-----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, S0PyOFi0nIdFgZb1QGzmyy/ab8cvEcOWwygI/egXQJKms1xI2WoagWKXvO2kzjBr uSrDV3HjbXyAL0dj7Z8mBA== 0000737210-97-000010.txt : 19970328 0000737210-97-000010.hdr.sgml : 19970328 ACCESSION NUMBER: 0000737210-97-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13203 FILM NUMBER: 97565147 BUSINESS ADDRESS: STREET 1: 457 BROADWAY CITY: LORAIN STATE: OH ZIP: 44052-1769 BUSINESS PHONE: 2162446000 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended Commission file December 31, 1996 number 0-13203 LNB Bancorp, Inc. (Exact name of the registrant as specified in its Charter) Ohio 34-1406303 (State of incorporation) (I.R.S. Employer Identification No.) 457 Broadway, Lorain, Ohio 44052-1769 (Address of principal executive offices) (Zip Code) (216) 244 - 6000 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934: Title of Each Class Name of Each Exchange on Which Registered Common Stock, Par Value $1.00 NASDAQ - OTC Per Share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant at February 28, 1997 was approximately $85,563.000. The number of shares of Registrant's Common Stock outstanding on February 28, 1997 was 4,138,533. Portions of the 1996 Annual Report to Stockholders of Registrant are incorporated in Parts I, II, III and IV of this report. Portions of the Proxy Statement of Registrant dated March 17, 1997 are incorporated in Part III of this report. 1 LNB Bancorp, Inc. Form 10-K Report Table of Contents 1996 Page PART I Item 1 Business a. General Development of Business 2 b. Financial Information About Industry Segments 2 c. Description of LNB Bancorp, Inc.'s Business 3 d. Financial Information About Foreign and Domestic Operations and Export Sales 5 e. Statistical Disclosure by Bank Holding Companies 6 I. Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential 6 II. Investment Portfolio 6 III. Loan Portfolio 9 IV. Summary of Loan Loss Experience 12 V. Deposits 14 VI. Return on Equity and Assets 15 VII. Short-Term Borrowings 16 Item 2 Properties 16 Item 3 Legal Proceedings 17 Item 4 Submission to Matters to a Vote of Shareholders 17 PART II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters 18 Item 6 Selected Financial Data 18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 8 Financial Statements and Supplementary Data 19 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART III Item 10 Directors and Executive Officers of the Registrant 20 Item 11 Executive Compensation 20 Item 12 Security Ownership of Certain Beneficial Owners and Management 20 Item 13 Certain Relationships and Related Transactions 21 PART IV Item 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 22 SIGNATURES 23 EXHIBIT INDEX 25 2 PART 1 ITEM 1 - BUSINESS a) GENERAL DEVELOPMENT OF BUSINESS LNB Bancorp, Inc. (the Corporation), a bank holding company, was incorporated on October 11, 1983 under the laws of the State of Ohio at the direction of the Board of Directors of The Lorain National Bank (the Bank), a national banking association, for the purpose of acquiring all the outstanding common stock of the Bank. At a special meeting of the shareholders of the Bank, held on February 28, 1984, the shareholders approved the Plan of Reorganization, involving the merger of the Bank into the Lorain Interim Association, a national banking corporation, incorporated solely for the purpose of effecting the Reorganization Plan. Lorain Interim was a wholly-owned subsidiary of the Corporation. Upon the consummation of the merger on March 30, 1984, under the Plan of Reorganization, the business of the Bank is conducted by the merged Bank under the name "The Lorain National Bank". Each outstanding share of common stock of the Bank, par value $2.50, was converted into one share of the Bancorp stock, par value $2.50. A total of 904,570 shares of corporate stock were issued at the effective date of the merger. On April 18, 1989, the shareholders of the Corporation approved a two-for-one stock split, which reduced the par value to $1.25. On April 20, 1993, the shareholders of the Corporation approved a five-for-four stock split, which reduced the par value to $1.00. On April 18, 1995, the Corporation's Shareholders approved an amendment to the Articles of Incorporation to increase the authorized number of shares of Common Stock from 4,000,000 to 5,000,000 and fix the par value of Common Stock at $1.00 per share to allow for a five-for-four stock split. On April 18, 1995, the Corporation's Board of Directors authorized a five-for- four stock split in the form of a 25 percent stock dividend. The stock split increased the number of shares outstanding by 802,692. Also, Common Stock has been increased by $802,692 with an offsetting reduction to additional capital to reflect the fixed $1.00 par value per share for each additional share issued pursuant to the stock split. LNB Bancorp, Inc. has broader corporate powers than the Bank. These corporate powers principally include the power to engage in certain non-banking businesses closely related to banking, to own capital stock of banks located in Ohio and certain other states and to own capital stock of business corporations (other than banks) located within or outside Ohio. The Corporation has no present plans to engage in any non-banking activities or to acquire companies engaged in such activities. b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Corporation and the Bank are engaged in commercial and retail banking. Reference is hereby made to Item 1e., Statistical Disclosure by Bank Holding Companies, and to Item 8 of this Form 10-K for financial information pertaining to the Corporation's business. 3 c) DESCRIPTION OF LNB BANCORP, INC.'S BUSINESS LNB Bancorp, Inc. is a $438 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 sixteen banking offices in Lorain, Elyria, Amherst, Avon Lake, Oberlin, Olmsted Township, Vermilion and Westlake. The Bank is a full service bank offering a wide range of commercial and personal banking services. These services include checking accounts, savings accounts, certificates of deposit, IRA's, Fortune Fifty (a Senior Citizen program), Keogh plans, commercial loans, real estate loans, installment loans, home equity loans, Small Business Administration loans, Visa card, student loans, safe deposit boxes, night depository, U. S. savings bonds, travelers' checks, money orders, cashiers checks, bank-by-mail, automatic teller machine cash and transaction services, wire transfers, electronic funds transfer, utility bill collections, computer services, notary public service, personal computer based cash management service, 24 hour telephone banking with bill paying service, and discount brokerage services. The Trust and Investment Management Division of the Bank performs complete trust administrative functions and offers agency and trust services to individuals, partnerships, corporations, institutions and municipalities. The Bank is not dependent upon any one significant customer or specific industry. The business of the Corporation is not seasonal to any material degree. In the opinion of management, LNB Bancorp, Inc. does not have exposure to material costs associated with environmental hazardous waste clean up. Competition The banking business is and will continue to be highly competitive. The Lorain National Bank competes with seven other banks and bank holding companies operating in Lorain County which range in size from approximately $438 million to over $102 billion in assets. Other competition comes primarily from savings and loans, credit unions, and other financial intermediaries operating in Lorain County and counties adjacent to it. The Bank's market share of total deposits in Lorain County in all types of financial institutions was approximately 12.77% and 11.91% in 1996 and 1995, respectively. Supervision and Regulation The Corporation, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the Act), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the Federal Reserve Board). Generally, the Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking and a proper incident thereto. 4 The Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank and restricts interstate banking activities. The Act does not place territorial restrictions on the banking subsidiaries of bank holding companies. The Corporation's banking subsidiary is subject to limitations with respect to intercompany loans and investments. The Corporation and the Bank are subject to an extensive scheme of banking laws and regulations that are intended primarily for the protection of the customers and depositors of the Corporation's subsidiaries rather than holders of the Corporation's securities. These laws and regulations govern such areas as permissible activities, loans and investments, rates of interest that can be charged on loans and reserves. The Corporation and the Bank also are subject to general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio. Set forth below are brief descriptions of selected laws and regulations applicable to the Corporation and the Bank. A substantial portion of the Corporation's cash revenues is derived from dividends paid by its subsidiary bank. These dividends are subject to various legal and regulatory restrictions as summarized in Note(10) on page 16 of the LNB Bancorp, Inc. 1996 Annual Report. This note is incorporated herein by reference. The Bank is subject to the provisions of the National Bank Act. The Bank is subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (OCC). The Bank is also subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Under the Act, as amended, and under Regulations of the Federal Reserve Board pursuant thereto, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. The Corporation and its subsidiary bank are also subject to the state banking laws of Ohio. Ohio adopted nationwide reciprocal interstate banking effective October, 1988. However, banking laws of other states may restrict branching of banks to other counties within the state and acquisition or merger involving banks and bank holding companies located in other states. Federal regulators adopted risk-based capital guidelines and leverage standards for banks and bank holding companies. A discussion of the impact of risk-based capital guidelines and leverage standards is presented on page 16 of the LNB Bancorp, Inc. 1996 Annual Report and is incorporated herein by reference. The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company and its controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation after the date of enactment of FIRREA and incurred in connection with the default involving any affiliated insured bank or savings association or the default of any FDIC assisted transaction involving an affiliated insured bank or savings association. 5 On December 19, 1991, the President signed the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) which covers an expanse of banking regulatory issues. FDICIA deals with the recapitalization of the Bank Insurance Fund, with deposit insurance reform including requiring the FDIC to establish a risk-based premium assessment system with a number of other regulatory and supervisory matters. Under current FDIC practices, the Bank will not be required to pay deposit insurance premiums during 1997. However, The Bank will be required to make payments for the servicing of obligations of the Financing Corporation ("FICO") issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. Noncompliance to laws and regulations by bank holding companies and banks can lead to monetary penalties and/or an increased level of supervision or a combination of these two items. Management is not aware of any current instances of noncompliance to laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis. Recent regulatory inspections and examinations of the Bancorp and the Bank have not disclosed any significant instances of noncompliance. The minor instances of noncompliance detected during these inspections and examinations were promptly corrected by management and no action was taken by the regulators against the Corporation or the Bank. The earnings and growth of LNB Bancorp, Inc. are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board. Its policies influence the amount of bank loans and deposits and the interest rates charged and paid thereon, and thus have an effect on earnings. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Corporation and its subsidiary bank cannot be predicted. The discussion of "Impacts of Accounting and Regulatory Pronouncements" is incorporated herein by reference to page 27 of the LNB Bancorp, Inc. 1996 Annual Report. Employees As of December 31, 1996, the Corporation and the Bank employed 218 full-time employees and 67 part-time employees. The Corporation is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be very good. Employee benefits programs are considered by management to be competitive with benefits programs provided by other financial institutions and major employers within the Bank's market area. d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Corporation and the Bank do not have any offices located in foreign countries and they have no foreign assets, liabilities or related income and expense for the years presented. 6 e) STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The following section contains certain financial disclosures related to the Corporation as required under the Securities and Exchange Commission's Industry Guide 3, "Statistical Disclosures by Bank Holding Companies", or a specific reference as to the location of the required disclosures in the LNB Bancorp, Inc. 1996 Annual Report, portions of which are incorporated in this Form 10-K by reference. LNB BANCORP, INC.'S STATISTICAL DISCLOSURE I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL A. & B. The average balance sheet information and the related analysis of net interest income for the years ending December 31, 1996, 1995, and 1994 are included in the Condensed Consolidated Average Balance Sheets, within Management's Discussion and Analysis found on page 23 of the LNB Bancorp, Inc. 1996 Annual Report and is incorporated into this Item I by reference. All interest is reported on a fully taxable equivalent basis. Nonaccruing loans, for the purpose of the computations are included in the daily average loan amounts outstanding. Loan fees are included in interest on loans. C. Tables setting forth the effect of volume and rate changes on interest income and expense for the years ended December 31, 1996 and 1995 are included in Rate/Volume Analysis of Net Interest Income within Management's Discussion and Analysis found on page 23 of the LNB Bancorp, Inc. 1996 Annual Report and is incorporated into this Item I by reference. II. INVESTMENT PORTFOLIO A. The carrying values of securities at year end are as follows: December 31, ----------------------------------- (Amounts in Thousands) 1996 1995 1994 - ------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 14,380 $ 14,768 $ 9,767 Equity securities 1,722 393 370 - ------------------------------------------------------------------------- Total securities available for sale 16,102 15,161 10,137 - ------------------------------------------------------------------------- Investment securities: U.S. Treasury securities 69,673 69,422 80,112 Securities of other U.S. Government agencies and corporations 16,500 14,500 1,500 States and political subdivisions 2,685 5,483 7,775 - ------------------------------------------------------------------------- Total investment securities 88,858 89,405 89,387 - ------------------------------------------------------------------------- Total securities $104,960 $104,566 $ 99,524 - ------------------------------------------------------------------------- 7 B. MATURITY DISTRIBUTION OF INVESTMENT SECURITIES Maturities of nonequity securities owned by the Corporation as of December 31, 1996 are presented below: Maturing ---------------------------------------------------- Within From 1 to From 5 to After 10 (Amounts in Thousands) 1 year 5 years 10 years years Total - ------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 5,363 $ 9,017 $ 0 $ 0 $ 14,380 - ------------------------------------------------------------------------- Total securities available for sale 5,363 9,017 0 0 14,380 - ------------------------------------------------------------------------- Investment securities: U.S. Treasury securities 13,745 54,933 995 0 69,673 Securities of other U.S. Government agencies and corporations 3,500 13,000 0 0 16,500 States and political subdivisions 544 1,692 318 131 2,685 - ------------------------------------------------------------------------- Total investment securities 17,789 69,625 1,313 131 88,858 - ------------------------------------------------------------------------- Total securities $23,152 $78,642 $ 1,313 $ 131 $103,238 - ------------------------------------------------------------------------- 8 WEIGHTED-AVERAGE YIELD OF INVESTMENT SECURITIES The weighted-average yield for each range of maturities of investment securities is shown below as of December 31, 1996: Maturing ----------------------------------------------------- Within From 1 to From 5 to After 10 1 year 5 years 10 years years Total - -------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities 5.43 5.44 N/A N/A 5.44 - ------------------------------------------------------------------------- Total securities available for sale 5.43 5.44 N/A N/A 5.44 - ------------------------------------------------------------------------- Investment securities: U.S. Treasury securities 6.07 6.21 7.96 N/A 6.21 Securities of other U.S. Government agencies and corporations 7.49 6.29 N/A N/A 6.54 States and political subdivisions (1) 8.36 7.73 8.58 7.55 7.95 - ------------------------------------------------------------------------- Total investment securities 6.42 6.26 8.11 7.55 6.32 - ------------------------------------------------------------------------- Total securities 6.19 6.16 8.11 7.55 6.19 - ------------------------------------------------------------------------- (1) Yields on tax-exempt obligations are computed on a tax equivalent basis based upon a 34% statutory Federal income tax rate. C. Excluding those holdings of the securities portfolio in U.S. Treasury Securities and U.S. Government Agencies and corporations, there were no investments in securities of any one issuer which exceeded 10% of the consolidated shareholders' equity of the Corporation at December 31, 1996. 