-----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, WT9a8x8LfLg+08nMT9ClntusJApLdUDGycNCL3F4uOb9wL259bcDfgTURP0uB02b FjPgTbn02Q71VmjBN34UcQ== 0000737210-96-000008.txt : 19960319 0000737210-96-000008.hdr.sgml : 19960319 ACCESSION NUMBER: 0000737210-96-000008 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960318 SROS: NASD 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: ARS SEC ACT: 1934 Act SEC FILE NUMBER: 000-13203 FILM NUMBER: 96535865 BUSINESS ADDRESS: STREET 1: 457 BROADWAY CITY: LORAIN STATE: OH ZIP: 44052-1769 BUSINESS PHONE: 2162446000 ARS 1 1 COVER DESCRIPTION Dark green background 1995 ANNUAL REPORT LNB BANCORP, INC. Beige lettering Picture of family at Customer Service Desk Vault in background INSIDE FRONT COVER Blank HALF PAGE INSERT FRONT SIDE LNB Bancorp, Inc. - Shareholder Information CORPORATE HEADQUARTERS The Corporation's headquarters are located at: LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052-1739 (216) 244-6000 NOTICE OF ANNUAL MEETING The 1996 Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 10:00 a.m. on Tuesday, April 16, 1996 at The Lorain National Bank, 521 Broadway, Lorain, Ohio. FORM 10-K A copy of the LNB Bancorp, Inc.'s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be furnished to shareholders upon written request to: Thomas P. Ryan Executive Vice President and Secretary LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052-1739 REGISTRAR The Lorain National Bank 457 Broadway Lorain, Ohio 44052-1739 (216) 244-7317 STOCK TRANSFER AGENT Shareholders requesting information about their stock holdings should contact our Shareholders Relations Department listed below: 2 The Lorain National Bank Shareholder Relations Department 457 Broadway Lorain, Ohio 44052-1739 (216) 244-7317 (800) 860-1007 MARKET MAKERS IN LNB BANCORP, INC. STOCK Kemper Securities, Lorain, Ohio McDonald & Company Securities, Inc., Elyria, Ohio Merrill Lynch, North Olmsted, Ohio The Ohio Company, Cleveland, Ohio Pierre R. Smith & Co., Elyria, Ohio CASH DIVIDEND PAYMENTS Subject to approval of the Board of Directors, cash dividends are paid on LNB Bancorp Inc.'s common stock on or about the first day of January, April, July, and October. 3 HALF PAGE INSERT BACK SIDE Table of Contents Highlights . . . . . . . . . . . . . . . . . . . . . . . . 1 Common Stock Trading Ranges and Cash Dividends Declared . . . . . . . . . . . . . . . . 1 Corporate Profile . . . . . . . . . . . . . . . . . . . . 1 Message to Our Shareholders . . . . . . . . . . . . . . . 2 Consolidated Balance Sheets . . . . . . . . . . . . . . . 6 Consolidated Statements of Income . . . . . . . . . . . . 7 Consolidated Statements of Cash Flows . . . . . . . . . . 8 Consolidated Statements of Shareholders' Equity . . . . . 9 Notes to Consolidated Financial Statements . . . . . . . .10 Report of Management . . . . . . . . . . . . . . . . . . .21 Independent Auditors' Report . . . . . . . . . . . . . . .21 Management's Discussion and Analysis . . . . . . . . . . .22 Selected Quarterly Financial Data . . . . . . . . . . . .28 Five Year Consolidated Financial Summary . . . . . . . . .29 Directors and Officers of LNB Bancorp, Inc.. . . . . . . .30 Officers of Lorain National Bank . . . . . . . . . . . . .31 Earnings and Stock Performance . . . . . . . . . . . . . .32 Customer Service Locations . . . . . . . . . . . . . . . IBC 4 HIGHLIGHTS December 31, 1995 1994 1985 - ---------------------------------------------------------------------- BANKING OFFICES 17 17 13 OFFICERS AND STAFF 294 294 259 SHAREHOLDERS 1,991 1,867 1,349 ASSETS $421,603,000 $394,855,000 $251,384,000 DEPOSITS $353,455,000 $335,219,000 $222,381,000 NET LOANS $272,491,000 $257,975,000 $133,493,000 ---------------------------------------------- TOTAL CAPITAL $ 40,791,000 $ 37,511,000 $ 17,756,000 ---------------------------------------------- NET INCOME $ 5,003,000 $ 4,432,000 $ 2,259,000 ---------------------------------------------- SHARES OUTSTANDING 4,039,347 4,000,068 3,694,380 ---------------------------------------------- CASH DIVIDENDS DECLARED $ 2,175,000 $ 1,905,000 $ 783,000 ---------------------------------------------- Shares outstanding have been adjusted for five-for-four stock splits in 1995 and 1993 and a two-for-one stock split in 1989 and stock dividends. Common Stock Trading Ranges and Cash Dividends Declared 1995 1994 -------------------------------------------------------- Bid Price Bid Price -------------------------------------------------------- Dividend Dividend High Low Amount High Low Amount ------- ------ --------- ------- ------ -------- First Quarter $24.60 $24.10 $.12 $22.20 $21.00 $.11 Second Quarter 26.50 24.60 .12 23.40 22.20 .11 Third Quarter 27.00 26.50 .14 24.00 23.40 .12 Fourth Quarter 27.50 27.00 .16 24.10 24.00 .14 The shares of common stock, par value $1.00 per share, of LNB Bancorp, Inc. are traded on the over-the-counter market primarily with brokers in the Corporation's service area. There are 4,039,347 common shares outstanding, held by 1,991 shareholders as of December 31, 1995. Dividend amounts have been adjusted for the 3% stock dividend on April 19, 1994. Dividend amounts, bid prices, and par value have also been adjusted to reflect the five-for-four stock split on April 18, 1995. The above quoted bid prices may reflect inter-dealer prices, without adjustments for retail markups, markdowns or commissions and may not represent actual transactions. 5 Corporate Profile LNB Bancorp, Inc. is a $422 million locally owned one bank holding company headquartered in Lorain, Ohio. The Bancorp's predecessor, The Lorain National Bank, was formed as a result of the merger of The Lorain Banking Company and The National Bank of Lorain on January 1, 1961. The Lorain Banking Company was a state bank formed in 1905 and The National Bank of Lorain was a national bank receiving its national charter in 1934. On March 30, 1984, The Lorain National Bank became the wholly owned subsidiary of LNB Bancorp, Inc. The Lorain National Bank has seventeen banking offices in Lorain, Elyria, Amherst, Avon Lake, Oberlin, Olmsted Township, Vermilion, and Westlake which offer a wide range of commercial and personal banking services. The major services include checking, savings and time deposits, personal, mortgage, student and commercial loans, home equity loans, Small Business Administration loans, credit cards, an ATM network, and trust and investment management services. The Lorain National Bank is an equal opportunity employer. END PUBLISHED PAGE 1 6 Upper left margin black and white photograph of Staley G. Pijor, Chairman, Chief Executive Officer Message to Our Shareholders It pleases us to report that LNB Bancorp, Inc. and its subsidiary, The Lorain National Bank, have enjoyed another successful year of operation. We have recorded increases in all significant areas of financial performance, including 14 consecutive years of earnings growth and a record high dividend payout to shareholders. A Tradition of Change In order to ensure results like these, we continuously refine our strengths and adjust our operations to meet the changing needs of our four publics: our customers, shareholders, employees and community. For more than 90 years, we've faced the challenges of a dynamic financial services industry and we have emerged a leader in local independent banking, serving those publics well. Two years ago at this time, our directors announced a management succession plan which would provide leadership of our organization well into the next century. Our 1996 management team with James F. Kidd, President and C.E.O., Thomas P. Ryan, Executive Vice President and Secretary, Gregory D. Friedman, Senior Vice President - C.O.O. and C.F.O., Willard H. DoBrunz, Senior Vice President - Loan Administration, Michael D. Ireland, Senior Vice President - Operations, Emma N. Mason, Senior Vice President - Trust Investment, and James H. Weber, Senior Vice President - Marketing Adminsitration, has nearly 200 years of combined banking experience. This team will continue to focus its strengths on issues critical to our bank's success. In late 1995, we accepted with regret the retirement of James H. Riddell as a member of our board. The Riddell name will remain, however, as his son Jeffrey has accepted a position on our board. We wish Jim well and thank him for his years of service and at the same time, welcome Jeffrey to our team. In 1996, we will respond to many exciting challenges. Our customers are solicited by competitors from around the world, who reach them through the mail, on television, over the phone and now through their home computers. Consumers have more choices now than ever before. Our shareholders have more investment opportunities at their disposal than ever before. They are looking for return, for increased value and for growth without undue risk. Our employees need training and education to keep pace with the advances of technology and the skills to deal with the changing needs of our customers. Employment opportunities elsewhere are more varied than ever before. The communities we serve rely on us to remain involved in civic affairs where our expertise is needed. Our people are continuously sought for seats on boards across our market area. As communities grow, the need for knowledgeable, enthusiastic support is larger than ever before. END PUBLISHED PAGE 2 7 Upper right margin black and white photograph of James F. Kidd, President & Chief Operating Officer We will address these challenges by employing our strengths - our people and our technology. In November, we announced a new organizational structure, which was designed to position key individuals in management roles where they can make the best use of these two key ingredients. We'll develop and market new products and take them to new marketplaces, using new methods of distribution. We'll learn more about our existing customers and find new ways to attract business. We'll strive to work as a team, through improved communications and committee structures which lead to a broader exchange of ideas. As a result, we will be a better bank, fortified with a renewed vigor to provide unparalleled customer service. Earnings Increase In 1995 we posted our 14th consecutive year of increased earnings, as net income increased in 1995 by 12.9% over 1994, reaching $5,003,000. Earnings per share also increased to $1.24 for 1995 compared to $1.10 for 1994. Dividends declared per share amounted to $.54 in 1995 compared to $.48 in 1994. It should be noted that dividend amounts have been adjusted to reflect the 3% stock dividend in April of 1994 and the five-for-four stock split in April of 1995. Total cash dividends in 1995, including the EXTRA dividend declared by the Board of Directors in November, rose to almost $2,175,000. The cash dividends declared in 1995 represent a 54.9% increase over 1991, when $1,404,000 in cash dividends were paid. In each of the last 10 years, an increase in the regular cash dividend has been approved. Cash dividends declared increased 178% since 1985, when the payout totaled $783,000. The graphs on page 32 depict the performance of our stock, including accumulation of dividends and market value, over the past 10 years. The graphs display a hypothetical purchase of 100 shares of stock in 1985 and its approximate annual performance without further reinvestment. Also, you will find a graph which displays a history of earnings over the past 10 years on the same page. Other financial highlights as of December 31, 1995 include an increase in net loans to $272.5 million, up $14.5 million from 1994 and an increase in total deposits to $353.5 million, up $18.2 million from 1994. Total assets of the Bank reached $421.6 million, which represents an increase of $26.7 million over 1994. The return on average assets of LNB Bancorp, Inc. rose from 1.13% in 1994 to 1.21% in 1995. Total shareholders' equity increased $3.3 million to $40.8 million, an increase of 8.7% over the year-end 1994 equity position. The ratios of total shareholders' equity to total assets were 9.7% and 9.5% at December 31, 1995 and 1994, respectively. END PUBLISHED PAGE 3 8 LNB Bancorp, Inc. and its subsidiary, The Lorain National Bank, significantly exceed all current regulatory capital guidelines (for more detail, See Management's Discussion & Analysis on page 22.) Trust & Investment Management Division The Trust & Investment Management Division continues to grow, not only in terms of assets under management, but in the size and scope of its abilities to provide high quality service. The Trust & Investment Management Division's assets under management increased 11% in 1995, compared to the same period in 1994. Direct revenues for the division in 1995 increased 11.7%. 