% 6.76% 7.01% Consumer loans . . . . . . . . . . 23,149 18,005 13,417 7,842 Weighted average yield . . . . . . 9.30% 8.00% 8.40% 9.23% Home equity lines of credit. . . . 31,661 -0- -0- -0- Weighted average yield . . . . . . 9.94% 0.00% 0.00% 0.00% Credit Card loans. . . . . . . . . 5,215 -0- -0- -0- Weighted average yield . . . . . . 14.73% 0.00% 0.00% 0.00% Securities and other(2). . . . . . 27,939 22,333 29,254 9,978 Weighted average yield . . . . . . 6.20% 6.30% 6.03% 5.71% -------------------------------------- Total interest-earning assets . . 326,359 62,807 73,446 46,673 -------------------------------------- Certificates of deposit. . . . . . 151,740 30,505 6,913 3,817 Weighted average yield . . . . . . 5.73% 6.25% 5.28% 6.03% Savings deposits . . . . . . . . . 38,380 38,380 19,190 -0- Weighted average yield . . . . . . 2.00% 2.00% 2.00% 0.00% Interest-bearing demand. . . . . . 49,467 49,467 24,734 -0- Weighted average yield . . . . . . 2.93% 2.93% 2.93% 0.00% Short-term borrowings. . . . . . . 39,391 -0- -0- -0- Weighted average yield . . . . . . 5.69% 0.00% 0.00% 0.00% Federal Home Loan Bank advances. . 16,095 8,250 -0- -0- Weighted average yield . . . . . . 6.25% 5.18% 0.00% 0.00% -------------------------------------- Total interest-bearing liabilities 295,073 126,602 50,837 3,817 -------------------------------------- Interest-earning assets less Interest-bearing liabilities. . . 31,286 (63,795) 22,609 42,856 -------------------------------------- Cumulative interest-rate sensitive gap . . . . . . . . . .$ 31,286 $(32,509) $ (9,900) $ 32,956 -------------------------------------- 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)% Cumulative interest-rate gap as a percentage of total earning assets at December 31, 1998 4.22% -------------------------------------- Gap Analysis (Dollars in Thousands) Expected Maturity/Repricing Date Fair 2005 Thereafter Total Value(3) - ------------------------------------------------------------------------ Commercial loans . . . . . . . . .$ 375 $ 1,989 $186,866 $186,206 Weighted average yield . . . . . . 6.89% 7.49% 9.75% Mortgage loans(1). . . . . . . . . 17,351 4,234 157,575 157,040 Weighted average yield . . . . . . 7.90% 7.25% 7.25% 169 Consumer loans . . . . . . . . . . 3,125 4,285 69,823 70,119 Weighted average yield . . . . . . 9.34% 8.86% 8.76% Home equity lines of credit. . . . -0- -0- 31,661 31,678 Weighted average yield . . . . . . 0.00% 0.00% 9.94% Credit Card loans. . . . . . . . . -0- -0- 5,215 5,215 Weighted average yield . . . . . . 0.00% 0.00% 14.73% Securities and other(2). . . . . . 7,535 32,979 130,018 129,861 Weighted average yield . . . . . . 6.37% 5.52% 6.09% -------------------------------------- Total interest-earning assets . . 28,386 43,487 581,158 580,119 -------------------------------------- Certificates of deposit. . . . . . 392 13 193,380 193,382 Weighted average yield . . . . . . 6.57% 6.82% 5.76% Savings deposits . . . . . . . . . -0- -0- 95,950 95,950 Weighted average yield . . . . . . 0.00% 0.00% 2.00% Interest-bearing demand. . . . . . -0- -0- 123,668 123,668 Weighted average yield . . . . . . 0.00% 0.00% 2.93% Short-term borrowings. . . . . . . -0- -0- 39,391 39,391 Weighted average yield . . . . . . 0.00% 0.00% 5.60% Federal Home Loan Bank advances. . -0- -0- 24,345 24,345 Weighted average yield . . . . . . 0.00% 0.00% 5.45% -------------------------------------- Total interest-bearing liabilities 392 13 476,734 476,626 -------------------------------------- Interest-earning assets less Interest-bearing liabilities. . . 27,994 43,474 104,424 ---------------------------- Cumulative interest- rate sensitive gap. . . . . . . .