9 III. LOAN PORTFOLIO A. The following table summarized the distribution of the loan portfolio: December 31, --------------------------------------------------- (Amounts in Thousands) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------- Commercial $113,170 $105,847 $104,209 $105,289 $ 98,514 Mortgage 138,455 124,012 114,611 100,140 94,787 Installment 27,683 23,310 19,933 18,554 17,939 Consumer revolving lines of credit 22,765 23,324 23,054 21,774 22,530 - -------------------------------------------------------------------------- TOTAL LOANS 302,073 276,493 261,807 245,757 233,770 Reserve for possible loan losses (4,116) (4,002) (3,832) (3,714) (3,406) - -------------------------------------------------------------------------- NET LOANS $297,957 $272,491 $257,975 $242,043 $230,364 ========================================================================== B. COMMERCIAL LOAN MATURITY AND REPRICING ANALYSIS AS OF DECEMBER 31, 1996 (Amounts in Thousands) 1996 - ---------------------------------------------- Maturing in one year or less $ 15,620 Maturing after one year, but within five years 22,335 Maturing beyond five years 75,215 - ---------------------------------------------- TOTAL COMMERCIAL LOANS $ 113,170 ============================================== Loans repricing beyond one year: Fixed rate 7,251 Variable rate 90,299 - ---------------------------------------------- TOTAL $ 97,550 ============================================== C. RISK ELEMENTS A summary of nonaccrual, restructured loans, other real estate owned, accruing loans past due 90 days, and potential problem loans at December 31, follows: (Amounts in Thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------- Nonaccrual loans: Real estate loans $ 641 $ 511 $ 318 $ 438 $ 801 Commercial loans 114 221 0 420 90 Consumer loans 10 0 0 0 38 - ----------------------------------------------------------------- Total nonaccrual loans 765 732 318 858 929 Restructured loans 0 0 0 0 0 Other Real Estate owned 39 0 0 0 0 Total nonperforming assets $ 804 $ 732 $ 318 $ 858 $ 929 - ----------------------------------------------------------------- 10 Reserve for possible loan losses to nonperforming assets 511.9% 546.7% 1,205.4% 432.8% 366.6% ================================================================= Accruing loans past due 90 days $ 357 $ 725 $ 419 $ 407 $ 109 Potential problem loans 1,066 942 1,197 1,095 2,669 ================================================================= 1) The Corporation, through its subsidiary bank, grants commercial, residential, and consumer loans to customers located primarily in the northern Ohio counties of Lorain, Cuyahoga and Huron. Nonperforming assets consist of nonaccrual loans and loans which have been restructured, which are defined as follows: Nonaccrual loans are loans which are 90 days past due and with respect to which, in management's opinion, collection of interest is doubtful. These loans no longer accrue interest and are accounted for on a cash basis. Loans are classified as restructured when, due to the deterioration of a customer's financial ability, the original terms have been favorably modified or either principal or interest has been forgiven. The level of nonperforming assets remains at a relatively low level from 1992 through 1996, except for 1994. The amount of nonperforming loans at December 31, 1994 was lower than in other years due to the charge-off of a large credit in late 1994. The lower level of nonperforming loans at December 31, 1994, is not, by itself an adequate measure of the credit risk in the loan portfolio. The level of nonperforming loans at December 31, 1994 was at a trough because of the aforementioned charge-off and is not indicative of the credit risk in the loan portfolio. The ratio of the reserve for possible loan loss to nonperforming assets decreased from 1,205.4% in 1994 to 546.7% in 1995 and decreased to 511.9% in 1996. The 1996 decrease is the result of net increases in nonperforming loans in the amount of $72,000. It is the Bank's policy to cease accruing interest on any loans where the principal and/or interest remains unpaid for 90 days or more, unless the loan is both well secured and in the process of collection. For the year ending December 31, 1996, the interest income that would have been earned on the nonaccrual loans in the loan portfolio at year end, would have been approximately $74,000; however, the interest income actually earned and reported as income in 1996 amounted to approximately $27,000. In addition to the nonperforming assets classified above, the loan review committee identifies accruing loans past due 90 days plus potential problem loans. These loans are closely monitored by the loan review committee to assess the borrowers' ability to comply with the terms of the loans. Management's year-end review indicated that a charge to the reserve for possible loan losses or classification to nonperforming status was not warranted. Loans which are 90 days or more past due but continue to accrue interest are loans which, in management's opinion, are well secured and are in the process of collection. 11 2. Potential Problem Loans - As shown in the table on page 10 of Form 10-K, at December 31, 1996, there are approximately $1,066,000 of loans identified on management's watch list which includes both loans which management has some doubt as to the borrowers' ability to comply with the present repayment terms and loans which management is actively monitoring due to changes in the borrowers financial condition. These loans and their potential loss exposure have been considered in management's analysis of the adequacy of the allowance for loan losses. The increase in potential problem loans during 1992 is due, in part, to the lag between the weakened condition of the local economy from 1990 through the first half of 1992 and its subsequent effect on local businesses which have borrowed from the Bank. The decrease in the potential problem loans in 1993, 1994, 1995, and 1996 is due in part to improved national and local economic conditions. 3) Foreign Outstandings - There were no foreign loans outstandings at December 31, 1996, 1995 or 1994. 4) Loan Concentrations - Bank management reviews concentrations of credit and other portfolio risk elements on a quarterly basis. Management is not aware of any significant loans, group of loans or segments of the loan portfolio, other than those reported in the schedule of nonperforming loans, where there are serious doubts as to the ability of the borrower to comply with the present loan repayment terms. No loans are outstanding which would, if consolidated, be considered as a concentration of lending in any particular industry or group of industries nor are there significant amounts of loans made to agricultural or energy related businesses. Credit risk is managed through the bank's loan loss review policy which provides loan department officers and the loan review committee with the responsibility to manage loan quality. The Corporation's credit policies are reviewed and modified on an ongoing basis in order to remain suitable for the management of credit risks within the loan portfolio as conditions change. At December 31, 1996, there were no significant concentrations of credit risk in the loan portfolio. The Corporation's credit policies and review procedures are intended to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, management must rely upon estimates, appraisals and evaluations of loans and the possibility that changes in such estimates, appraisals and evaluations could occur quickly because of changing economic conditions and the economic prospects of borrowers. Also see Note (17) of the "Notes to Consolidated Financial Statements" which appears on page 19 of the LNB Bancorp, Inc. 1996 Annual Report and is incorporated herein by reference. 5) No material amount of loans that have been classified by regulatory examiners as loss, substandard, doubtful, or special mention have been excluded from the amounts disclosed as nonaccrual, past due 90 days or more, restructured, or potential problem loans. Corporate management is not aware of any current recommendations by regulatory authorities which, if they were implemented, would have a material effect on the liquidity, capital resources or operations of the Corporation or its subsidiary bank. D. Other interest-bearing assets - As of December 31, 1996, there are no other interest-bearing assets that would be required to be disclosed under Item III C.1 or 2 if such assets were loans. The Corporation had $39,000 and $0 in Other Real Estate Owned at December 31, 1996, and 1995, respectively. 12 IV. SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes activity relating to the Reserve for Possible Loan Losses: December 31, ------------------------------------------- (Amounts in Thousands) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $ 4,002 $ 3,832 $ 3,714 $ 3,406 $2,803 Charge-offs: Commercial (296) (100) (190) (177) (71) Real Estate (185) (209) (141) (222) (71) Consumer (191) (140) (68) (116) (230) - ---------------------------------------------------------------------- Total charge-offs (672) (449) (399) (515) (372) Recoveries: Commercial 61 163 18 70 38 Real Estate 67 5 57 152 152 Consumer 58 51 42 101 85 - ---------------------------------------------------------------------- Total recoveries 186 219 117 323 275 - ---------------------------------------------------------------------- Net charge-offs (486) (230) (282) (192) (97) - ---------------------------------------------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 600 400 400 500 700 - ---------------------------------------------------------------------- BALANCE AT END OF YEAR $ 4,116 $4,002 $ 3,832 $ 3,714 $ 3,406 ====================================================================== ANALYTICAL DATA BALANCES: Average total loans $287,809 $272,011 $252,345 $237,671 $227,780 Total loans at year end 302,073 276,493 261,807 245,757 233,770 Net charge-offs 486 230 282 192 97 Provision for possible loan losses 600 400 400 500 700 Reserve for possible loan losses at year end 4,116 4,002 3,832 3,714 3,406 RATIOS: Net charge-offs to: Average total loans .17% 0.08% 0.11% 0.08% 0.04% Total loans at year end .16 0.08 0.11 0.08 0.04 Provision for possible loan losses 81.00 57.50 70.50 38.40 13.86 Reserve for possible loan losses 11.81 5.75 7.36 5.17 2.85 Reserve for possible loan losses to: Average total loans 1.43 1.47 1.52 1.56 1.50 Total loans at year end 1.36 1.45 1.46 1.51 1.46 13 The higher amount of 1996 net charge-offs and the higher provision for possible loan losses charge to expense resulted from increases in net charge- offs of commercial and consumer loans. The decreasing trend in the provision for possible loan losses charged to expense which occurred from 1993 through 1995 resulted from the influences of an improvement in the local and national economy. The level of net charge-offs in 1997 is expected to be comparable to the 1996 level. The Bank's policy is to maintain the allowance for possible loan losses at a level considered by management to be adequate for potential future losses. The evaluation performed by the Loan Review Committee is based upon a continuous review of delinquency trends; the amount of nonperforming loans (nonaccrual, restructured, and other real estate owned); loans past due 90 days or more and potential problem loans; historical and present trends in loans charged-off; changes in the composition and level of various loan categories; and current economic conditions. Net charge-offs (recoveries) by portfolio type which are summarized from the analysis of the Reserve for Possible Loan Losses on page 13 of the Form 10-K are presented in the following table: (Amounts in Thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------ Commercial $ 235 $(63) $172 $107 $ 33 Real estate 118 204 84 70 (81) Consumer 133 89 26 15 145 - ------------------------------------------------------------------ Total net charge-offs $ 486 $230 $282 $192 $ 97 ================================================================== Both the provision and the allowance are based on an analysis of individual credits, prior and current loss experience, overall growth in the portfolio, changes in portfolio mix, current economic conditions, and other factors. Consumer and credit card loans are charged off within industry norms, while commercial loans are evaluated individually. An allocation of the ending reserve for possible loan losses by major type follows: (Amounts in Thousands) 1996 1995 1994 1993 1992 ---------------------------------------------------------------- Commercial $1,429 $1,597 $1,487 $1,036 $ 819 Real estate 803 651 623 485 469 Consumer 381 363 348 313 321 Off-balance sheet risk 250 250 250 250 150 Unallocated 1,253 1,141 1,124 1,630 1,647 - ------------------------------------------------------------------ TOTAL $4,116 $4,002 $3,832 $3,714 $3,406 ================================================================== 14 This allocation is made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. The 1996, 1995 and 1994 provision for possible loan losses exceeded net charge-offs by $114,000, $170,000 and $118,000 respectively. The allocated portion of the reserve for possible loan losses has remained relatively consistent during 1992 through 1993. The Bank allocates a portion of the reserve for possible loan losses to off-balance sheet risks which consist primarily of commitments to extend credit. The allocated portion of the reserve to commercial and real estate loans increased in 1994, 1995 and 1996 due to changes in credit risk in those areas. With the adoption of SFAS No. 114 in 1995, it is anticipated that the allowance for possible loan losses in future filings will not be materially different from the 1995 or 1996 allocation due to the current risk inherent in the loan portfolio. The major risk classifications used to aggregate loans for application of SFAS No.114 are commercial, mortgage, and consumer loans. The following table shows the percentage of loans in each category to total loans at year end: 1996 1995 1994 1993 1992 - ------------------------------------------------------------- Commercial 37.5% 38.3% 39.8% 42.8% 42.1% Real estate 45.8 44.8 43.8 40.8 40.6 Consumer 16.7 16.9 16.4 16.4 17.3 ------------------------------------------ 100.0% 100.0% 100.0% 100.0% 100.0% ------------------------------------------ The loan portfolio mix has shifted during the past five years. Consumer loans as a percent of total loans has decreased each year from 1992 through 1993 and leveled off in 1994 while increasing in 1995. The commercial loans percentage has increased from 1992 through 1993. During 1994 the commercial loans as a percentage of total loans decreased by three percent with a related increase in real estate loans of three percent. During 1995 Real estate loans increased by 1 percent and Consumer loans increased by .5%, while Commercial loans decreased by the related 1.5%. During 1996, Real estate loans increased by 1.0% with a related decrease in commercial loans of .8% and consumer loans of .2%. V. DEPOSITS AVERAGE DEPOSITS BY CLASSIFICATION The following table sets forth the classification of average deposits for the indicated period. December 31, ------------------------------------- (Amounts in Thousands) 1996 1995 1994 - ---------------------------------------------------------------- Demand deposits $ 58,989 $ 55,456 $ 53,287 NOW accounts 45,983 44,646 46,253 Money market accounts 21,650 25,578 33,034 Savings deposits 92,570 91,845 96,485 Time deposits 139,028 128,977 100,197 - ---------------------------------------------------------------- Total $358,220 $346,502 $329,256 ================================================================ 15 AVERAGE RATES PAID ON DEPOSITS The following table sets forth average rates paid on categories of interest-bearing deposits for the periods indicated: Years ended December 31, ---------------------------------------- 1996 1995 1994 - --------------------------------------------------------------- NOW accounts 1.61% 1.89% 1.95% Money market accounts 1.95 2.10 2.18 Savings deposits 2.20 2.27 2.31 Time deposits 5.25 5.52 3.91 ======================================== MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE The following table sets forth the maturity of time deposits of $100,000 or more, in thousands of dollars, at December 31, 1996. Maturing within 3 months $ 26,904 After 3 but within 6 months 5,928 After 6 but within 12 months 3,626 After 12 months 1,875 - ---------------------------------------------- Total $ 38,333 ============================================== VI. RETURN ON EQUITY AND ASSETS Information relating to key operating ratios for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 is presented in the tabular form below. December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------- Return on average assets 1.37% 1.21% 1.13% 1.08% 1.07% Return on average equity 13.70 12.72 12.16 11.90 12.17 Dividend payout ratio 44.28 43.47 42.98 42.81 40.64 Average equity to average assets 10.01 9.55 9.31 9.11 8.78 Net interest margin 5.33 5.14 5.09 5.10 5.28 16 VII. SHORT-TERM BORROWINGS Information relating to short-term borrowings for the years ended December 31, 1996, 1995 and 1994 follows: (Amounts in Thousands) 1996 1995 1994 - ---------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements At December 31: Outstanding $23,386 $24,148 $19,171 Interest Rate 4.22% 4.98% 5.36% Average for the period: Outstanding $21,465 $22,864 $21,106 Interest rate 4.75% 4.85% 3.58% Maximum month-end outstanding $34,076 $29,121 $30,750 Construction line of credit At December 31: Outstanding $ 0 $ 0 $ 0 Interest rate 0.000% 0.000% 0.000% Average for the period: Outstanding $ 0 $ 0 $ 2,061 Interest rate 0.000% 0.000% 4.895% Maximum month-end outstanding $ 0 $ 0 $ 2,750 ITEM 2 - PROPERTIES THE LORAIN NATIONAL BANK The principal executive offices are located at its Main Office, 457 Broadway, Lorain, Ohio. The Bank owns the land and buildings occupied by the Main Office, twelve of its branch banking offices, the Branch Administration Building, and the Computer Operations Center. The remaining three branch offices are subject to lease obligations with various lessors and varying lease terms. There is no outstanding mortgage debt on any of the properties which the bank owns. In January of 1997, the Bank entered into two lease agreements to rent branch banking offices in Cuyahoga County at The Renaissance and Westlake Village. 