-----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, N1/FVQT7RZP6TdeI+2dRXFD2QPv6iDGHssm9Lw+3GwEwmWTJXp4dfumQ6oxliO65 eDMh+R/T3wjGFuyyfw6nmQ== 0000737210-02-000007.txt : 20020515 0000737210-02-000007.hdr.sgml : 20020515 20020515162612 ACCESSION NUMBER: 0000737210-02-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13203 FILM NUMBER: 02652850 BUSINESS ADDRESS: STREET 1: 457 BROADWAY CITY: LORAIN STATE: OH ZIP: 44052-1769 BUSINESS PHONE: 800-860-1007 10-Q 1 lnb10q102.txt FIRST QUARTER 2002 10Q 1 Form 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-13203 LNB Bancorp, Inc. (Exact name of the registrant as specified on its charter) Ohio 34-1406303 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 457 Broadway, Lorain, Ohio 44052 - 1769 (Address of principal executive offices) (Zip Code) (440) 244 - 6000 Registrant's telephone number, including area code Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at May 13, 2002: 4,317,558 shares Class of Common Stock: $1.00 par value 2 LNB Bancorp, Inc. Quarterly Report on Form 10-Q Quarter Ended March 31, 2002 Part I - Financial Information Item 1 - Financial Statements Interim financial information required by Rule 10-01 of Regulation S-X is included in this Form 10-Q as referenced below: Page Number(s) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 5 Condensed Consolidated Statements of Cash Flows 7 Notes to Condensed Consolidated Financial Statements 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 19 Part II - Other Information Item 1 - Legal Proceedings 20 Item 2 - Changes in Securities 20 Item 3 - Defaults upon Senior Securities 20 Item 4 - Submission of matters to a Vote of Security Holders 20 Item 5 - Other Information 21 Item 6 - Exhibits and Reports on Form 8-K 21 Signatures 21 Exhibit Index 22 3 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS MARCH 31, DECEMBER 31, CONDENSED CONSOLIDATED BALANCE SHEETS 2002 2001 ------------- -------------- (Unaudited) (See Note 1) ASSETS: Cash and due from banks $ 20,164,000 $ 28,017,000 Federal funds sold and short-term investments 3,453,000 3,488,000 Securities: Available for sale, at fair value 115,396,000 117,628,000 Held to maturity, at cost (fair value $13,334,000 and $17,485,000, respectively) 13,177,000 17,191,000 Federal Home Loan Bank, Federal Reserve Bank and other equity stock, at cost 3,619,000 3,582,000 -------------- -------------- Total securities 132,192,000 138,401,000 -------------- -------------- Loans: Portfolio loans 481,019,000 465,029,000 Loans available for sale 8,558,000 12,459,000 -------------- -------------- Total loans 489,577,000 477,488,000 Reserve for loan losses (6,269,000) (5,890,000) -------------- -------------- Net loans 483,308,000 471,598,000 -------------- -------------- Bank premises and equipment, net 10,245,000 10,520,000 Intangible assets 3,376,000 3,470,000 Accrued interest receivable 3,179,000 3,796,000 Other assets 5,518,000 5,113,000 Foreclosed assets 141,000 123,000 -------------- -------------- TOTAL ASSETS $661,576,000 $664,526,000 ============== ============== STATEMENT CONTINUED ON NEXT PAGE 4 STATEMENT CONTINUED FROM PREVIOUS PAGE LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits: Demand and other noninterest-bearing deposits $ 76,982,000 $ 87,488,000 Savings, Market Access and passbook accounts 264,876,000 253,506,000 Certificates of deposit 180,464,000 177,273,000 -------------- -------------- Total deposits 522,322,000 518,267,000 -------------- -------------- Securities sold under repurchase agreements and other short-term borrowings 20,763,000 29,170,000 Federal Home Loan Bank advances, short-term 26,450,000 15,080,000 Federal Home Loan Bank advances, long-term 23,925,000 34,265,000 Accrued interest payable 1,056,000 1,131,000 Accrued taxes, expenses, and other liabilities 4,718,000 4,475,000 -------------- -------------- TOTAL LIABILITIES 599,234,000 602,388,000 -------------- -------------- SHAREHOLDERS' EQUITY: Preferred stock, no par value: Shares authorized 1,000,000, and shares outstanding, none Common stock $1.00 par: Shares authorized 15,000,000, Shares issued 4,417,558 and 4,417,558, respectively and Shares outstanding 4,317,558 and 4,317,558, respectively 4,418,000 4,418,000 Additional capital 26,238,000 26,238,000 Retained earnings 34,136,000 33,125,000 Accumulated other comprehensive income 450,000 1,257,000 Treasury stock at cost, 100,000 shares (2,900,000) (2,900,000) -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 62,342,000 62,138,000 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $661,576,000 $664,526,000 ============== ============== See notes to unaudited condensed consolidated financial statements. 5 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THREE MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS MARCH 31, OF INCOME (UNAUDITED) ---------------------------- 2002 2001 INTEREST INCOME: ---------------------------- Interest and fees on loans: Taxable $ 8,372,000 $ 9,833,000 Tax-exempt -0- 3,000 Interest and dividends on securities: U.S. Treasury securities 6,000 30,000 U.S. Government agencies and corporations 1,535,000 1,673,000 States and political subdivisions 134,000 72,000 Other debt and equity securities 123,000 72,000 Interest on Federal funds sold and other interest-bearing instruments 19,000 41,000 ------------- ------------ TOTAL INTEREST INCOME 10,189,000 11,724,000 ------------- ------------ INTEREST EXPENSE: Interest on Deposits: Time certificates of $100,000 and over 298,000 778,000 Other deposits 2,276,000 3,401,000 Interest on securities sold under repurchase agreements and other short-term borrowings 151,000 396,000 Interest on Federal Home Loan Bank advances 381,000 328,000 ------------- ------------ TOTAL INTEREST EXPENSE 3,106,000 4,903,000 ------------- ------------ NET INTEREST INCOME 7,083,000 6,821,000 Provision for loan losses 600,000 450,000 NET INTEREST INCOME AFTER PROVISION ------------- ------------ FOR LOAN LOSSES 6,483,000 6,371,000 ------------- ------------ NONINTEREST INCOME: Investment and Trust Services Division income 575,000 558,000 Service charges on deposit accounts 916,000 799,000 Other service charges, exchanges and fees 731,000 644,000 Gains from sales of securities 275,000 23,000 Other operating income 141,000 19,000 ------------- ------------ TOTAL NONINTEREST INCOME 2,638,000 2,043,000 ------------- ------------ STATEMENT CONTINUED ON NEXT PAGE 6 STATEMENT CONTINUED FROM PREVIOUS PAGE NONINTEREST EXPENSES: Salaries and employee benefits 2,917,000 2,600,000 Net occupancy expense of premises 381,000 386,000 Furniture and equipment expenses 531,000 519,000 Supplies and postage 276,000 275,000 Ohio franchise tax 61,000 162,000 Credit card and merchant expenses 302,000 282,000 Other operating expenses 1,526,000 1,175,000 ------------- ------------ TOTAL NONINTEREST EXPENSES 5,994,000 5,399,000 ------------- ------------ INCOME BEFORE INCOME TAXES 3,127,000 3,015,000 INCOME TAXES 1,022,000 1,009,000 ------------- ------------ NET INCOME $ 2,105,000 $ 2,006,000 ============= ============ PER SHARE DATA: BASIC EARNINGS PER SHARE $ .49 $ .47 ======= ======= DILUTED EARNINGS PER SHARE $ .49 $ .47 ======= ======= DIVIDENDS DECLARED PER SHARE $ .25 $ .25 ======= ======= See notes to unaudited condensed consolidated financial statements. 7 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THREE MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS MARCH 31, OF CASH FLOWS (UNAUDITED) ---------------------------- 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: ---------------------------- Interest received $10,905,000 $12,603,000 Other income received 1,983,000 1,962,000 Interest paid (3,181,000) (4,881,000) Cash paid for salaries and employee benefits (2,796,000) (3,211,000) Net occupancy expense of premises paid (305,000) (306,000) Furniture and equipment expenses paid (215,000) (181,000) Cash paid for supplies and postage (276,000) (275,000) Cash paid for other operating expenses (1,911,000) (1,249,000) Federal income taxes paid (250,000) -0- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,954,000 4,462,000 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities held to maturity 4,300,000 7,000,000 Proceeds from sales and maturities of securities available for sale 27,332,000 13,915,000 Purchases of securities held to maturity (1,499,000) (442,000) Purchases of securities available for sale (25,125,000) (23,140,000) Net (increase) in loans made to customers (12,252,000) (896,000) Purchases of bank premises and equipment and intangible assets (93,000) (224,000) Proceeds from liquidation of other foreclosed assets 33,000 296,000 Purchases of other foreclosed assets (51,000) (247,000) ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (7,355,000) (3,738,000) ------------- ------------- STATEMENT CONTINUED ON NEXT PAGE 8 STATEMENT CONTINUED FROM PREVIOUS PAGE CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) in demand and other noninterest-bearing deposits (10,506,000) (3,244,000) Net increase in savings and passbook deposits 11,370,000 3,744,000 Net increase in certificates of deposit 3,191,000 11,798,000 Net (decrease) in securities sold under repurchase agreements and other short-term borrowings (27,407,000) (2,774,000) Proceeds from Federal Home Loan Bank advances 22,330,000 -0- Payment on Federal Home Loan advances (2,300,000) (9,000,000) Dividends paid (1,165,000) (1,137,000) ------------- ------------- NET CASH (USED) BY FINANCING ACTIVITIES (4,487,000) (613,000) ------------- ------------- NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (7,888,000) 111,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 31,505,000 25,136,000 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF QUARTER $23,617,000 $25,247,000 ============= ============= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $2,105,000 $2,006,000 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of investments & loans 307,000 29,000 Depreciation and amortization 392,000 418,000 Amortization of intangible assets 94,000 94,000 Amortization of deferred loan fees and costs, net (17,000) 112,000 Provision for loan losses 600,000 450,000 Decrease in accrued interest receivable 617,000 876,000 (Increase) in other assets (58,000) (613,000) Increase (decrease) in accrued interest payable (75,000) 22,000 Increase in accrued taxes, expenses and other liabilities 329,000 1,104,000 Others, net (340,000) (36,000) -------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $3,954,000 $4,462,000 ============== ============== See notes to unaudited condensed consolidated financial statements. 9 FORM 10-Q LNB Bancorp, Inc. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTRODUCTION The following areas of discussion pertain to the unaudited condensed consolidated balance sheets of LNB Bancorp, Inc. (The Parent Company) and its wholly-owned subsidiaries, Lorain National Bank (The Bank) and Charleston Insurance Agency, Inc. and a 49% interest in Charleston Title Insurance Agency, LLC., at March 31, 2002, compared to December 31, 2001 and the results of its operations and cash flows for the three months ended March 31, 2002 compared to the same period in 2001. The term "the Corporation" refers to LNB Bancorp, Inc. and its wholly-owned subsidiaries. It is the intent of this discussion to provide the reader with a more thorough understanding of the unaudited condensed consolidated financial statements and should be read in conjunction with those unaudited condensed consolidated financial statements and the Corporation's December 31, 2001 Annual Report. LNB Bancorp, Inc. is not aware of any trends, events, or uncertainties that might have a material effect on the soundness of operations; neither is LNB Bancorp, Inc. aware of any proposed recommendations by regulatory authorities which would have a similar effect if implemented. BASIS OF PRESENTATION The unaudited condensed consolidated balance sheet as of March 31, 2002 and the unaudited condensed consolidated statements of income and cash flows for the three months ended March 31, 2002 and 2001 are prepared in accordance with accounting principles generally accepted in the united States of America. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The above mentioned statements reflect all normal and recurring adjustments which are, in the opinion of Management, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The consolidated balance sheet at December 31, 2001 has been taken from the audited Financial Statements and condensed. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Corporation's December 31, 2001 Annual Report to Shareholders. 