1995 Highlights In November, we installed a new cash dispensing machine at the Convenient Food Mart at West Erie Avenue and Kolbe Road in Lorain. It is our first location inside a retail establishment where "convenient" shopping and banking come together. This exciting new "mini-ATM" dispenses cash, allows transfers between accounts and provides balance inquiries. After 30 years of leasing space at the Lorain Plaza shopping center, we have chosen to construct a full-service branch office at the site of our drive-in facility less than two blocks away at 37th Street and Oberlin Avenue. Upon its completion in May, customers of our Plaza office will enjoy ample parking and a spacious lobby complete with state-of-the-art banking amenities. We improved our technological capabilities with the installation of a new main-frame computer, electronic hardware and local area network software in 1995. We have also developed a blueprint to guide our use of technology for 1996 and beyond. We developed three new products which will become available to customers bankwide in 1996. Our Four-Point Banking checking package is designed to meet the needs of college students who need a simple banking account while at school. Corporate Connection is a personal computer-based cash management service designed for business customers to manage funds on a daily basis. Customers will soon be able to bank by telephone 24-hours a day by telephone with our new TeleBanker voice response system. All three products will be made available to customers early in 1996. In the fall, we made several exterior improvements to our Kansas Avenue office, including the expansion of the customer parking area and a more convenient entranceway to the lobby. We also relocated our Cleveland Street office ATM to the innermost lane to improve serviceability. END PUBLISHED PAGE 4 9 Throughout 1995, our staff received an extensive amount of training in the Use of personal computers and software, sales techniques and customer relations skills. Our training department has been extremely active in providing high quality training and education in areas which directly relate to improved customer service and employee productivity. Also in 1995, we developed a new disaster recovery plan for bankwide protection in the event of a major interruption of service. The plan provides highly detailed information critical to the bank's operation in case of emergency. In Memoriam We regrettably acknowledge the passing in 1995 of former director James C. Hageman. His many years of service as a director of both The Lorain National Bank and LNB Bancorp, Inc. is deeply appreciated. Mr. Hageman's knowledge of local industry and banking were invaluable to us. He will not soon be forgotten. Local Economy The future of the Lorain County economy continues to brighten. Through cooperation, teamwork and a re-focused leadership, the expansion and stabilization of our economy has become a reality. Through the overall reinvestment by both government and business into our community, we have set a new tone for a strong, aggressive economy, filled with opportunities. New industry continues to flow into Lorain County. Corporations like Manco and A.J. Rose are providing new jobs, new tax dollars and a renewed feeling of expansion in our marketplace. These new industries are leading the way for others into our industrial parks and are spurring the development of growth throughout the county. As we have for several years, we continue to grow in size physically, yet we have maintained staffing levels over the past several years. We are finding new ways to increase productivity and operate more profitably without adding to staff. We appreciate your continued support of our current activities and look forward to a rewarding 1996. Stanley G. Pijor James F. Kidd /s/ Stanley G. Pijor /s/ James F. Kidd Chairman & Chief Executive Officer President & Chief Operating Officer END PUBLISHED PAGE 5 10 Consolidated Balance Sheets December 31, 1995 1994 - ------------------------------------------------------------------------- ASSETS: Cash and due from banks (note 2) $ 27,428,000 $ 21,102,000 Federal funds sold and other interest bearing instruments 102,000 173,000 Securities (note 3): Securities available for sale 15,161,000 10,137,000 Investment securities 89,405,000 89,387,000 ---------------------------- Total securities (Market value $106,076,000 and $97,080,000, respectively) 104,566,000 99,524,000 ---------------------------- Loans (notes 4 and 14): Portfolio loans 263,824,000 253,889,000 Loans available for sale 12,669,000 7,918,000 ---------------------------- Total loans 276,943,000 261,807,000 Reserve for possible loan losses (4,002,000) (3,832,000) ---------------------------- Net loans 272,491,000 257,975,000 ---------------------------- Bank premises and equipment, net (note 5) 11,006,000 10,682,000 Accrued interest receivable 2,764,000 2,391,000 Other assets 3,246,000 3,008,000 ---------------------------- TOTAL ASSETS $421,603,000 $394,855,000 ---------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits (note 6): Demand and other noninterest-bearing deposits $ 60,163,000 $ 57,096,000 Savings and passbook accounts 159,447,000 171,095,000 Time, including certificates of deposit over $100,000 totaling $33,942,000 and $26,652,000, respectively 133,845,000 107,028,000 ---------------------------- Total deposits 353,455,000 335,219,000 ---------------------------- Securities sold under repurchase agreements and other short-term borrowings (note 7) 24,148,000 19,171,000 Accrued interest payable 1,250,000 868,000 Taxes and other liabilities (notes 8 and 10) 1,959,000 2,086,000 ---------------------------- Total liabilities 380,812,000 357,344,000 ---------------------------- 11 Shareholders' equity: Common stock, $1.00 par: Shares authorized 5,000,000 Shares issued and outstanding 4,039,347 and 3,200,054, respectively (notes 11, 12 and 13) 4,039,000 3,200,000 Additional capital 17,854,000 18,415,000 Retained earnings (note 9) 18,856,000 16,028,000 Net unrealized gain (losses) on Securities available for sale, net of tax 42,000 (132,000) ---------------------------- Total shareholders' equity 40,791,000 37,511,000 ---------------------------- Commitments and contingencies (notes 5 and 16) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $421,603,000 $394,855,000 ---------------------------- See accompanying notes to consolidated financial statements END PUBLISHED PAGE 6 12 Consolidated Statements of Income Years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans: Taxable $ 24,752,000 $ 21,353,000 $ 20,158,000 Tax exempt 75,000 72,000 82,000 Interest and dividends on securities: U.S. Treasury securities 5,104,000 4,323,000 4,449,000 U.S. Government agencies and corporations 408,000 170,000 285,000 States and political subdivisions 452,000 595,000 624,000 Other debt and equity securities 20,000 20,000 20,000 Interest on Federal funds sold and other interest bearing instruments 300,000 297,000 274,000 -------------------------------------------- TOTAL INTEREST INCOME 31,111,000 26,830,000 25,892,000 INTEREST EXPENSE: Interest on deposits: Time certificates of $100,000 and over 1,847,000 793,000 740,000 Other deposits 8,681,000 6,968,000 7,398,000 Interest on securities sold under repurchase agreements and other short-term borrowings 1,107,000 755,000 400,000 Other interest 1,000 56,000 2,000 -------------------------------------------- TOTAL INTEREST EXPENSE 11,636,000 8,572,000 8,540,000 -------------------------------------------- NET INTEREST INCOME 19,475,000 18,258,000 17,352,000 Provision for possible loan losses (note 4) 400,000 400,000 500,000 -------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 19,075,000 17,858,000 16,852,000 -------------------------------------------- OTHER INCOME: Trust division income 1,038,000 916,000 825,000 Service charges on deposit accounts 1,360,000 1,300,000 1,284,000 Other service charges, exchanges and fees 1,849,000 1,837,000 1,642,000 Gains on sales of loans and securities -0- 70,000 191,000 Other operating income 40,000 11,000 67,000 -------------------------------------------- TOTAL OTHER INCOME 4,287,000 4,134,000 4,009,000 13 OTHER EXPENSES: Salaries and employee benefits (notes 10, 11, 12 and 13) 7,926,000 7,675,000 7,318,000 Net occupancy expense of premises (note 5) 1,211,000 1,112,000 1,091,000 Furniture and equipment expenses (note 5) 1,895,000 1,768,000 1,653,000 Supplies and postage 904,000 837,000 825,000 FDIC deposit insurance premium 385,000 722,000 699,000 Ohio franchise tax 508,000 475,000 474,000 Other operating expenses 3,194,000 3,090,000 2,957,000 -------------------------------------------- TOTAL OTHER EXPENSES 16,023,000 15,679,000 15,017,000 -------------------------------------------- INCOME BEFORE FEDERAL INCOME TAXES 7,339,000 6,313,000 5,844,000 -------------------------------------------- FEDERAL INCOME TAXES (BENEFIT) (note 8): Current 2,111,000 1,816,000 1,895,000 Deferred 225,000 65,000 (80,000) -------------------------------------------- TOTAL FEDERAL INCOME TAXES 2,336,000 1,881,000 1,815,000 -------------------------------------------- NET INCOME $ 5,003,000 $ 4,432,000 $ 4,029,000 -------------------------------------------- NET INCOME PER SHARE (note 15) $ 1.24 $ 1.10 $ 1.00 -------------------------------------------- See accompanying notes to consolidated financial statements. END PUBLISHED PAGE 7 14 Consolidated Statements of Cash Flows Years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 30,734,000 $ 26,732,000 $ 26,094,000 Other income received 4,245,000 4,057,000 3,797,000 Interest paid (11,254,000) (8,492,000) (8,638,000) Cash paid for salaries and employee benefits (7,832,000) (7,661,000) (7,434,000) Net occupancy expense of premises paid (901,000) (847,000) (842,000) Furniture and equipment expenses paid (733,000) (708,000) (697,000) Cash paid for supplies and postage (904,000) (837,000) (825,000) Cash paid for other operating expenses (4,354,000) (4,372,000) (3,894,000) Federal income taxes paid (1,956,000) (1,960,000) (1,838,000) -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,045,000 5,912,000 5,723,000 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available for sale 2,953,000 7,069,000 -0- Proceeds from maturities of investment securities 45,799,000 43,905,000 45,832,000 Proceeds from sales of investment securities -0- -0- 4,230,000 Purchases of securities available for sale (7,702,000) (6,999,000) -0- Purchases of investment securities (45,914,000) (40,494,000) (56,371,000) Net (increase) decrease in credit card loans (119,000) 129,000 229,000 Net (increase) in long-term loans (14,969,000) (16,528,000) (12,344,000) Purchases of bank premises, equipment and software (2,276,000) (4,052,000) (2,465,000) Proceeds from sales of bank premises and equipment -0- -0- 260,000 -------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (22,228,000) (16,970,000) (20,629,000) 15 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand and other noninterest- bearing deposits 3,067,000 6,855,000 (1,815,000) Net increase (decrease) in savings and passbook deposits (11,648,000) (1,801,000) 12,514,000 Net increase (decrease) in time deposits 26,817,000 9,153,000 (7,417,000) Net increase (decrease) in securities sold under re- purchase agreements and other short-term borrowings 4,997,000 (249,000) 539,000 Proceeds from line of credit -0- 1,668,000 1,100,000 Cash paid on line of credit -0- (2,768,000) -0- Proceeds from exercise of stock options 278,000 56,000 204,000 Dividends paid (2,073,000) (1,857,000) (1,671,000) -------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 21,438,000 11,057,000 3,454,000 -------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,255,000 (1,000) (11,452,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,275,000 21,276,000 32,728,000 -------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,530,000 $ 21,275,000 $ 21,276,000 -------------------------------------------- 16 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $ 5,003,000 $ 4,432,000 $ 4,029,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,473,000 1,325,000 1,207,000 Gain on sales of loans and securities -0- (70,000) (191,000) Amortization and accretion on securities, net (4,000) 19,000 45,000 Amortization of deferred loan fees and costs, net 173,000 67,000 (64,000) Provision for possible loan losses 400,000 400,000 500,000 Increase (decrease) in deferred Federal income taxes 157,000 65,000 (80,000) (Increase) decrease in accrued interest receivable (373,000) (117,000) 157,000 (Increase) decrease in other assets (188,000) (282,000) 467,000 Increase (decrease) in accrued interest payable 382,000 80,000 (98,000) Increase (decrease) in Federal income taxes payable 223,000) (79,000) 23,000 Increase (decrease) in accrued expenses (424,000) 65,000 (251,000) Others, net 223,000 7,000 (21,000) -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $7,045,000 $5,912,000 $5,723,000 -------------------------------------------- See accompanying notes to consolidated financial statements. END PUBLISHED PAGE 8 17 Consolidated Statements of Shareholders' Equity Net Unrealized Gains (Loss) Years Ended on Securities Total December 31, 1995 Common Additional Retained Available Shareholders' 1994 and 1993 Stock Capital Earnings for Sale Equity - ------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1992 $3,067,000 $15,685,000 $13,800,000 $ -0- $32,552,000 ----------------------------------------------------------- Net income -0- -0- 4,029,000 -0- 4,029,000 Cash dividends declared, $.44 per share -0- -0- (1,725,000) -0- (1,725,000) Issuance of 37,811 shares of common stock under stock option plans 31,000 173,000 -0- -0- 204,000 ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 3,098,000 15,858,000 16,104,000 -0- 35,060,000 ----------------------------------------------------------- Net income -0- -0- 4,432,000 -0- 4,432,000 Cash dividends declared, $.48 per share -0- -0- (1,905,000) -0- (1,905,000) Issuance of 11,668 shares of common stock under stock option plans 9,000 47,000 -0- -0- 56,000 Market value of stock issued in payment of 3% stock dividend, 116,206 shares 93,000 2,510,000 (2,603,000) -0- -0- Change in unrealized gain(loss) on securities available for sale, net of tax -0- -0- -0- (132,000) (132,000) ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 3,200,000 18,415,000 16,028,000 (132,000) 37,511,000 ----------------------------------------------------------- 18 Net Unrealized Gain(Loss) on Years ended Securities Total December 31, 1995 Common Additional Retained Available Shareholders' 1994 and 1993 Stock Capital Earnings For Sale Equity - ------------------------------------------------------------------------- Net income -0- -0- 5,003,000 -0- 5,003,000 Cash dividends declared, $.54 per share -0- -0- (2,175,000) -0- (2,175,000) Issuance of 36,601 shares of common stock under stock option plans 36,000 242,000 -0- -0- 278,000 Issuance of 802,692 shares of common stock with a fixed par value of $1.00, under a five-for-four stock split 803,000 (803,000) -0- -0- -0- Change in unrealized gain(loss) on securities available for sale, net of tax -0- -0- -0- 174,000 174,000 ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $4,039,000 $17,854,000 $18,856,000 $ 42,000 $40,791,000 ----------------------------------------------------------- See accompanying notes to consolidated financial statements. END PUBLISHED PAGE 9 19 Notes to Consolidated Financial Statements December 31, 1995, 1994 and 1993 (1) Summary of Significant Accounting Policies: (a) Principles of Consolidation: The consolidated financial statements include the accounts of LNB Bancorp, Inc. (the Corporation) and its wholly owned subsidiary, The Lorain National Bank (the Bank). All material intercompany transactions and balances have been eliminated in consolidation. (b) Segment of Business: The Corporation's activities are considered to be a single industry segment for financial reporting purposes. (c) Cash and Cash Equivalents: For purposes of reporting in the Consolidated Statements of Cash Flows, cash and cash equivalents include currency on hand, amounts due from banks, Federal funds sold, and securities purchased under resale agreements. Generally, Federal funds sold and securities purchased under resale agreements are for one day periods. (d) Securities: Effective January 1, 1994, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires the Corporation to classify debt and equity securities as held to maturity, trading or available for sale. The effect on retained earnings at December 31, 1995 and 1994 of adopting SFAS No. 115 is included as a separate component of shareholders' equity in the Consolidated Balance Sheets and represents the after-tax effect of adjusting securities available for sale to fair value. Prior to the adoption of SFAS No. 115, the Corporation recorded investment securities at