17 Listed below are the branches/customer service facilities of the Bank and their locations: Main Office 457 Broadway, Lorain Vermilion Office 4455 Liberty Avenue, Vermilion Amherst Office 1175 Cleveland Avenue, Amherst Lake Avenue Office Lake Avenue & Route 254, Elyria Avon Lake Office 240 Miller Road, Avon Lake Kansas Avenue Office 1604 Kansas Avenue, Lorain Sixth Street Auto Bank 200 Sixth Street, Lorain Pearl Avenue Office 2850 Pearl Avenue, Lorain Oberlin Office 40 East College Street, Oberlin West Park Drive Office 2130 West Park Drive, Lorain Second Street Office 221 Second Street, Elyria Cleveland Street Office 801 Cleveland Street, Elyria Oberlin Avenue Office 3660 Oberlin Avenue, Lorain Olmsted Office 27095 Bagley Road, Olmsted Township Westlake Office 30210 Detroit Road, Westlake Kendal at Oberlin Office 600 Kendal Drive, Oberlin Computer Operations Center 2130 West Park Drive, Lorain Maintenance Building 2140 West Park Drive, Lorain Purchasing Building 2150 West Park Drive, Lorain Branch Administration Building 521 Broadway, Lorain The Bank also owns automated teller machines and on-line teller terminals, as well as computers and related equipment for use in its business. The Corporate office facility is currently utilized at a level of 75%. The remaining space will be utilized as the Bank continues to grow. The Corporation considers its Corporate offices, branch offices and computer operations center to be in good to excellent condition, well maintained and are more than adequate to conduct the business of Banking. ITEM 3 - LEGAL PROCEEDINGS There are no material legal proceedings, other than ordinary routine litigation incidental to its business, to which the Corporation or its subsidiary is a party to or which any of its property is subject. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the year ended December 31, 1996 there were no matters submitted to a vote of security holders. 18 PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Common Stock Trading Ranges, Cash Dividends Declared information and information relating to dividend restrictions appear on pages 1 and 16 of the LNB Bancorp, Inc. 1996 Annual Report and are incorporated herein by reference. HOLDERS The total number of shareholders was 2,021`as of February 28, 1997. Upon the consummation of the Plan of Reorganization on March 30, 1984, the Corporation became a one bank holding company and shareholders of the Bank became shareholders of the Corporation, receiving one share of voting Common Stock for each outstanding share of Common Stock of the Bank. ITEM 6 - SELECTED FINANCIAL DATA A Five Year Consolidated Financial Summary of selected financial data on page 29 of the LNB Bancorp, Inc. 1996 Annual Report is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis" is incorporated herein by reference to pages 22 - 27 of the LNB Bancorp, Inc. 1996 Annual Report. Also, see Item 8 - Financial Statements and Supplementary Data. In March 1997, Ford Motor Company announced that it would cease production of the Ford Thunderbird and Mercury Cougar at its Lorain, Ohio assembly plant. This will result in the lay-off of 1,800 local Ford Motor Company employees in the third quarter of 1997. The immediate impact on the local economy should be minimal due to the fact that the laid-off employees will continue to receive a significant portion of their wages under union benefit agreements. Also, there has been significant growth in the number of new jobs in the local industries and this trend is expected to continue. There will be a "trickle down" effect through the area caused by the subsequent lay-off of employees in satellite industries and reduction of tax revenues collected by local government and school districts. Lorain National Bank has analyzed the impact of the lay-offs and their subsequent economic impact and has made the initial determination that they should not have a material impact on its financial condition. 19 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Corporation's Independent Auditor's Report and Consolidated Financial Statements are listed below and are incorporated herein by reference to the LNB Bancorp, Inc. 1996 Annual Report (Exhibit 13), pages 6 through 21. The supplementary financial information specified by Item 302 of Regulation S-K, selected quarterly financial data, is included on page 28 of the LNB Bancorp, Inc. 1996 Annual Report. Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Income for Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 Report of Management Independent Auditors' Report ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 20 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT All Directors of the Bank, prior to the merger, became Directors of the Bank and of the Corporation. The Officers of the Bank, prior to the merger, became Officers of the Bank and certain Executive Officers became Officers of the Corporation. "Election of Directors" and "Director's Committees" on pages 3 through 5 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 17, 1997) is incorporated herein by reference. Also, see the additional information presented below which relates to Executive Officers of the Corporation and/or the Bank. BANK LNB BANCORP PRINCIPAL OCCUPATION DIRECTOR DIRECTOR NAME(AGE) DURING PAST 5 YEARS SINCE SINCE Mitchell J. Fallis Vice President and (Not a Director) (42) Chief Accounting Officer, LNB Bancorp, Inc. and The Lorain National Bank Gregory D. Friedman Senior Vice President, (Not a Director) (46) Chief Operating Officer and Chief Financial Officer, LNB Bancorp, Inc. and The Lorain National Bank Michael D. Ireland Senior Vice President, (Not a Director) (50) LNB Bancorp, Inc. and The Lorain National Bank Sandra L. Kotradi Vice President and (Not a Director) (51) Chief Lending Officer, LNB Bancorp, Inc. and The Lorain National Bank Emma N. Mason Senior Vice President, (Not a Director) (59) LNB Bancorp, Inc. and The Lorain National Bank James H. Weber Senior Vice President, (Not a Director) (50) LNB Bancorp, Inc. and The Lorain National Bank ITEM 11 - EXECUTIVE COMPENSATION The information contained on pages 7 through 12 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 17, 1997) is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained on page 15 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 17, 1997), relating to "Compliance with Section 16(A) of the Securities Exchange Act" is incorporated herein by reference. The information contained on page 13 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 17, 1997) is incorporated herein by reference. 21 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained on pages 6, 7 and 15 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 17, 1997) is incorporated herein by reference. Analysis of Loans to Related Parties: The information contained in Note (11) "Transactions with Related Parties" on page 16 of the LNB Bancorp, Inc. 1996 Annual Report is incorporated herein by reference. 22 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following Consolidated Financial Statements and related Notes to Consolidated Financial Statements, together with the Independent Auditors' Report, KPMG Peat Marwick LLP, dated January 24, 1997, appear on pages 6 through 21 of the LNB Bancorp, Inc. 1996 Annual Report and are incorporated herein by reference: (1) Financial Statements Consolidated Balance Sheets December 31, 1996 and 1995 Consolidated Statements of Income for Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements for Years Ended December 31, 1996, 1995 and 1994 Report of Management Independent Auditors' Report (2) Financial Statement Schedules Financial statement schedules are omitted as they are not required or are not applicable or because the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits required by Item 601 Regulation S-K Reference is made to the Exhibit Index which is found on page 25 of this Form 10-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of the year ending December 31, 1996 (c) Exhibits required by Item 601 Regulation S-K Reference is made to the Exhibit Index which is found on page 25 of this Form 10-K. (d) See Item 14(a)(2) above. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LNB Bancorp, Inc. (Registrant) By /s/ Thomas P. Ryan Thomas P. Ryan Executive Vice President, Secretary/Treasurer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: /s/ James L. Bardoner DIRECTOR March 18, 1997 - ----------------------- James L. Bardoner /s/ Daniel P. Batista DIRECTOR March 18, 1997 - ----------------------- Daniel P. Batista /s/ Robert M. Campana DIRECTOR March 18, 1997 - ----------------------- Robert M. Campana /s/ Wellsley O. Gray DIRECTOR March 18, 1997 - ----------------------- Wellsley O. Gray /s/ David M. Koethe DIRECTOR March 18, 1997 - ----------------------- David M. Koethe /s/ Benjamin G. Norton DIRECTOR March 18, 1997 - ----------------------- Benjamin G. Norton /s/ Jeffrey F. Riddell DIRECTOR March 18, 1997 - ----------------------- Jeffrey F. Riddell 24 /s/ T. L. Smith, M.D. DIRECTOR March 18, 1997 - ----------------------- T. L. Smith, M.D. /s/ Eugene M. Sofranko DIRECTOR March 18, 1997 - ----------------------- Eugene M. Sofranko /s/ Paul T. Stack DIRECTOR March 18, 1997 - ----------------------- Paul T. Stack ABSENT - EXCUSED DIRECTOR March 18, 1997 - ----------------------- Leo Weingarten /s/ Stanley G. Pijor CHAIRMAN OF THE March 18, 1997 - ----------------------- BOARD AND DIRECTOR Stanley G. Pijor PRESIDENT, CHIEF March 18, 1997 /s/ James F. Kidd EXECUTIVE OFFICER - ----------------------- AND DIRECTOR James F. Kidd SENIOR VICE /s/ Gregory D. Friedman PRESIDENT, March 18, 1997 - ----------------------- CHIEF FINANCIAL Gregory D. Friedman OFFICER AND CHIEF OPERATING OFFICER /s/ Mitchell J. Fallis VICE PRESIDENT AND March 18, 1997 - ----------------------- CHIEF ACCOUNTING Mitchell J. Fallis OFFICER 25 LNB Bancorp, Inc. Exhibit Index Pursuant to Item 601 (a) of Regulation S-K S-K Reference Number Exhibit Method of Filing (10) Material Contracts (a)Supplemental Retirement Agreement by Previously filed as and between James F. Kidd and The Exhibit (10a) to Lorain National Bank dated July 30, 1996. Quarterly Report Form 10-Q (Commission File no.0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference. (b)Supplemental Retirement Agreement by Previously filed as and between Thomas P. Ryan and The Exhibit(10b) to Lorain National Bank dated July 30, 1996. Quarterly Report on Form 10-Q (Commission File no. 0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference. (c)Supplemental Retirement Agreement by Previously filed as and between Gregory D. Friedman and The Exhibit (10.c) to Lorain National Bank dated July 30, 1996. Quarterly Report on Form 10-Q (Commission File no. 0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference. (d)Employment Agreement by and between Previously filed as James F. Kidd and LNB Bancorp, Inc. and Exhibit (10a) to The Lorain National Bank dated September Quarterly Report on 11, 1995. Form 10-Q (Commission File no. 0-13203) for the quarter ended September 30, 1995, and incorporated herein by reference. 26 S-K Reference Number Exhibit Method of Filing (e)Employment Agreement by and between Previously filed as Thomas P. Ryan and LNB Bancorp, Inc. and Exhibit (10b) to The Lorain National Bank dated September Quarterly Report on 11, 1995. Form 10-Q (Commission File no. 0-13203 for the quarter ended September 30, 1995, and incorporated herein by reference. (11) Computation of Shares Used for Earnings Per Share Calculation. (13) LNB Bancorp, Inc. 1996 Annual Report to Shareholders. (21) Subsidiary of LNB Bancorp, Inc. (22) Notice of Annual Meeting to Shareholders and Proxy Statement (dated March 17, 1997). (23) Consent of Independent Accountants. (27) Financial Data Schedule. (99.1) Annual report on Form 11-K of The Lorain National Bank Employee Stock Ownership Plan (registration number 33-65034) for the plan year ended December 31, 1996 to be filed as an amendment to this annual report on Form 10-K. (99.2) Annual report on Form 11-K of The Lorain National Bank Stock Purchase Plan (registration number 33-65034) for the plan year ended December 31, 1996 to be filed as an amendment to this annual report on Form 10-K. 27 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1996) S - K Reference Number (11) Computation of Shares Used for Earnings Per Share Calculation. Years Ended December 31, ------------------------------------- 1996 1995 1994 ------------------------------------- Weighted-Average Shares Outstanding 4,128,459 4,101,825 4,073,793 Common Stock Equivalents (Stock Options) 10,269 19,222 42,269 ----------- ----------- ----------- 4,138,728 4,121,047 4,116,062 =========== =========== =========== 28 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1996) S - K Reference Number (13) LNB Bancorp, Inc. 1996 Annual Report to Shareholders. 29 COVER DESCRIPTION Beige background LNB Bancorp, Inc. Annual Report 1996 "Achieving as a team What cannot be achieved individually" Dark brown lettering Picture of five hands pulling down on a rope with a hoist. INSIDE FRONT COVER Mission Statement The Mission of Lorain National Bank is to be a profitable, responsible, independent business that provides extraordinary service to our customers and community, while maximizing shareholder value and creating a high-quality and challenging work environment for our employees. Vision Statement Lorain National Bank's vision is to become recognized as the most progressive and dynamic, independent provider of financial services in our market. 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 1997 Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 10:00 a.m. on Tuesday, April 15, 1997 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/Treasurer LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052-1739 STOCK TRANSFER AGENT AND REGISTRAR Shareholders requesting information about their stock holdings should contact our Shareholders Relations Department listed below: The Lorain National Bank Shareholder Relations Department 457 Broadway Lorain, Ohio 44052-1739 (216) 244-7317 or (800) 860-1007 COMMON STOCK INFORMATION The common stock of LNB Bancorp, Inc. is traded on the over-the-counter market under the symbol LNBB. The stock is listed as "LNB Bancorp" in the newspapers. LNB Bancorp, Inc.'s CUSIP is 502100 10 0. MARKET MAKERS IN LNB BANCORP, INC. STOCK Akin Investment Services Group, Elyria, Ohio Everen Securities, Inc. Lorain, Ohio Kemper Securities, Lorain, Ohio McDonald & Company Securities, Inc., Elyria and Sandusky, Ohio Merrill Lynch, North Olmsted, Ohio The Ohio Company, Cleveland, 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. 30 HALF PAGE INSERT BACK SIDE Table of Contents Mission Statement . . . . . . . . . . . . . . . . . . . IFC Vision Statement . . . . . . . . . . . . . . . . . . . . IFC 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 Directors Emeritus of Lorain National Bank . . . . . . . .30 Officers of Lorain National Bank . . . . . . . . . . . . .31 Earnings and Stock Performance . . . . . . . . . . . . . .32 Customer Service Locations . . . . . . . . . . . . . . . IBC 31 Highlights DECEMBER 31, 1996 1995 1986 - ---------------------------------------------------------------------- BANKING OFFICES 16 17 15 OFFICERS AND STAFF 285 294 270 SHAREHOLDERS 2,028 1,991 1,389 ASSETS $438,243,000 $421,603,000 $267,930,000 DEPOSITS $366,380,000 $353,455,000 $231,690,000 NET LOANS $297,957,000 $272,491,000 $150,367,000 ---------------------------------------------- TOTAL CAPITAL $ 44,198,000 $ 40,791,000 $ 19,385,000 ---------------------------------------------- NET INCOME $ 5,852,000 $ 5,003,000 $ 2,407,000 ---------------------------------------------- CASH DIVIDENDS DECLARED $ 2,591,000 $ 2,175,000 $ 816,000 ---------------------------------------------- SHARES OUTSTANDING 4,138,533 4,120,134 3,778,661 ---------------------------------------------- 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 1996 1995 -------------------------------------------------------- Bid Price Bid Price -------------------------------------------------------- Dividend Dividend High Low Amount High Low Amount ------- ------ --------- ------- ------ -------- First Quarter $28.75 $27.75 $.14 $24.60 $24.10 $.12 Second Quarter 28.00 27.75 .14 26.50 24.60 .12 Third Quarter 28.50 28.00 .16 27.00 26.50 .14 Fourth Quarter 29.00 28.50 .19 27.50 27.00 .15 The shares of common stock, par value $1.00 per share, of LNB Bancorp, Inc. are traded on the over-the-counter market primarily through registered brokers in the Corporation's service area. The above bid prices represent quotations between dealers without adjustments for retail markups, markdowns or commissions and may not represent actual transactions. Dividend amounts have been adjusted for the 2% stock dividend on April 16, 1996. Dividend amounts and bid prices have also been adjusted to reflect the five-for-four stock split on April 18, 1995. There are 4,138,533 common shares outstanding, held by 2,028 shareholders as of December 31, 1996. 