10 The results of operations for the period ended March 31, 2002 are not necessarily indicative of the operating results for the full year. RESERVE FOR LOAN LOSSES Because some loans may not be repaid in full, a reserve for loan losses is recorded. This reserve is increased by provisions charged to earnings and is reduced by loan charge-offs, net of recoveries. Estimating the risk of loss on any loan is necessarily subjective. Accordingly, the reserve is maintained by Management at a level considered adequate to cover loan losses that are currently anticipated based on Management's evaluation of several key factors including information about specific borrower situations, their financial position and collateral values, current economic conditions, changes in the mix and levels of the various types of loans, past charge-off experience and other pertinent information. The reserve for loan losses is based on estimates using currently available information, and ultimate losses may vary from current estimates due to changes in circumstances. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. While Management may periodically allocate portions of the reserve for specific problem situations, the entire reserve is available for any charge- offs that may occur. Charge-offs are made against the reserve for loan losses when Management concludes that it is probable that all or a portion of a loan is uncollectible. After a loan is charged-off, collection efforts continue and future recoveries may occur. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of the expected future cash flows discounted at the loans initial effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. If the loan valuation is less than the recorded value of the loan, an impairment reserve 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. 11 RECLASSIFICATIONS Certain 2001 amounts have been reclassified to conform to 2002 presentation. 2. EARNINGS PER SHARE Earnings per share is calculated as follows: For the Quarter ended March 31, 2002 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $2,105,000 Basic EPS Income available to common shareholders $2,105,000 4,315,558 $ .49 ===== Effect of Dilutive Securities Incentive Stock Options -0- 1,462 ---------- --------- Diluted EPS Income available to common shareholders + assumed conversions $2,105,000 4,317,020 $ .49 ========== ========= ===== For the Quarter ended March 31, 2001 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $2,006,000 Basic EPS Income available to common shareholders $2,006,000 4,295,268 $ .47 ===== Effect of Dilutive Securities Incentive Stock Options -0- 3,653 ---------- --------- Diluted EPS Income available to common shareholders + assumed conversions $2,006,000 4,298,921 $ .47 ========== ========= ===== 12 3. COMPREHENSIVE INCOME The Corporation's comprehensive income for the quarters ended March 31, 2002 and 2001 are as follows: For the quarters ended March 31, 2002 2001 -------------------------------- Net income $2,105,000 $2,006,000 Other comprehensive income: Unrealized gain(loss) on securities available for sale, net of tax (benefit)of $(415,000) and $392,000 (807,000) 760,000 ------------ ------------ Comprehensive Income $1,298,000 $2,766,000 ============ ============ For the quarters ended March 31, 2002 2001 -------------------------------- Disclosure of Reclassification Amount Unrealized holding gains (losses) arising during the period, net of tax $ (596,000) $ 755,000 Less reclassification adjustment for gains included in the net income, net of tax of $94,000 and $8,000 181,000 15,000 ------------ ------------ Change in unrealized gain (loss) on securities available for sale, net of tax $ (415,000) $ 760,000 ============ ============ 4. CRITICAL ACCOUNTING POLICIES The Corporation maintains critical accounting policies for reserve for loan losses, classification and evaluation of securities and a deferred tax asset valuation allowance. Refer to notes 1,5,7 and 12 of Notes to Consolidated Financial Statements for additional information incorporated by reference to the 2001 Annual Report to Shareholders for the year ended December 31, 2001. 13 PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS 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. FINANCIAL CONDITION Total assets of the Corporation decreased $2,950,000 during the first quarter, to $661,576,000. Federal funds sold and short-term investments decreased by $35,000 during the first quarter of 2002. The total securities portfolio decreased $6,209,000 ending the first quarter at $132,192,000. At March 31, 2002 gross unrealized gains (losses) in the held to maturity securities portfolio were approximately $225,000 and $(68,000), respectively. Net loans increased $11,710,000 during the first quarter to $483,308,000 at March 31, 2002. This increase was a result of good loan demand in our market. Commercial and consumer loan growth was particularly strong, showing first quarter increases of $14,146,000 and $4,158,000, respectively. Mortgage loans decreased by $6,215,000, during the first quarter of 2002. The consumer loan portfolio has increased because of increases in quality indirect automobile credits while mortgages decreased due to the seasonality factors. 14 The reserve for loan losses ended the quarter at $6,269,000 supported by a provision for loan losses of $600,000, recoveries of $107,000 and loan charge-offs of $328,000. The reserve for loan losses as a percentage of ending loans was 1.28% at March 31, 2002 and 1.23% at December 31, 2001. Corporate management believes that the reserve for loan losses as a percentage of ending loans at March 31, 2002 remains at an appropriate level. The ratio of the reserve for loan losses to nonperforming assets decreased to 247.7% as of March 31, 2002 from 409.3% at December 31, 2001. Corporate management believes that the current level of the reserve for loan losses is adequate based upon quantitative analysis of identified risks and analysis of historical trends. The level of nonperforming assets increased by $114,000 during the first quarter of 2002. This increase is the result of an increase in nonaccrual loans of $97,000 as well as by an increase in other foreclosed assets owned in the amount of $17,000. The increase in nonaccrual loans is due to decreases in nonaccrual principal balances of $366,000 which have been paid off or brought current, loans charged-off in the amount of $13,000 and liquidations of nonaccrual loans of $113,000 and increases in nonaccrual principal balances of $608,000 which includes three large commercial loan credits of $359,000 and 16 small consumer loan credits. The increase in nonaccrual loans in the first quarter of 2002 was due primarily to three commercial loan customer and 12 personal loan customers. The increase in Other Foreclosed Assets resulted from the net acquisition of repossessions in the amount of $17,000. The level of nonperforming assets remains at relatively low levels and Corporate management believes nonperforming assets are well collateralized. 15 The table below presents the level of nonperforming assets at the end of the last four calendar quarters. Amounts in thousands 03/31/02 12/31/01 09/31/01 06/30/01 -------- -------- -------- -------- Nonperforming Assets: Nonaccrual $1,413 $1,316 $2,518 $2,001 Restructured 0 0 0 0 Other Foreclosed Assets 141 123 0 19 ------ ------ ------ ------ Total Nonperforming Assets $1,554 $1,439 $2,518 $2,020 ====== ====== ====== ====== Reserve for loan losses to nonperforming assets 247.7% 409.3% 214.9% 257.2% ====== ====== ====== ====== Accruing loans past due 90 days $ 151 $ 149 $ 66 $ 119 ====== ====== ====== ====== Potential problem loans are those loans identified on Management's watch list in which Management has some doubt as to the borrower's ability to comply with the present repayment terms and loans which Management is actively monitoring due to changes in the borrower's financial condition. At March 31, 2002, potential problem loans totaled $8,983,000, an increase of $404,000 from the December 31, 2001 balance. The Corporation's credit policies are reviewed and modified on an ongoing basis in order to remain suitable for the management of credit risk within the loan portfolio as conditions change. At March 31, 2002 there are no significant concentrations of credit in the loan portfolio. The Corporation had outstanding loan and credit commitments to make loans totaling $132,530,000 and $114,342,000 at March 31, 2002 and 2001, respectively. The increase in outstanding loan commitments results in part from an increase in the unused portion of home equity lines of credits from home equity loan sale programs during 2001 plus increase in loan demand during the first quarter of 2002. Mortgage and commercial construction loan demand is expected to increase in the second quarter of 2002 as seasonal weather conditions improve and the construction season begins. Consumer loan demand is expected to increase in the second quarter for home improvement and automobile loans as weather conditions improve. Total deposits increased $4,055,000 during the first quarter to $522,322,000. Noninterest-bearing deposits decreased to $76,982,000, at March 31, 2002 for a decrease of $10,506,000, while interest-bearing deposits increased to $445,340,000 for an increase of $14,561,000. Federal funds purchased and securities sold under agreements to repurchase decreased $8,407,000 during the first quarter of 2002, mainly by decreases in short-term Federal home Loan bank advances. Due to the 16 volatility of customer repurchase agreements, most funds generated by repurchase activity enter the Corporation's earning assets as short-term investments. LIQUIDITY Liquidity measures a corporation's ability to generate cash or otherwise obtain funds at reasonable prices to fund commitments to borrowers as well as the demand of depositors and debt holders. Principal internal sources of liquidity for the Corporation and the Bank are cash and cash equivalents, Federal funds sold, and the maturity structures of investment securities and portfolio loans. Securities and loans available for sale provide another source of liquidity through the cash flows of these interest bearing assets as they mature or are sold. The Corporation continues to maintain a relatively liquid position in order to take advantage of interest rate fluctuations. As of March 31, 2002 short- term security investments with maturities of one year or less totaled $12,314,000 which represented 9.3% of total securities. Adding cash and due from banks of $20,164,000 and Federal Funds sold and other short-term investments of $3,453,000, total liquid assets represented 5.4% of total assets. The Corporation's subsidiary bank has established short-term lines of credit at correspondent banks, the Federal Home Loan Bank and the Federal Reserve Bank of Cleveland in the amounts of $20,000,000, $30,000,000 and $31,443,000, respectively, with credit available in the amounts of $20,000,000, $30,000,000 and $31,443,000, respectively. CAPITAL RESOURCES LNB Bancorp, Inc. continues to maintain a strong capital position. Total shareholders' equity increased to $62,342,000, at March 31, 2002. The increase resulted primarily from $2,105,000 of net income generated from the first quarter of operations less a dividend payable to shareholders of $1,079,000. The increase in interest rates experienced in the first quarter of 2002 has caused a decrease in the overall market value of available for sale securities which resulted in a decrease of shareholders' equity by $807,000 for the quarter ended March 31, 2002. As of March 31, 2002, the LNB Bancorp, Inc. held 100,000 shares of common stock as treasury stock at a cost of $2,900,000. The Corporation continues to monitor growth to stay within the constraints established by the regulatory authorities. Under Federal banking regulations, an institution is deemed to be well-capitalized if it has a Risk-based Tier 1 capital ratio of 6.00 percent or greater, a Risk-based Total capital ratio of 10.00 percent or greater and a Leverage ratio of 5.00 percent or greater. The Corporation's Risk-based capital and Leverage ratios have exceeded the ratios for a well-capitalized financial institution for all periods presented. The Corporation's capital and leverage ratios as of March 31, 2002 and 2001 follow together with those ratios required for the 17 Corporation to be considered well capitalized. MARCH 31, --------------------- 2002 2001 ------- ------- Tier I capital ratio 12.60% 11.99% Required Tier I capital ratio 4.00% 4.00% Total capital ratio 13.87% 13.12% Required total capital ratio 8.00% 8.00% Leverage ratio 9.48% 8.67% Required leverage ratio 3.00% 3.00% On an ongoing basis the Corporation analyzes acquisition opportunities in markets which are adjacent to or within the Corporation's current geographical market. Corporate management believes that it's current capital resources are sufficient to support any foreseeable acquisition activity. RESULTS OF OPERATIONS Interest and fees on loans decreased $1,464,000 when compared to the first quarter of 2001. This was the result of the impact of increases in the loan portfolio plus decreases in rates. Interest and dividends on securities was $1,798,000 for the first quarter of 2002 for a decrease of $49,000 over the same period in 2001. The first quarter decrease in interest and dividends on securities results from a net increase in the securities portfolio of $6,209,000 which was more than offset by decreases