$60,950 $104,424 ---------------------------- (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. END PUBLISHED PAGE 41 170 Liquidity Management: Liquidity measures a corporation's ability to generate cash or otherwise obtain funds at reasonable prices to fund commitments to borrowers as well as the demands of depositors and debt holders. Principal internal sources of liquidity for the Corporation and the Bank are cash and cash equivalents, Federal funds sold, and the maturity structures of securities held to maturity and portfolio loans. Securities and loans available for sale provide another source of liquidity through the cash flows of these interest-bearing assets as they mature or are sold. On December 31, 2000, cash and cash equivalents equaled $25,136,000 or 4.0% of total assets. The change in cash and cash equivalents is shown in the Consolidated Statement of Cash Flows on page 14 and arises from operating, investing, and financing activities. The adjustments to reconcile 2000 net income to net cash provided by operating activities primarily consists of depreciation and amortization of $1,667,000, amortization of intangible assets of $398,000, amortization of deferred loan fees and costs of $312,000 and a provision for loan losses of $1,700,000. 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 $37,625,000. Cash used in investing activities resulted from the purchases in securities of $16,672,000 offset by proceeds from maturities of securities of $13,731,000. Cash used in investing activities included net loan increases of $33,053,000 and purchases of capital assets of $1,703,000. Net cash provided by financing activities was $12,468,000. Cash provided by financing activities included increases in deposits of $39,260,000, increases in securities sold under repurchase agreements and other short-term borrowings of $21,731,000, proceeds from Federal Home Loan Bank advances of $9,000,000 less cash paid on Federal Home Loan Bank advances of $10,000,000 and proceeds from stock options exercised of $25,000. Cash used by financing activities includes dividends paid of $4,086,000. These cash flows resulted in a $12,207,000 increase in cash and cash equivalents from December 31, 1999 to December 31, 2000. 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, 2000 the Bank had pledged as collateral $31,757,000 in second mortgages with the Federal Reserve Bank of Cleveland to secure advances and discounts up to $25,406,000. At year-end the Bank had no borrowings from the Federal Reserve Bank of Cleveland. At year-end, the Bank had approved Federal funds facilities of $18,000,000 at four correspondent banks. At December 31, 2000, the Bank borrowed $14,000,000 under these arrangements. Additionally, the Bank has a $30,000,000 cash management advance line of credit with the Federal Home Loan Bank of Cincinnati. At December 31, 2000 the Bank had borrowed $9,000,000 from the Federal Home Loan Bank under this line of credit. At December 31, 2000, the Bank had available credit at the Federal 171 Reserve Bank discount window of $25,406,000. The internal and external sources of funds for liquidity, in the opinion of Management, satisfy the liquidity needs of the Corporation and the Bank. END PUBLISHED PAGE 42 172 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. 140, "Accounting for transfers and servicing of Financial Assets and Extinguishment of Liabilities" Implementation date by the Corporation and Impact on the Corporation: This Statement was issued in September 2000 and replaces SFAS No. 125. The guidance in SFAS Co. 140, while not changing most of the guidance originally issued in SFAS No. 125, revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures related to transferred assets. Certain provisions of the statement related to the recognition, reclassification and disclosure of collateral, as well as the disclosure of securitization transactions, became effective for 2000 year-end reporting. Other provisions related to the transfer and servicing of financial assets and extinguishments of liabilities are effective for transactions occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a significant impact on the financial position or results of operations as historically, and at year end 2000 the Corporation did not participate in securitizations. All other applicable Statements of Financial Accounting Standards that have been issued and have effective sates impacting 2000 