32 Corporate Profile LNB Bancorp, Inc. is a $438 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 sixteen 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 33 Bottom right column dark brown and white photograph of Stanley G. Pijor, Chairman of the Board Message to Our Shareholders Once again, it is our pleasure to report that LNB Bancorp, Inc. and its subsidiary, The Lorain National Bank, have successfully completed another year of operation. Since this time a year ago, we have recorded increases in all significant areas of financial performance, including our 15th consecutive year of earnings growth, and record high cash and stock dividends paid to our shareholders. Synergy Entering 1996, we were aware of the need to modify various aspects of our operations to meet future challenges. For example, we were faced with downward pressure on margins and growing non-bank competition. At the same time, our Board of Directors set some very specific and ambitious goals for us to accomplish. We viewed these external and internal challenges as an opportunity to make some positive changes. Our first objective was to continue reducing expenses while increasing operating efficiencies. It was, and still is, our goal to accomplish both without adversely affecting service to our four publics - our shareholders, customers, employees and community. As we continue to address the challenges of reducing expenses, we have resolved that we would not seek a significant reduction in staff as an initiative to increase profitability. The staff reductions we've experienced have come as a result of attrition. Instead, we chose a more difficult, yet positive course of action, focusing on our people's strengths, our technological resources and confidence in our management team's ability to achieve our goals. The word that best describes our team-building concept is synergy - the ability to achieve as a team what cannot be achieved individually. As a result, we're operating more efficiently, more effectively and more profitably than ever. Facing Realities The challenges we spoke of earlier still confront us today. Through mergers and acquisitions, the number of commercial banks is decreasing at a quickening pace. Today, there are fewer than 10,000 banks operating nationally, down from 15,000 a decade ago. The competition for quality loans is increasing, overhead costs are rising and the technology we use is becoming increasingly difficult to manage. Meanwhile, customer needs are changing and we're competing in an arena with financial services providers of all sizes. We are well-positioned to meet those challenges by preserving our core values and purpose while adapting our corporate culture, developing more effective operating and management practices and specific strategies to attain goals. We're confident that we have established ourselves as the most experienced, END PUBLISHED PAGE 2 34 Bottom left column dark brown and white photograph of James F. Kidd, President & Chief Executive Officer knowledgeable and responsive community bankers in our service area. Our continued success will come as a result of being true to our mission and vision and having the ability to adapt to the changing financial services environment. Planning Without proper planning, the saying "If you don't know where you're going, any road will lead you there" is more appropriate today than ever - just ask the 5,000 banks which have disappeared over the past 10 years. As with any successful organization, short-term and long-term strategic planning will guide our operations through 1997 and beyond, and will include asset growth, branch and market share growth, enhancement of products and services, attention to compliance issues, expansion of our sales and corporate cultures and growth of our shareholder base. Our synergistic approach to planning has helped bring the five corners of our organization together to reach a consensus on strategic planning. Input from all key divisions including lending, branches, trust and investment management, operations and marketing has greatly expanded our scope of knowledge bank-wide. Financial Performance In 1996 we posted our 15th consecutive year of increased earnings, as net income increased in 1996 by 17.0% over 1995, reaching $5,852,000. Earnings per share also increased to $1.41 for 1996 compared to $1.21 for 1995. Dividends declared per share amounted to $.63 in 1996 compared to $.53 in 1995. Total cash dividend in 1996, including the EXTRA dividend declared by the Board of Directors in November, rose to approximately $2,591,000. In each of the last 10 years, an increase in the regular cash dividend has been approved. The cash dividends declared in 1996 represent a 218% increase over 1986, when $816,000 in cash dividends were declared. 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 1986 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, 1996 include an increase in net loans to $298.0 million, up $25.5 million from 1995 and an increase in total deposits to $366.4 million, up $12.9 million from 1995. END PUBLISHED PAGE 3 35 Total assets of LNB Bancorp, Inc. reached $438.2 million, which represents an increase of $16.6 million over 1995. The return on average assets of LNB Bancorp, Inc. rose from 1.21% in 1995 to 1.37% in 1996. Total shareholders' equity increased $3.4 million to $44.2 million, an increase of 8.4% over the year-end 1995 equity position. The ratios of total shareholders' equity to total assets were 10.1% and 9.7% at December 31, 1996 and 1995, respectively. LNB Bancorp, Inc. and its subsidiary, The Lorain National Bank, significantly exceed all current regulatory capital guidelines (for more detail, see Note 10- Shareholders' Equity on page 16). 1996 Highlights Early in the year, we recognized the many years of dedicated service of retired directors Don A. Sanborn and James H. Riddell, naming them Directors Emeritus of Lorain National Bank. We also welcomed Robert M. Campana as our newest member of the Board of Directors during the first quarter. Our Lending Division enjoyed another robust year in 1996. Nearly $9.0 million in new commercial loans were booked, $14.1 million in mortgage loans and another $5.1 million in consumer loans were approved. This success can be attributed to a favorable economic climate, a low interest rate environment, diversity of business credit, an experienced lending staff and a loyal and growing customer base. The Trust & Investment Management Division continues to grow, surpassing the $200 million mark in assets under management for the first time ever, which represents an increase of 13.9% in 1996, over the year-end 1995 position. Direct revenues for the division in 1996 increased 5.5%. For 1997, the division will continue to develop plans for offering mutual funds to complement our bank customers' savings and investment portfolios. The ever-changing world of electronic technology kept the Bank Operations Division active in 1996. Installation of a wide area network (WAN) and enhancements to our local area network (LAN) provide greater speed, accuracy, system maintenance and communication to the organization. In addition to running the bank's daily transaction systems, this division supported new product development, delivery systems and personal computer use bank-wide. Our Branch Operations Division opened a new banking facility on Oberlin Avenue in Lorain and prepared for the opening of two mini-branches in the Westlake Village and The Renaissance retirement centers in Westlake and Olmsted Township, respectively, at year-end. This division effectively took strides in reducing branch employee turnover, increased operating efficiencies, assisted in product and service enhancements and was instrumental in achieving its team-building goals. More than 1,800 employee training contacts were made with our staff in 1996 in areas of personal computing, customer service, job knowledge and related education. In 1996, our Marketing Division capitalized on a wave of bank mergers and subsequent name changes with a message of our own. The outdoor and newspaper theme, "If Your Bank Just Changed Names, Maybe It's Time You Changed Banks," helped clarify our position on the matter. END PUBLISHED PAGE 4 36 Later in the year, we assisted the Lorain Fire Department with fund-raising for the purchase of high-tech thermal imaging lifesaving equipment. Our direct-mail campaign and resulting television coverage on all five Cleveland television stations resulted in the purchase of not one, but three pieces of equipment that may one day save the life of one or more members of the Lorain community. When we opened the new banking facility on Oberlin Avenue in June in conjunction with the closing of our Lorain Plaza location, our goal was to consolidate facilities while providing a smooth customer transition. Not only was the transition seamless, it actually attracted many new customers and accompanying account relationships. In October, we celebrated the 10th anniversary of the Olmsted Township office with a $1,200 diamond giveaway promotion. The direct-mail motivated promotion more than doubled the rate of new account openings for the month and gave us an opportunity to re-introduce ourselves to the Olmsted market. At year-end we installed a new free-standing automated teller machine in the food court at the Midway Mall in Elyria. It immediately became one of our most heavily-used ATMs in the system. We are currently investigating several other potential high-volume sites throughout the community. Throughout the course of the year, we established several new corporate direct deposit programs, conducted research on a variety of products and services and employed an outside firm to conduct mystery shops of our branch and customer sales and service staff for quality control purposes. New products introduced in 1996 had a decidedly electronic nature to them. Our business customers may now avail themselves to Corporate Connection, a personal computer-based cash management system which allows cash managers to access their accounts for balance inquiries and funds transfers at their discretion. TeleBanker is a 24-hour banking system which allows retail customers to perform similar functions by phone. A bill payment function of TeleBanker, called Telepay, will be introduced early in 1997. Local Economy Lorain County continues to grow, spurred on by a relatively healthy national economy. Unemployment has remained constant and new industries continue to discover the benefits of moderate-cost resources and easier access to the Lorain County marketplace. Our commercial and residential lending portfolios attest to the demand for dollars for business expansion and affordable housing throughout the communities we serve. Low interest rates continue to fuel spending, even in the consumer lending market. We're hopeful that the growth we've witnessed in 1996 will continue through this year and beyond. In closing, we once again thank you for your continued support of our current activities and look forward to a rewarding 1997. Stanley G. Pijor James F. Kidd /s/ Stanley G. Pijor /s/ James F. Kidd Chairman of the Board President and Chief Executive Officer END PUBLISHED PAGE 5 37 Consolidated Balance Sheets December 31, 1996 1995 - ------------------------------------------------------------------------- ASSETS: Cash and due from banks (note 2) $ 18,890,000 $ 27,428,000 Federal funds sold and other interest bearing instruments 103,000 102,000 Securities (note 3): Securities available for sale 16,102,000 15,161,000 Investment securities held to maturity 88,858,000 89,405,000 ---------------------------- Total securities (Market value $105,639,000 and $106,076,000, respectively) 104,960,000 104,566,000 ---------------------------- Loans (notes 4 and 11): Portfolio loans 290,133,000 263,824,000 Loans available for sale 11,940,000 12,669,000 ---------------------------- Total loans 302,073,000 276,493,000 Reserve for possible loan losses (4,116,000) (4,002,000) ---------------------------- Net loans 297,957,000 272,491,000 ---------------------------- Bank premises and equipment, net (note 5) 10,893,000 11,006,000 Accrued interest receivable 2,721,000 2,764,000 Other assets 2,719,000 3,246,000 ---------------------------- TOTAL ASSETS $438,243,000 $421,603,000 ---------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits (note 6): Demand and other noninterest-bearing deposits $ 63,802,000 $ 60,163,000 Savings and passbook accounts 159,589,000 159,447,000 Time deposits 142,989,000 133,845,000 ---------------------------- Total deposits 366,380,000 353,455,000 ---------------------------- Securities sold under repurchase agreements and other short-term borrowings (note 7) 23,386,000 24,148,000 Federal Home Loan Bank advances (note 8) 1,095,000 -0- Accrued interest payable 1,263,000 1,250,000 Taxes and other liabilities (notes 9 and 13) 1,921,000 1,959,000 ---------------------------- Total liabilities 394,045,000 380,812,000 ---------------------------- 38 Shareholders' equity: (note 10) Common stock, $1.00 par: Shares authorized 5,000,000 Shares issued and outstanding 4,138,533 and 4,039,347, respectively (notes 14, 15 and 16) 4,138,000 4,039,000 Additional capital 20,178,000 17,854,000 Retained earnings (note 12) 19,873,000 18,856,000 Net unrealized gain on securities available for sale, net of tax 9,000 42,000 ---------------------------- Total shareholders' equity 44,198,000 40,791,000 ---------------------------- Commitments and contingencies (notes 5 and 17) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $438,243,000 $421,603,000 ---------------------------- See accompanying notes to consolidated financial statements END PUBLISHED PAGE 6 39 Consolidated Statements of Income Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans: Taxable $ 25,851,000 $ 24,752,000 $ 21,353,000 Tax exempt 59,000 75,000 72,000 Interest and dividends on securities: U.S. Treasury securities 5,107,000 5,104,000 4,323,000 U.S. Government agencies and corporations 949,000 408,000 170,000 States and political subdivisions 228,000 452,000 595,000 Other debt and equity securities 93,000 20,000 20,000 Interest on Federal funds sold and other interest bearing instruments 183,000 300,000 297,000 -------------------------------------------- TOTAL INTEREST INCOME 32,470,000 31,111,000 26,830,000 INTEREST EXPENSE: Interest on deposits: Time certificates of $100,000 and over 1,875,000 1,847,000 793,000 Other deposits 8,630,000 8,681,000 6,968,000 Interest on securities sold under repurchase agreements and other short-term borrowings 954,000 1,107,000 755,000 Other interest 19,000 1,000 56,000 -------------------------------------------- TOTAL INTEREST EXPENSE 11,478,000 11,636,000 8,572,000 -------------------------------------------- NET INTEREST INCOME 20,992,000 19,475,000 18,258,000 Provision for possible loan losses (note 4) 600,000 400,000 400,000 -------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 20,392,000 19,075,000 17,858,000 -------------------------------------------- OTHER INCOME: Trust division income 1,095,000 1,038,000 916,000 Service charges on deposit accounts 1,903,000 1,360,000 1,300,000 Other service charges, exchanges and fees 1,870,000 1,849,000 1,837,000 Gains (loss) on sales of loans and securities (1,000) -0- 70,000 Other operating income 58,000 40,000 11,000 -------------------------------------------- TOTAL OTHER INCOME 4,925,000 4,287,000 4,134,000 40 OTHER EXPENSES: Salaries and employee benefits (notes 13, 14, 15 and 16) 8,134,000 7,926,000 7,675,000 Net occupancy expense of premises (note 5) 1,224,000 1,211,000 1,112,000 Furniture and equipment expenses (note 5) 2,045,000 1,895,000 1,768,000 Supplies and postage 971,000 904,000 837,000 FDIC deposit insurance premium 2,000 385,000 722,000 Ohio franchise tax 554,000 508,000 475,000 Other operating expenses 3,635,000 3,194,000 3,090,000 -------------------------------------------- TOTAL OTHER EXPENSES 16,565,000 16,023,000 15,679,000 -------------------------------------------- INCOME BEFORE FEDERAL INCOME TAXES 8,752,000 7,339,000 6,313,000 -------------------------------------------- FEDERAL INCOME TAXES (note 9): Current 2,763,000 2,111,000 1,816,000 Deferred 137,000 225,000 65,000 -------------------------------------------- TOTAL FEDERAL INCOME TAXES 2,900,000 2,336,000 1,881,000 -------------------------------------------- NET INCOME $ 5,852,000 $ 5,003,000 $ 4,432,000 -------------------------------------------- NET INCOME PER SHARE (note 1) $ 1.41 $ 1.21 $ 1.07 -------------------------------------------- See accompanying notes to consolidated financial statements. END PUBLISHED PAGE 7 41 Consolidated Statements of Cash Flows Years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 32,561,000 $ 30,734,000 $ 26,732,000 Other income received 4,970,000 4,245,000 4,057,000 Interest paid (11,465,000) (11,254,000) (8,492,000) Cash paid for salaries and employee benefits (8,015,000) (7,832,000) (7,661,000) Net occupancy expense of premises paid (935,000) (901,000) (847,000) Furniture and equipment expenses paid (787,000) (733,000) (708,000) Cash paid for supplies and postage (971,000) (904,000) (837,000) Cash paid for other operating expenses (3,829,000) (4,354,000) (4,372,000) Federal income taxes paid (2,974,000) (1,956,000) (1,960,000) -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 8,555,000 7,045,000 5,912,000 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities 30,006,000 45,799,000 43,905,000 Proceeds from maturities and sales of securities available for sale 9,763,000 2,953,000 7,069,000 Purchases of investment securities (29,405,000) (45,914,000) (40,494,000) Purchases of securities available for sale (10,743,000) (7,702,000) (6,999,000) Net (increase) decrease in credit card loans (132,000) (119,000) 129,000 Net (increase) in long-term loans (26,214,000) (14,969,000) (16,528,000) Purchases of bank premises, equipment and software (1,407,000) (2,276,000) (4,052,000) Proceeds from sales of bank premises and equipment 55,000 -0- -0- -------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (28,077,000) (22,228,000) (16,970,000) 42 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and other noninterest-bearing deposits 3,639,000 3,067,000 6,855,000 Net increase (decrease) in savings and passbook deposits 142,000 (11,648,000) (1,801,000) Net increase in time deposits 9,144,000 26,817,000 9,153,000 Net increase (decrease) in securities sold under re- purchase agreements and other short-term borrowings (762,000) 4,997,000 (249,000) Proceeds from Federal Home Loan Bank advances 1,095,000 -0- -0- Proceeds from line of credit -0- -0- 1,668,000 Cash paid