in the average yield of the securities portfolio. Interest and dividends on securities represented 17.6% of total interest income at March 31, 2002 compared to 15.7% at March 31, 2001. Interest on Federal funds sold and other interest-bearing instruments was $19,000 at March 31, 2002 compared to $41,000 at March 31, 2001. The decrease resulted from lower average balances invested in this form of financial instrument. Total interest expense increased by $1,797,000 when compared to the first quarter of 2001. The interest expense decrease was fueled by a decrease in interest expense from certificates of deposit greater than $100,000 in the amount of $1,125,000, plus decreases in deposit account interest of $480,000 plus decreases in securities sold under repurchase agreements and federal funds purchased of $245,000 offset in part by increases in interest on Federal Home Loan Bank advances of $53,000. The Corporation increased its loan loss provision by $150,000 to $600,000 for the first quarter of 2002. The increased loan loss provision results from the growth of the loan portfolio. Total noninterest income increased by $595,000 when compared to the first quarter of 2001. This increase resulted from increases in Investment and Trust Services Division Income of $17,000, increases in service charges of $117,000, increases in other service charges, exchanges and fees of $87,000, 18 increases in gains on sales of securities of $275,000 and other operating income of $122,000. The Corporation continuously monitors noninterest expenses for greater profitability. The entire staff is geared to improving productivity at all levels. Noninterest expense for the quarter ended March 31, 2002 was $5,994,000, 11.0% more than the first quarter of 2001. This increase was due primarily to increases in salary expenses, outside services, marketing expense and credit card and merchant expenses. The effective tax rate was 32.7% and 33.5% during the first quarter of 2002 and 2001, respectively. The effective tax rate decreased due to increases in holdings of tax-exempt securities. Net income was $2,105,000 and $2,006,000 for the quarters ended March 31, 2002 and 2001, respectively. Net income per basic and diluted share was $.49 and $.47 for the quarters ended March 31, 2002 and 2001, respectively. IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS Corporate management is not aware of any current recommendations by the Financial Accounting Standards Board or by regulatory authorities which, if they were implemented, would have a material effect on the liquidity, capital resources or operations of the Corporation. However, the potential impact of certain accounting and regulatory pronouncements warrant further discussion. On July 20, 2001, The Financial Accounting Standards Board issued Statement SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets." SFAS No. 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001. Effective January 1, 2002, all goodwill amortization expenses will cease and goodwill will be assessed (at least annually) for impairment at the reporting unit level by applying a fair-value-based test. SFAS No. 142 also provides additional guidance on acquired core deposit intangible requiring separate disclosure and amortization with impairment testing at least annually. LNB Bancorp, Inc. adopted SFAS No. 142 as of January 1, 2002 and reports Branch Goodwill and Core Deposit intangibles separately. The Corporation has determined that the provisions of SFAS No. 142 will have no effect on our financial position, results of operations or liquidity. In August 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." Statement 143 addresses financial accounting and reporting for obligations associated with the retirement of intangible long-lived assets and the associated asset retirement costs. Statement 143 is effective for fiscal years beginning after June 14, 2001. The Corporation has reviewed the provisions of Statement 143, and believes that upon adoption, it does not have a material impact on its financial position, results of operations or liquidity. In August 2001, the Financial Accounting Standards Board issued Statement 19 SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of disposal of a segment of a business. The provisions of SFAS No. 144 are effective for the Corporation January 1, 2002 and did not have a material impact on our financial position, results of operations or liquidity USA PATRIOT ACT On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept And Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"). During the first quarter of 2002, the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, issued proposed and interim regulations as mandated by the USA PATRIOT Act that would: (i) prohibit certain financial institutions from providing correspondent accounts to foreign shell banks; (ii) require such financial institutions to take reasonable steps to ensure that correspondent accounts provided to foreign banks are not being used to indirectly provide banking services to foreign shell banks; (iii) require certain financial institutions that provide correspondent accounts to foreign banks to maintain records of the ownership of such foreign banks and their agents in the United States; (iv) require the termination of correspondent accounts of foreign banks that fail to turn over their account records in response to a lawful request from the Secretary of the Treasury or the Attorney General. Additionally the USA PATRIOT Act encourages information sharing among financial institutions and federal law enforcement agencies to identify, prevent, deter and report money laundering and terrorist activity. Management does not believe that the USA PATRIOT Act will have a material impact on the financial position, results of operation or liquidity of the Corporation 20 PART I - OTHER INFORMATION ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market indices such as interest rates, foreign exchange rates and equity prices. The Corporation's principal market risk exposure is interest rate risk, with no material impact on earnings from changes in foreign exchange rates or equity prices. There have been no material changes in the asset and liability mix of the Corporation since December 31, 2001, which would impact the Corporation's level of market risk. Interest rate risk is the exposure to changes in market interest rates. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The Corporation monitors the interest rate sensitivity of its on - and - off balance sheet positions by examining its near-term sensitivity and its longer term gap position. Corporate management has determined no significant changes in the Corporation's interest rate risk profile since December 31, 2001. 21 PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings None ITEM 2 - Changes in Securities See item 4, (c), (1) ITEM 3 - Defaults Upon Senior Securities None ITEM 4 - Submission of Matters to a Vote of Security Holders (a) LNB Bancorp Inc.'s 2002 Annual Meeting of Shareholders was held on April 16, 2002. (b) Proxies were solicited by LNB Bancorp Inc.`s management pursuant to Regulation 14 under the Securities Exchange Act of 1934, there was no solicitation in opposition to management's nominees for election to the board of directors as listed in the proxy statement, and all such nominees were elected to the classes in the proxy statement pursuant to the vote of the shareholders. (c) Other matters voted upon (1)Election of directors to serve as Class II Directors until April 19, 2005 Annual Meeting of Shareholders as follows: ABSTAIN/ FOR WITHHELD NON-VOTES Terry D. Goode 2,579,693.78 65,426.27 1,670,438 Wellsley O. Gray 2,593,608.25 51,511.80 1,670,438 James R. Herrick 2,589,956.46 55,163.59 1,370,438 Benjamin G. Norton 2,595,106.57 50,013.48 1,370,438 John W. Schaeffer,M.D. 2,592,524.57 52,595.48 1,370,438 Gary C. Smith 2,589,725.78 55,394.27 1,370,438 The total number of shares of LNB Bancorp, Inc. Common Stock, $1.00 par value, outstanding as of March 5, 2002, the record date of the Annual Meeting, was 4,315,558. 22 ITEM 5 - Other Information (a) None ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibit (10) - Computation of Shares Used for Earnings Per Share Calculations. (b) Exhibit (13) - First Quarter Report to Shareholders of LNB Bancorp, Inc. - March 31, 2002 - EDGAR Version. (c) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended March 31, 2002. Also, see the Exhibit Index which is found on the next page of this Form. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LNB BANCORP, INC. (registrant) /s/ Gregory D. Friedman Date: May 15, 2002 -------------------------- Gregory D. Friedman, CPA Executive Vice President, Chief Financial Officer and Corporate Secretary (Principal Financial Officer) /s/ Mitchell J. Fallis Date: May 15, 2002 -------------------------- Mitchell J. Fallis, CPA Vice President and Chief Accounting Officer (Principal Accounting Officer) 23 LNB Bancorp, Inc. Form 10-Q Exhibit Index Pursuant to Item 601 (a) of Regulation S-K S-K Reference Exhibit Number (10a) Material Contracts - Employment Agreement by and between Terry M. White and LNB Bancorp, Inc. and the Lorain National Bank dated January 23, 2002. 24 LNB Bancorp, Inc. Exhibit to Form 10 - Q (for the three months ended March 31, 2002) S - K Reference Number (10a) Employment Agreement by and between Terry M. White and LNB Bancorp, Inc, and The Lorain National Bank dated January 23, 2002. 25 TERRY M. WHITE EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement"), made at Lorain, Ohio, as of the 23rd day of January, 2002, by and among TERRY M. WHITE, herein referenced as "Employee", and LNB BANCORP, INC. (an Ohio corporation) and THE LORAIN NATIONAL BANK (a banking organization organized and existing under the laws of the United States of America), which together with their respective successors and assigns are collectively herein referenced as "Employer", is to EVIDENCE THAT: WHEREAS Employer desires to secure and retain the employment services of Employee as its Executive Vice President and Chief Investment Officer, and Employee desires to accept employment as Employer's Executive Vice President and Chief Investment Officer; and WHEREAS, but for Employee's promises made in this Agreement, especially in Section 8, Employer would not employ Employee under the terms and conditions of this Agreement and, therefore, expressly to induce Employer to execute this Agreement, Employee represents that Employee fully understands and accepts the restrictive covenants in Section 8 and agrees to be bound thereby; NOW, THEREFORE, in consideration of the mutual covenants and promises herein, Employer and Employee (collectively the "Parties" and individually a "Party") hereby agree as follows: 1. Employment and Term. 1.1 Employee will render management services to Employer in the capacity as Employer's Executive Vice President and Chief Investment Officer for the term of this Agreement (herein called the "Agreement Term") commencing on or about April 1, 2002, and continuing thereafter until terminated pursuant to the termination provisions of this Agreement, including the provisions of Section 7. 1.2 Employee will devote Employee's full business-time and best efforts to performing conscientiously, faithfully and loyally all duties: (i) required of Employee by virtue of Employee's position as Employer's Executive Vice President and Chief Investment Officer, including (but not limited to) chairing the Asset/Liability Committee, providing cash management coordination services and strategic engineering services, and serving as Employer's Merger and Acquisition Analyst, (ii) set forth in Employer's Code of Regulations, Bylaws and policies as adopted by Employer's Board of Directors, and (iii) assigned or delegated to Employee by Employer's President and Chief Executive Officer and/or the Chairman of the Board of Directors. 26 1.3 Except as otherwise expressly provided herein, this Agreement represents the entire agreement between Employee and Employer regarding Employee's employment by Employer. 1.4 Except as otherwise expressly provided herein, this Agreement may be changed or amended only by a written document which is clearly designated as an amendment to this specific Agreement and only if such document is signed by all Parties. 1.5 No action by any Party and no refusal or neglect of any Party to exercise a right granted under this Agreement or to enforce compliance with any provision of this Agreement shall constitute a waiver of any provision of or any right under this Agreement, unless such waiver is expressed in a written document which is clearly designated as a waiver to a specific provision(s) of this Agreement and unless such document is signed by all Parties. 