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 organization to offer customers a more complete array of financial products and services. The GLB Act provides a new regulatory framework 173 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 are diligently working on developing the necessary notices, policies and procedures to implement the privacy provisions. Corporate Management does not believe that the adoption of these privacy provisions will have a significant impact on the financial position or results of operation in 2001 and beyond. END PUBLISHED PAGE 43 174 Directors and Officers of LNB Bancorp, Inc. 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. David M. Koethe Retired, former Chairman of the Board The Lorain Printing Company Benjamin G. Norton Human Resource Consultant LTI Power Systems Jeffrey F. Riddell President and Chief Executive Officer, Consumeracq, Inc. and Consumers Builders Supply Co. 175 Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. John W. Schaeffer, M.D. President North Ohio Heart Center, Inc. Gary C. Smith President and Chief Executive Officer LNB Bancorp, Inc. Eugene M. Sofranko Chairman of the Board Lorain Glass Company, Inc. Leo Weingarten Retired 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 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 176 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 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. 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. 177 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 44 178 Officers 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 Sales 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 Branch Officers Teresa E. George Vice President Branch Administration Main Office & Sixth Street Drive-In Office Keith H. Kapanke Assistant Vice President 179 Amherst Office G. Dale Rosenkranz Vice President Avon Lake Office Charles A. DeAngelis Vice President Cleveland Street Office Timothy J. Gallagher Vice President Cooper-Foster Park Road Office Linda Buehner Assistant Vice President Ely Square Office James E. Schmittgen Vice President Kansas Avenue Office Connie Sklarek Assistant Cashier Village of LaGrange Office Carrie Hartman Assistant Vice President Lake Avenue Office Christine M. Weber Assistant Vice President Midway Mall Office Kimberly S. Plzak Assistant Vice President Oberlin Avenue Office Jennifer M. Nickolls Assistant Vice President Oberlin & Kendal at Oberlin Offices Marilyn R. Krasienko Assistant Vice President Olmsted Township & The Renaissance Offices Diana L. Schmittgen Assistant Vice President Carol Snyder Assistant Cashier Pearl Avenue Office Patricia A. Wolanczyk Assistant Cashier 180 Vermilion Office Robert B. White Vice President Barbara M. Beres-Clark Assistant Branch Manager West Park Drive Office Rita M. Hoyt Assistant Cashier The Crossings of Westlake & Westlake Village Offices Susan M. Neiding Vice President Loan Officers Commercial Loans John A. Funderburg Vice President Lee C. Myers Vice President Ellen M. Walsh Vice President Kenneth P. Wayton Vice President Consumer Loans Bruce Diso Vice President Robert D. Asik 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 181 Loan Review Richard P. Vieritz Vice President Loan Services Cynthia M. Marks Assistant Cashier 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 Auditing Randy E. Lottman Assistant Vice President and Auditor Compliance Donna Jean Phillips Assistant Vice President and Compliance Officer Deposit Operations Patricia L. Cole Assistant Vice President E.D.P. Services Larry R. Johnson Vice President Larry A. Hill Assistant Vice President Human Resources Carol A. Mesko Vice President Teresa E. Kreger Assistant Cashier 182 Maintenance Robert J. Witkowski Maintenance Officer Marketing Steven F. Cooper Vice President Debra L. Temerario Marketing Operations Officer Purchasing Susan I. Tuttle Assistant Vice President Security James E. Long Assistant Vice President Training Marianne Kocak Assistant Vice President 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 