on line of credit -0- -0- (2,768,000) Proceeds from exercise of stock options 179,000 278,000 56,000 Dividends paid (2,452,000) (2,073,000) (1,857,000) -------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 10,985,000 21,438,000 11,057,000 -------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,537,000) 6,255,000 (1,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27,530,000 21,275,000 21,276,000 -------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,993,000 $ 27,530,000 $ 21,275,000 -------------------------------------------- 43 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $ 5,852,000 $ 5,003,000 $ 4,432,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,547,000 1,473,000 1,325,000 (Gains) loss on sales of loans and securities 1,000 -0- (70,000) Amortization and accretion on securities, net (48,000) (4,000) 19,000 Amortization of deferred loan fees and costs, net 280,000 173,000 67,000 Provision for possible loan losses 600,000 400,000 400,000 Decrease in deferred Federal income taxes 137,000 157,000 65,000 (Increase) decrease in accrued interest receivable 43,000 (373,000) (117,000) (Increase) decrease in other assets 302,000 (188,000) (282,000) Increase in accrued interest payable 13,000 382,000 80,000 Increase (decrease) in Federal income taxes payable (211,000) 223,000 (79,000) Increase (decrease) in accrued expenses 34,000 (424,000) 65,000 Others, net 5,000 223,000 7,000 -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $8,555,000 $7,045,000 $5,912,000 -------------------------------------------- See accompanying notes to consolidated financial statements. END PUBLISHED PAGE 8 44 Consolidated Statements of Shareholders' Equity Net Unrealized Gains (Loss) Years Ended on Securities Total December 31, 1996 Common Additional Retained Available Shareholders' 1995 and 1994 Stock Capital Earnings for Sale Equity - ------------------------------------------------------------------------- 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 ----------------------------------------------------------- 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, 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 ----------------------------------------------------------- 45 Net Unrealized Gain(Loss) on Years ended Securities Total December 31, 1996 Common Additional Retained Available Shareholders' 1995 and 1994 Stock Capital Earnings For Sale Equity - ------------------------------------------------------------------------- Net income -0- -0- 5,852,000 -0- 5,852,000 Cash dividends declared, $.63 per share -0- -0- (2,591,000) -0- (2,591,000) Issuance of 18,307 shares of common stock under stock option plans 18,000 161,000 -0- -0- 179,000 Market value of stock issued in payment of 2% stock dividend, 80,879 shares 81,000 2,163,000 (2,244,000) -0- -0- Change in unrealized gain(loss) on securities available for sale, net of tax -0- -0- -0- (33,000) (33,000) ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $4,138,000 $20,178,000 $19,873,000 $ 9,000 $44,198,000 ----------------------------------------------------------- See accompanying notes to consolidated financial statements. END PUBLISHED PAGE 9 46 Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (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) Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Industry Segment Information: The Corporation's activities are considered to be a single industry segment for financial reporting purposes. LNB Bancorp, Inc. is a bank holding company engaged in the business of commercial and retail banking and trust and investment management services, with operations conducted through its main office and branches located throughout Lorain and western Cuyahoga Counties of Ohio. Lorain and western Cuyahoga Counties provide the source for substantially all of the Bank's deposit, loan and trust activities. The majority of the Bank's income is derived from a diverse base of commercial, mortgage and retail lending activities and investments. (d) Cash and Cash Equivalents: For purposes of reporting in the Consolidated Statements of Cash Flows, cash and cash equivalents include currency on hand, amounts due from banks, Federal funds sold, and securities purchased under resale agreements. Generally, Federal funds sold and securities purchased under resale agreements are for one day periods. (e) Securities: The Corporation provides for securities as required by 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, 1996 and 1995 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. Investment securities which are classified as being held to maturity are stated at cost. Securities are adjusted for amortization of premiums and accretion of discounts using the interest method. Securities available for sale are carried at fair value with unrealized gains and losses 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. The Bank does not maintain a trading account. (f) 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. 47 (g) 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. END PUBLISHED PAGE 10 48 (1) Summary of Significant Accounting Policies (continued): (h) Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed generally on the straight-line method over the estimated useful lives of the assets. (i) 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. (j) 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. (k) 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. (l) Trust and Investment Management 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 and Investment Management Division is reported on an accrual basis. (m) Interest on Deposit Accounts: Interest on deposit accounts is accrued and charged to expense monthly and is paid or credited in accordance with the terms of the respective accounts. (n) Federal Income Taxes: The Corporation and its wholly owned subsidiary file a consolidated federal income tax return. The Corporation provides for federal income taxes as required by Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes". Under this 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. (o) 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 2% stock dividend in 1996 and the five-for-four stock split in 1995 and the 3% stock dividend in 1994. (p) Reclassifications: Certain 1994 and 1995 amounts have been reclassified to conform to the 1996 presentation. 49 (q) Employee Stock Ownership Plan and Stock Purchase Plan: These two qualified defined contribution plans are accounted for under the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions". (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 $6,252,000 and $5,660,000 at December 31, 1996 and 1995, 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 $6,271,000 and $5,674,000, during 1996 and 1995 respectively. END PUBLISHED PAGE 11 50 (3) Securities: The amortized cost, gross unrealized gains and losses and fair values of securities at December 31, 1996 and 1995 follow: Gross Gross Amortized Unrealized Unrealized Fair December 31, 1996 Cost Gains Losses Value - --------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 14,424,000 $ 32,000 $( 76,000) $ 14,380,000 Equity securities 1,665,000 57,000 -0- 1,722,000 -------------------------------------------------- Total securities available for sale 16,089,000 89,000 ( 76,000) 16,102,000 -------------------------------------------------- Investment securities held-to-maturity: U.S. Treasury securities 69,673,000 783,000 (126,000) 70,330,000 Securities of other U.S. Government agencies and corporations 16,500,000 39,000 (93,000) 16,446,000 States and political subdivisions 2,685,000 79,000 (3,000) 2,761,000 --------------------------------------------------- Total investment securities held- to-maturity 88,858,000 901,000 (222,000) 89,537,000 ----------------------------------------------------- Total securities $104,947,000 $ 990,000 $(298,000) $105,639,000 ----------------------------------------------------- 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 held-to-maturity: 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 held- to-maturity 89,405,000 1,672,000 (162,000) 90,915,000 ---------------------------------------------------- Total securities $104,496,000 $1,793,000 $ (213,000) $ 106,076,000 ---------------------------------------------------- 51 The amortized cost, fair values and yields of debt securities by contractual maturity date at December 31, 1996 follow: Fully-Tax Amortized Fair Equivalent December 31, 1996 Cost Value Yield - ------------------------------------------------------------------------- U.S. Treasury securities available for sale: Due within 1 year $ 5,348,000 $ 5,363,000 5.43% After 1 but within 5 years 9,076,000 9,017,000 5.44 Equity securities 1,665,000 1,722,000 5.59 ------------------------------------------- 16,089,000 16,102,000 5.45 ------------------------------------------- Investment securities held-to-maturity: Due within 1 year 17,789,000 17,853,000 6.42 After 1 but within 5 years 69,625,000 70,115,000 6.26 After 5 but within 10 years 1,313,000 1,440,000 8.11 After 10 years 131,000 129,000 7.55 ------------------------------------------- 88,858,000 89,537,000 6.32 ------------------------------------------- Total $104,947,000 $105,639,000 6.19% =========================================== END PUBLISHED PAGE 12 52 (3) Securities (continued): Proceeds from the sale of securities during 1996 were $1,999,000 resulting in gross realized gains of $-0- and realized losses of $1,000. There were no sales of securities in 1995 and 1994. 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 $94,173,000 and $87,922,000 at December 31, 1996 and 1995, respectively. The fair value of securities is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments. At December 31, 1996 the securities portfolio contained approximately $1,974,000 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 $2,039,000. 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, 1996. (4) Loans and Reserve for Possible Loan Losses: Loan balances at December 31, 1996 and 1995 are summarized as follows: December 31, 1996 1995 - -------------------------------------------------------------------------- Real estate loans (includes loans secured primarily by real estate only): Construction and land development $ 26,188,000 $ 24,804,000 One to four family residential 153,178,000 138,979,000 Multi-family residential 10,062,000 7,719,000 Non-farm non-residential properties 63,292,000 59,419,000 Commercial and industrial loans (except those secured primarily by real estate) 19,055,000 17,732,000 Personal loans to individuals: Auto, single payment and installment 23,631,000 20,445,000 Credit card and related plans 5,195,000 5,073,000 Obligations of states and political subdivisions other than securities 842,000 991,000 All other loans 630,000 1,331,000 ------------------------------------ TOTAL LOANS 302,073,000 276,493,000 Reserve for possible loan losses (4,116,000) (4,002,000) ------------------------------------ NET LOANS $297,957,000 $272,491,000 ------------------------------------ 53 Activity in the reserve for possible loan losses for 1996, 1995 and 1994 is summarized as follows: Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------- Balance at beginning of year $4,002,000 $3,832,000 $3,714,000 Provision for possible loan losses 600,000 400,000 400,000 Loans charged-off (672,000) (449,000) (399,000) Recoveries on loans previously charged-off 186,000 219,000 117,000 -------------------------------------------- BALANCE AT END OF YEAR $4,116,000 $4,002,000 $3,832,000 -------------------------------------------- At December 31, 1996 and 1995, $11,940,000 and $12,669,000 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, 1996 and 1995. The market value of loans available for sale equaled or exceeded its carrying value. At December 31, 1996, the Bank had firm commitments for the sale of approximately $936,000 of these loans. At December 31, 1996, the recorded investment in loans have been identified as being impaired and have been evaluated in accordance with SFAS No. 114 and 118 totalled $1,216,000 (of which $540,000 were on a non-accrual basis). Included in the impaired amount is $911,000 related to loans with a corresponding valuation allowance of $152,000. For the year ended December 31, 1996, the average recorded investment in impaired loans was approximately $983,000. The Corporation recognized $66,000 of interest on impaired loans (during the portion of the year that they were impaired), of which $7,000 related to impaired loans for which income is recognized on the cash basis. At December 31, 1995, the recorded investment in loans have been identified as being impaired and have been evaluated in accordance with SFAS No. 114 and 118 totalled $1,513,000 (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 54 (5) Bank Premises and Equipment: Bank premises and equipment are summarized as follows: December 31, 1996 1995 - ------------------------------------------------------------------------- Land $ 1,941,000 $ 1,941,000 Buildings 9,159,000 8,777,000 Equipment and furniture 11,462,000 11,428,000 Leasehold improvements 311,000 441,000 --------------------------------------------- 22,873,000 22,587,000 --------------------------------------------- Less accumulated depreciation and amortization 11,980,000 11,581,000 --------------------------------------------- TOTAL $10,893,000 $11,006,000 --------------------------------------------- Depreciation and amortization of Bank premises and equipment charged to other expense amounted to $1,332,000 in 1996, $1,299,000 in 1995 and $1,170,000 in 1994. Amortization of purchased software charged to other operating expenses amounted to $215,000 in 1996, $174,000 in 1995 and $155,000 in 1994. At December 31, 1996, 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 - ----------------------------------------------------------- 1997 $ 49,000 $38,000 1998 32,000 38,000 1999 25,000 4,000 2000 20,000 4,000 2001 and thereafter 108,000 4,000 ------------------------ Rentals paid under leases on branch offices and equipment, respectively, amounted to $101,000 and $54,000 in 1996, $115,000 and $68,000 in 1995 and $106,000 and $65,000 in 1994. 55 (6) Deposits: Deposit balances at December 31, 1996 and 1995 are summarized as follows: December 31, 1996 1995 - -------------------------------------------------------------------------- Demand and other noninterest- bearing deposits: Individuals, partnerships and corporations $ 54,899,000 $ 50,513,000 U.S. Government 693,000 1,612,000 States and political subdivisions 4,411,000 5,088,000 Certified, official, travelers checks and other 3,799,000 2,950,000 ----------------------------------- Total demand and other noninterest- bearing deposits 63,802,000 60,163,000 ----------------------------------- Savings and passbook accounts: Individuals and non-profit organizations 141,978,000 142,020,000 Corporations and profit organizations 17,611,000 17,427,000 ----------------------------------- Total savings and passbook accounts 159,589,000 159,447,000 ----------------------------------- Time deposits: Individuals, partnerships and corporations 116,364,000 113,473,000 States and political subdivisions 26,625,000 20,372,000 ------------------------------------ Total time deposits 142,989,000 133,845,000 ------------------------------------ TOTAL DEPOSITS $366,380,000 $353,455,000 ------------------------------------ The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $38,333,000 and $33,942,000 at December 31, 1996 and 1995, respectively. The maturity distribution of time certificates of deposit as of December 31, 1996 and 1995 follows: After 3 After 6 Months Months Within 3 But Within But Within Months 6 Months 1 Year - ------------------------------------------------------------------------- December 31, 1996 $60,553,000 $23,053,000 $25,110,000 - ------------------------------------------------------------------------ December 31, 1995 $46,457,000 $36,044,000 $20,956,000 - ------------------------------------------------------------------------- After 1 After 2 Year But Years But Within Within 2 Years 5 Years Total - ------------------------------------------------------------------------- December 31, 1996 $22,707,000 $11,566,000 $142,989,000 - ------------------------------------------------------------------------- December 31, 1995 $20,489,000 $ 9,899,000 $133,845,000 - ------------------------------------------------------------------------- END PUBLISHED PAGE 14 56 (7) Short-Term Borrowings: Information relating to short-term borrowings for the years ended December 31, 1996 and 1995 follows: December 31, 1996 1995 - -------------------------------------------------------------------------- Securities sold under repurchase agreements and other short-term borrowings At December 31: Outstanding $23,386,000 $24,148,000 Interest rate 4.22% 4.98% Average for the period: Outstanding $21,465,000 $22,864,000 Interest rate 4.75% 4.85% Maximum month-end outstanding $34,076,000 $29,121,000 (8) Federal Home Loan Bank Advances: Advances from the Federal Home Loan Bank of Cincinnati, with maturities and fixed interest rates thereon at December 31, 1996 are as follows: Maturity Interest Rate 1996 - --------------------------------------------------- 2001 6.85% $ 360,000 2001 6.25% 735,000 - --------------------------------------------------- Total $1,095,000 -------------- The Bank maintains a $10,000,000 line of credit with the Federal Home Loan Bank of Cincinnati (FHLB) which matures in October 1997. At December 31, 1996, pledged as collateral for FHLB advances were all of the shares of FHLB stock owned by the Bank, with a carrying value of $1,322,000, and qualified mortgage loans totaling $1,642,500. Based on the carrying amount of FHLB stock owned by the Bank, total FHLB advances available were limited to approximately $13,046,000 at December 31, 1996. 