2. Compensation 2.1 In consideration for the services rendered by Employee as Executive Vice President and Chief Investment Officer, Employer agrees to pay Employee a basic salary (herein called the "Basic Salary") equal to the sum of One Hundred Thirty Thousand Dollars ($130,000.00) for each twelve (12) consecutive monthly period (a "Contract Year") of the Agreement Term. The Basic Salary shall be payable in twenty-six (26) equal bi-weekly payments and prorated if the Agreement Term is terminated prior to the completion of any Contract Year. 2.2 As additional consideration for Employee's services performed hereunder, Employee may (but shall not be entitled to) receive a discretionary bonus from time to time. Such bonus (and Employee's eligibility therefor) shall be determined by Employer's Board of Directors in its sole discretion. 2.3 There shall be an annual review of Employee's performance and compensation by Employer's Board of Directors (or a committee thereof). The annual review shall occur not less than sixty (60) days prior to the end of Employer's fiscal year for the express purpose of reviewing the current fiscal year's performance of Employee. Any change in compensation as a result of the annual review shall immediately act as an amendment of Section 2.1 above, effective as of the date of the compensation change. 2.4 The obligations of Employer to pay Employee's Basic Salary, bonuses (if any), and other benefits under this Agreement are expressly conditioned upon Employee's continued and faithful performance of and adherence to each and every material promise, duty and obligation assigned to or made by Employee under this Agreement. 27 3. Vacations and Time-Off. 3.1 Employee shall be entitled to twenty (20) working days of compensated vacation through December 31, 2002, and, thereafter, Employee shall be entitled to twenty-seven (27) working days of compensated vacation for each Contract Year, pursuant to the terms and conditions of Employer's vacation time-off policy (as may be periodically changed in Employer's sole discretion), to be taken at times as mutually agreed in advance between Employee and Employer's President and Chief Executive Officer or Chairman of the Board of Directors. 3.2 Except as may be periodically changed in Employer's sole discretion, all vacation time-off shall be non-cumulative if not taken within the Contract Year or within the first quarter of the succeeding Contract Year; provided, however, that unused vacation time may be redeemed as compensation pursuant to the terms and conditions of Employer's vacation time-off policy. 3.3 Employee's vacation time-off may be increased by Employer in its sole discretion. 3.4 Employee shall be permitted additional time-off to attend professional meetings, seminars, and conventions and to satisfy professional educational and licensure requirements as have been mutually agreed upon between Employee and Employer's President and Chief Executive Officer or Chairman of the Board of Directors. Attendance at such approved meetings, seminars, and conventions and accomplishment of approved professional educational and licensure requirements shall be fully compensated and shall not be considered vacation. Employer shall reimburse Employee for all reasonable expenses incurred by Employee incident to attendance at approved professional meetings, seminars and conventions and such reasonable entertainment expenses incurred by Employee in furtherance of Employer's interest. 3.5 Employee shall also be entitled to additional days of time-off with full compensation for holidays in accordance with Employer's holiday time-off policy (which may be periodically changed in Employer's sole discretion). 3.6 Employee shall further be entitled to additional days of time-off with full compensation for personal matters in accordance with Employer's personal time-off policy (which may be periodically changed in Employer's sole discretion). 4. Fringe Benefits 4.1 Employee shall be entitled to all fringe benefits to which other employees of Employer in Employee's classification are entitled. 28 4.2 As additional consideration for Employee's performance of Employee's duties and responsibilities as Executive Vice President and Chief Investment Officer of Employer, Employer agrees: (A) To provide Employee with (i) short-term disability benefits pursuant to Employer's short-term disability program (which may be periodically changed or terminated in Employer's sole discretion), and (ii) long-term disability insurance benefits commencing one hundred eighty (180) days after Employee incurs a Disability, as defined in Section 11.1(E) of this Agreement, and continuing pursuant to the terms of Employer's long-term disability program (which may be periodically changed or terminated in Employer's sole discretion); and (B) To include Employee in Employer's defined benefit retirement pension plan, stock option plan (if any), stock ownership plan, section 401(k) plan, and flexible benefit plan, as such plans may be periodically changed or terminated in Employer's sole discretion; and (C) To provide Employee with such plan of hospitalization, health and dental insurance as maintained by Employer and as may be periodically changed or terminated in Employer's sole discretion; and (D) To provide (i) a term life insurance policy on the life of Employee (provided that Employee is insurable under the standard rate criteria of a commercial life insurance company) in an amount equal to 2.75 times the Basic Salary of Employee, but not to exceed Three Hundred Thousand Dollars ($300,000.00), as may be periodically increased in Employer's sole discretion, and payable to the beneficiary or beneficiaries of Employee's choice, and (ii) an accidental death and dismemberment insurance policy upon Employee in an amount equal to 2.75 times the Basic Salary, but not to exceed One Hundred Fifty Thousand Dollars ($150,000.00), as may be increased in Employer's sole discretion, and payable to the beneficiary or beneficiaries of Employer's choice; and (E) To provide Employee with such sick leave as presently in force by Employer and as may be periodically changed or terminated in Employer's sole discretion; and (F) To purchase or lease for the use of Employee an automobile as selected by Employee and approved by Employer, to reimburse Employee for expenses related to its operation for business purposes upon presentation of appropriate itemization and receipts, and to replace such automobile after three (3) years of use by Employee; provided, however, that upon termination of the Agreement Term for any reason, Employer shall be immediately entitled to possession of said automobile; and (G) To pay the initiation fee and monthly dues for a corporate membership for Employee at Spring Valley Country Club, Elyria, Ohio, and to reimburse Employee for all future assessments and reasonable 29 expenses incurred by Employee at such Club in furtherance of Employer's business interests upon presentation of appropriate itemizations and receipts; and (H) To reimburse Employee for all reasonable and approved expenses related to the performance of Employee's duties as Executive Vice President and Chief Investment Officer, including (but not limited to): entertainment and promotional expenses; educational expenses incurred for the purpose of maintaining or improving Employee's skills directly related to the performance of Employee's duties and obligations hereunder (including, but not limited to, professional continuing educational requirements); expenses of membership in civic groups, clubs and fraternal organizations; and all other items of reasonable and necessary expenses incurred by Employee in the performance of Employee's duties as Employer's Vice President and Chief Investment Officer. 4.3 Relocation Expenses. Employer shall pay for any and all reasonable and necessary: (i) moving and relocation expenses incurred by Employee to move Employee, Employee's family and Employee's household possessions to the Lorain, Ohio area, and (ii) housing lease expenses until Employee purchases a residence in the Lorain, Ohio area; provided, however, that the aggregate of all such moving, relocation and housing expenses shall not exceed $20,000.00 but shall include a "gross-up" for any Federal and State income taxes Employee pays as a result of Employer's payment or reimbursement of such expenses. Employer shall either directly pay or reimburse Employee for such expenses within ten (10) days after Employee presents Employer with an invoice, receipt or other evidence satisfactory to Employer covering the expenses to be reimbursed. 5. Stock Options. If determined by Employer's Board of Directors, Employee shall participate in any and all incentive stock option plans and programs currently in existence or adopted by Employer after commencement of the Agreement Term in accordance with all applicable eligibility requirements, terms and conditions of such plans and programs (as may be periodically changed or terminated in Employer's sole discretion). 6. Prohibition Against Transfer. Employee's duties, obligations and services rendered under this Agreement are personal in nature and are unique to Employer. Therefore, without Employer's prior written consent, Employee shall not assign or otherwise transfer any of Employee's duties, obligations or responsibilities hereunder. 7. Termination of the Agreement Term 7.1 If either Employer or Employee materially violates the term and conditions of this Agreement, the other Party shall give the breaching Party notice of said violation and, if the breaching Party does not cure such violation within sixty (60) days after notice, then the other Party shall have the continuing right to terminate the Agreement Term without further 30 notice; provided, however, that Employer may immediately terminate the Agreement Term if Employee violates or fails to adhere to any provision of Section 8 (pertaining to non-disclosure and non-competition). 7.2 Through its Board of Directors, Employer may terminate the Agreement Term without cause at any time upon ninety (90) days prior written notice to Employee. 7.3 Subject to the terms and conditions of Section 11, Employee may terminate the Agreement Term upon the occurrence of a "Change in Control" as defined in Section 11.1(C) for "Good Reason" as defined in Section 11.1(F). 7.4 The Agreement Term shall automatically and immediately terminate upon the death of Employee. 7.5 In the event of the Disability of Employee as defined in Section 11.1(E) of this Agreement, the Agreement Term shall terminate and Employee shall be entitled to benefits provided by Employer under Employer's long-term disability program as designated in Section 4.2(A)(ii) of this Agreement. 7.6 In Employee's sole discretion, Employee may terminate the Agreement Term by giving the Board of Directors of Employer at least ninety (90) days written notice of Employee's decision to terminate the Agreement Term. 7.7 Employer shall have the sole discretion to determine whether Employee shall continue to render services hereunder during such notice periods as provided for in this Section 7. 7.8 Upon the termination of the Agreement Term pursuant to Section 7.1 (but only if Employee terminates the Agreement Term due to the Employer's breach) or Section 7.2, Employer shall continue to pay Employee's total compensation (as reflected on Employee's W-2 Federal Income Tax Statement from Employer for the prior calendar year) for a period of one (1) year from the date of termination of the Agreement Term; provided, however, that if Employer chooses a two (2)-year Restricted Period under Section 8.1(G), then Employer shall continue to pay such compensation for a period of two (2) years from the date of termination of the Agreement Term. Any termination payments payable to Employee shall survive Employee's death if Employee dies during the period Employee is receiving termination payments as provided in this Section 7.8. 