END PUBLISHED PAGE 45 183 Banking Offices & ATMs ATM service available wherever you see this symbol** Lorain Banking Offices **Main Office 457 Broadway Lorain, Ohio 44052 (440)244-7185 **Sixth Street Drive-In Office 200 Sixth Street Lorain, Ohio 44052 (440)244-7242 **Cooper-Foster Park Road Office 1920 Cooper-Foster Park Road Lorain, Ohio 44053 (440)282-1252 **Kansas Avenue Office 1604 Kansas Avenue Lorain, Ohio 44052 (440)288-9151 **Oberlin Avenue Office 3660 Oberlin Avenue Lorain, Ohio 44053 (440)282-9196 **Pearl Avenue Office 2850 Pearl Avenue Lorain, Ohio 44055 (440)277-1103 **West Park Drive Office 2130 West Park Drive Lorain, Ohio 44053 (440))989-3131 Amherst Banking Office **Amherst Office 1175 Cleveland Avenue Amherst, Ohio 44001 (440)988-4423 Avon Lake Banking Office **Avon Lake Office 240 Miller Road Avon Lake, Ohio 44012 (440)933-2186 184 Elyria Banking Offices **Ely Square Office 124 Middle Avenue Elyria, Ohio 44035 (440)323-4621 **Cleveland Street Office 801 Cleveland Street Elyria, Ohio 44035 (440)365-8397 **Lake Avenue Office 42935 North Ridge Road Elyria Township, Ohio 44035 (440)233-7196 **Midway Mall Office 6395 Midway Mall Blvd. Elyria, Ohio 44035 (440)324-6530 Village of LaGrange Banking Office **Village of LaGrange Office 546 North Center Street Village of LaGrange, Ohio 44050 (440)355-6734 Oberlin Banking Offices **Kendal at Oberlin Office* 600 Kendal Drive Oberlin, Ohio 44074 (440)774-5400 **Oberlin Office 40 East College Street Oberlin, Ohio 44074 (440)775-1361 Olmsted Township Banking Offices **Olmsted Township Office 27095 Bagley Road Olmsted Township, Ohio 44138 (440)235-4600 The Renaissance Office 26376 John Road Olmsted Township, Ohio 44138 (440)427-0041 185 Vermilion Banking Office **Vermilion Office 4455 East Liberty Avenue Vermilion, Ohio 44089 (440)967-3124 Westlake Banking Offices **Crossings of Westlake Office 30210 Detroit Road Westlake, Ohio 44145 (440)892-9696 Westlake Village Office 28550 Westlake Village Drive Westlake, Ohio 44145 (440)808-0229 ATMs **Captain Larry's Marathon 1317 State Route 60 Vermilion, Ohio **Dad's Sunoco 7580 Leavitt Road State Route 58 Amherst, Ohio **Fligner's Supermarket 1846 Broadway Lorain, Ohio **Gateway Plaza 3451 Colorado Avenue Lorain, Ohio **Lakeland Medical Center 3700 Kolbe Road Lorain, Ohio **Lorain County Community College 1005 North Abbe Road Elyria, Ohio **Lowe's Home Improvement Warehouse 620 Midway Boulevard Elyria, Ohio **Mobile ATM 2130 West Park Drive Lorain, Ohio 186 Other Offices Executive Offices 457 Broadway Lorain, Ohio 44052 (440)244-7123 Branch Administration 457 Broadway Lorain, Ohio 44052 (440)244-7253 Commercial, Consumer and Mortgage Loans 457 Broadway Lorain, Ohio 44052 (440)244-7220 (440)244-7272 (440)244-7216 VISA/Electronic Banking 2130 West Park Drive Lorain, Ohio 44053 (440)989-3348 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 Investment and Trust Services 457 Broadway Lorain, Ohio 44052 (440)244-7226 All Other Departments & Information Not Listed Telebanker (440)245-4562 Telebanker (800)610-9033 Toll Free (800)860-1007 Lorain (440)244-6000 187 Internet:www.4LNB.com *Restricted to residents, their visitors and employees END PUBLISHED PAGE 46 188 Investment and Trust Services The Investment and Trust Services Division (the Division) continues to grow and develop both the capabilities of its staff and the services available to Lorain National Bank's customers. As a result of consistent, high quality performance, this division contributed 28.1 percent of total noninterest income in 2000 to the Corporation. In 2000, the Investment and Trust Services Division income to the Corporation increased 12.4 percent reaching a record $2,355,000. The year 2000 was a time of preparing for the on-going growth of business. Three highly trained and experienced trust officers were added to the staff. With these additions, the Division now has five officers who have served as Senior Trust Officers in both community banks and larger regional banks. This means that Lorain National Bank's customrs have the benefit of