amortized cost. The Bank does not maintain a trading account. Investment securities which are classified as being held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Securities available for sale are carried at fair value with unrealized gains and losses included as a separate component of shareholders' equity, net of tax. Gains or losses on dispositions are based on net proceeds and the carrying value of securities sold, using the specific identification method. (e) Loans Available for Sale: The Bank has identified certain commercial and student loans which may be sold prior to maturity. These loans are carried at the lower of amortized cost (carrying value) or estimated market value, determined on an aggregate basis for each type of loan available for sale. 20 (f) Reserve for Possible Loan Losses: The Corporation adopted the provision of Statement of Financial Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure" on January 1, 1995. SFAS No. 114 provides guidelines for measuring impairment losses on loans. Under SFAS No. 114, a loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of the expected future cash flows discounted at the loans initial effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for possible loan losses or by a provision for possible loan losses, depending upon the adequacy of the reserve for possible loan losses. SFAS No. 118 permits existing income recognition practices to continue. The provision for possible loan losses is determined based on management's evaluation of the loan portfolio and the adequacy of the reserve for possible loan losses under current economic conditions and such other factors which, in management's judgement, deserve current recognition. (g) Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed generally on the straight-line method over the estimated useful lives of the assets. (h) Other Real Estate Owned: Other real estate owned is carried in other assets at fair value, net of estimated costs to sell, not to exceed the cost of property acquired through foreclosure. Neither the Corporation nor the Bank carried any other real estate owned at December 31, 1995 or 1994. (i) Additional Capital and Retained Earnings: The additional capital account includes amounts received in excess of par value of common stock sold and amounts voluntarily transferred from retained earnings. In the case of stock dividends, the Corporation transfers the market value of shares issued from retained earnings to the common stock and additional capital accounts. END OF PUBLISHED PAGE 10 21 (1) Summary of Significant Accounting Policies (continued): (j) Interest and Fees on Loans: Interest income on loans is accrued on the principal balances of loans outstanding on a "simple interest" basis. Loan origination fees and certain direct origination costs are deferred and amortized over the contractual lives of the related loans using the interest method. (k) Trust Division Assets and Income: Property held by the Corporation in fiduciary or agency capacity for its customers is not included in the accompanying financial statements, as such items are not assets of the Corporation. Income from the Trust Division is reported on an accrual basis. (l) Federal Income Taxes: In 1993, the Corporation changed its method of accounting for income taxes from the deferred method to the liability method required by Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes" (see Note 8 "Federal Income Taxes"). Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be removed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (m) Reclassifications: Certain 1993 and 1994 amounts have been reclassified to conform to the 1995 presentation. (2) Cash and Due From Banks: In order to meet deposit reserve requirements, the Corporation's subsidiary bank is required to maintain cash on hand and reserve balances at the Federal Reserve Bank. Cash and due from banks included approximately $5,751,000 and $6,143,000 at December 31, 1995 and 1994, respectively, to meet these deposit reserve requirements. The average balances maintained in cash on hand and in reserve balances at the Federal Reserve Bank to meet deposit reserve requirements approximated $5,674,000 and $5,719,000, during 1995 and 1994 respectively. END PUBLISHED PAGE 11 22 (3) Securities: The amortized cost, gross unrealized gains and losses and fair values of securities at December 31, 1995 and 1994 follow: Gross Gross Amortized Unrealized Unrealized Fair December 31, 1995 Cost Gains Losses Value - ------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 14,748,000 $ 71,000 $( 51,000) $ 14,768,000 Equity securities 343,000 50,000 -0- 393,000 ------------------------------------------------ Total securities available for sale 15,091,000 121,000 ( 51,000) 15,161,000 ------------------------------------------------ Investment securities: U.S. Treasury securities 69,422,000 1,328,000 (146,000) 70,604,000 Securities of other U.S. Government agencies and corporations 14,500,000 161,000 (3,000) 14,658,000 States and political subdivisions 5,483,000 183,000 ( 13,000) 5,653,000 ------------------------------------------------- Total investment securities 89,405,000 1,672,000 (162,000) 90,915,000 ------------------------------------------------- Total securities $104,496,000 $1,793,000 $(213,000) $106,076,000 ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 1994 Cost Gains Losses Value - ------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 9,995,000 $ -0- $ (228,000) $ 9,767,000 Equity securities 343,000 27,000 -0- 370,000 -------------------------------------------------- Total securities available for sale 10,338,000 27,000 (228,000) 10,137,000 -------------------------------------------------- Investment securities: U.S. Treasury securities 80,112,000 14,000 (2,427,000) 77,699,000 Securities of other U.S. Government agencies and corporations 1,500,000 2,000 (8,000) 1,494,000 States and political subdivisions 7,775,000 92,000 (117,000) 7,750,000 ------------------------------------------------- Total investment securities $ 89,387,000 $ 108,000 $(2,552,000) $ 86,943,000 -------------------------------------------------- Total securities $ 99,725,000 $ 135,000 $(2,780,000) $ 97,080,000 -------------------------------------------------- 23 The amortized cost, fair values and yields of debt securities by contractual maturity date at December 31, 1995 follow: Fully-Tax Amortized Fair Equivalent December 31, 1995 Cost Value Yield - ------------------------------------------------------------------------- U.S. Treasury securities available for sale: Due within 1 year $ 5,749,000 $ 5,755,000 5.25% After 1 but within 5 years 8,999,000 9,013,000 5.55 ------------------------------------------- 14,748,000 14,768,000 5.43 ------------------------------------------- Investment securities: Due within 1 year 29,268,000 29,723,000 5.81 After 1 but within 5 years 55,927,000 57,120,000 6.28 After 5 but within 10 years 3,713,000 3,937,000 8.17 After 10 years 137,000 135,000 7.25 ------------------------------------------- 89,405,000 90,915,000 6.20 ------------------------------------------- Total $104,153,000 $105,683,000 6.07% =========================================== END PUBLISHED PAGE 12 24 (3) Securities (continued) There were no sales of securities in 1995 and 1994. Proceeds from the sale of securities during 1993 were $4,230,000 resulting in gross realized gains of $140,000 and realized losses of $-0-. All other redemptions during these three years were in the form of proceeds at maturity or calls by the issuers of debt. The carrying value of securities pledged to secure trust and public deposits and for other purposes required by law amounted to $87,922,000 and $76,430,000 at December 31, 1995 and 1994 respectively. The fair value of securities is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using the quoted prices of comparable instruments. At December 31, 1995 the securities portfolio contained approximately $3,256,000 in non-rated securities of state and political subdivisions. Based upon yield, term to maturity and market risk, the valuation service estimated the fair value of these securities to be $3,348,000. The majority of these non-rated securities are short-term debt issues of local political subdivisions. Management has reviewed these non-rated securities and has determined that there is no impairment to their value as of December 31, 1995. (4) Loans and Reserve for Possible Loan Losses: Loan balances at December 31, 1995 and 1994 are summarized as follows: December 31, 1995 1994 - -------------------------------------------------------------------------- Real estate loans (includes loans secured primarily by real estate only): Construction and land development $ 24,804,000 $ 24,340,000 One to four family residential 138,979,000 130,066,000 Multi-family residential 7,719,000 7,863,000 Non-farm non-residential properties 59,419,000 59,185,000 Commercial and industrial loans (except those secured primarily by real estate) 17,732,000 16,179,000 Personal loans to individuals: Auto, single payment and installment 20,445,000 17,393,000 Credit card and related plans 5,073,000 4,986,000 Obligations of states and political subdivisions other than securities 991,000 1,242,000 All other loans 1,331,000 553,000 ------------------------------------ TOTAL LOANS 276,493,000 261,807,000 Reserve for possible loan losses (4,002,000) (3,832,000) ------------------------------------ NET LOANS $272,491,000 $257,975,000 ------------------------------------ 25 Activity in the reserve for possible loan losses for 1995, 1994 and 1993 is summarized as follows: Years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- Balance at beginning of year $3,832,000 $3,714,000 $3,406,000 Provision for possible loan losses 400,000 400,000 500,000 Loans charged-off (449,000) (399,000) (515,000) Recoveries on loans previously charged-off 219,000 117,000 323,000 -------------------------------------------- BALANCE AT END OF YEAR $4,002,000 $3,832,000 $3,714,000 -------------------------------------------- At December 31, 1995 and 1994, $12,669,000 and $7,918,000 of commercial and student loans were available for sale in the secondary market. No provision for possible loan loss on the carrying value of these loans was necessary at December 31, 1995 and 1994. The market value of loans available for sale equaled or exceeded its carrying value. At December 31, 1995, the Bank had firm commitments for the sale of approximately $1,134,000 of these loans. At December 31, 1995, the recorded investment in loans has been identified as being impaired and has been evaluated in accordance with SFAS No. 114 and 118 totalled $1,420,000 (of which $518,000 were on a non-accrual basis). Included in the impaired amount is $699,000 related to loans with a corresponding valuation allowance of $239,000. For the year ended December 31, 1995, the average recorded investment in impaired loans was approximately $910,000. The Corporation recognized $103,000 of interest on impaired loans (during the portion of the year that they were impaired), of which $24,000 related to impaired loans for which income is recognized on the cash basis. END PUBLISHED PAGE 13 26 (5) Bank Premises and Equipment: Bank premises and equipment are summarized as follows: December 31, 1995 1994 - ------------------------------------------------------------------------- Land $ 1,941,000 $ 1,941,000 Buildings 8,777,000 8,549,000 Equipment and furniture 11,428,000 10,920,000 Leasehold improvements 441,000 441,000 --------------------------------------------- 22,587,000 21,851,000 --------------------------------------------- Less accumulated depreciation and amortization 11,581,000 11,169,000 --------------------------------------------- TOTAL $11,006,000 $10,682,000 --------------------------------------------- Depreciation and amortization of Bank premises and equipment charged to other expense amounted to $1,299,000 in 1995, $1,170,000 in 1994 and $1,052,000 in 1993. Amortization of purchased software charged to other operating expenses amounted to $174,000 in 1995, $155,000 in 1994 and $155,000 in 1993. At December 31, 1995, the Bank was obligated to pay rental commitments under noncancelable operating leases on branch offices and certain equipment as follows: Year Ending Branch December 31, Offices Equipment - ----------------------------------------------------------- 1996 $84,000 $52,000 1997 14,000 46,000 1998 4,000 12,000 1999 -0- 12,000 2000 and thereafter -0- -0- ------------------------ Rentals paid under leases on branch offices and equipment, respectively, amounted to $115,000 and $68,000 in 1995, $106,000 and $65,000 in 1994 and $99,000 and $74,000 in 1993. 