8. Employee's Non-Disclosure and Non-Competition Promises 8.1 For purposes of this Section 8, the Parties agree to and understand the following definitions: 31 (A) "Competitive Act" means any of the following: (i) Employee's rendering services (whether or not for compensation) to, for or on behalf of a Competitor (as defined herein) as an employee, independent contractor, consultant, advisor, representative, agent or in any other capacity; and (ii) Employee's investment in or ownership (partial or total) of a Competitor, unless the Competitor's stock is publicly traded on a national exchange and Employee owns less than two percent (2%) of such stock. (B) "Competitive Activity" means the performance or rendering of any banking services; trust services and investment services; portfolio management; retirement planning; administration of employee benefit plans; administration of decedents' estates and court-supervised accounts, guardianships, and custodial arrangements; personal tax and estate tax planning; financial consulting services; investment advising services; and any other business activity, service or product which competes with any existing or future business activity, service or product of Employer. (C) "Competitor" means any of the following: (i) any person, sole proprietorship, partnership, association (other than Employer), organization, corporation, limited liability company or other entity (governmental or otherwise) who or which provides, renders or performs a Competitive Activity (as defined herein) within the Service Area (as defined herein), even if the Competitor has no office or other facilities located within the Service Area; and (ii) any parent, subsidiary or other person or entity affiliated with, or related by ownership to, any of the foregoing designated in Subitem (i) of this Section 8.1(C). (D) "Confidential Information" means all of the following (whether written or verbal) pertaining to Employer: (i) trade secrets (as defined by Ohio law); Client or Customer lists, records and other information regarding Employer's Clients or Customers (whether or not evidenced in writing); Client or Customer fee or price schedules and fee or price policies; financial books, plans, records, ledgers and information; business development plans; sales and marketing plans; research and development plans; employment and personnel manuals, records, data and policies; business manuals, methods and operations; business forms, correspondence, memoranda and other records; computer records and related data; and any other confidential or proprietary data and information of Employer or its Clients or Customers which Employee encounters during the Employment Term (as defined in Section 8.1(E)); and (ii) all products, technology, ideas, inventions, discoveries, developments, devices, processes, business notes, forms and documents, business products, computer programs, and other creations (and improvements of any of the foregoing), whether patentable or copyrightable, which Employee has acquired, developed, conceived or made (whether directly or indirectly, whether solicited or unsolicited, or whether during normal work hours or during off-time) during the Employment Term or during the Restricted Period and which relate to any business activity of Employer or are derived from the Confidential Information designated in Subsection (i) of this Section 8.1(D). 32 (E) "Client" or "Customer" means a person, sole proprietorship, partnership, association, organization, corporation, limited liability company, or other entity (governmental or otherwise), wherever located: (i) to or for which Employer sells any products or renders or performs services either during the 180-day period immediately preceding commencement of the Restricted Period or during the Restricted Period, or (ii) which Employer solicits or (as demonstrated by plans, strategies or other tangible preparation) intends to solicit to purchase products or services from Employer either during the 180-day period immediately preceding commencement of the Restricted Period or during the Restricted Period. (F) "Employment Term" means the period of time starting on the date Employee's employment with Employer commences and terminating at the close of business on the date Employee's employment with Employer terminates. (G) "Restricted Period" means a time-period, as chosen by Employer (in its sole discretion) by written notice to Employee within thirty (30) days after termination of the Employment Term, equal to either one (1) year or two (2) years commencing on the date the Employment Term is terminated by either Party (for any reason, with or without cause); provided, however, that such period shall be extended to include any period of time during which Employee engages in any activity constituting a breach of this Agreement and any period of time during which litigation transpires wherein Employee is held to have breached this Agreement. (H) "Service Area" means: (i) Lorain County, Ohio and all counties immediately contiguous to Lorain County, constituting those geographic areas in which Employer presently conducts substantial business activities; and (ii) those counties located in the State of Ohio in which Employer conducts or transacts substantial business activities on the date the Employment Term terminates; and (iii) those counties in the State of Ohio in which, on the date the Employment Term terminates, Employer intends to conduct or transact substantial business activities as demonstrated by plans, strategies or other tangible preparation for such business activities. (I) "Employer" means, for purposes of this Section 8, LNB Bancorp, Inc. and The Lorain National Bank (a national bank association), all direct and indirect parent and subsidiary entities thereof, and all entities related to LNB Bancorp, Inc., to The Lorain National Bank or to such parent and subsidiary entities by common ownership. 8.2 Expressly in consideration for Employer's promises made in this Agreement and to induce Employer to sign this Agreement, Employee promises and agrees that: (A) Confidentiality. The Confidential Information is and, at all times, shall remain the exclusive property of Employer, and Employee: (i) shall hold the Confidential Information in strictest confidence and in a position of trust for Employer and its Clients and Customers, and (ii) except 33 as may be necessary to perform Employee's employment duties with Employer but only in compliance with Employer's confidentiality policies and all applicable laws, shall not (directly or indirectly) use for any purpose, copy, duplicate, disclose, convey to any third-party or convert any Confidential Information, either during the Employment Term or at any time following termination of the Employment Term (by any Party, for any reason, with or without cause), and (iii) upon the request of Employer at any time during or after the Employment Term, shall immediately deliver to Employer all the Confidential Information in Employee's possession and shall neither convey to any third-party nor retain any copies or duplicates thereof; and (B) Competitive Acts. During the Employment Term and during the Restricted Period, Employee (or any entity owned or controlled by Employee) shall not directly or indirectly, without the prior written approval of the President and Chief Executive Officer of Employer (or any person expressly designated by the President and Chief Executive Officer), perform a Competitive Act; and (C) Clients and Custiners. During the Restricted Period, Employee (or any entity owned or controlled by Employee) shall not directly or indirectly: (i) solicit from or perform for any Client or Customer a Competitive Activity, wherever such Client or Customer is located, or (ii) influence (or attempt to influence) any Client or Customer to transfer such Client's or Customer's patronage or business from Employer, or (iii) otherwise interfere with any business relationship of Employer with any Client or Customer; and (D) Employees. During the Restricted Period, Employee (or any entity owned or controlled by Employee) shall not directly or indirectly: (i) employ, engage, contract for the services of, or solicit or otherwise induce the services of any person who, during the one hundred eighty (180)- day period immediately preceding commencement of the Restricted Period or during the Restricted Period, is or was an employee of Employer, or (ii) otherwise interfere with (or attempt to interfere with) any employment relationship of Employer with any employee. (E) Other Employment. During the Employment Term, Employee shall not perform services (whether or not for compensation) as an employee, independent contractor, consultant, representative or agent of any person, sole proprietorship, partnership, limited liability company, corporation, association (other than Employer), organization, or other entity (governmental or otherwise) without the prior, written consent of the President and Chief Executive Officer of Employer (or any person expressly designated by the President). (F) Costs of Enforcement. Employee shall pay all reasonable legal fees, court costs, expert fees, investigation costs, and other expenses incurred by Employer in any litigation under which Employee is adjudicated to have violated this Section 8. 34 8.3 Employee understands and agrees that: (A) during the Employment Term, Employee will materially assist Employer in the generation, development or enhancement of certain Confidential Information, Clients and Customers and certain other business assets and activities for Employer; and (B) Employee's promises in this Section 8: (i) were negotiated at arm's-length and with ample time for Employee to seek the advice of legal counsel, (ii) are required for the fair and reasonable protection of Employer and the Confidential Information, and (iii) do not constitute an unreasonable hardship to Employee in working for Employer or in subsequently earning a livelihood in Employee's field of expertise outside the Service Area; and (C) if Employee breaches (or threatens to breach) any or all of the promises in this Section 8: the privacy and thereby the value of the Confidential Information will be significantly jeopardized; Employer will be subject to the immediate risk of material, immeasurable, and irreparable damage and harm; the remedies at law for Employee's breach shall be inadequate; and Employer shall therefore be entitled to injunctive relief against Employee in addition to any and all other legal or equitable remedies; and (D) if Employee had not agreed to the restrictive promises in this Agreement, Employer would not have signed this Agreement. 8.4 Employee's promises, duties and obligations made in this Section 8 shall apply to Employee irrespective of whether a Change in Control (as defined in Section 11.1) occurs and shall survive the voluntary or involuntary cessation or termination of the Employment Term by either Party (for any reason, with or without cause). If any of the restrictions contained in this Section 8 are ever judicially held to exceed the geographic or time limitations permitted by law, then such restrictions shall be deemed to be reformed to comply with the maximum geographic and time limitations permitted by law. The existence of any claim or cause of action by Employee against Employer (whether or not derived from or based upon Employee's employment with Employer) shall not constitute a defense to Employer's enforcement of any covenant, duty or obligation of Employee in this Section 8. 9. Indemnification. 9.1 Employer hereby indemnifies and saves Employee harmless from and against all claims, liabilities, judgments, decrees, fines, penalties, fees, amounts paid in settlement or any other costs, losses, expenses (including, but not limited to, attorneys' fees and court costs) directly or indirectly arising or resulting from or in connection or association with any threatened or pending action, suit or proceeding (whether civil, criminal, 35 administrative, investigatory or otherwise) and any appeals related thereto under which Employee is a party or participant because of Employee's good faith actions or omissions arising from the performance of Employee's duties and obligations under this Agreement, except for such claims (including court proceedings) brought by the respective Parties against each other. 9.2 As a condition precedent to the indemnification and other obligations of Employer under this Section 9, Employee must: (A) Notify Employer of any actual or potential claim under this Section 9; and (B) Authorize and permit Employer, in its sole discretion, to choose any legal counsel to defend or otherwise handle the claim and all proceedings and matters relating thereto; and (C) Permit Employer to assume total, complete and exclusive control of the claim and all proceedings and matters relating thereto; and (D) Cooperate in all reasonable respects with Employer in handling the claims and all proceedings and matters related thereto. 10. Miscellaneous. 10.1 This Agreement constitutes the entire agreement among the Parties with respect to the subject matter hereof and supersedes any and all other prior or contemporaneous agreements or contracts (either oral or written) between the Parties with respect to the subject matter hereof. 10.2 The invalidity or unenforceability of any particular provision of this Agreement shall not affect its other provisions and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted. 10.3 Except as otherwise expressly provided herein, this Agreement shall be binding upon and inure to the benefit of Employer, its successors and assigns and upon Employee, Employee's administrators, executors, legatees, heirs and assigns. At any time, Employer may assign this Agreement and Employer's rights, duties, obligations and benefits thereunder to any Subsidiary as defined in Section 11.1(I) of this Agreement. 10.4 This Agreement shall be construed and enforced under and in accordance with the laws of the State of Ohio; for all litigation arising hereunder, the State Courts of Lorain County, Ohio shall have exclusive venue; and each Party (separately and collectively) hereby submits to the personal jurisdiction of the State Courts of Lorain County, Ohio for all litigation arising under this Agreement. 10.5 All promises, representations, warranties and covenants of the 36 Parties shall survive termination of the Agreement Term, unless otherwise expressly provided herein. 