57 (9) Federal Income Taxes: 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, 1996 1995 1994 - ------------------------------------------------------------------------- Computed "expected" tax expense $2,976,000 $2,495,000 $2,146,000 Increase (reduction) in income taxes resulting from: Tax exempt interest on obligations of states and political subdivisions (89,000) (162,000) (216,000) Other, net 13,000 3,000 (49,000) --------------------------------------------- TOTAL FEDERAL INCOME TAXES $2,900,000 $2,336,000 $1,881,000 --------------------------------------------- Net deferred Federal tax assets of $739,000, $876,000 and $1,101,000 at December 31, 1996, 1995 and 1994, 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. December 31, 1996 1995 1994 - ------------------------------------------------------------------------- Deferred Federal tax assets: Reserve for possible loan losses $ 956,000 $ 917,000 $ 859,000 Deferred compensation 127,000 131,000 132,000 Accrued vacation payable 135,000 120,000 105,000 Accrued pension expense -0- 51,000 106,000 Deferred loan fees and costs -0- 34,000 162,000 Other, net 2,000 2,000 70,000 ------------------------------------ Total deferred Federal tax assets 1,220,000 1,255,000 1,434,000 Deferred Federal tax liabilities: Bank premises and equipment (265,000) (214,000) (147,000) Deferred charges (168,000) (165,000) (186,000) FHLB stock dividends (25,000) -0- -0- Prepaid pension expense (15,000) -0- -0- Accrued loan fees and costs (8,000) -0- -0- ------------------------------------- Total deferred Federal tax liabilities (481,000) (379,000) (333,000) ------------------------------------- NET DEFERRED FEDERAL TAX ASSETS $ 739,000 $ 876,000 $1,101,000 ------------------------------------- END PUBLISHED PAGE 15 58 (10) Shareholders' Equity: The capital resources of the Corporation and the Bank continue to grow stronger. The percentage of average equity to average assets were 10.01%, 9.55%, and 9.31% for 1996, 1995 and 1994, respectively. The approval of the Comptroller of the Currency is required for national banks to pay dividends in excess of earnings retained in the current year plus retained net profits for the preceding two years. As of December 31, 1996 approximately $532,000 of undistributed earnings of the Bank was available for distribution to the parent company as dividends without prior regulatory approval. Under regulations issued by the Federal Reserve Board and the Comptroller of the Currency, banks and bank holding companies are required to maintain certain minimum capital ratios known as the risk-based capital ratio and the leverage ratio. An objective of these ratios is to incorporate risk-weighted capital guidelines that include not only balance sheet items but also off-balance sheet activities such as unused commitments and letters of credit. Banks and bank holding companies are required to maintain total risk-based capital ratios of 8% of which 4% must be Tier I (core) capital, and a leverage capital ratio of generally 4%. Tier I capital consists of shareholders' equity, exclusive of net unrealized gain (loss) on securities available for sale, while total risk-based capital consists of shareholders' equity, exclusive of net gain (loss) on securities available for sale, plus the allowable portion of the reserve for possible loan losses and subordinated debt. The allowance included in total risk-based capital cannot exceed 1.25% of risk-weighted assets. In addition to adopting a risk-based assessment system, federal regulatory agencies adopted regulations defining five capital categories. These regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically undercapitalized." To be considered "well capitalized", an institution must generally have a leverage capital ratio of at least 5 percent, a Tier I risk-based capital ratio of at least 6 percent, and a total risk-based capital ratio of at least 10 percent. At December 31, 1996, and 1995, the capital ratios for the Corporation and its wholly owned subsidiary, Lorain National Bank, exceeded the above ratios required to be "well capitalized". The "well capitalized" status affords the Bank the ability to operate with the greatest flexibility under current laws and regulations. As of March 31, 1996, the most recent notification from the Comptroller of the Currency categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category. 59 An analysis of the Corporation's risk-based capital position at December 31, 1996 and 1995 follows: December 31, 1996 1995 - ------------------------------------------------------------------------- Tier I capital - Shareholders' equity $ 44,189 $ 40,749 Tier II capital - Allowable portion of the reserve for possible loan losses 3,273 2,857 ---------- ---------- Total risk-based capital $ 47,462 $ 43,606 ---------- ---------- Risk-weighted assets $246,983 $228,578 Risk weighted off-balance sheet assets 14,875 13,783 ---------- ---------- Total risk-weighted assets $261,858 $242,361 ---------- ---------- Tier I capital ratio 16.93% 16.81% Required Tier I capital ratio 4.00% 4.00% Total capital ratio 18.18% 17.99% Required capital ratio 8.00% 8.00% Leverage ratio - Tier I capital as a percentage of average assets 10.36% 9.89% Required leverage ratio 3.00% 3.00% (11) 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, 1996 1995 - ------------------------------------------------------------------------- Aggregate amount at beginning of year $2,907,000 $2,773,000 Additions (deductions): New loans 1,271,000 652,000 Repayments (1,342,000) (529,000) Changes in directors and officers and/or their affiliations, net 1,048,000 11,000 - ------------------------------------------------------------------------- Aggregate amount at end of year $3,884,000 $2,907,000 - ------------------------------------------------------------------------- END PUBLISHED PAGE 16 60 (12)Parent Company: Substantially all of the retained earnings of the Corporation represent undistributed net income of its subsidiary. Condensed financial information of LNB Bancorp, Inc. (Parent Company only) is as follows: Condensed Balance Sheets ASSETS: December 31, 1996 1995 - -------------------------------------------------------------------------- Cash $ 934,000 $ 753,000 Investment in subsidiary at equity in underlying value of its net assets 31,097,000 35,885,000 Securities available for sale 4,864,000 4,729,000 Notes receivable - subsidiary 8,000,000 -0- Other assets 89,000 71,000 ----------------------------------- $44,984,000 $41,438,000 ----------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: December 31, 1996 1995 - -------------------------------------------------------------------------- Dividends payable $ 786,000 $ 647,000 Shareholders' equity: Common stock, $1.00 par 4,138,000 4,039,000 Additional capital 20,178,000 17,854,000 Retained earnings 19,873,000 18,856,000 Net unrealized gain on securities available for sale, net of tax 9,000 42,000 ------------------------------------ Total shareholders' equity 44,198,000 40,791,000 ------------------------------------ $44,984,000 $41,438,000 ------------------------------------ Condensed Statements of Income Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------- INCOME: Cash dividends from subsidiary $10,509,000 $2,094,000 $1,841,000 Interest and other income 258,000 235,000 209,000 ---------------------------------------------- 10,767,000 2,329,000 2,050,000 EXPENSES: Other expenses 70,000 92,000 70,000 ---------------------------------------------- Income before Federal income taxes and equity in undistributed net income of subsidiary 10,697,000 2,237,000 1,980,000 Federal income tax expense 63,000 49,000 47,000 Equity in undistributed net income of subsidiary (1) (4,782,000) 2,815,000 2,499,000 ---------------------------------------------- NET INCOME $ 5,852,000 $5,003,000 $4,432,000 ---------------------------------------------- (1) Amount in parentheses represents the excess of dividends declared over net income of subsidiary. 61 Condensed Statements of Cash Flows Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Dividends from subsidiary $10,509,000 $2,094,000 $1,841,000 Other, net 107,000 77,000 89,000 --------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,616,000 2,171,000 1,930,000 --------------------------------------------- CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES: Proceeds from maturities of securities available for sale 965,000 -0- -0- Proceeds from maturities of investment securities -0- 470,000 622,000 Purchases of investment securities -0- -0- (450,000) Purchases of securities available for sale (1,127,000) (1,034,000) -0- Proceeds from sale of building to Bank -0- -0- 2,855,000 Construction of bank premises -0- -0- (2,109,000) Cash paid on line of credit -0- -0- (2,768,000) Advance to subsidiary (8,000,000) -0- -0- Proceeds from line of credit -0- -0- 1,668,000 Proceeds from exercise of stock options 179,000 278,000 56,000 Dividends paid (2,452,000) (2,073,000) (1,857,000) --------------------------------------------- NET CASH USED IN INVESTING AND FINANCING ACTIVITIES (10,435,000) (2,359,000) (1,983,000) --------------------------------------------- NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS 181,000 (188,000) (53,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 753,000 941,000 994,000 --------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 934,000 $ 753,000 $ 941,000 --------------------------------------------- END OF PUBLISHED PAGE 17 62 (13) 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 $55,000 in 1996, $92,000 in 1995 and $128,000 in 1994. At December 31, 1996 there were 213 participants in the plan. An analysis of net periodic pension cost for 1996, 1995 and 1994 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 1996 and 1995. The expected long-term rate of return on assets was 8.50% for 1996 and 1995. An analysis which sets forth the plan's funded status and prepaid (accrued) pension liability as reported in the Corporations financial statements at December 31, 1996 and 1995 is also presented below. Components of Net Periodic Pension Cost: 1996 1995 1994 - ------------------------------------------------------------------------- Service cost $ 257,000 $ 184,000 $ 229,000 Interest cost of projected benefit obligation 435,000 466,000 467,000 Actual return on plan assets (1,097,000) (1,410,000) (131,000) Net total of other components 460,000 852,000 (437,000) --------------------------------------------- Net periodic pension cost $ 55,000 $ 92,000 $ 128,000 --------------------------------------------- Actuarial Present Value of Benefit Obligations: 1996 1995 - -------------------------------------------------------------------------- Accumulated benefit obligation including vested benefits of $(5,433,000) in 1996 and $(5,591,000) in 1995 $(5,455,000) $(5,644,000) ----------------------------------- Projected benefit obligation $(7,025,000) $(7,251,000) Plan assets at market value, primarily U. S. Government securities and investments in bond and equity funds 7,666,000 7,758,000 ----------------------------------- Plan assets in excess of projected benefit obligations 641,000 507,000 Unrecognized net (gains) losses subsequent to transition (220,000) (196,000) Unrecognized prior service cost (294,000) (329,000) Unrecognized net assets, being recognized over employees' average remaining service life (87,000) (136,000) ----------------------------------- Prepaid (accrued) pension liability $ 40,000 $ (154,000) ----------------------------------- 63 (14) Stock Option Plan: The Corporation applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" to account for stock option plans and, accordingly, no compensation cost has been recognized for its incentive stock options in the financial statements. Had the Corporation determined compensation cost on the fair value at the date of grant for its incentive stock options under the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", there would have been no difference in the Corporation's 1996 net income and earnings per share and the impact on the 1995 net income and earnings per share would have not been material. 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. During 1996, stock options amounting to 18,307 shares were exercised at a price range of $6.57 to $19.99. An analysis of the status of the stock option plans as of December 31, 1996 follows: Plan Year 1985 1982 - -------------------------------------------------------------------------- Options outstanding: Total 17,650 9,864 Vested 17,650 9,864 Options available for granting -0- -0- Exercise price $19.99 $14.93 - -------------------------------------------------------------------------- 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 64 (15) 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 $400,000, $360,000, and $375,000 in 1996, 1995, and 1994, respectively. At December 31, 1996 there were 266 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. Transactions by the ESOP, relating to activity in the Corporation's common stock, are summarized below: Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------- Cash dividend income $ 62,000 $ 44,000 $ 31,000 Stock dividend/split shares 1,865 13,845 1,350 Shares purchased 22,542 18,958 12,216 Shares distributed 4,246 3,420 101 Year end holdings: Shares 107,010 86,849 57,466 Market value $3,103,000 $2,388,000 $1,731,000 As a percentage of total plan assets 86.0% 68.6% 57.6% (16) 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 $110,000, $105,000 and $105,000 in 1996, 1995 and 1994, respectively. At December 31, 1996 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, 1996 1995 1994 - -------------------------------------------------------------------------- Cash dividend income $ 76,000 $ 66,000 $ 63,000 Stock dividend/split shares 2,427 25,537 3,052 Shares purchased 19,447 5,552 18,991 Shares distributed 13,394 21,238 8,765 Year end holdings: Shares 127,750 119,270 109,419 Market value $3,705,000 $3,280,000 $3,296,000 As a percentage of total plan assets 99.8% 90.8% 96.9% 65 (17) Commitments, Credit Risk, and Contingencies: In the normal course of business, the Bank enters into commitments with off-balance sheet risk to meet the financing needs of its customers. These instruments are currently limited to commitments to extend credit and standby letters of credit. Commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Bank since the time the commitment was made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of 60 to 120 days or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on management's credit evaluation of the applicant. Collateral held is generally single-family residential real estate, and commercial real estate. The Corporation's maximum potential obligation to extend credit for financial instruments with off-balance sheet risk at December 31, 1996 was: Commitments to extend credit $61,898 Standby letters of credit 1,686 ------- Total $63,584 ------- Most of the Corporation's business activity is with customers located within the Corporation's defined market area. As of December 31, 1996, 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. (18) 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 66 (19) 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 and Accrued interest, accounts receivable and other financial assets: For these short-term financial instruments, the carrying value is a reasonable estimate of fair value. Securities: The fair value of securities is based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments. 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. Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market, checking and NOW accounts, is equal to the amount payable on demand as of December 31, for each year presented. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. For variable rate certificates of deposit, the carrying amount is a reasonable estimate of fair value. Securities sold under repurchase agreements and other short-term borrowings and Accrued interest payable and other financial liabilities: For these short term financial instruments, the carrying value is a reasonable estimate of fair value. Federal Home Loan Bank advances: The fair value of these long-term financial instruments is estimated by discounting future cash flows using current FHLB rates for the remaining term to maturity. Commitments to extend credit and standby letters of credit: The difference between the notional amount and the estimated fair value of these commitments is not material. Limitations: Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial 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. 