27 (6) Deposits: Deposit balances at December 31, 1995 and 1994 are summarized as follows: December 31, 1995 1994 - -------------------------------------------------------------------------- Demand and other noninterest- bearing deposits: Individuals, partnerships and corporations $ 50,513,000 $ 47,743,000 U.S. Government 1,612,000 1,595,000 States and political subdivisions 5,088,000 4,032,000 Certified, official, travelers checks and other 2,950,000 3,726,000 ----------------------------------- Total demand and other noninterest- bearing deposits 60,163,000 57,096,000 ----------------------------------- Savings and passbook accounts: Individuals and non-profit organizations 142,020,000 152,126,000 Corporations and profit organizations 17,427,000 18,969,000 ----------------------------------- Total savings and passbook accounts 159,447,000 171,095,000 ----------------------------------- Time deposits: Individuals, partnerships and corporations 113,473,000 93,484,000 States and political subdivisions 20,372,000 13,544,000 ------------------------------------ Total time deposits 133,845,000 107,028,000 ------------------------------------ TOTAL DEPOSITS $353,455,000 $335,219,000 ------------------------------------ The maturity distribution of time certificates of deposit over $100,000 as of December 31, 1995 and 1994 follows: After 3 After 6 Months Months Within 3 But Within But Within Months 6 Months 1 Year - ------------------------------------------------------------------------- December 31, 1995 $21,956,000 $7,659,000 $ 2,559,000 - ------------------------------------------------------------------------- December 31, 1994 $17,802,000 $3,357,000 $ 3,680,000 - ------------------------------------------------------------------------- After 1 After 2 Year But Years But Within Within 2 Years 5 Years Total - ------------------------------------------------------------------------- December 31, 1995 $ 883,000 $ 885,000 $33,942,000 - ------------------------------------------------------------------------- December 31, 1994 $ 600,000 $1,213,000 $26,652,000 - ------------------------------------------------------------------------- END PUBLISHED PAGE 14 28 (7) Short-Term Borrowings: Information relating to short-term borrowings for the years ended December 31, 1995 and 1994 follows: December 31, 1995 1994 - -------------------------------------------------------------------------- Securities sold under repurchase agreements and other short-term borrowings At December 31: Outstanding $24,148,000 $19,171,000 Interest rate 4.981% 5.360% Average for the period: Outstanding $22,863,000 $21,106,000 Interest rate 4.846% 3.575% Maximum month-end outstanding $29,121,000 $30,750,000 Construction line of credit At December 31: Outstanding $ -0- $ -0- Interest rate 0.000% 0.000% Average for the period: Outstanding $ -0- $ 2,061,000 Interest rate 0.000% 4.895% Maximum month-end outstanding $ -0- $ 2,750,000 In December of 1993, the Corporation obtained a $3,000,000 construction line of credit from a commercial bank to fund the expansion of the Bank's main office complex. The Corporation made monthly draws on the line to pay billings from construction contractors. The term of the line was 15 months. The interest rate was based upon the current LIBOR rate plus fifty basis points and was adjustable monthly. The line was collateralized with $3,400,000 of U.S. Treasury securities. During construction the interest and fee from the line were capitalized as part of the construction in progress. When the building was placed into service in August 1994, a total of approximately $61,000 in interest and fees had been capitalized. In December 1994 the line was paid off and expired in February of 1995 with no further draws being made against it. END PUBLISHED PAGE 16 29 (8) Federal Income Taxes: In 1993, the Corporation adopted SFAS No. 109 on a prospective basis. The cumulative effect of this change in accounting method did not have a material impact on the Corporation's consolidated financial position or results of operations. Income taxes on gains from sales of loans and investment securities are provided at the statutory income tax rate and included on the current portion of the provision. The following presents a reconciliation of the total Federal income taxes as shown on the Consolidated Statements of Income with that which would be computed by applying the statutory Federal tax rate of 34 percent to income before Federal income taxes. Years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------- Computed "expected" tax expense $2,495,000 $2,146,000 $1,987,000 Increase (reduction) in income taxes resulting from: Tax exempt interest on obligations of states and political subdivisions (162,000) (216,000) (212,000) Other, net 3,000 (49,000) 40,000 --------------------------------------------- TOTAL FEDERAL INCOME TAXES $2,336,000 $1,881,000 $1,815,000 --------------------------------------------- Net deferred Federal tax assets of $876,000,$1,101,000 and $1,098,000 at December 31, 1995, 1994 and 1993 respectively, are included in other assets on the consolidated balance sheets. Management believes that it is more likely than not that the deferred tax assets will be realized. The tax effects of temporary differences that give rise to significant portions of the deferred Federal tax assets and deferred Federal tax liabilities are presented below. 30 December 31, 1995 1994 1993 - ------------------------------------------------------------------------- Deferred Federal tax assets: Reserve for possible loan losses 917,000 859,000 839,000 Deferred compensation 131,000 132,000 118,000 Accrued pension expense 51,000 106,000 109,000 Accrued vacation payable 120,000 105,000 102,000 Deferred loan fees and costs 34,000 162,000 160,000 Other, net 2,000 70,000 2,000 ------------------------------------ Total deferred Federal tax assets 1,255,000 1,434,000 1,330,000 Deferred Federal tax liabilities: Bank premises and equipment (214,000) (147,000) (111,000) Deferred charges (165,000) (186,000) (121,000) ------------------------------------- Total deferred Federal tax liabilities (379,000) (333,000) (232,000) ------------------------------------- NET DEFERRED FEDERAL TAX ASSETS 876,000 1,101,000 1,098,000 ------------------------------------- END PUBLISHED PAGE 16 31 (9) Parent Company: Substantially all of the retained earnings of the Corporation represent undistributed net income of its subsidiary. Dividends paid by the subsidiary are subject to restrictions by the Office of the Comptroller of the Currency. As of December 31, 1995, Bank retained earnings available for payment of dividends without obtaining regulatory approval amounted to approximately $4,597,000. Condensed financial information of LNB Bancorp, Inc. (Parent Company only) is as follows: Condensed Balance Sheets ASSETS: December 31, 1995 1994 - -------------------------------------------------------------------------- Cash $ 753,000 $ 941,000 Investment in subsidiary at equity in underlying value of its net assets 35,885,000 32,879,000 Investment securities -0- 4,181,000 Securities available for sale 4,729,000 -0- Other assets 71,000 54,000 ----------------------------------- $41,438,000 $38,055,000 ----------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: December 31, 1995 1994 - -------------------------------------------------------------------------- Dividends payable $ 647,000 $ 544,000 Shareholders' equity: Common stock, $1.00 par 4,039,000 3,200,000 Additional capital 17,854,000 18,415,000 Retained earnings 18,856,000 16,028,000 Net unrealized gain (loss) on securities available for sale 42,000 (132,000) ------------------------------------ Total shareholders' equity 40,791,000 37,511,000 ------------------------------------ $41,438,000 $38,055,000 ------------------------------------ 32 Condensed Statements of Income Years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- INCOME: Cash dividends from subsidiary $2,094,000 $1,841,000 $4,725,000 Interest and other income 235,000 209,000 106,000 ---------------------------------------------- 2,329,000 2,050,000 4,831,000 EXPENSES: Other expenses 92,000 70,000 74,000 ---------------------------------------------- Income before Federal income taxes and equity in undistributed net income of subsidiary 2,237,000 1,980,000 4,757,000 Federal income tax expense 49,000 47,000 11,000 ---------------------------------------------- 2,188,000 1,933,000 4,746,000 Equity in undistributed net income of subsidiary 2,815,000 2,499,000 (717,000) ---------------------------------------------- NET INCOME $5,003,000 $4,432,000 $4,029,000 ---------------------------------------------- 33 Condensed Statements of Cash Flows Years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Dividends from subsidiary $2,094,000 $1,841,000 $4,725,000 Other, net 77,000 89,000 (23,000) --------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,171,000 1,930,000 4,702,000 --------------------------------------------- CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES: Proceeds from maturities of investment securities 470,000 622,000 496,000 Purchases of investment securities -0- (450,000) (3,654,000) Purchases of securities available sale (1,034,000) -0- -0- Proceeds from sale of building to Bank -0- 2,855,000 -0- Construction of Bank premises -0- (2,109,000) -0- Cash paid on line of credit -0- (2,768,000) -0- Investment in construction in progress, net -0- -0- (746,000) Proceeds from line of credit -0- 1,668,000 1,100,000 Proceeds from exercise of stock options 278,000 56,000 204,000 Dividends paid (2,073,000) (1,857,000) (1,671,000) --------------------------------------------- NET CASH USED IN INVESTING AND FINANCING ACTIVITIES (2,359,000) (1,983,000) (4,271,000) --------------------------------------------- NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS (188,000) (53,000) 431,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 941,000 994,000 563,000 --------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 753,000 $ 941,000 $ 994,000 END OF PUBLISHED PAGE 17 --------------------------------------------- 34 (10) Retirement Plan: The Bank maintains a non-contributory defined benefit pension plan covering substantially all of its employees. In general, benefits are based on years of service and the employee's level of compensation. The Bank's policy is to fund the pension plan according to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). The net periodic pension costs charged to other expenses amounted to $92,000 in 1995, $128,000 in 1994 and $124,000 in 1993. At December 31, 1995 there were 214 participants in the plan. An analysis of net periodic pension cost for 1995, 1994 and 1993 is presented below. The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 6.50% and 5.00%, respectively for 1995 and 7.75% and 5.50%, respectively for 1994. The expected long-term rate of return on assets was 8.50% and 7.75% for 1995 and 1994. An analysis which sets forth the plan's funded status at December 31, 1995 and 1994 is also presented below. Components of Net Periodic Pension Cost: 1995 1994 1993 - ------------------------------------------------------------------------- Service cost $ 184,000 $ 229,000 $ 212,000 Interest cost of projected benefit obligation 466,000 467,000 439,000 Actual return on plan assets (1,410,000) (131,000) (483,000) Net total of other components 852,000) (437,000) (44,000) --------------------------------------------- Net periodic pension cost $ 92,000 $ 128,000 $ 124,000 --------------------------------------------- Actuarial Present Value of Benefit Obligations: 1995 1994 - -------------------------------------------------------------------------- Accumulated benefit obligation including vested benefits of $(5,591,000) in 1995 and $(4,800,000) in 1994 $(5,644,000) $(4,924,000) ----------------------------------- Projected benefit obligation $(7,251,000) $(6,370,000) Plan assets at market value, primarily U. S. Government securities and investments in bond and equity funds 7,758,000 6,405,000 ----------------------------------- Plan assets in excess of projected benefit obligations 507,000 35,000 Unrecognized net (gains) losses subsequent to transition (196,000) 183,000 Unrecognized prior service cost (329,000) (363,000) Unrecognized net assets, being recognized over employees' average remaining service life (136,000) (167,000) ----------------------------------- Accrued pension cost $ (154,000) $ (312,000) ----------------------------------- 35 (11) Stock Option Plan: The Corporation's shareholders approved incentive stock option plans on April 6, 1982 and April 16, 1985 for all officers at or above the position of Vice President or equivalent. Under each plan, 50,000 shares of stock were originally reserved. Options may be granted at fair market value at the date of the grant and, accordingly, no charges are reflected in salaries and employee benefits expense due to the granting of stock options. The excess of the option price over the par value of the shares purchased through the exercise of stock options is credited to additional capital. Options granted under the plans may not be outstanding for periods exceeding 10 years from date of grant. On December 27, 1993, the remaining 21,456 options available for granting under the 1985 plan, were awarded to officers by the employee benefits committee, in accordance with the plan agreement. The grant price of the options was $20.39. During 1995, stock options amounting to 36,601 shares were exercised at a price range of $4.81 to $20.39. An analysis of the status of the stock option plans as of December 31, 1995 follows: Plan Year 1985 1982 - -------------------------------------------------------------------------- Options outstanding: Total 32,540 12,471 Vested 32,540 12,471 Options available for granting -0- -0- Range of exercise prices $6.70-$20.39 $15.23 - -------------------------------------------------------------------------- Pursuant to the terms of the plans, share information and exercise prices have been adjusted to reflect the impact of stock splits and dividends subsequent to the granting dates of the options. END PUBLISHED PAGE 18 (12) Employee Stock Ownership Plan: The Lorain National Bank Employee Stock Ownership Plan (ESOP) is a non-contributory plan that covers substantially all employees. Contributions by the Bank to the ESOP are discretionary and subject to approval by the Board of Directors. Contributions are expensed in the year in which they are approved and totaled $360,000, $375,000, and $327,000 in 1995, 1994, and 1993, respectively. At December 31, 1995 there were 246 participants in the plan. Under the terms of the ESOP agreement, Corporation common stock is to be the plan's primary investment. Therefore, it is anticipated that the ESOP will acquire additional Corporation common stock, at fair market value, in future years. 