11. Change in Control. 11.1 For purposes solely of this Section 11, the following terms shall have the respective meanings set forth below: (A) "Bonus Amount" means the highest annual incentive bonus earned by Employee from Employer (or its Subsidiaries) during the last three (3) completed fiscal years of Employer immediately preceding Employee's Date of Termination (annualized in the event Employee was not employed by Employer or its Subsidiaries for the whole of any such fiscal year). (B) "Cause" means any one or more of the following: (i) the willful and continued failure of Employee to perform substantially Employee's duties with Employer (other than any such failure resulting from Employee's Disability as defined in Section 11.1(E) of this Agreement or any such failure subsequent to Employee's being delivered a Notice of Termination without Cause by Employer or after Employee's delivering a Notice of Termination for Good Reason to Employer) after a written demand for substantial performance is delivered to Employee by Employer's Board of Directors which specifically identifies the manner in which the Board of Directors believes that Employee has not substantially performed Employee's duties and provides Employee with three (3) days to correct such failure, or (ii) the willful engaging by Employee in illegal conduct or gross misconduct which is injurious to Employer or any Subsidiary, or (iii) the conviction of Employee of, or a plea by Employee of nolo contendere to, a felony, or (iv) Employee's breach of or failure to perform any of the non-competition and non-disclosure covenants contained in Section 8 of this Agreement or contained in any other document signed by Employee and by Employer. For purpose of this paragraph (B), no act or failure to act by Employee shall be considered "willful" unless done or omitted to be done by Employee in bad faith and without reasonable belief that Employee's action or omission was in the best interests of Employer. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by Employer's Board of Directors, based upon the advice of counsel for Employer, or based upon the instructions of Employer's Chief Executive Officer or another senior officer of Employer shall be conclusively presumed to be done, or omitted to be done, by Employee in good faith and in the best interests of Employer. (C) "Change in Control" means the occurrence of any one of the following events: (i) if individuals who, on the date of this Agreement, constitute the Board of Directors (the "Incumbent Directors") of LNB Bancorp, Inc. (herein called "Company") cease for any reason to constitute at least a majority of Company's Board of Directors; provided, however, that: (A) any person becoming a director subsequent to the date of this Agreement, whose election 37 or nomination for election was approved by a vote of at least two-thirds (2/3) of the Incumbent Directors then on Company's Board of Directors (either by a specific vote or by approval of the proxy statement of Company in which such person is named as a nominee for director, without written objection by such Incumbent Directors to such nomination), shall be deemed to be an Incumbent Director, and (B) no individual elected or nominated as a director of Company initially as a result of an actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies by or on behalf of any person other than Company's Board of Directors shall be deemed to be an Incumbent Director; (ii) if any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Company representing twenty percent (20%) or more of the combined voting power of Company's then-outstanding securities eligible to vote for the election of Company's Board of Directors (the "Company Voting Securities"); provided, however, that the events described in this clause (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by Company or any Subsidiary, (B) by any employee benefit plan sponsored or maintained by Employer or any Subsidiary or by any employee stock benefit trust created by Employer or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non- Qualifying Transaction (as defined in clause (iii) of this paragraph (C), below), (E) pursuant to any acquisition by Employee or any group of persons including Employee (or any entity controlled by Employee or by any group of persons including Employee), or (F) a transaction (other than one described in clause (iii) of this paragraph (C), below) in which Company Voting Securities are acquired from Company, if a majority of the Incumbent Directors approves a resolution providing expressly that the acquisition pursuant to this subparagraph (F) does not constitute a Change in Control under this clause (ii); (iii) upon the consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving Company or any of its Subsidiaries that requires the approval of Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than fifty percent (50%) of the total voting power of either (x) the corporation resulting from the consummation of such Business Combination (the "Surviving Corporation") or, if applicable, (y) the ultimate parent corporation that directly or indirectly has beneficial ownership of one hundred percent (100%) of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation") is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, represented by shares into which such Company Voting Securities were converted pursuant to such 38 Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation or any employee stock benefit trust created by the Surviving Corporation or the Parent Corporation) is or becomes the beneficial owner, directly or indirectly, of twenty percent (20%) or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board of Director's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) of this Section 11.1(C)(iii) shall be deemed to be a "Non-Qualifying Transaction"); or (iv) if the shareholders of Company approve a plan of complete liquidation or dissolution of Company or a sale of all or substantially all of Company's assets but only if, pursuant to such liquidation or sale, the assets of Company are transferred to an entity not owned (directly or indirectly) by Company's shareholders. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than twenty percent (20%) of Company Voting Securities as a result of the acquisition of Company Voting Securities by Company which reduces the number of Company Voting Securities outstanding; provided, however, that if (after such acquisition by Company) such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control shall then occur. Notwithstanding anything in this Agreement to the contrary, if (1) Employee's employment is terminated prior to a Change in Control for reasons that would have constituted a Qualifying Termination if they had occurred following a Change in Control, (2) Employee reasonably demonstrates that such termination was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a Change in Control, and (3) a Change in Control involving such third party (or a party competing with such third party to effectuate a Change in Control) does occur, then (for purposes of this Agreement) the date immediately prior to the date of such termination of employment (or event constituting Good Reason) shall be treated as a Change in Control. (D) "Date of Termination" means (1) the effective date on which Employee's employment by Employer terminates as specified in a prior written notice by Employer or Employee (as the case may be) to the other, or (2) if Employee's employment by Employer terminates by reason of death, the date of death of Employee, or (3) if the Employee incurs a Disability, the 39 date of such Disability as determined by a physician chosen by Employer. For purposes of determining the timing of payments and benefits to Employee under Section 11.2, the date of the actual Change in Control shall be treated as Employee's Date of Termination. (E) "Disability" means Employee's inability to perform Employee's then-existing duties with Employer on a full-time basis for at least one hundred eighty (180) consecutive days as a result of Employee's incapacity due to physical or mental illness. (F) "Good Reason" means, without Employee's express written consent, the occurrence of any of the following events after a Change in Control: (i) (a) any change in the duties or responsibilities (including reporting responsibilities) of Employee that is inconsistent in any material and adverse respect with Employee's positions, duties, responsibilities or status with Employer immediately prior to such Change in Control (including any material and adverse diminution of such duties or responsibilities), or (b) a material and adverse change in Employee's titles or offices with Employer (including, if applicable, membership on Employer's Board of Directors) from those existing immediately prior to such Change in Control; (ii) (a) a reduction by Employer in Employee's Basic Salary as in effect immediately prior to such Change in Control (or as such Basic Salary may be increased from time to time thereafter), or (b) the failure by Employer to pay Employee an annual bonus in respect of the year in which such Change in Control occurs or any subsequent year in an amount greater than or equal to the annual bonus earned for the year ended prior to the year in which such Change in Control occurs; (iii) any requirement of Employer that Employee: (a) be based anywhere more than fifty (50) miles from the office where Employee is located at the time of the Change in Control, or (b) travel on Employer business to an extent substantially greater than the travel obligations of Employee immediately prior to such Change in Control; (iv) the failure of Employer to: (a) continue in effect any material employee benefit plan, compensation plan, welfare benefit plan or other material fringe benefit plan in which Employee is participating immediately prior to such Change in Control or the taking of any action by Employer which would materially and adversely affect Employee's participation in or reduce Employee's benefits under any such plan, unless Employee is permitted to participate in other plans providing Employee with substantially equivalent benefits in the aggregate, or (b) provide Employee with paid vacation in accordance with the most favorable vacation policies of Employer as in effect for Employee immediately prior to such Change in Control, including the crediting of all service for which Employee had been credited under such vacation policies prior to the Change in Control; or 40 (v) the failure of Employer to obtain the assumption (and, if applicable, guarantee) agreement from any successor (and Parent Corporation) as contemplated in Section 11.4(B). Notwithstanding any contrary provision in this Agreement: (1) an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by Employer within ten (10) days after receipt of notice thereof given by Employee shall not constitute Good Reason; and (2) Employee's right to terminate employment for Good Reason shall not be affected by Employee's incapacities due to mental or physical illness; and (3) Employee's continued employment shall not constitute a consent to, or a waiver of rights with respect to, any event or condition constituting Good Reason (provided, however, that Employee must provide notice of termination of employment within thirty (30) days following Employee's knowledge of an event constituting Good Reason or such event shall not constitute Good Reason under this Agreement). (G) "Qualifying Termination" means a termination of Employee's employment with Employer after a Change in Control (i) by Employer other than for Cause, or (ii) by Employee for Good Reason. Termination of Employee's employment on account of death, Disability or Retirement shall not constitute a Qualifying Termination. (H) "Retirement " means the termination of Employee's employment with Employer: (i) on or after the first of the month coincident with or next following Employee's attainment of age sixty-five (65), or (ii) on such later date as may be provided in a written agreement between Employer and Employee. (I) "Subsidiary" means any corporation or other entity in which Company: (i) has a direct or indirect ownership interest of fifty percent (50%) or more of the total combined voting power of the then- outstanding securities or interests of such corporation or other entity entitled to vote generally in the election of directors, or (ii) has the right to receive fifty percent (50%) or more of the distribution of profits or fifty percent (50%) of the assets upon liquidation or dissolution of such corporation or other entity. (J) "Termination Period" means the period of time beginning with a Change in Control and ending two (2) years following such Change in Control. (K) "Highest Base Salary" means Employee's highest annual base salary (excluding any bonuses) paid to Employee by Employer during Employer's last three (3) fiscal years completed immediately prior to the Date of Termination. (L) "Company" means LNB Bancorp, Inc. and its successors. 