67 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, 1996 and 1995 are summarized as follows: December 31, 1996 1995 - ------------------------------------------------------------------------- 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 $ 18,993,000 $ 18,993,000 $ 27,530,000 $ 27,530,000 instruments ============ ============ ============ ============ Securities $104,960,000 $105,639,000 $104,566,000 $106,076,000 ============ ============ ============ ============ Net loans $297,957,000 $297,917,000 $272,491,000 $272,754,000 ============ ============ ============ ============ Accrued interest, accounts receivable and other financial assets $ 3,965,000 $ 3,965,000 $ 4,424,000 $ 4,424,000 ============ ============ ============ ============ Financial liabilities: Deposits: Demand deposits, savings accounts and money market deposits $223,391,000 $223,391,000 $219,610,000 $219,610,000 Certificates of 142,989,000 143,569,000 133,845,000 134,791,000 deposit ------------ ------------ ------------ ------------ Total deposits $366,380,000 $366,960,000 $353,455,000 $354,401,000 ============ ============ ============ ============ Securities sold under repurchase agree- ments and other short-term borrowings $ 23,386,000 $ 23,386,000 $ 24,148,000 $ 24,148,000 ============ ============ ============ ============ Federal Home Loan Bank advances $ 1,095,000 $ 1,103,000 $ -0- $ -0- ============ ============ ============ ============ Accrued interest payable and other financial $ 2,849,000 $ 2,849,000 $ 2,673,000 $ 2,673,000 liabilities ============ ============ ============ ============ END PUBLISHED PAGE 20 68 Report of Management To The Shareholders of LNB Bancorp, Inc. January 24, 1997 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/ James F. Kidd /s/ Gregory D. Friedman James F. Kidd Gregory D. Friedman President and Senior Vice President, Chief Executive Officer Chief Operating Officer and Chief Financial Officer 69 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in the notes to consolidated financial statements the Corporation adopted the provisions of Statement of Financial Standards No. 114 "Accounting by Creditors for Impairment of a Loan," and No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" in 1995, and No. 115, "Accounting for Certain Investment in Debt and Equity Securities", in 1994. /s/ KPMG Peat Marwick LLP Cleveland, Ohio January 24, 1997 END PUBLISHED PAGE 21 70 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 1996 Annual Report to Shareholders. Forward-Looking Statements: When used in this Annual Report, the words or phrases "will likely result", "are expected to","will continue","is anticipated", "estimate", "projected" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Corporation's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Corporation's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Corporation wishes to advise readers that the factors listed above could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Corporation does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Earnings Summary: LNB Bancorp, Inc.'s consolidated 1996 net income reached a record high of $5,852,000, compared to $5,003,000 in 1995 and $4,432,000 in 1994. Net income for 1996 and 1995 was favorably affected by an increase in net interest income and increased noninterest income. Net income in 1996 and 1995 was favorably affected by reductions in FDIC Deposit Insurance Premiums. Earnings per share totaled $1.41 for 1996 compared to $1.21 for 1995 and $1.07 for 1994. Prior period earnings per share data have been restated to reflect the 2% stock dividend in 1996, five-for-four stock split in 1995 and the 3% stock dividend in 1994. The return on average assets increased to 1.37% in 1996 from 1.21% in 1995 and 1.13% in 1994. 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. 71 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. Net interest income in 1996 increased by $1,426,000 from $19,674,000 in 1995 to $21,100,000 in 1996. 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 decreased from 3.71% in 1995 to 3.58% in 1996, or a total of 13 basis points. During the same period, the yield on earning assets increased 4 basis points to 8.23% in 1996, compared to 8.19% in 1995, resulting in a increase in the interest spread by 17 basis points in 1996. 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 1995 to 1996 from increases in interest rates and volumes. Net interest income increased by $1,121,000 in 1995 from $18,553,000 in 1994 to $19,674,000 in 1995. Net interest income in 1995 was affected by increases in the volume of interest-bearing assets and liabilities plus increases in market interest rates during the second half of 1995. The cost of funds dropped 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 8.91% in 1995, compared to 7.45% in 1994, resulting in a decrease in the interest spread by 10 basis points in 1995. The net yield on earning assets in 1996 was 5.33% compared to 5.14% in 1995 and 5.09% in 1994. 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. END PUBLISHED PAGE 22 72 Condensed Consolidated Average Balance Sheets Fully-Tax Equivalent (FTE) Interest Rate and Interest Differential December 31, 1996 - -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate ---------------------------------------------- ASSETS: Securities $ 98,661 $ 6,056 6.14% Securities-tax exempt 4,312 313 7.26 Federal funds sold and other interest-bearing instruments 4,916 276 5.61 Commercial loans 108,750 10,327 9.50 Commercial loans tax-exempt 929 82 8.83 Mortgage loans 130,026 10,369 7.97 Consumer loans 48,104 5,155 10.72 ---------------------------------------------- TOTAL EARNING ASSETS 395,698 32,578 8.23% ---------------------------------------------- Reserve for possible loan losses (4,043) Cash and due from banks 17,794 Other assets 17,173 ---------------------------------------------- TOTAL ASSETS $426,622 ---------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Certificates of deposit $139,028 $ 7,302 5.25% Savings deposits 92,570 2,041 2.20 Interest-bearing demand 67,633 1,162 1.72 Short-term borrowings 21,465 954 4.47 Long-term borrowings 291 19 6.53 ---------------------------------------------- TOTAL INTEREST- 320,987 11,478 3.58% BEARING LIABILITIES ---------------------------------------------- Noninterest-bearing deposits 58,989 Other liabilities 3,944 Shareholders' equity 42,702 ---------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $426,622 ---------------------------------------------- NET INTEREST INCOME(FTE) $21,100 Taxable equivalent adjustment (108) ---------------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS $20,992 ---------------------------------------------- NET YIELD ON EARNING ASSETS 5.33% ---------------------------------------------- 73 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: Certificates of deposit $127,013 $ 7,013 5.52% Savings deposits 93,809 2,133 2.27 Interest-bearing demand 70,224 1,383 1.97 Short-term borrowings 22,864 1,107 4.84 Long-term borrowings -0- -0- -0- ---------------------------------------------- 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% ---------------------------------------------- 74 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: Certificates of deposit $100,185 $ 3,913 3.91% Savings deposits 96,375 2,227 2.31 Interest bearing demand 79,408 1,621 2.04 Short-term borrowings 23,167 811 3.50 Long-term borrowings -0- -0- -0- ---------------------------------------------- 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% ---------------------------------------------- 75 Rate/Volume Analysis of Net Interest Income Fully-Tax Equivalent Years ended December 31, 1996 and 1995 - ------------------------------------------------------------------------- (Dollars in Thousands) Increase (Decrease) In Interest Income/Expense --------------------------------------------- Volume Rate Total --------------------------------------------- Securities $ 81 $ 443 $ 524 Securities-tax exempt (288) (22) (310) Federal funds sold and other interest- bearing instruments (13) (11) (24) Commercial loans 338 (244) 94 Commercial loans tax-exempt (16) (5) (21) Mortgage loans 737 (6) 731 Consumer loans 354 (80) 274 --------------------------------------------- TOTAL INTEREST INCOME 1,193 75 1,268 --------------------------------------------- Certificates of deposit 663 (374) 289 Savings deposits (28) (64) (92) Interest-bearing demand (51) (170) (221) Short-term borrowings (68) (85) (153) Long-term borrowings -0- 19 19 --------------------------------------------- TOTAL INTEREST EXPENSE 516 (674) (158) --------------------------------------------- NET INTEREST INCOME $ 677 $ 749 $ 1,426 --------------------------------------------- 76 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 --------------------------------------------- Certificates of deposit 1,048 2,052 3,100 Savings deposits (59) (35) (94) Interest-bearing demand (187) (51) (238) Short-term borrowings (11) 307 296 Long-term borrowings -0- -0- -0- --------------------------------------------- TOTAL INTEREST EXPENSE 791 2,273 3,064 --------------------------------------------- NET INTEREST INCOME $ 717 $ 404 $ 1,121 --------------------------------------------- END PUBLISHED PAGE 23 77 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 79.4% in 1995 to 79.6% in 1996. Interest and dividends on securities and Federal funds sold, as a percentage of total interest income, on a fully-tax equivalent basis, decreased from 20.6% in 1995 to 20.4% in 1996. This decrease results from a lower average balance in the security portfolio and Federal funds from 1995 to 1996, even though the market rates on securities increased from 1995 through 1996. The higher yield in 1996 of the security portfolio is the result of 1994 and some 1995 purchases of securities with higher interest rates than those securities that matured in 1994 and 1995. The cost of interest-bearing liabilities in 1996 was $11,478,000 compared to $11,636,000 and $8,572,000 in 1995 and 1994, respectively. The net favorable impact of decreases in rates plus increases in volume caused interest expense to decrease from 1995 through 1996. Repricing of interest-bearing liabilities from 1995 through 1996 resulted in a significant net favorable change in interest expense during 1996. The unfavorable impact of increases in deposit rates plus increases in volume caused interest expense to increase from 1994 to 1995. Repricing of interest bearing liabilities from 1994 through 1995 resulted in a significant net unfavorable change in interest expense in 1995. Total other income in 1996 increased to $4,925,000 compared to $4,287,000 in 1995 for an increase of $638,000. This increase results from increases from Trust Division income of $57,000, and service charges of $543,000. The increase in service charges is due, in part, to reevaluating the assessment of transaction account charges. Total other income in 1995 increased by $153,000 to $4,287,000 as compared to 1994. This increase resulted from increases in Trust division income of $122,000 and service charges of $60,000. Total other expenses increased 3.4% in 1996 compared to 1995 after a 2.2% increase for 1995 compared to 1994. A significant portion of the increases in 1996 and 1995 were the result of the effects of inflation on salaries and benefits plus increases in furniture and equipment expenses. Total other expenses in 1996 and 1995 were also affected by decreases in FDIC Deposit Insurance Premiums. The effective tax rate of the Corporation was 33.1%, 31.8%, and 29.8% in 1996, 1995, and 1994, respectively. The increase in the effective tax rate in 1996 and 1995 was primarily due to lower levels of tax-exempt interest 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 15. 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 1996, 1995 and 1994 is presented on page 28. There were no significant intra-quarter fluctuations except for fourth quarter increases in other income in 1995 and 1996. The increase in other income reflects the realization of annual Trust Division billings which are based on year-end market values. 78 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, 1996, was $4,116,000, or 1.36% of outstanding loans, compared to $4,002,000, or 1.45% at year-end 1995. The provision for possible loan losses charged to operating expense was $600,000 and $400,000 in 1996 and 1995, respectively. In addition to meeting management's expectations for adequacy, this level of funding for the reserve also kept the Bank's ratio of the reserve as a percentage of outstanding loans comparable to that of banks of similar size, loan portfolio size and mix and credit philosophies. Net charge-offs for 1996 were $486,000, as compared to $230,000 for 1995, while net charge-offs as a percentage of average loans outstanding for 1996 was 0.17%, compared to 0.08% for 1995. Non-performing loans at year-end 1996 were $1,122,000 compared to $1,457,000 at year-end 1995. 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, 1996, 63% of non-performing loans were Commercial Loans and 37% were Residential Mortgage Loans. This compares to 29% and 71%, respectively for the same categories at year-end 1995. Non-performing loans did not have a material impact on interest income during 1996, 1995 or 1994. END PUBLISHED PAGE 24 79 Provision and Reserve for Possible Loan Losses (continued) The quality of the loan portfolio remains fairly high, as the ratio of non-performing loans to total loans decreased from 0.53% at year-end 1995 to 0.37% at year-end 1996. 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, 1996, there were no significant concentrations of credit risk in the loan portfolio. Additional information regarding the loan portfolio is presented on page 13. Financial Condition: The earning assets mix has changed considerably from December 31, 1995 to December 31, 1996. During this period, loans increased by $25,580,000 and securities increased by $394,000. Increases in loans are primarily funded by growth in deposits, current retained earnings, and reductions in cash and due from banks. The economy showed good growth during 1996 which stimulated loan demand. The maturity distribution of debt securities which appears on page 12 of this report, indicates that $101,794,000, or 97.0%, of debt securities mature within the next five year period with $23,152,000, or 22.1% maturing during 1997. At the close of 1996 and 1995 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 $692,000 or 0.6%, at the close of 1996. Total deposits held by the Corporation increased $12,925,000 during 1996 compared to an increase of $18,236,000 during 1995. Interest-bearing deposits represented 82.6% and 83.0% of total deposits at December 31, 1996 and 1995, respectively. Noninterest-bearing deposits increased by $3,639,000 while interest-bearing deposits increased by $9,286,000 during 1996. During 1995, noninterest-bearing deposits increased by $3,067,000 while interest-bearing deposits increased by $15,169,000. In both 1996 and 1995, 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, decreased by $762,000 during 1996, following a increase of $4,977,000 in 1995. 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: Total shareholder's equity was $44,198,000 at December 31, 1996 compared to $40,791,000 at December 31, 1995, an increase of $3,407,000, or 8.4%. This increase was primarily attributable to net income of $5,852,000 less dividends declared to shareholders of $2,591,000 and a decrease in the unrealized gains, net of deferred tax, on available for sale securities from year-end 1995 to year-end 1996 of $33,000. The book value per share of common stock was $10.68 at year-end 1996 compared to $9.90 at year-end 1995, a 7.9% increase, adjusted for a 2% stock dividend in April 1996. Cash dividends declared on the common stock of LNB Bancorp, Inc. during the year ended December 31, 1996 totaled $2,591,00 or $.63 per share. This compared to $2,175,000, or $.53 per share for the year ended December 31, 1995. In addition to the regular fourth quarter dividend of $.16 per share, an EXTRA cash dividend of $.03 per share was declared by the Board of Directors. The 1996 dividends per share represent an increase of 18.9% over the cash dividend declared in 1995. Dividends declared in 1996 represented a payout ratio of 44.3% of net income compared to 43.5% in 1995. In addition to cash dividends declared in 1996, the Board of Directors approved a 2% stock dividend to its shareholders which was paid on April 16, 1996. 80 The Corporation's primary source of funds for the payment of dividends is its Bank subsidiary. During December of 1996, the Bank paid $8,786,000 in dividends to the Corporation. Of this amount, $786,000 was used to fund the fourth quarter dividend to shareholders. The remainder, $8,000,000, was upstreamed to the Corporation in order for it to have sufficient equity capital to take advantage of future acquisition opportunities and to pay future dividends. In order for the Bank to fund its balance sheet and remain well capitalized, the Corporation and the Bank entered into a subordinated debt agreement on December 30, 1996 for $8,000,00 payable on January 1, 2007 at an interest rate of 6.80%. The Bank, which is limited by regulation as to the amount of a dividend which can be paid, remains within these regulatory guidelines. Currently this restriction will not preclude the Bank from paying sufficient dividends to fund, as needed, the usual quarterly dividends paid to the Corporation's shareholders. Under regulations issued by the Federal Reserve Board and the Office of the Comptroller of the Currency, bank holding companies and banks are required to maintain certain minimum capital ratios in order to be considered "well capitalized." At December 31, 1996 and 1995, the capital ratios of both the Corporation and the Bank exceeded those required to be considered "well capitalized." For additional information on the Corporation and Bank's capital ratios, refer to Note 10-Shareholders' Equity, on page 16. On an ongoing basis the Corporation analyzes acquisition opportunities in markets which are adjacent to or within the Corporation's current geographical market. Corporate management believes that its current capital resources are sufficient to support any foreseeable acquisition activity. The Corporation also retains a portion of the net income it earns to accommodate current operational and regulatory capital requirements and to fund future growth opportunities. A part of future growth depends upon capital expenditure programs. Capital expenditures of approximately $1,250,000 are projected for 1997. END PUBLISHED PAGE 25 81 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. 82 The table below presents an analysis of the interest rate sensitivity of the Corporation at December 31, 1996. 