36 Transactions by the ESOP, relating to activity in the Corporation's common stock, are summarized below: Years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- Cash dividend income $ 44,000 $ 31,000 $ 23,000 Stock dividend/split shares 13,845 1,350 8,419 Shares purchased 18,958 12,216 8,699 Shares distributed 3,420 101 3,826 Year end holdings: Shares 86,849 57,466 44,001 Market value $2,388,000 $1,731,000 $1,155,000 As a percentage of total plan assets 68.6% 57.6% 49.3% (13) Stock Purchase Plan: The Bank maintains a voluntary Stock Purchase Plan. Under provisions of the plan, a participating employee can contribute up to 6% of their compensation. The Bank then makes a contribution equal to 50% of each participant's contribution. The plan uses the contributions to purchase Corporation common stock at fair market value. The common stock is distributed to plan participants, under provisions of the plan, based upon the participant's cumulative prorata share of plan assets. The Bank's 50% matching contributions are expensed in the year in which the associated participant contributions are made and totaled $105,000, $105,000 and $88,000 in 1995, 1994 and 1993, respectively. At December 31, 1995 there were 201 participants in the plan. Transactions by the Stock Purchase Plan relating to the activity in the Corporation's common stock are summarized below: Years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- Cash dividend income $ 66,000 $ 63,000 $ 54,000 Stock dividend/split shares 25,537 3,052 19,955 Shares purchased 5,552 18,991 3,130 Shares distributed 21,238 8,765 14,534 Year end holdings: Shares 119,270 109,419 96,141 Market value $3,280,000 $3,296,000 $2,524,000 As a percentage of total plan assets 90.8% 96.9% 87.5% 37 (14) Transactions With Related Parties: The Corporation, through its subsidiary Bank, makes loans to its officers, directors and their affiliates. These loans are made with substantially the same terms and conditions as transactions with nonrelated parties. An analysis of loans outstanding to related parties follows: Years ended December 31, 1995 1994 - ------------------------------------------------------------------------- Aggregate amount at beginning of year $2,773,000 $3,186,000 Additions (deductions): New loans 652,000 31,000 Repayments (529,000) (444,000) Changes in directors and officers and/or their affiliations, net 11,000 -0- - ------------------------------------------------------------------------- Aggregate amount at end of year $2,907,000 $2,773,000 - ------------------------------------------------------------------------- (15) Per Share Data: Net income per common and common equivalent shares (stock options) have been computed using the weighted average number of shares outstanding during each year after giving consideration to the dilutive effect of shares granted under incentive stock option plans, the 3% stock dividend in 1994 and the five-for-four stock splits in 1995 and 1993. (16) Commitments and Contingencies: In the normal course of business, the Corporation is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These instruments are currently limited to commitments to extend credit and standby letters of credit. These instruments possess credit risk characteristics which are essentially the same as that involved in extending loans to customers and are subject to the Corporation's normal credit policies. The Corporation's maximum potential obligation to extend credit for financial instruments with off-balance sheet risk at December 31, 1995 was: Commitments to extend credit $60,776,000 Standby letters of credit 1,304,000 ----------- Total $62,080,000 ----------- Most of the Corporation's business activity is with customers located within the Corporation's defined market area. As of December 31, 1995, the Corporation had no significant concentrations of credit risk in its loan portfolio. The Corporation also has no exposure to highly leveraged transactions and no foreign credits in its loan portfolio. There are various lawsuits and claims pending against the Corporation which arise in the normal course of business. In the opinion of management, any liabilities that may result from pending lawsuits and claims will not materially affect the financial position of the Corporation. 38 (17) Recent Accounting and Regulatory Pronouncements: The Financial Accounting Standards Board, the Federal government and Federal regulators have issued several pronouncements and legislation which are or will be impacting the Corporation. These pronouncements are briefly discussed on page 27 of this report. END PUBLISHED PAGE 19 (18) Estimated Fair Value of Financial Instruments: Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures about Fair Value of Financial Instruments", requires that the Corporation disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and due from banks and Federal funds sold and other interest-bearing instruments: For those short-term investments, the carrying amount is a reasonable estimate of fair value. Securities: The fair value of securities is based on quoted prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments. Loans: For variable rate loans with interest rates that may be adjusted on a quarterly, or more frequent basis, the carrying amount is a reasonable estimate of fair market value. The fair value of other types of loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Accrued interest, accounts receivable and other financial assets: For these short-term financial instruments, the carrying amount is a reasonable estimate of fair value. Deposits: Under SFAS No. 107, the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market, checking and NOW accounts, is equal to the amount payable on demand as of December 31, for each year presented. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. For variable rate certificates of deposit, the carrying amount is a reasonable estimate of fair value. Securities sold under repurchase agreements and other short-term borrowings: For this short term debt, the carrying amount is a reasonable estimate of fair value. 39 Accrued interest payable and other financial liabilities: For these short-term financial instruments, the carrying amount is a reasonable estimate of fair value. Commitments to extend credit and standby letters of credit: The difference between the notional amount and the estimated fair value of these commitments is not material. Limitations: Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Estimates of fair value are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a substantial trust division that contributes net fee income annually. The Trust Division is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include property, plant, and equipment and deferred tax liabilities. In addition, it is not practicable for the Corporation to estimate the tax ramifications related to the realization of the unrealized gains and losses and they have not been reflected in any of the estimates of fair value. The impact of these tax ramifications can have a significant effect on estimates of fair value. The estimated fair values of the Corporation's financial instruments at December 31, 1995 and 1994 are summarized as follows: December 31, 1995 1994 - ------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value - ------------------------------------------------------------------------- Financial assets: Cash and due from banks and Federal funds sold and other interest-bearing $ 27,530,000 $ 27,530,000 $ 21,275,000 $ 21,275,000 instruments ============ ============ ============ ============ Securities $104,566,000 $106,076,000 $ 99,524,000 $ 97,080,000 ============ ============ ============ ============ Loans $276,493,000 $261,807,000 Reserve for possible loan (4,002,000) (3,832,000) losses ------------ ------------ Net loans $272,491,000 $272,754,000 $257,975,000 $258,456,000 ============ ============ ============ ============ Accrued interest, accounts receivable and other financial assets $ 4,424,000 $ 4,424,000 $ 3,823,000 $ 3,823,000 ============ ============ ============ ============ 40 Financial liabilities: Deposits: Demand deposits, savings accounts and money market deposits $219,610,000 $219,610,000 $228,191,000 $228,191,000 Certificates of 133,845,000 134,791,000 107,028,000 106,881,000 deposit ------------ ------------ ------------ ------------ Total deposits $353,455,000 $354,401,000 $335,219,000 $335,072,000 ============ ============ ============ ============ Securities sold under repurchase agree- ments and other short-term borrowings 24,148,000 $ 24,148,000 $ 19,171,000 $ 19,171,000 repurchase ============ ============ ============ ============ Accrued interest payable and other financial $ 2,673,000 $ 2,673,000 $ 2,336,000 $ 2,336,000 liabilities ============ ============ ============ ============ END PUBLISHED PAGE 20 41 Report of Management To The Shareholders of LNB Bancorp, Inc. January 16, 1996 The integrity of the financial statements and other financial information contained in this Annual Report is the responsibility of the management of LNB Bancorp, Inc. Such financial information has been prepared in accordance with generally accepted accounting principles, based on the best estimates and judgement of management. LNB Bancorp, Inc. maintains an internal control structure designed to provide reasonable assurance that transactions are executed and recorded in accordance with management's authorizations, that assets are properly safeguarded, that financial information is objective and reliable and that compliance with laws and regulations is maintained. Because of the inherent limitations in any system of internal control there can be no absolute assurance that errors or irregularities will not occur. Nevertheless, management believes that the internal control structure and related control procedures provide reasonable assurance that the objectives cited above are being attained. The internal control structure includes the careful delineation of functions, the proper selection and training of staff, the communication of policies and procedures consistent with the highest standards of business conduct and the maintenance of an internal audit function that independently evaluates and formally reports on the adequacy and effectiveness of the system. The Audit Committee of the Board of Directors is composed entirely of outside directors who are independent of management and meets periodically with both internal and independent auditors to review the results and recommendations of their audits. The Committee selects the independent auditor with approval by the shareholders. The accounting firm of KPMG Peat Marwick LLP has been engaged by LNB Bancorp, Inc. to audit its financial statements and their report follows. /s/ Stanley G. Pijor /s/ Gregory D. Friedman Stanley G. Pijor Gregory D. Friedman Chairman and Senior Vice President and Chief Executive Officer Chief Financial Officer 42 Independent Auditors' Report The Board of Directors LNB Bancorp, Inc. We have audited the accompanying consolidated balance sheets of LNB Bancorp, Inc. and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, cash flows and shareholders' equity for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LNB Bancorp, Inc. and subsidiary at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in the notes to consolidated financial statements, in 1994 the Corporation changed its method of accounting for certain investments in debt and equity securities and in 1993 changed its method of accounting for income taxes. /s/ KPMG Peat Marwick LLP Cleveland, Ohio January 16, 1996 END PUBLISHED PAGE 21 43 Management's Discussion and Analysis Introduction: The following is management's discussion and analysis of the financial condition and results of operations of LNB Bancorp, Inc. (the Corporation). It is intended to amplify certain financial information regarding LNB Bancorp, Inc. and should be read in conjunction with the Consolidated Financial Statements, related Notes, and other financial information and discussions included in the 1995 Annual Report to Shareholders. LNB Bancorp, Inc. is a locally owned one bank holding company whose wholly owned banking subsidiary is The Lorain National Bank (the Bank). LNB Bancorp, Inc. is headquartered in Lorain, Ohio and the Bank operates seventeen banking offices in Lorain and western Cuyahoga counties. It is a full service commercial bank offering personal, trust and business services and products. The Bank is committed to enhance its position as a community leader by providing quality customer service. Earnings Summary: LNB Bancorp, Inc.'s consolidated 1995 net income reached a record high of $5,003,000, compared to $4,432,000 in 1994 and $4,029,000 in 1993. Net income for 1995 and 1994 was favorably affected by an increase in net interest income and increased noninterest income. Net income in 1995 was favorably affected by reductions in F.D.I.C. Deposit Insurance Premiums. Earnings per share totaled $1.24 for 1995 compared to $1.10 for 1994 and $1.00 for 1993. Prior period earnings per share data have been restated to reflect the five-for-four stock splits in 1995 and 1993 and the 3% stock dividend in 1994. The return on average assets increased to 1.21% in 1995 from 1.13% in 1994 and 1.08% in 1993. Net Interest Income: Net interest income, the difference between interest and loan fee income on earnings assets and the interest paid on deposits and borrowed funds, is the principal source of earnings for the Corporation. Throughout this discussion net interest income is presented on a fully taxable equivalent (FTE) basis which restates interest on tax-exempt securities and loans as if such interest was subject to federal income tax at the statutory rate. Net interest income is affected by market interest rates on both earnings assets and interest bearing liabilities, the level of earning assets being funded by interest bearing liabilities, non-interest bearing liabilities and equity and the growth in earning assets. In addition, net interest income is affected not only by management's asset/liability strategies to alter the volume and mix of earning assets and sources of funds, but also such external factors as economic conditions and credit demand. A summary of the impacts of volume and rate changes on the Corporation's net interest income is presented on the next page. Changes in net interest income result from changes in both rate and volume. Volume refers to the impact of net changes in the balances of earning assets and interest-bearing liabilities. Rate refers to the impact of net changes in interest rates. 