41 11.2 Notwithstanding any contrary provision in Section 7 or in any other Section of this Agreement, if (during the Termination Period) Employee's employment with Employer terminates pursuant to a Qualifying Termination: (A) Employer shall pay to Employee, within twenty (20) days following the Date of Termination, a lump sum cash amount equal to the sum of (i) two hundred percent (200%) of Employee's Highest Base Salary, as defined in Section 11.1(K), through the Date of Termination, plus (ii) any base salary and bonuses which have been earned through the Date of Termination and are payable, to the extent not theretofore paid or deferred, plus (iii) a pro rata portion of Employee's annual bonus for the fiscal year in which Employee's Date of Termination occurs in an amount at least equal to (1) Employee's Bonus Amount multiplied by (2) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination and the denominator of which is three hundred sixty-five (365), and reduced by (3) any amounts paid to Employee by Employer as an executive bonus (pursuant to approval of the Board of Directors) for the fiscal year in which Employee's Date of Termination occurs, plus (iv) any accrued and unpaid vacation pay. (B) Employer shall continue to provide, for a period of twenty-four (24) months following the Date of Termination, Employee (and Employee's dependents, if applicable) with the same level of medical, dental, accident, disability and life insurance benefits and continuing education payments (necessary for Employee to maintain any professional licensure requirements related to Employee's employment duties with Employer) upon substantially the same terms and conditions (including contributions required by Employee for such benefits) as existed immediately prior to Employee's Date of Termination (or, if more favorable to Employee, as such benefits and terms and conditions existed immediately prior to the Change in Control); provided, however, that if Employee is not eligible or qualified to continue to participate in Employer's plans providing such benefits, Employer shall otherwise provide such benefits on the same after-tax basis as if continued participation had been permitted. Notwithstanding the foregoing, in the event Employee becomes re-employed with another employer and becomes eligible to receive welfare benefits from such employer, the welfare benefits described herein shall be secondary to such benefits during the period of such eligibility but only if (and to the extent that) Employer reimburses Employee for any increased cost and provides any additional benefits necessary to give Employee the benefits provided in this Section 11.2(B). Employee's accrued benefits as of the Date of Termination under Employer's employee benefit plans shall be payable in accordance with the terms of such plans. (C) Notwithstanding any contrary provision in this Section 11.2, Employer's payments to Employee under this Section 11.2 shall be reduced to the extent that such payments (together with all other payments by Employer to Employee under all other written or verbal agreements between 42 Employer and Employee) constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code (as may be periodically amended). 11.3 Employer shall withhold from all payments due to Employee (or Employee's beneficiaries or estate) hereunder all taxes which, by applicable federal, state, local or other law, Employer is required to withhold therefrom. 11.4 (A) This Section 11 shall not be terminated by any Business Combination. In the event of any Business Combination, the provisions of this Section 11 shall be binding upon the Surviving Corporation and such Surviving Corporation shall be treated as Employer hereunder. (B) Employer agrees that, in connection with any Business Combination, Employer will cause any successor entity to Employer unconditionally to assume (and, for any Parent Corporation in such Business Combination, to guarantee), by written instrument delivered to Employee (or Employee's beneficiaries or estate), all of the obligations of Employer under this Section 11. Failure of Employer to obtain such assumption or guarantee prior to the effectiveness of any such Business Combination that constitutes a Change in Control shall be a breach of this Agreement and shall constitute Good Reason hereunder and, further, shall entitle Employee to compensation and other benefits from Employer in the same amount and on the same terms as Employee would be entitled hereunder as if Employee's employment were terminated following a Change in Control by reason of a Qualifying Termination. For purposes of implementing this Section 11.4(B), the date on which any such Business Combination becomes effective shall be deemed the date Good Reason occurs and shall be the Date of Termination, if so requested by Employee. (C) This Section 11 shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee dies while any amounts would have been payable to Employee under this Section 11 if Employee had continued to live, all such amounts (unless otherwise provided herein) shall be paid in accordance with the terms of this Section 11 to such person or persons appointed in writing by Employee to receive such amounts or, if no person is so appointed, to Employee's estate. 11.5 In the event of a tender or exchange offer, proxy contest, or the execution of any agreement which, if consummated, would constitute a Change in Control, Employee agrees (as a condition to receiving any payments and benefits under Section 11.2 of this Agreement) not to leave voluntarily the employ of the Employer (other than as a result of Disability, Retirement or an event which would constitute Good Reason if a Change in Control had occurred) until the Change in Control occurs or, if earlier, such tender or exchange offer, proxy contest or agreement is terminated or abandoned. 43 IN WITNESS WHEREOF, the Parties have set their hands as of the day and year first above written. In the Presence of: /s/Ann E. Koler /s/Terry M. White ______________________ __________________________ (Signature of First Witness) Terry M. White "Employee" /s/Denise M. Harmych ______________________ (Signature of Second Witness) LNB BANCORP, INC. /s/Ann E. Koler By:/s/Gary C. Smith ______________________ __________________________ (Signature of First Witness) Gary C. Smith, President /s/Denise M. Harmych ______________________ (Signature of Second Witness) THE LORAIN NATIONAL BANK /s/Ann E. Koler By:/s/Gary C. Smith _______________________ __________________________ (Signature of First Witness) Gary C. Smith, President /s/Denise M. Harmych _______________________ (Signature of Second Witness) "Employer" 44 LNB Bancorp, Inc. Exhibit to Form 10 - Q (For the three months ended March 31, 2002) S - K Reference Number (13) First Quarter Report to Shareholders of LNB Bancorp, Inc. - March 31, 2002 EDGAR Version Description: Three sided pamphlet Outside cover: white with photo of two seagulls ANNUITIES / MUTUAL FUNDS TRUST / ESTATE PLANNING TITLE AGENCY BANKING INVESTMENT MANAGEMENT INSURANCE AGENCY (Logo) LNB Bancorp, Inc. and subsidiaries First Quarter Report March 31, 2002 Inside contains: Message to Shareholders Unaudited EDGAR version Consolidated Balance Sheets for period ending March 31, 2002 and March 31, 2001, respectively, Unaudited EDGAR version Consolidated Statements of Income for the Three Months ended March 31, 2002 and March 31, 2001, respectively, White, Campagna join LNB: Friedman's, Weber's roles expand LNB's new high-performance checking program off to a fast start LNB Bancorp, Inc. Subsidiary Locations Banking Centers, ATMs, LNB Investment and Trust Services and LNB Investment Center 45 Inside of front cover: Message to Shareholders It's a pleasure, once again, to report on the progress of LNB Bancorp, Inc., and its subsidiary companies after the first quarter of 2002. As of March 31, 2002, LNB Bancorp, Inc. achieved growth in earnings, dividends, assets, loans, deposits and shareholders' equity. We are pleased to announce that earnings increased 5% for the first quarter of 2002, compared to the same quarter one year ago, climbing to $2,105,000, up from last year's $2,006,000. The 2002 first quarter's earnings were the highest for any first quarter in the history of LNB Bancorp, Inc. Basic and diluted earnings per share for the first quarter of 2002 reached $.49, a 4% increase from the $.47 amount reported for the first quarter of 2001. Per share amounts have been adjusted for the 2001 stock dividend. Earnings for 2002 were higher than a year ago because of higher net interest income and noninterest income, offset in part by higher loan loss provision and operating expenses. Increases in net interest income were fueled by strong commercial and consumer loan growth. The first quarter cash dividends declared per share in 2002 was $.25 per share, the same amount as the first quarter of 2001. Asset growth remains solid. Consolidated assets climbed 6% to $661.6 million at March 31, 2002, up $36.2 million from March 31, 2001. Net loans grew by $37.0 million from one year ago to $483.3 million at March 31, 2002, for an 8% increase. Total deposits rose almost 3% to $522.3 million at March 31, 2002, up $13.9 million from one year ago. Increases in savings, checkinvest, Market Access, and money market deposits accounted for the deposit increase. Lorain National Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC). Lorain National Bank operates 20 banking centers and 27 ATMs in nine local communities. Total shareholders' equity increased by $4.1 million during the twelve months ended March 31, 2002 for a 7% increase. Total shareholders' equity was $62.3 million or $14.47 per share at March 31, 2002, compared to $58.2 million or $13.56 per share at March 31, 2001. The percentage of shareholders' equity to assets reached 9% at March 31, 2002. The annualized return on average shareholders' equity and annualized return on average assets were 13.56% and 1.29%, respectively, for the first quarter of 2002. Gary C. Smith, LNB Bancorp's President and Chief Executive Office, stated: "The effectiveness with which we managed around a weak economy was illustrated by the results of a survey supplied by the investment firm of Howe Barnes Investments Inc., in March. Of the 27 banks in the survey, which compared publicly traded Ohio-based banks with total assets under $1 billion, LNB Bancorp ranked second in four categories for the 12 months ended December 31, 2001: return on average assets (ROAA), return on average equity (ROAE), noninterest income to average assets and net interest margin. 46 "Of the surveyed banks holding the number-one positions in these performance measures," he explained, "no single bank achieved top ranking in more than a single category, making LNB Bancorp's overall position in the survey most enviable." "We are very proud of our relative performance and feel it reflects the hard work and dedication of all of our employees. Moreover, we are pursuing initiatives aimed at increasing the investment community's awareness of the many strengths in our business and operations, creating additional value for all of our stakeholders," Smith concluded. We appreciate and thank you for your continuing support and look forward to addressing you after the completion of our second quarter of operations. /s/ Stanley G. Pijor /s/ Gary C. Smith --------------------- ------------------ Stanley G. Pijor Gary C. Smith Chairman of the Board President and Chief Executive Officer NET INCOME millions of dollars (A Net Income graph follows in printed version with income on the y-axis and years 1998 through 2002 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) DIVIDENDS PER SHARE dollars* (A Dividends Per Share graph follows in printed version with dividends on the y-axis and years 1998 through 2002 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) BASIC EARNINGS PER SHARE dollars* (A Basic Earnings Per Share graph follows in printed version with earnings per share on the y-axis and years 1998 through 2002 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 Net Income Dividends Per Share Per Share Year millions of dollars dollars* dollars* 2002 $2,105 $0.25 $0.49 2001 $2,006 $0.25 $0.47 2000 $1,980 $0.23 $0.47 1999 $1,833 $0.21 $0.42 1998 $1,678 $0.19 $0.40 *Adjusted for stock dividends and splits 47 Consolidated Balance Sheets (Unaudited) -------------------------- March 31, 2002 2001 - ---------------------------------------------------------------------- ASSETS: Cash and Due from Banks. . . . . . . . . . .$ 20,164,000 $ 22,130,000 Federal Funds Sold and Short-term Investments 3,453,000 3,117,000 Federal Home Loan Bank and Federal Reserve Bank Stock, at Cost . . . . . . . . 3,619,000 3,203,000 Securities Held to Maturity, at Cost . . . . 13,177,000 43,777,000 Securities Available for Sale, at Fair Value 115,396,000 83,332,000 Portfolio Loans. . . . . . . . . . . . . . . 481,019,000 442,515,000 Loans Available for Sale . . . . . . . . . . 