extensive fiduciary experience and expertise. Personal service is a high priority in the Investment and Trust Services Division. All of the Trust Officers have experience in community banks and understand the importance of keeping in close contact with our clients. The support staff pay close attention to the accurate and timely handling of all assets and transactions. They understand how critical their work is to maintain high quality reports and service. The Division has developed core specialty units within the Division to prepare for on-going growth. The Personal Trust unit is chaired by Neal Conger, with 35 years experience, and the Employee Benefits unit is chaired by Jerry Falcon, with 27 years experience. Dave Nocjar, who has 25 years experience in trust and investment services, chairs the Investment Unit. Tom Eschke, an 11-year employee of the department, heads the Operations Unit. The tax compliance function is ably handled by Tom and Georgia Bour, Personal Trust Officer, who has 15 years experience in the trust and investment services businesses. In addition to traditional investment and trust services, the Division is able to offer complete retirement planning services to both individuals and corporations. Prototype plans, participant record- keeping and rollover Individual Retirement Accounts are just a part of the services available. By continuing to develop relationships with third party providers, we are well positioned to advise and provide a wide range of modern investment products and services. For those clients who so desire, portfolio information is available any time on the bank's Internet web site at www.4LNB.com. Personal service remains the hallmark of the Investment and Trust Services Division. Each staff member is dedicated to meeting the needs of our clients. /s/Emma N. Mason Emma N. Mason Sr. Vice President and Senior Trust Officer INVESTMENT AND TRUST SERVICES FEE INCOME Thousands of dollars (An Investment and Trust Services Fee Income graph follows in printed 189 version with fee income on the y-axis and years 1991 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.) Investment and Trust Services Fee Income Year Thousands of Dollars 2000 $2,355 1999 $2,095 1998 $1,887 1997 $1,293 1996 $1,095 1995 $1,038 1994 $ 916 1993 $ 825 1992 $ 756 1991 $ 645 END PUBLISHED PAGE 47 190 Earnings, Dividend and Book Value per Share Performance - ----------------------- 10 Year Annual Earnings 1991 through 2000 (10 Year Earnings History graph follows in printed version with years 1991 through 2000 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 1991 through 2000. 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 1991 - 2000: $1,110.01 (Cumulative Cash Dividends Declared graph follows in printed version with years 1991 through 2000 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 $1,110.01. - -------------------- Book Value Per Share 1991 through 2000 (Book Value Per Share graph follows in printed version with years 1991 through 2000 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 1991 through 2000. Senior management has worked diligently to cause the rapid increase in the book value per share over the past ten years. 191 The data points used to plot the three (3) graphs previously described follows: NET INCOME CUMULATIVE CASH BOOK VALUE YEAR IN THOUSANDS DIVIDENDS DECLARED PER SHARE 2000 $8,430,000.00 $1,110.01 $13.42 1999 $7,641,000.00 $ 929.01 $12.13 1998 $6,818,000.00 $ 766.17 $11.58 1997 $6,480,000.00 $ 613.95 $10.69 1996 $5,852,000.00 $ 488.28 $10.26 1995 $5,003,000.00 $ 378.66 $ 9.52 1994 $4,432,000.00 $ 286.32 $ 8.84 1993 $4,029,000.00 $ 204.12 $ 8.28 1992 $3,826,000.00 $ 129.64 $ 7.77 1991 $3,512,000.00 $ 61.80 $ 7.24 END PUBLISHED PAGE 48 192 THREE QUARTER PAGE INSERT FRONT SIDE Please detach postage-paid card(s) and return through U.S. Mail or to a Lorain National Bank office near you. Top card reads as follows: LNB Bancorp, Inc. - Dividend Reinvestment Plan To: Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. 