44 Net interest income in 1995 increased by $1,121,000 from $18,553,000 in 1994 to $19,674,000 in 1995. This increase was affected by increases in the volume of interest-bearing assets and liabilities plus increases in market interest rates. The cost of funds increased from 2.87% in 1994 to 3.71% in 1995, or a total of 84 basis points. During the same period, the yield on earning assets increased 74 basis points to 8.19% in 1995, compared to 7.45% in 1994, resulting in a decrease in the interest spread by 10 basis points in 1995. The increase in net interest income resulted from increases in the volume of earning assets, which were greater than the increases in the volume of interest-bearing liabilities. Thus, net interest income increased from 1994 to 1995 from increases in interest rates and volumes. Net interest income increased by $901,000 in 1994 from $17,652,000 in 1993 to $18,553,000 in 1994. Net interest income in 1994 was affected by increases in the volume of interest-bearing assets and liabilities plus increases in market interest rates during the second half of 1994. The cost of funds dropped from 2.98% in 1993 to 2.87% in 1994, or a total of 11 basis points. During the same period, the yield on earning assets fell 12 basis points to 7.45% in 1994, compared to 7.57% in 1993, resulting in a slight decrease in the interest spread in 1994. The net yield on earning assets in 1994 was 5.14% compared to 5.09% in 1994 and 5.10% in 1993. This relatively constant yield reflects the fact that the Corporations's portfolio of earning assets and interest-bearing liabilities are well matched and that Corporate management is responsive to the impacts of competition and regulation. Results from Operations: The Corporation's primary source of interest income is from loans. The relationship of loan income to total interest income, on a fully-tax equivalent basis, was relatively constant, increasing from 79.1% in 1994 to 79.4% in 1995. Interest and dividends on securities and Federal funds sold, as a percentage of total interest income, on a fully-tax equivalent basis, decreased from 20.9% in 1994 to 20.6% in 1995. This decrease results from a lower average balance in the security portfolio and Federal funds from 1994 to 1995, even though the market rates on securities decreased from 1994 through 1995. The higher yield in 1995 of the security portfolio is the result of 1993 and some 1994 purchases of securities with higher interest rates than those securities that matured in 1993 and 1994. END PUBLISHED PAGE 22 45 Condensed Consolidated Average Balance Sheets Fully-Tax Equivalent (FTE) Interest Rate and Interest Differential December 31, 1995 - -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate ---------------------------------------------- ASSETS: Securities $ 97,242 $ 5,532 5.69% Securities-tax exempt 8,025 623 7.76 Federal funds sold and other interest-bearing instruments 5,143 300 5.83 Commercial loans 105,277 10,233 9.72 Commercial loans tax-exempt 1,094 103 9.41 Mortgage loans 120,788 9,638 7.98 Consumer loans 44,852 4,881 10.88 ---------------------------------------------- TOTAL EARNING ASSETS 382,421 31,310 8.19 ---------------------------------------------- Reserve for possible loan losses (3,956) Cash and due from banks 16,277 Other assets 17,060 ---------------------------------------------- TOTAL ASSETS $411,802 ---------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Time deposits 199,038 8,636 4.34 Savings deposits 21,784 510 2.34 Interest-bearing demand 70,224 1,383 1.97 Short-term borrowings 22,864 1,107 4.84 ---------------------------------------------- TOTAL INTEREST- 313,910 11,636 3.71 BEARING LIABILITIES --------------------------------------------- Noninterest-bearing deposits 55,456 Other liabilities 3,113 Shareholders' equity 39,323 ---------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $411,802 ---------------------------------------------- NET INTEREST INCOME (FTE) $19,674 Taxable equivalent adjustment (199) ---------------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS $19,475 ---------------------------------------------- NET YIELD ON EARNING ASSETS 5.14% ---------------------------------------------- 46 Condensed Consolidated Average Balance Sheets Fully-Tax Equivalent (FTE) Interest Rate and Interest Differential December 31, 1994 - -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate -------------------------------------------- ASSETS: Securities $ 93,658 $ 4,513 4.82% Securities-tax exempt 11,113 859 7.73 Federal funds sold and other interest-bearing instruments 7,140 297 4.16 Commercial loans 104,170 8,777 8.43 Commercial loans tax-exempt 1,328 103 7.76 Mortgage loans 105,839 8,499 8.03 Consumer loans 41,008 4,077 9.94 ---------------------------------------------- TOTAL EARNING ASSETS 364,256 27,125 7.45 ---------------------------------------------- Reserve for possible loan losses (3,836) Cash and due from banks 16,277 Other assets 14,627 ---------------------------------------------- TOTAL ASSETS $391,324 ----------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Time deposits 172,764 5,589 3.24 Savings deposits 23,796 551 2.32 Interest bearing demand 79,408 1,621 2.04 Short-term borrowings 23,167 811 3.50 ---------------------------------------------- TOTAL INTEREST- 299,135 8,572 2.87 BEARING LIABILITIES ---------------------------------------------- Noninterest-bearing deposits 53,143 Other liabilities 2,626 Shareholders' equity 36,420 ---------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $391,324 ---------------------------------------------- NET INTEREST INCOME (FTE) $18,553 Taxable equivalent adjustment (295) ---------------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS $18,258 ---------------------------------------------- NET YIELD ON EARNING ASSETS 5.09% ---------------------------------------------- 47 Condensed Consolidated Average Balance Sheets Fully-Tax Equivalent (FTE) Interest Rate and Interest Differential December 31, 1993 - -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate ---------------------------------------------- ASSETS: Securities $ 88,037 $ 4,754 5.40% Securities-tax exempt 11,089 889 8.02 Federal funds sold and other interest-bearing instruments 9,179 274 2.99 Commercial loans 99,893 7,771 7.78 Commercial loans tax-exempt 1,613 117 7.25 Mortgage loans 96,252 8,422 8.75 Consumer loans 39,913 3,965 9.93 ---------------------------------------------- TOTAL EARNING ASSETS 345,976 26,192 7.57 ---------------------------------------------- Reserve for possible loan losses (3,670) Cash and due from banks 16,450 Other assets 12,779 ---------------------------------------------- TOTAL ASSETS $371,535 ---------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Time deposits 168,259 5,652 3.36 Savings deposits 23,751 764 3.22 Interest-bearing demand 79,020 1,722 2.18 Short-term borrowings 15,483 402 2.60 ---------------------------------------------- TOTAL INTEREST- 286,513 8,540 2.98 BEARING LIABILITIES ---------------------------------------------- Noninterest-bearing deposits 48,572 Other liabilities 2,592 Shareholders' equity 33,858 ---------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $371,535 ---------------------------------------------- NET INTEREST INCOME(FTE) $17,652 Taxable equivalent adjustment (300) ---------------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS $17,352 ---------------------------------------------- NET YIELD ON EARNING ASSETS 5.10% ---------------------------------------------- 48 Rate/Volume Analysis of Net Interest Income Fully-Tax Equivalent Years ended December 31, 1995 and 1994 - ------------------------------------------------------------------------- (Dollars in Thousands) Increase (Decrease) In Interest Income/Expense --------------------------------------------- Volume Rate Total --------------------------------------------- Securities $ 173 $ 846 $ 1,019 Securities-tax exempt (239) 3 (236) Federal funds sold and other interest- bearing instruments (83) 86 3 Commercial loans 93 1,363 1,456 Commercial loans tax-exempt (18) 18 -0- Mortgage loans 1,200 (61) 1,139 Consumer loans 382 422 804 --------------------------------------------- TOTAL INTEREST INCOME 1,508 2,677 4,185 --------------------------------------------- Time deposits 850 2,197 3,047 Savings deposits (47) 6 (41) Interest-bearing demand (187) (51) (238) Short-term borrowings (11) 307 296 --------------------------------------------- TOTAL INTEREST EXPENSE 605 2,459 3,064 --------------------------------------------- NET INTEREST INCOME $ 903 $ 218 $ 1,121 --------------------------------------------- 50 Results from Operations (continued): The cost of interest-bearing liabilities in 1995 was $11,636,000 compared to $8,572,000 and $8,540,000 in 1994 and 1993, respectively. The unfavorable impact of increases in rates plus increases in volume caused interest expense to increase from 1994 through 1995. Repricing of interest-bearing liabilities from 1994 through 1995 resulted in a significant net unfavorable change in interest expense during 1995. The favorable impact of decreases in deposit rates began to diminish during 1994 and were offset by increases in volume. This caused interest expense to remain relatively constant from 1993 to 1994. Total other income in 1995 increased to $4,287,000 compared to $4,134,000 in 1994 for an increase of $153,000. This increase primarily results from increases from Trust Division income of $122,000, and service charges of $60,000.Total other income in 1994 increased by $125,000 to $4,134,000 as compared to 1993. This increase resulted from increases in trust division income of $91,000 and increases of other service charges, exchanges and fees of $195,000. The increase in other service charges, exchanges and fees is the result of pricing increases in credit card and merchant fees. Other operating income and gains on sales of loans and securities decreased by $56,000 and $121,000, respectively. Total other expenses increased 2.2% in 1995 compared to 1994 after a 4.4% increase for 1994 compared to 1993. A significant portion of the increases in 1995 and 1994 were the result of the effects of inflation on salaries and benefits plus increases in furniture and equipment expenses. Total other expenses in 1995 were also affected by decreases in FDIC Deposit Insurance Premiums. The effective tax rate of the Corporation was 31.8%, 29.8%, and 31.1% in 1995, 1994, and 1993, respectively. The increase in the effective tax rate in 1995 was primarily due to lower levels of tax-exempt income. The decrease in the effective tax rate in 1994 was due primarily to the favorable outcome of a Federal tax examination. A detailed analysis of Federal income taxes is presented on page 16. The Corporation's Consolidated Statements of Income reflect the effects of inflation. Since interest rates, loan demand and deposit levels are related to inflation, the resulting changes in interest sensitive assets and liabilities are reflected in net interest income. Similarly, operating expenses such as salaries, rents and maintenance are affected by inflation. The only major expense items which do not reflect inflation are depreciation and amortization as these expenses are based on original purchase costs. Selected quarterly financial data for 1995, 1994 and 1993 is presented on page 28. There were no significant intra-quarter fluctuations except for fourth quarter increases in other income in 1994 and 1995. The increase in other income reflects the realization of annual Trust Division billings which are based on year-end market values. 51 Provision and Reserve for Possible Loan Losses The reserve for possible loan losses is maintained by management at a level considered adequate to cover possible losses. The amount of the provision for possible loan losses charged to operating expenses is the amount necessary, in the opinion of management, to maintain the reserve for possible loan losses at an adequate level. Management determines the adequacy of the reserve based on past experience, changes in portfolio size and mix, relative quality of the loan portfolio and the rate of loan growth, assessments of current and future economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates, which are subject to change over time. While management's periodic analysis of the reserve for possible loan losses may dictate portions of the reserve be allocated to specific problem loans, the entire amount is available for any loan charge-offs that may occur. The reserve for loan losses on December 31, 1995, was $4,002,000, or 1.45% of outstanding loans, compared to $3,832,000, or 1.46% at year-end 1994. The provision for possible loan losses charged to operating expense was $400,000 in 1995 and 1994. In addition to meeting management's expectations for adequacy, this level of funding for the reserve also kept the Bank's ratio of reserve as a percentage of outstanding loans comparable to that of bank's of similar size, loan portfolio size and mix and credit philosophies. Net charge-offs for 1995 were $230,000, as compared to $282,000 for 1994, while charge-offs as a percentage of average loans outstanding for 1995 was 0.08%, compared to 0.11% for 1994. Non-performing loans at year-end 1995 were $1,457,000 compared to $737,000 at year-end 1994. Non-performing loans consist of loans past due 90 days or more and loans which have been placed on non-accrual status. As of December 31, 1995, 29% of non-performing loans were Commercial Loans and 71% were Residential Mortgage Loans. This compares to 42.0% and 58%, respectively for the same categories at year-end 1994. Non-performing loans did not have a material impact on interest income during 1993, 1994 or 1995. The quality of the loan portfolio remains fairly high, even though the ratio of non-performing loans to total loans increased from .28% at year-end 1994 to 0.53% at year-end 1995. The Corporation's credit policies are reviewed and modified on an ongoing basis in order to remain suitable for management of credit risks within the loan portfolio as conditions change. At December 31, 1995, there were no significant concentrations of credit risk in the loan portfolio. Additional information regarding the loan portfolio is presented on page 13. END PUBLISHED PAGE 24 52 Financial Condition: The earning assets mix has changed considerably from December 31, 1994 to December 31, 1995. During this period, loans increased by $14,686,000 and securities increased by $5,042,000. Increases in loans are primarily funded by growth in deposits, current retained earnings, and reductions in Federal funds sold. The economy showed moderate growth during 1995 which stimulated loan demand. The maturity distribution of debt securities which appears on page 12 of this report, indicates that $100,323,000, or 96.3%, of debt securities mature within the next five year period with $35,383,000, or 34.0% maturing during 1996. At the close of 1994 and 1993 there were no significant differences between the book and fair values of the debt securities portfolio. The fair value of the debt securities portfolio exceeded its amortized cost by $1,530,000 or 1.5%, at the close of 1995. Total deposits held by the Corporation increased $18,236,000 during 1995 compared to an increase of $ 14,207,000 during 1994. Interest-bearing deposits represented 83.0% of total deposits at December 31, 1995 and 1994, Noninterest-bearing deposits increased by $3,067,000 while interest-bearing deposits increased by $15,169,000 during 1995. During 1994, noninterest-bearing deposits increased by $6,855,000 while interest-bearing deposits increased by $7,352,000. In both 1995 and 1994, as long-term deposits matured and new funds were deposited, these funds were primarily placed in short-term deposits. Total other borrowings, primarily repurchase agreements, increased by $4,977,000 during 1995, following a decrease of $229,000 in 1994. Due to the volatility of customer repurchase agreements all funds generated by repurchase agreement activity enter the Bank's earning assets as short-term investments. Capital Resources: The capital resources of the Corporation and the Bank continue to grow stronger. The percentages of average equity to average assets were 9.55%, 9.31%, and 9.11% for 1995, 1994, and 1993, respectively. Federal regulators adopted risk-based capital guidelines for banks and bank holding companies. The guidelines require that percentages be applied to various assets, including off-balance sheet assets, in relation to the regulators' perceived risk. The guidelines establish two components of capital, Tier I and Tier II. For the reporting purposes of the Corporation, Tier I capital consists of shareholders' equity excluding net unrealized gain (loss) on securities available for sale and Tier II capital consists of the allowable portion of the reserve for possible loan losses. Under "Prompt Corrective Action" regulations adopted in September of 1992, the FDIC has defined five categories of capitalization (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized). The Corporation meets the "well capitalized" definition which requires a Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10%, and a leverage ratio of at least 5% and the absence of any written agreement, order, or directive from any regulatory agency. "Well capitalized" status affords the Corporation the ability to operate with the greatest flexibility under current laws and regulations. 