8,558,000 8,815,000 Reserve for Loan Losses. . . . . . . . . . . (6,269,000) (5,045,000) --------------------------- NET LOANS. . . . . . . . . . . . . . . . . . 483,308,000 446,285,000 --------------------------- Premises, Equipment and Intangible Assets (net). . . . . . . . . . . . . . . . 13,621,000 14,794,000 Accrued Interest Receivable and Other Assets. . . . . . . . . . . . . . . . 8,838,000 8,721,000 --------------------------- TOTAL ASSETS . . . . . . . . . . . . . . . .$661,576,000 $625,359,000 --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Noninterest-Bearing Deposits . . . . . . . .$ 76,982,000 $ 79,849,000 Interest-Bearing Deposits. . . . . . . . . . 445,340,000 428,540,000 --------------------------- TOTAL DEPOSITS . . . . . . . . . . . . . . . 522,322,000 508,389,000 --------------------------- Securities Sold under Repurchase Agreements and Other Short-term Borrowings . . . . . . 20,763,000 27,617,000 Federal Home Loan Bank Advances. . . . . . . 50,375,000 24,345,000 Accrued Interest, Taxes, Expenses and Other Liabilities . . . . . . . . . . . . . 5,774,000 6,764,000 --------------------------- TOTAL LIABILITIES. . . . . . . . . . . . . . 599,234,000 567,115,000 --------------------------- Common Stock . . . . . . . . . . . . . . . . 4,418,000 4,313,000 Additional Capital . . . . . . . . . . . . . 26,238,000 24,336,000 Retained Earnings. . . . . . . . . . . . . . 34,136,000 31,543,000 Accumulated Other Comprehensive Income . . . 450,000 952,000 Treasury Stock, at Cost. . . . . . . . . . . (2,900,000) (2,900,000) --------------------------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . 62,342,000 58,244,000 --------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $661,576,000 $625,359,000 --------------------------- 48 TOTAL ASSETS millions of dollars (A Total Assets graph follows in printed version with assets on the y-axis and years 1998 through 2002 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) TOTAL SHAREHOLDERS' EQUITY millions of dollars (A Total Shareholders' Equity graph follows in printed version with shareholder's equity on the y-axis and years 1998 through 2002 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) TOTAL DEPOSITS millions of dollars (A Total Deposits graph follows in printed version with deposits on the y- axis and years 1998 through 2002 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) Total Shareholders' Total Assets Equity Total Deposits Year millions of dollars millions of dollars millions of dollars 2002 $661.6 $62.3 $522.3 2001 $625.4 $58.2 $508.4 2000 $600.3 $51.9 $489.5 1999 $560.6 $49.2 $452.8 1998 $490.0 $45.8 $412.6 49 Consolidated Statements of Income (Unaudited) ------------------------ Three Months Ended March 31, 2002 2001 - ---------------------------------------------------------------------- INTEREST INCOME: Interest and Fees on Loans. . . . . . . . . . $ 8,372,000 $ 9,836,000 Interest and Dividends on Securities. . . . . 1,798,000 1,847,000 Interest on Federal Funds Sold and Short-term Investments . . . . . . . . . . . 19,000 41,000 ------------------------- TOTAL INTEREST INCOME . . . . . . . . . . . . 10,189,000 11 724,000 ------------------------- INTEREST EXPENSE: Interest on Deposits. . . . . . . . . . . . . 2,574,000 4,179,000 Interest on Federal Home Loan Bank Advances . 381,000 328,000 Interest on Securities Sold under Repurchase Agreements and Other Short-term Borrowings. . . . . . . 151,000 396,000 ------------------------- TOTAL INTEREST EXPENSE. . . . . . . . . . . . 3,106,000 4,903,000 ------------------------- NET INTEREST INCOME . . . . . . . . . . . . . 7,083,000 6,821,000 Provision for Loan Losses . . . . . . . . . . 600,000 450,000 ------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . 6,483,000 6,371,000 ------------------------- NON-INTEREST INCOME: Investment and Trust Services Division Income 575,000 558,000 Fees and Service Charges. . . . . . . . . . . 1,683,000 1,443,000 Gains From Sales of Loans and Securities. . . 307,000 29,000 Other Operating Income. . . . . . . . . . . . 73,000 13,000 ------------------------- TOTAL NON-INTERST INCOME. . . . . . . . . . . 2,638,000 2,043,000 ------------------------- NON-INTEREST EXPENSES: Salaries and Employee Benefits. . . . . . . . 2,917,000 2,600,000 Net Occupancy Expense of Premises . . . . . . 381,000 386,000 Furniture and Equipment Expenses. . . . . . . 531,000 519,000 Card-related Expenses . . . . . . . . . . . . 302,000 282,000 Supplies and Postage. . . . . . . . . . . . . 276,000 275,000 Ohio Franchise Tax. . . . . . . . . . . . . . 61,000 162,000 Other Operating Expenses. . . . . . . . . . . 1,526,000 1,175,000 ------------------------- TOTAL NON-INTEREST EXPENSE. . . . . . . . . . 5,994,000 5,399,000 ------------------------- INCOME BEFORE INCOME TAXES. . . . . . . . . . 3,127,000 3,015,000 ------------------------- Income Taxes. . . . . . . . . . . . . . . . . 1,022,000 1,009,000 ------------------------- 50 NET INCOME. . . . . . . . . . . . . . . . . . $ 2,105,000 $ 2,006,000 ------------------------- PER SHARE DATA: BASIC EARNINGS PER SHARE. . . . . . . . . . . $.49 $.47 ------------------------- DILUTED EARNINGS PER SHARE. . . . . . . . . . $.49 $.47 ------------------------- DIVIDENDS DECLARED PER SHARE. . . . . . . . . $.25 $.25 ------------------------- (Logo) LNB Bancorp, Inc. And subsidiaries Logos for LNBB NASDAQ LISTED, FDIC Insured, Federal Home Loan Bank System, and Equal Housing Lender 51 Inside of back cover White, Campagna join LNB; Friedman's, Weber's roles expand Gary C. Smith, president and chief executive officer, announced the hiring of two new Lorain National Bank officers and the expansion of responsibilities of two current LNB officers. Terry M. White has joined LNB as Executive Vice President and Chief Investment Officer. Paul Campagna has joined the bank's commercial lending division as Vice President, Senior Lending Officer. Gregory D. Friedman, CPA, LNB executive vice president & chief financial officer, will serve as Corporate Secretary and James H. Weber, LNB senior vice president and senior marketing officer, will serve as head of Investor Relations. "We welcome Terry and Paul to our organization," Smith said. "They fit very well into out organization and will have an immediate, positive impact on our operations. I am also pleased to announce the expansion of Greg's and Jim's duties in the bank. I appreciate their willingness to step forward and expand their leadership roles." Color photo in middle of page of Terry M. White Since July of 2000, White served as senior manager in the financial management division of Austin & Associates, Inc. in Toledo, where his responsibilities included advising financial institutions in asset/liability management, product and customer profitability, organizational profitability and technology and merger integration. Color photo at top right side of page of Paul Campagna Campagna most recently served as Senior Vice President and Credit Officer for ShoreBank in Cleveland for four years. He was directly responsible for the overall asset quality of that organization. Prior to joining ShoreBank, Campagna was employed by the former PremierBank & Trust Company for 16 years. Color photo at middle of page of Gregory D. Friedman Friedman has served as chief financial officer since 1989, having joined LNB as an assistant vice president in 1985. He was promoted to executive vice president in 1999. Prior to joining LNB, he served as senior manager at KPMG LLP (formerly Peat, Marwick, Mitchell & Co.), where he specialized in financial institution and insurance audits. Color photo at middle of page of James H. Weber Weber joined LNB"s management program in 1968. During his career at LNB, he has been promoted through the ranks as marketing assistant, public relations officer, vice president of marketing and senior vice president, senior 52 marketing officer. In addition to marketing and investor relations, Weber oversees the bank's purchasing and maintenance departments and directs all new physical plant and facilities planning. LNB"s new high-performance checking program off to a fast start Lorain National Bank's new high-performance checking program, featuring totally free checking, has been given a warm reception throughout LNB's service area. The program, which offers customers a choice of seven new checking accounts, was kicked off in January. All new checking customers receive a free gift for opening the checking account best suited to their lifestyle, ranging from totally free checking to plans that pay attractive rates of interest. Every six weeks a different gift is offered. LNB's first quarter gifts, Pyrex Portable cookware and Wilson sport duffel bag, were very favorably received. More than 1,500 new checking accounts were opened during the first quarter. The new high performance-checking program is a permanent addition to the bank's product menu and its key components - free gifts and totally free checking, are now a fixture in the bank's core account marketing plan. Color photo of free gift coupons on bottom left side of page Core deposit generation has exceeded our initial projections from the high performance checking initiative, where LNB focus is on building relationships with these new customers, providing companion products to fill their financial needs. Our existing customers have been given many new choices, yet we respect their wishes to maintain present checking accounts that have served them adequately. 53 Back Cover: White background with black and blue lettering LNB Bancorp, Inc. Subsidiary Locations LORAIN NATIONAL BANK CHARLESTON INSURANCE CHARLESTON TITLE 457 Broadway AGENCY, INC. AGENCY, LLC Lorain, Ohio 44052 457 Broadway 424 Middle Avenue (440) 244-6000 Lorain, Ohio 44052 Elyria, Ohio 44035 (800) 860-1007 (440) 244-7158 (440) 244-5212 (800) 845-2152 (440) 284-5165 Banking Centers, ATMs, LNB Investment and Trust Services and Investment Center Four column format LORAIN NATIONAL BANK LORAIN BANKING CENTERS AMHERST BANKING CENTER **Main **Amherst 457 Broadway 1175 Cleveland Avenue Lorain, Ohio 44052 Amherst, Ohio 44001 (440) 244-7185 (440) 988-4423 **Sixth Street Drive-In AVON LAKE 200 Sixth Street BANKING CENTER Lorain, Ohio 44052 **Avon Lake (440) 244-7242 240 Miller Road Avon Lake, **Kansas Avenue Ohio 44012 1604 Kansas Avenue (440) 933-2186 Lorain, Ohio 44052 (440) 288-9151 ELYRIA BANKING CENTERS **Ely Square **Oberlin Avenue 124 Middle Avenue 3660 Oberlin Avenue Elyria, Ohio 44035 Lorain, Ohio 44053 (440) 323-4621 (440) 282-9196 **Cleveland Street **Pearl Avenue 801 Cleveland Street 2850 Pearl Avenue Elyria, Ohio 44035 Lorain, Ohio 44055 (440) 365-8397 (440) 277-1103 **Lake Avenue **West Park Drive 42935 North Ridge Road 2130 West Park Drive Elyria Township, Lorain, Ohio 44053 Ohio 44035 (440) 989-3131 (440) 233-7196 54 **Midway Mall WESTLAKE BANKING CENTERS 6395 Midway Mall Blvd. **Crossings of Westlake Elyria, Ohio 44035 30210 Detroit Road (440) 324-6530 Westlake, Ohio 44145 (440) 892-9696 **Elyria United Methodist Village Westlake Village 807 West Avenue 28550 Westlake Elyria, Ohio 44035 Village Drive (440) 323-6488 Westlake, Ohio 44145 (440) 808-0229 VILLAGE OF LAGRANGE BANKING CENTER ATMS **Village of LaGrange **Captain Larry's Marathon 546 North Center Street 1317 State Route 60 Village of LaGrange, Vermilion, Ohio 44089 Ohio 44050 (440) 355-6734 **City Center Building 300 Broadway OBERLIN BANKING CENTERS Lorain, Ohio 44052 **Kendal at Oberlin* 600 Kendal Drive **Cooper-Foster Park Road Oberlin, Ohio 44074 1920 Cooper-Foster (440) 774-5400 Park Road Lorain, Ohio 44053 **Oberlin 40 East College Street **Dad's Sunoco Oberlin, Ohio 44074 7580 Leavitt Road (440) 775-1361 State Route 584053 Amherst, Ohio 44001 OLMSTED TOWNSHIP BANKING CENTERS **Gateway Plaza **Olmsted Township 3451 Colorado Avenue 27095 Bagley Road Lorain, Ohio 44052 Olmsted Township, Ohio 44138 **Lakeland Medical Center (440) 235-4600 3700 Kolbe Road Lorain, Ohio 44053 The Renaissance 26376 John Road **Lorain County Olmsted Township, Community College Ohio 44138 1005 North Abbe Road (440) 427-0041 Elyria, Ohio 44035 VERMILION BANKING CENTER **Lowe's Home **Vermilion Improvement Warehouse 4455 East Liberty Avenue 620 Midway Boulevard Vermilion, Ohio 44089 Elyria, Ohio 44035 (440) 967-3124 55 **Mobile ATM LNB INVESTMENT AND 2130 West Park Drive TRUST SERVICES Lorain, Ohio 44053 457 Broadway Lorain, Ohio 44052 OTHER OFFICES (440) 244-7226 Executive LNB INVESTMENT CENTER 457 Broadway LNB Investment Center Lorain, Ohio 44052 457 Broadway (440) 244-7123 Lorain, Ohio 44052 (440) 244-7158 Branch Administration (800) 845-2152 457 Broadway Lorain, Ohio 44052 ALL OTHER OFFICES NOT LISTED (440) 244-7253 Toll Free (800) 860-1007 Lorain (440) 244-6000 Commercial, Consumer and Mortgage Loans TELEBANKER 457 Broadway Telebanker (440) 245-4562 Lorain, Ohio 44052 Telebanker (800) 610-9033 (440) 244-7220 (440) 244-7272 INTERNET: WWW.4LNB.COM (440) 244-7216 (440) 989-3348 **ATM service available wherever you see this symbol * Restricted to residents, their visitors and employees -----END PRIVACY-ENHANCED MESSAGE-----