457 Broadway, Lorain, Ohio 44052 Yes, I am interested in obtaining information on LNB Bancorp, Inc.'s Dividend Reinvestment and Cash Stock Purchase Plan. Name_________________________ Address______________________ City____State____Zip______Phone________ Middle card reads as follows: LNB Bancorp, Inc. - Common Stock To: Gary C. Smith President and Chief Executive Officer LNB Bancorp, Inc. 457 Broadway, Lorain Ohio 44052 Yes, I am interested in learning more about the investment merits of LNB Bancorp, Inc. common stock and would like to be contacted by a stock broker. Name_________________________ Address______________________ City____State____Zip______Phone________ Number of Shares Requested__________ Bottom card reads as follows: 2000 Annual Report Survey Thank you for reading the 2000 LNB Bancorp, Inc. Annual Report. To help us improve our ability to serve you, please complete the following survey. The following grading scale should be used: Excellent-5; Good-4; Fair-3; Poor-2; and, Very Poor-1. - ------------------------------------------------------------------------ 1. Please rate the sections of the Annual Report you found most helpful. When evaluating, consider the overall quality, communication effectiveness and readability of the section. _____ Corporate Information _____ Message to Shareholders _____ Customer testimonials _____ Financial Statements and Notes _____ Stock and Dividend Information _____ Management's Discussion and Analysis _____ Earnings and Dividend Performance 193 2. Please rate the Annual Report on the following characteristics: _____ Appearance/design _____ Organization/ease of locating information _____ Ease of Reading _____ Use of Charts/graphs _____ Use of Photographs _____ Showing how LNB Bancorp, Inc. is positioned for the future _____ Helping you understand LNB Bancorp, Inc. 3. Please give a rating for your overall impression of the Annual Report._____ 4. What information would you like to see in future Annual Reports? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 5. Please provide name & address ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Thank you for answering these questions. THREE QUARTER PAGE INSERT BACK SIDE Three postage paid postcards Top card reads as follows: Lorain National Bank Attn: Thomas P. Ryan 457 Broadway Lorain, Ohio 44052-9986 Middle card reads as follows: Lorain National Bank Attn: Gary C. Smith 457 Broadway Lorain, Ohio 44052-9986 Bottom card reads as follows: Lorain National Bank Attn: Mitchell J. Fallis 457 Broadway Lorain, Ohio 44052-9986 194 Inside Back Cover END OF INSIDE BACK COVER 195 COVER DESCRIPTION Outside back cover White background Blue stripe across the top of the page LNB Bancorp, Inc. Logo LNB Bancorp, Inc. Blue lettering Mail: LNB Bancorp, Inc. 457 Broadway . Lorain, Ohio 44052-1739 E-Mail: emailservices@4LNB.com . Internet: www.4LNB.com Telephone: (440) 244-6000 . Toll Free: (800) 860-1007 Telefax: (440) 244-4815 END OF PUBLISHED LNB BANCORP, INC. 2000 ANNUAL REPORT 196 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 2000) 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 (1) . ............................. . Subsidiary . .................. . .Ohio Corporation(1) . . ...................... . ................................. . LNB Financial Services, Inc. . . Wholly-Owned Subsidiary . . an Ohio Corporation (1) . . (dormant) . ................................. (1) The physical location and legal mailing address for all entities is: 457 Broadway Lorain, Ohio 44052 197 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 2000) S - K Reference Number (23) Consent of Independent Accountants. 198 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. 333-43441 on Form S-3 of LNB Bancorp, Inc. of our report dated January 23, 2001, relating to the consolidated balance sheets of LNB Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999, 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, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of LNB Bancorp, Inc. /s/ KPMG LLP Cleveland, Ohio March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----