53 The Corporation exceeds all applicable capital requirements. An analysis of the Corporation's risk-based capital position at December 31, 1995 and 1994 follows: December 31, 1995 1994 - ------------------------------------------------------------------------- Tier I capital - Shareholders' equity $ 40,749 $ 37,643 Tier II capital - Allowable portion of the reserve for possible loan losses 2,857 2,735 ---------- ---------- Total risk-based capital $ 43,606 $ 40,378 ---------- ---------- Risk-weighted assets $228,578 $218,819 Risk weighted off-balance sheet assets 13,783 12,699 ---------- ---------- Total risk-weighted assets $242,361 $231,518 ---------- ---------- Tier I capital ratio 16.81% 16.26% Required Tier I capital ratio 4.00 4.00 Total capital ratio 17.99 17.44 Required capital ratio 8.00 8.00 Leverage ratio - Tier I capital as a percentage of average assets 9.89 9.62 Required leverage ratio 3.00 3.00 The Corporation returns a portion of the income it earns to its shareholders in the form of cash dividends. Dividends declared as a percentage of net income were 43.5%, 43.0% and 42.8% in 1995, 1994 and 1993, respectively. The Corporation also retains a portion of the income it earns to accommodate current operational and regulatory capital requirements and to fund future growth opportunities. A part of future growth depends on capital expenditure programs. Capital expenditures of approximately $1,600,000 are planned in 1996. END PUBLISHED PAGE 25 54 Interest Rate Sensitivity Management: Interest rate sensitivity is a measurement of the risk inherent in net interest income attributable to fluctuations in market interest rates. The Corporation manages the repricing of interest rate sensitive assets and liabilities to stabilize interest margins and reduce the risk resulting from fluctuations of interest rates. Differences in the repricing of interest rate sensitive assets and liabilities over a period of time is referred to as the interest rate gap. If more rate sensitive assets reprice than rate sensitive liabilities during a given period of time, the period is said to have a positive interest rate gap. If the opposite relationship exists, the period is said to have a negative interest rate gap. When rates are increasing a positive interest rate gap will, with all other factors held constant, result in an increase in the net interest income. When rates are decreasing, a negative interest rate gap will, with all other factors held constant, also result in an increase in the net interest income. 55 The table below presents an analysis of the interest rate sensitivity of the Corporation at December 31, 1995. However, this table does not necessarily indicate the impact of general interest rate movements on the Corporation's net interest yield because repricing of various categories of assets and liabilities is discretionary and is subject to competition and other external factors. At December 31, 1995 the Corporation's cumulative twelve month gap position was in a moderate asset-sensitive gap position as illustrated in the following table: Interest Rate Sensitivity Analysis After 3 After 6 Months Months Within 3 But Within But Within December 31, 1995 Months 6 Months 1 Year - -------------------------------------------------------------------------- (Dollars in Thousands) Interest earning assets: Loans $ 129,550 $ 19,993 $ 29,608 Securities 6,926 10,175 18,283 Federal funds sold and other interest-bearing assets -0- 102 -0- ------------------------------------------------------- Total interest earning assets $ 136,476 30,270 47,891 ------------------------------------------------------- Interest-bearing liabilities: Savings and other non-time deposits 69,851 4,936 -0- Time deposits 46,675 36,045 20,957 Short-term borrowings and other interest bearing liabilities 24,148 -0- -0- ------------------------------------------------------- Total interest bearing liabilities 140,674 40,981 20,957 ------------------------------------------------------- INTEREST RATE SENSITIVITY GAP $ (4,198) $ (10,711) $ 26,934 ------------------------------------------------------ CUMULATIVE INTEREST RATE SENSITIVITY $ (4,198) $ (14,909) $ 12,025 GAP ------------------------------------------------------- CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL INTEREST EARNING ASSETS (1.10%) (3.91%) 3.15% ------------------------------------------------------- 56 After 1 Year But Within After 5 December 31, 1995 5 Year Years Total - -------------------------------------------------------------------------- (Dollars in Thousands) Interest earning assets: Loans $ 89,846 $ 7,496 $ 276,493 Securities 65,332 3,850 104,566 Federal funds sold and other interest-bearing assets -0- -0- 102 ------------------------------------------------------- Total interest earning assets 155,178 11,346 381,161 ------------------------------------------------------- Interest-bearing liabilities: Savings and other non-time deposits 84,660 -0- 159,447 Time deposits 30,168 -0- 133,845 Short-term borrowings and other interest bearing liabilities -0- -0- 24,148 ------------------------------------------------------- Total interest- bearing liabilities 114,828 -0- 317,440 ------------------------------------------------------- INTEREST RATE SENSITIVITY GAP $ 40,350 $ 11,346 $ 63,721 ------------------------------------------------------ CUMULATIVE INTEREST RATE SENSITIVITY GAP $ 52,375 $ 63,721 ------------------------------------------------------- CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL INTEREST EARNING ASSETS 13.74% 16.72% ------------------------------------------------------- Liquidity Management: Liquidity measures a corporation's ability to generate cash or otherwise obtain funds at reasonable prices to fund commitments to borrowers as well as the demands of depositors and debt holders. Principal internal sources of liquidity for the Corporation and the Bank are cash and cash equivalents, Federal funds sold, and the maturity structures of 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. 57 On December 31, 1995, cash and cash equivalents equaled $27,530,000 or 6.5% of total assets. The change in cash and cash equivalents is shown in the Consolidated Statement of Cash Flows and arises from operating, investing and financing activities. The adjustments to reconcile 1995 net income to net cash provided by operating activities primarily consists of depreciation and amortization of $1,473,000 and a provision of possible loan losses of $400,000. These items represent expenses included in net income which do not represent an expenditure or receipt of cash. END PUBLISHED PAGE 26 Liquidity Management (continued): The cash flows from investing activities relate primarily to securities, loans and purchases of capital assets. Net cash used in investing activities was $22,228,000. Cash used in investing activities resulted from net increases in securities of $4,864,000. Cash used in investing activities included net loan increases of $15,088,000 and purchases of capital assets of $2,276,000. Net cash provided by financing activities was $21,438,000. Cash provided by financing activities included increases in deposits of $18,236,000, increases in securities sold under repurchase agreements of $4,997,000 and proceeds from stock options exercised of $278,000. Cash used by financing activities primarily included dividends paid of $2,073,000. These cash flows resulted in a $6,255,000 increase in cash and cash equivalents from December 31, 1994 to December 31, 1995. The Corporation can obtain additional liquidity from off-balance sheet sources which include the purchase of Federal funds from correspondent banks and borrowing from the Federal Reserve Bank's discount window. At year-end, the Bank had available Federal funds facilities in excess of $9,000,000 at three correspondent banks. The internal and external sources of funds for liquidity, in the opinion of management, satisfy the liquidity needs of the Corporation. 58 Impacts of Accounting and Regulatory Pronouncements: Corporate management is not aware of any current recommendations by regulatory authorities which, if they were implemented, would have a material effect on the liquidity, capital resources, or operations of the Corporation. However, the potential impact of certain accounting and regulatory pronouncements warrant further discussion. The Financial Accounting Standards Board (FASB) has issued: SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of" Implementation date by the Corporation: January 1, 1996 Impact on the Corporation: This Statement establishes accounting standards for the impairment of long-lived assets. Corporate management does not believe that adoption of SFAS No. 121 will have a significant impact on net income. SFAS No. 123, "Accounting for Stock Based Compensation" Implementation date by the Corporation: January 1, 1996 Impact on the Corporation: This Statement provides elective accounting for stock-based employee compensation arrangements using a fair value model. Companies currently accounting for such arrangements under APB Opinion 25 "Accounting for Stock Issued to Employees," may continue to do so: however, SFAS No. 123 supersedes the disclosure requirements of Opinion 25. Corporate management does not believe that adoption of SFAS No. 123 will have a significant impact on net income, but will increase disclosure requirements for stock based compensation. All other applicable Statements of Financial Accounting Standards that have been issued and have effective dates impacting 1995 and prior years financial statements have been adopted by the Corporation. Corporate management believes there are no Statements of Financial Accounting Standards which have been issued and have implementation dates in the future which will materially impact the financial statements of future years. 59 Significant actions by the Federal government and its agencies, affecting the financial institutions industry in general, are currently having and will continue to have an impact on the Corporation. A discussion of these actions follows: "Omnibus Budget Reconciliation Act of 1993" Effective date of impact on the Corporation: August 10, 1993 Impact on the Corporation: Although the cost of tax compliance will increase, Corporate management does not anticipate that this tax act will have a material impact on net income. "The President's Reform Plan for the Savings and Loan Industry" and subsequent action by the FDIC: Effective date (direct impact on the Corporation): January 1, 1990 Impact on the Corporation: During 1993, a risk-related assessment system was developed by the Federal Deposit Insurance Corporation. Effective, January 1, 1993, the Bank was assigned to the lowest deposit insurance assessment rate currently possible. Under the system, the FDIC will reevaluate the Bank's deposit insurance rate on a semi-annual basis. The Corporation's subsidiary Bank will have a significantly lower deposit insurance assessment rate for the second half of 1995. The FDIC has approved a new rate schedule due to the fact that the Bank Insurance Fund (BIF) has reached its designated reserve ratio. The new rates became effective September 15, 1995 and are applied retroactive to June 1, 1995. June is the month following the month in which the BIF reached the 1.25 percent reserve ratio mandated by the Federal Deposit Insurance Corporation Improvement Act (FDICIA). During the third quarter of 1995, the Bank received a refund for second and third quarter FDIC Insurance Premiums totalling about $207,000. The Bank was assigned to the lowest deposit insurance assessment rate under the September, 15 1995 guidelines. END PUBLISHED PAGE 27 60 Selected Quarterly Financial Data Quarterly financial and per share data for the years ended December 31, 1995, 1994 and 1993 are summarized as follows: First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------- Total interest income 1995 $7,346,000 $7,789,000 $7,900,000 $8,076,000 1994 6,197,000 6,480,000 6,901,000 7,252,000 1993 6,501,000 6,462,000 6,507,000 6,422,000 - -------------------------------------------------------------------------- Total interest expense 1995 2,716,000 2,992,000 2,932,000 2,996,000 1994 1,928,000 1,972,000 2,176,000 2,496,000 1993 2,226,000 2,156,000 2,134,000 2,024,000 - -------------------------------------------------------------------------- Net interest income 1995 4,360,000 4,797,000 4,968,000 5,080,000 1994 4,269,000 4,508,000 4,725,000 4,756,000 1993 4,275,000 4,306,000 4,373,000 4,398,000 - -------------------------------------------------------------------------- Provision for possible 1995 100,000 100,000 100,000 100,000 loan losses 1994 100,000 100,000 100,000 100,000 1993 150,000 100,000 125,000 125,000 - -------------------------------------------------------------------------- Net interest income 1995 4,530,000 4,697,000 4,868,000 4,980,000 after provision for 1994 4,169,000 4,408,000 4,625,000 4,656,000 possible loan losses 1993 4,125,000 4,206,000 4,248,000 4,273,000 - -------------------------------------------------------------------------- Other income 1995 1,078,000 1,005,000 1,089,000 1,115,000 1994 929,000 1,033,000 1,060,000 1,112,000 1993 918,000 1,052,000 1,009,000 1,030,000 - -------------------------------------------------------------------------- Other expenses, 1995 4,521,000 4,524,000 4,648,000 4,666,000 including Federal 1994 4,064,000 4,360,000 4,552,000 4,584,000 income taxes 1993 4,041,000 4,276,000 4,237,000 4,278,000 - -------------------------------------------------------------------------- Net income 1995 $1,087,000 $1,178,000 $1,309,000 $1,429,000 1994 1,034,000 1,081,000 1,133,000 1,184,000 1993 1,002,000 982,000 1,020,000 1,025,000 - -------------------------------------------------------------------------- Net income per share 1995 $ .27 $ .29 $ .33 $ .35 1994 .26 .27 .28 .30 1993 .25 .25 .25 .26 - -------------------------------------------------------------------------- Dividends paid per share (1) 1995 $ .12 $ .12 $ .14 $ .16 1994 .11 .11 .12 .14 1993 .10 .10 .11 .13 - -------------------------------------------------------------------------- (1) All share and per share data have been adjusted to reflect the five- for-four stock splits in 1993 and 1995, and 3 percent stock dividends in all other years presented. END PUBLISHED PAGE 28 61 Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31, 1995 1994 1993 - -------------------------------------------------------------------------- Total interest income $31,111,000 $26,830,000 $25,892,000 Total interest expense 11,636,000 8,572,000 8,540,000 --------------------------------------------- Net interest income 19,475,000 18,258,000 17,352,000 Provision for possible loan losses 400,000 400,000 500,000 Other income 4,287,000 4,064,000 3,818,000 Gains from sales of loans and securities -0- 70,000 191,000 Other expense 16,023,000 15,679,000 15,017,000 --------------------------------------------- Income before Federal income taxes 7,339,000 6,313,000 5,844,000 Federal income taxes 2,336,000 1,881,000 1,815,000 --------------------------------------------- NET INCOME $ 5,003,000 $ 4,432,000 $ 4,029,000 --------------------------------------------- CONDENSED BALANCE SHEETS - DECEMBER 31, 1995 1994 1993 - -------------------------------------------------------------------------- Cash and cash equivalents $ 27,530,000 $ 21,275,000 $ 21,276,000 Securities 104,566,000 99,524,000 103,086,000 Net loans 272,491,000 257,975,000 242,043,000 Other assets 17,016,000 16,081,000 13,211,000 --------------------------------------------- TOTAL ASSETS $421,603,000 $394,855,000 $379,616,000 --------------------------------------------- Total deposits $353,455,000 $335,219,000 $321,012,000 Other borrowings 24,148,000 19,171,000 19,400,000 Other liabilities 3,209,000 2,954,000 4,144,000 --------------------------------------------- Total liabilities 380,812,000 357,344,000 344,556,000 --------------------------------------------- Total shareholders' equity 40,791,000 37,511,000 35,060,000 --------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $421,603,000 $394,855,000 $379,616,000 --------------------------------------------- SHARE DATA 1995 1994 1993 - -------------------------------------------------------------------------- Per share data (1): Net income (2) $ 1.24 $ 1.10 $ 1.00 Cash dividends $ .54 $ .48 $ .44 Cash dividends declared $2,175,000 $1,905,000 $1,725,000 Net increase in shareholders' equity $3,280,000 $2,451,000 $ 2,508,000 Book value per share (1) $10.10 $ 9.38 $ 8.79 Number of shares out- standing at end of year (1) 4,039,347 4,000,068 3,988,360 - -------------------------------------------------------------------------- 62 Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31, 1992 1991 - -------------------------------------------------------------------------- Total interest income $27,465,000 $30,080,000 Total interest expense 10,223,000 14,087,000 ------------------------------ Net interest income 17,242,000 15,993,000 Provision for possible loan losses 700,000 600,000 Other income 3,605,000 3,612,000 Gains from sales of loans and securities 14,000 -0- Other expense 14,785,000 14,164,000 ------------------------------ Income before Federal income taxes 5,376,000 4,841,000 Federal income taxes 1,550,000 1,329,000 ------------------------------ NET INCOME $ 3,826,000 $ 3,512,000 ------------------------------ CONDENSED BALANCE SHEETS - DECEMBER 31, 1992 1991 - -------------------------------------------------------------------------- Cash and cash equivalents $32,728,000 $24,060,000 Securities 96,631,000 95,600,000 Net loans 230,364,000 220,458,000 Other assets 12,503,000 11,611,000 ------------------------------ TOTAL ASSETS $372,226,000 $351,729,000 ------------------------------ Total deposits $317,730,000 $301,953,000 Other borrowings 18,861,000 16,509,000 Other liabilities 3,083,000 3,129,000 ------------------------------ Total liabilities 339,674,000 321,591,000 ------------------------------ Total shareholders' equity 32,552,000 30,138,000 ------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $372,226,000 $351,729,000 ------------------------------ SHARE DATA 1992 1991 - -------------------------------------------------------------------------- Per share data (1): Net income (2) $ .97 $ .88 Cash dividends $ .39 $ .36 Cash dividends declared $ 1,555,000 $ 1,404,000 Net increase in shareholders' equity $ 2,414,000 $ 2,280,000 Book value per share (1) $ 8.24 $7.68 Number of shares out- standing at end of year (1) 3,949,414 3,922,754 - -------------------------------------------------------------------------- 63 (1) All share and per share data have been adjusted to reflect the five- for-four stock splits in 1993 and 1995 and 3 percent stock dividends in all other years presented. (2) Net income per share is computed using the weighted average number of shares outstanding during each year. END PUBLISHED PAGE 29 63 Directors and Officers of LNB Bancorp, Inc. Directors James L. Bardoner Retired, Former President Dorn Industries, Inc. Daniel P. Batista Attorney/Partner Cook & Batista Co., L.P.A. Wellsley O. Gray Sales Consultant Smith Dairy Company James F. Kidd President and Chief Operating Officer LNB Bancorp, Inc. and Lorain National Bank David M. Koethe Chairman of the Board The Lorain Printing Company Benjamin G. Norton Employee and Community Relations Manager RelTec Corporation - Lorain Products Stanley G. Pijor Chairman and Chief Executive Officer LNB Bancorp, Inc. and Lorain National Bank James H. Riddell* Chairman of the Board Consumers Builders Supply Company President, Consumeracq, Inc. * Retired as a Director in November 1995 Jeffrey F. Riddell President Consumers Builders Supply Company Vice President and Chief Executive Officer, Consumeracq, Inc. Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. Executive Vice President and Secretary Lorain National Bank 64 Don A. Sanborn Retired T. L. Smith, M.D. Retired Physician Eugene M. Sofranko President and Chief Executive Officer Lorain Glass Company, Inc. Paul T. Stack Manufacturer's Representative Coley's Inc. and A-1 Welding and Fabricating, Inc. Leo Weingarten Retired Officers Stanley G. Pijor Chairman and Chief Executive Officer James F. Kidd President and Chief Operating Officer Thomas P. Ryan Executive Vice President and Secretary/Treasurer Gregory D. Friedman Senior Vice President and Chief Financial Officer Willard H. DoBrunz Senior Vice President Michael D. Ireland Senior Vice President Emma N. Mason Senior Vice President James H. Weber Senior Vice President END PUBLISHED PAGE 30 65 Officers of Lorain National Bank Executive Offices Stanley G. Pijor Chairman and Chief Executive Officer James F. Kidd President and Chief Operating Officer Thomas P. Ryan Executive Vice President and Secretary Administration James H. Weber Senior Vice President Debra R. Brown Vice President Carol A. Mesko Assistant Vice President Teresa E. Kreger Employment Officer James E. Long Assistant Vice President Susan I. Tuttle Assistant Cashier Marianne Kocak Assistant Vice President Robert J. Witkowski Maintenance Officer Teresa E. George Assistant Cashier Audit Division David P. Krebs Vice President Gary W. Sedlak Assistant Vice President and Compliance Officer Carol A. Cavanaugh Senior Staff Auditor Dan P. Dudziak Senior Staff Auditor 66 Randy E. Lottman E.D.P. Auditor Loan Division Willard H. DoBrunz Senior Vice President Edwin F. Klenz Vice President Sandra L. Kotradi Vice President Bruce Diso Vice President Kenneth P. Wayton Vice President Ellen M. Walsh Vice President Joan M. Raymond Assistant Vice President Karen L. Borer Assistant Vice President Denise M. Kosakowski Assistant Vice President John A. Funderberg Assistant Vice President Robert D. Asik Consumer Retail Officer Fiscal Division Gregory D. Friedman Senior Vice President and Chief Financial Officer Mitchell J. Fallis Vice President and Controller Marketing Division Steven F. Cooper Assistant Vice President 67 Trust and Investment Management Division Emma N. Mason Senior Vice President Gerald S. Falcon Vice President Edward J. Baker Vice President Brian D. Morgan Vice President Patrick E. Sheridan Investment Officer James E. Carpenter Assistant Trust Officer Jodi L. Penwell Assistant Trust Officer Operations and Consumer Revolving Credit Divisions Michael D. Ireland Senior Vice President Larry R. Johnson Vice President Frances V. Lesniak Vice President Larry A. Hill Assistant Vice President Donna Jean Phillips Assistant Vice President Jeanne C. Maschari Assistant Vice President Patricia L. Cole Operations Officer 68 Banking Offices Amherst Office G. Dale Rosenkranz Vice President Fred W. Zemanek Assistant Cashier Avon Lake Office Charles A. DeAngelis Assistant Vice President Cleveland Street Office Timothy J. Gallagher Vice President Kansas Avenue Office Connie Sklarek Branch Manager Lake Avenue Office Christine M. Weber Assistant Cashier Main Office & 6th St. Drive-In Joel A. Krueck Assistant Vice President and CRA Officer Rita M. Hoyt Assistant Branch Manager Oberlin Office & Kendal at Oberlin Marilyn R. Krasienko Assistant Vice President Olmsted Office Diana L. Schmittgen Assistant Cashier Pearl Avenue Office Keith H. Kapanke Assistant Cashier Plaza Office & Oberlin Ave. Drive-In Jennifer M. Nickolls Assistant Vice President Second Street Office James E. Schmittgen Assistant Vice President Vermilion Office Robert B. White Assistant Vice President 69 The Crossings of Westlake Office Susan M. Neiding Vice President West Park Drive Office Patricia A. Wolanczyk Branch Manager END PUBLISHED PAGE 31 70 EARNINGS AND STOCK PERFORMANCE 10 Year Earnings History (10 Year Earnings History graph follows in printed version with years 1986 through 1995 on the X-axis and earnings on the Y-axis in $1,000,000.00 increments ranging from $0 to $5,000,000.00. The graph is a horizontal bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid along with an accompanying legend for indentification purposes.) The graph above depicts the earnings history of LNB Bancorp, Inc. from 1986 through 1995. The Corporation's management team is proud of its record of continuously increasing profits over this ten year period. Market Value of Cumulative Shares 100 Shares Purchased December 31, 1985 - Cost: $2,000.00 378 Shares Currently Held December 31, 1995 - Market Value: $10,395.00 (Market Value of Cumulative Shares graph follows in printed version with years 1986 through 1995 on the X-axis and market values on the Y-axis in $2,500.00 increments ranging from $0 to $12,500.00. The graph is a horizontal bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid along with an accompanying legend for identification purposes.) Cumulative Cash Dividends Declared Total Cash Dividends Declared 1986 - 1995: $1,356.21 (Cumulative Cash Dividends Declared graph follows in printed version with years 1986 through 1995 on the X-axis and Dividends Declared on the Y-axis in $300.00 increments ranging from $0 to $1,500.00. The graph is horizontal bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid along with an accompanying legend for identification purposes.) For the information of our shareholders, the bottom two graphs reflect a 10 year chronological record of stock and dividend performance following a hypothetical purchase of 100 shares of LNB Bancorp, Inc. stock without further reinvestment. Purchase of 100 shares of LNB Bancorp, Inc. stock at $20.00 per share in 1985: Total market value..........................$2,000.00 Through three stock splits and several stock dividends over the years, the shareholder in this example now owns 378 shares of LNB Bancorp, Inc. stock with a market value of $27.50 per share as of December 31, 1995. Total market value.........................$10,395.00 71 In addition, our hypothetical shareholder would have benefited from the cash dividends declared on the stock. Cumulative cash dividends declared ........ $1,356.21 (The data points used to plot the three (3) graphs previously described follows: NET INCOME CUMMULATIVE CUMULATIVE YEAR IN THOUSANDS MARKET VALUE CASH DIVIDENDS 1995 $5,003,000.00 $10,395.00 $1,356.21 1994 $4,432,000.00 $ 9,127.88 $1,152.09 1993 $4,029,000.00 $ 7,953.75 $ 970.29 1992 $3,826,000.00 $ 6,431.00 $ 805.09 1991 $3,512,000.00 $ 5,807.50 $ 655.09 1990 $3,343,000.00 $ 5,320.00 $ 518.03 1989 $3,217,000.00 $ 4,414.50 $ 392.59 1988 $2,881,000.00 $ 3,815.00 $ 277.05 1987 $2,562,000.00 $ 3,233.00 $ 173.50 1986 $2,407,000.00 $ 2,729.50 $ 84.46) END PUBLISHED PAGE 32 72 HALF PAGE INSERT FRONT SIDE Please detach postage-paid card(s) and return through U.S. Mail or to a Lorain National Bank office near you. Two cards reading as follows: To: James F. Kidd President and Chief Executive Officer LNB Bancorp, Inc. 457 Broadway, Lorain Ohio 44052 Yes, I am interested in acquiring LNB Bancorp, Inc., stock and would like to be contacted by a stock broker when a stock purchase opportunity arises. Name Address City State Zip Phone Number of Shares Requested HALF PAGE INSERT BACK SIDE Two postage paid postcards reading as follows: Lorain National Bank Attn: James F. Kidd 457 Broadway Lorain Oh 44052-9986 73 COVER DESCRIPTION Inside Back Cover CUSTOMER SERVICE LOCATIONS Bank Offices Amherst Office 1175 Cleveland Avenue Amherst, Ohio (216) 988-4423 Avon Lake Office 240 Miller Road Avon Lake, Ohio (216) 933-2186 Cleveland Street Office 801 Cleveland Street Elyria, Ohio (216) 365-8397 Kansas Avenue Office 1604 Kansas Avenue Lorain, Ohio (216) 288-9151 Lake Avenue Office 42935 E. North Ridge Road Elyria, Ohio (216) 233-7196 Main Office * 457 Broadway Lorain, Ohio (216) 244-7185 Sixth Street Drive-In 200 Sixth Street Lorain, Ohio (216) 244-7242 Oberlin Office 40 East College Street Oberlin, Ohio (216) 775-1361 Kendal at Oberlin Office 600 Kendal Drive Oberlin, Ohio (216) 774-5400 Olmsted Office 27095 Bagley Road Olmsted Twp., Ohio (216) 235-4600 74 Pearl Avenue Office 2850 Pearl Avenue Lorain, Ohio (216) 277-1103 Plaza Office** 1147 Meister Road Lorain, Ohio (216) 282-9196 W. 37th and Oberlin Avenue** Drive-In 3660 Oberlin Avenue Lorain, Ohio (216) 282-9196 Second Street Office 221 Second Street Elyria, Ohio (216) 323-4621 Vermilion Office 4455 Liberty Avenue Vermilion, Ohio (216) 967-3124 The Crossings of Westlake Office 30210 Detroit Road Westlake, Ohio (216) 892-9696 West Park Drive Office 2130 West Park Drive Lorain, Ohio (216) 989-3131 75 Community-Based Automated Teller Machine Locations Convenient Food Mart Cash Machine 5375 West Erie Avenue Lorain, Ohio Lakeland Medical Center 3700 Kolbe Road Lorain, Ohio Lorain County Community College 1005 N. Abbe Road Elyria, Ohio Lowe's Home Improvement Warehouse 620 Midway Boulevard Elyria, Ohio Route 60 and Sailorway Drive 1317 State Route 60 Vermilion, Ohio Lorain Community/St. Joseph Regional Health Center 205 W. 20th Street Lorain, Ohio * Drive-up ATM is available at Sixth Street Drive-In. All other offices feature ATMs. **Plaza Office will be relocated to W. 37th & Oberlin Avenue in May 1996. Outside back cover Dark green background LNB Bancorp, Inc. Beige lettering END OF PUBLISHED LNB BANCORP, INC. 1995 ANNUAL REPORT -----END PRIVACY-ENHANCED MESSAGE-----