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, 1996 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, 1996 Months 6 Months 1 Year - -------------------------------------------------------------------------- (Dollars in Thousands) Interest earning assets: Loans $ 137,797 $ 19,522 $ 28,450 Securities 5,780 4,195 13,109 Federal funds sold and other interest-bearing assets -0- 103 -0- ------------------------------------------------------- Total interest earning assets $ 143,577 23,820 41,559 ------------------------------------------------------- Interest-bearing liabilities: Savings and other non-time deposits 67,229 4,146 -0- Time deposits 60,552 23,053 25,110 Short-term borrowings and other interest bearing liabilities 23,386 -0- -0- ------------------------------------------------------- Total interest bearing liabilities 151,167 27,199 25,110 ------------------------------------------------------- INTEREST RATE SENSITIVITY GAP $ (7,590) $ (3,379) $ 16,449 ------------------------------------------------------ CUMULATIVE INTEREST RATE SENSITIVITY $ (7,590) $ (10,969) $ 5,480 GAP ------------------------------------------------------- CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL INTEREST EARNING ASSETS (1.86%) (2.69%) 1.35% ------------------------------------------------------- 83 After 1 Year But Within After 5 December 31, 1996 5 Years Years Total - -------------------------------------------------------------------------- (Dollars in Thousands) Interest earning assets: Loans $ 107,758 $ 8,546 $ 302,073 Securities 78,772 3,104 104,960 Federal funds sold and other interest-bearing assets -0- -0- 103 ------------------------------------------------------- Total interest earning assets 186,530 11,650 407,136 ------------------------------------------------------- Interest-bearing liabilities: Savings and other non-time deposits 88,214 -0- 159,589 Time deposits 34,243 31 142,989 Short-term borrowings and other interest bearing liabilities 1,095 -0- 24,481 ------------------------------------------------------- Total interest- bearing liabilities 123,552 31 327,059 ------------------------------------------------------- INTEREST RATE SENSITIVITY GAP $ 62,978 $ 11,619 $ 80,077 ------------------------------------------------------ CUMULATIVE INTEREST RATE SENSITIVITY GAP $ 68,458 $ 80,077 ------------------------------------------------------- CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL INTEREST EARNING ASSETS 16.81% 19.67% ------------------------------------------------------- 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. 84 On December 31, 1996, cash and cash equivalents equaled $18,993,000 or 4.3% 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 1996 net income to net cash provided by operating activities primarily consists of depreciation and amortization of $1,547,000 and a provision of possible loan losses of $600,000. These items represent expenses included in net income which do not represent an expenditure or receipt of cash. END PUBLISHED PAGE 26 85 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 $28,077,000. Cash used in investing activities resulted from net increases in securities of $379,000. Cash used in investing activities included net loan increases of $26,346,000 and purchases of capital assets of $1,407,000. Net cash provided by financing activities was $10,985,000. Cash provided by financing activities included increases in deposits of $12,925,000, decreases in securities sold under repurchase agreements of $762,000 and proceeds from stock options exercised of $179,000. Cash used by financing activities primarily included dividends paid of $2,452,000. These cash flows resulted in a $8,537,000 decrease in cash and cash equivalents from December 31, 1995 to December 31, 1996. 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 $10,800,000 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. 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. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" Implementation date by the Corporation: January 1, 1997 Impact on the Corporation: This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfer of financial assets that are sales from transfers that are secured borrowings. Corporate management does not believe that adoption of SFAS No. 125 will have a significant impact on net income. All other applicable Statements of Financial Accounting Standards that have been issued and have effective dates impacting 1996 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. 86 Significant actions by the Federal government and its agencies, affecting the financial institutions industry in general, are currently having and will continue to have an impact on the Corporation. A discussion of these actions follows: "The 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 had 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. During 1996, the Bank paid FDIC Insurance Premiums of $2,000 compared to $385,000 for 1995. The lower FDIC Insurance Premium results from a full year of lower FDIC insurance rates. During 1995, the lower FDIC insurance rates were in affect for only June through December. The Bank does not anticipate significant increases in FDIC insurance rates during 1997. END PUBLISHED PAGE 27 87 Selected Quarterly Financial Data Quarterly financial and per share data for the years ended December 31, 1996, 1995 and 1994 are summarized as follows: First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------- Total interest income 1996 $7,892,000 $8,032,000 $8,187,000 $8,359,000 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 - -------------------------------------------------------------------------- Total interest expense 1996 2,878,000 2,770,000 2,890,000 2,940,000 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 - -------------------------------------------------------------------------- Net interest income 1996 5,014,000 5,262,000 5,297,000 5,419,000 1995 4,630,000 4,797,000 4,968,000 5,080,000 1994 4,269,000 4,508,000 4,725,000 4,756,000 - -------------------------------------------------------------------------- Provision for possible 1996 125,000 175,000 125,000 175,000 loan losses 1995 100,000 100,000 100,000 100,000 1994 100,000 100,000 100,000 100,000 - -------------------------------------------------------------------------- Net interest income 1996 4,889,000 5,087,000 5,172,000 5,244,000 after provision for 1995 4,530,000 4,697,000 4,868,000 4,980,000 possible loan losses 1994 4,169,000 4,408,000 4,625,000 4,656,000 - -------------------------------------------------------------------------- Other income 1996 1,221,000 1,227,000 1,254,000 1,223,000 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 - -------------------------------------------------------------------------- Other expenses, 1996 4,784,000 4,863,000 4,923,000 4,895,000 including Federal 1995 4,521,000 4,524,000 4,648,000 4,666,000 income taxes 1994 4,064,000 4,360,000 4,552,000 4,584,000 - -------------------------------------------------------------------------- Net income 1996 1,326,000 1,451,000 1,503,000 1,572,000 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 - -------------------------------------------------------------------------- Net income per share 1996 .33 .35 .36 .37 (2) 1995 .27 .28 .32 .34 1994 .25 .27 .27 .28 - -------------------------------------------------------------------------- Dividends paid per share (1) 1996 .14 .14 .16 .19 1995 .12 .12 .14 .15 1994 .10 .12 .12 .13 - -------------------------------------------------------------------------- (1) All share and per share data have been adjusted to reflect the 2 percent stock dividend in 1996, the five-for-four stock split in 1995, and 3 percent stock dividend in 1994. (2) Net income per share is computed using the weighted average number of shares outstanding during each year. END PUBLISHED PAGE 28 88 Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------------------- Total interest income $32,470,000 $31,111,000 $26,830,000 Total interest expense 11,478,000 11,636,000 8,572,000 --------------------------------------------- Net interest income 20,992,000 19,475,000 18,258,000 Provision for possible loan losses 600,000 400,000 400,000 Other income 4,925,000 4,287,000 4,064,000 Gains from sales of loans and securities -0- -0- 70,000 Other expense 16,565,000 16,023,000 15,679,000 --------------------------------------------- Income before Federal income taxes 8,752,000 7,339,000 6,313,000 Federal income taxes 2,900,000 2,336,000 1,881,000 --------------------------------------------- NET INCOME $ 5,852,000 $ 5,003,000 $ 4,432,000 --------------------------------------------- CONDENSED BALANCE SHEETS - DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------------------- Cash and cash equivalents $ 18,993,000 $ 27,530,000 $ 21,275,000 Securities 104,960,000 104,566,000 99,524,000 Net loans 297,957,000 272,491,000 257,975,000 Other assets 16,333,000 17,016,000 16,081,000 --------------------------------------------- TOTAL ASSETS $438,243,000 $421,603,000 $394,855,000 --------------------------------------------- Total deposits $366,380,000 $353,455,000 $335,219,000 Other borrowings 24,481,000 24,148,000 19,171,000 Other liabilities 3,184,000 3,209,000 2,954,000 --------------------------------------------- Total liabilities 394,045,000 380,812,000 357,344,000 --------------------------------------------- Total shareholders' equity 44,198,000 40,791,000 37,511,000 --------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $438,243,000 $421,603,000 $394,855,000 --------------------------------------------- SHARE DATA 1996 1995 1994 - -------------------------------------------------------------------------- Per share data (1): Net income (2) $ 1.41 $ 1.21 $ 1.07 Cash dividends $ .63 $ .53 $ .47 Cash dividends declared $2,591,000 $2,175,000 $1,905,000 Net increase in shareholders' equity $3,407,000 $3,280,000 $2,451,000 Book value per share (1) $10.68 $ 9.90 $ 9.19 Number of shares out- standing at end of year (1) 4,138,533 4,120,134 4,080,069 - -------------------------------------------------------------------------- 89 Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31, 1993 1992 - -------------------------------------------------------------------------- Total interest income $25,892,000 $27,465,000 Total interest expense 8,540,000 10,223,000 ------------------------------ Net interest income 17,352,000 17,242,000 Provision for possible loan losses 500,000 700,000 Other income 3,818,000 3,605,000 Gains from sales of loans and securities 191,000 14,000 Other expense 15,017,000 14,785,000 ------------------------------ Income before Federal income taxes 5,844,000 5,376,000 Federal income taxes 1,815,000 1,550,000 ------------------------------ NET INCOME $ 4,029,000 $ 3,826,000 ------------------------------ CONDENSED BALANCE SHEETS - DECEMBER 31, 1993 1992 - -------------------------------------------------------------------------- Cash and cash equivalents $ 21,276,000 $32,728,000 Securities 103,086,000 96,631,000 Net loans 242,043,000 230,364,000 Other assets 13,211,000 12,503,000 ------------------------------ TOTAL ASSETS $379,616,000 $372,226,000 ------------------------------ Total deposits $321,012,000 $317,730,000 Other borrowings 19,400,000 18,861,000 Other liabilities 4,144,000 3,083,000 ------------------------------ Total liabilities 344,556,000 339,674,000 ------------------------------ Total shareholders' equity 35,060,000 32,552,000 ------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $379,616,000 $372,226,000 ------------------------------ SHARE DATA 1993 1992 - -------------------------------------------------------------------------- Per share data (1): Net income (2) $ .98 $ .94 Cash dividends $ .43 $ .39 Cash dividends declared $ 1,725,000 $ 1,555,000 Net increase in shareholders' equity $ 2,508,000 $ 2,414,000 Book value per share (1) $ 8.62 $8.08 Number of shares out- standing at end of year (1) 4,068,127 4,082,402 - -------------------------------------------------------------------------- (1) All share and per share data have been adjusted to reflect the 2 percent stock dividend in 1996, the five-for-four stock split in 1995 and 1993, and the 3 percent stock dividends in 1994 and 1992 (2) Net income per share is computed using the weighted average number of shares outstanding during each year. END PUBLISHED PAGE 29 90 Directors and Officers of LNB Bancorp, Inc. Directors Stanley G. Pijor Chairman of the Board LNB Bancorp, Inc. and Lorain National Bank James L. Bardoner Retired, Former President Dorn Industries, Inc. Daniel P. Batista Attorney/Partner Cook & Batista Co., L.P.A. Robert M. Campana Managing Director P.C. Campana, Inc. Wellsley O. Gray Sales Consultant Smith Dairy Company James F. Kidd President and Chief Executive 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 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 T. L. Smith, M.D. Retired Physician 91 Eugene M. Sofranko President and Chief Executive Officer Lorain Glass Company, Inc. Paul T. Stack Retired Manufacturer's Representative Coley's Inc. Leo Weingarten Retired Officers James F. Kidd President and Chief Executive Officer Thomas P. Ryan Executive Vice President and Secretary/Treasurer Gregory D. Friedman Senior Vice President, Chief Operating Officer and Chief Financial Officer Michael D. Ireland Senior Vice President Emma N. Mason Senior Vice President James H. Weber Senior Vice President Mitchell J. Fallis Vice President and Chief Accounting Officer Sandra L. Kotradi Vice President and Chief Lending Officer Directors Emeritus of Lorain National Bank James H. Riddell Chairman of the Board Consumers Builders Supply Company President, Consumeracq, Inc. Don A. Sanborn Retired END PUBLISHED PAGE 30 92 Officers of Lorain National Bank Executive Offices James F. Kidd President and Chief Executive Officer Thomas P. Ryan Executive Vice President and Secretary Gregory D. Friedman Senior Vice President, Chief Operating Officer and Chief Financial Officer Administration Debra R. Brown Vice President David P. Krebs Vice President Teresa E. George Assistant Vice President Marianne Kocak Assistant Vice President James E. Long Assistant Vice President Carol A. Mesko Assistant Vice President Teresa E. Kreger Employment Officer Susan I. Tuttle Assistant Cashier Robert J. Witkowski Maintenance Officer Audit Division Gary W. Sedlak Vice President, Auditor and Compliance Officer Randy E. Lottman Assistant Vice President and E.D.P. Auditor Daniel P. Dudziak Senior Staff Auditor 93 Fiscal Division Mitchell J. Fallis Vice President and Chief Accounting Officer Mary L. Kapanke Fiscal Operations Officer Marketing Division James H. Weber Senior Vice President Steven F. Cooper Assistant Vice President Debra L. Temerario Marketing Operations Officer Loan Division Sandra L. Kotradi Vice President and Chief Lending Officer Edwin F. Klenz Vice President Bruce Diso Vice President John A. Funderberg Vice President Denise M. Kosakowski Vice President Ellen M. Walsh Vice President Kenneth P. Wayton Vice President Joel A. Krueck Assistant Vice President And CRA Officer Joan M. Raymond Assistant Vice President Robert D. Asik Consumer Loan Officer Kelly A. Dunfee Assistant Cashier Cynthia M. Pena Assistant Cashier 94 Joyce L. Wasela Commercial Loan Operations 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 Jeanne C. Maschari Assistant Vice President Donna Jean Phillips Assistant Vice President Patricia L. Cole Operations Officer Trust and Investment Management Division Emma N. Mason Senior Vice President Edward J. Baker Vice President Gerald S. Falcon Vice President Brian D. Morgan Vice President Patrick E. Sheridan Investment Officer James E. Carpenter Assistant Trust Officer Jodi L. Penwell Assistant Trust Officer Carol A. Cavanaugh Assistant Employee Benefits Officer Bank Offices Amherst Office G. Dale Rosenkranz Vice President 95 Avon Lake Office Charles A. DeAngelis Assistant Vice President Cleveland Street Office Timothy J. Gallagher Vice President Kansas Avenue Office Connie Sklarek Assistant Cashier Lake Avenue Office Christine M. Weber Assistant Cashier Main Office & 6th St. Drive-In Keith H. Kapanke Assistant Cashier Oberlin Office & Kendal at Oberlin Marilyn R. Krasienko Assistant Vice President Oberlin Avenue Office Jennifer M. Nickolls Assistant Vice President Olmsted Office & The Renaissance Office Diana L. Schmittgen Assistant Cashier Pearl Avenue Office Patricia A. Wolanczyk Branch Manager Second Street Office James E. Schmittgen Assistant Vice President Vermilion Office Robert B. White Assistant Vice President The Crossings of Westlake Office & Westlake Village Office Susan M. Neiding Vice President West Park Drive Office Rita M. Hoyt Branch Manager END PUBLISHED PAGE 31 96 EARNINGS AND STOCK PERFORMANCE 10 Year Earnings History (10 Year Earnings History graph follows in printed version with years 1987 through 1996 on the X-axis and earnings on the Y-axis in $2,000,000.00 increments ranging from $0 to $6,000,000.00. The graph is a horizontal bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid along with an accompanying legend for identification purposes.) The graph above depicts the earnings history of LNB Bancorp, Inc. from 1987 through 1996. 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, 1986 - Cost: $2,650.00 381 Shares Currently Held December 31, 1996 - Market Value: $11,049.00 (Market Value of Cumulative Shares graph follows in printed version with years 1987 through 1996 on the X-axis and market values on the Y-axis in $4,000.00 increments ranging from $0 to $12,000.00. The graph is a horizontal bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid along with an accompanying legend for identification purposes.) Cumulative Cash Dividends Declared Total Cash Dividends Declared 1987 - 1996: $1,486.99 (Cumulative Cash Dividends Declared graph follows in printed version with years 1987 through 1996 on the X-axis and Dividends Declared on the Y-axis in $500.00 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 $26.50 per share in 1986: Total market value..........................$2,650.00 Through three stock splits and several stock dividends over the years, the shareholder in this example now owns 381 shares of LNB Bancorp, Inc. stock with a market value of $29.00 per share as of December 31, 1996. Total market value.........................$11,049.00 97 In addition, our hypothetical shareholder would have benefited from the cash dividends declared on the stock. Cumulative cash dividends declared ........ $1,486.99 (The data points used to plot the three (3) graphs previously described follows: NET INCOME CUMULATIVE CUMULATIVE YEAR IN THOUSANDS MARKET VALUE CASH DIVIDENDS 1996 $5,852,000.00 $11,049.00 $1,486.99 1995 $5,003,000.00 $10,285.00 $1,246.96 1994 $4,432,000.00 $ 9,007.38 $1,045.00 1993 $4,029,000.00 $ 7,612.50 $ 865.60 1992 $3,826,000.00 $ 6,322.00 $ 703.20 1991 $3,512,000.00 $ 5,681.25 $ 555.74 1990 $3,343,000.00 $ 5,177.50 $ 421.66 1989 $3,217,000.00 $ 4,293.00 $ 299.58 1988 $2,881,000.00 $ 3,710.00 $ 187.22 1987 $2,562,000.00 $ 3,141.50 $ 86.52 END PUBLISHED PAGE 32 98 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 99 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 Oberlin Avenue Office 3660 Oberlin Avenue Lorain, Ohio (216) 282-9196 Olmsted Office 27095 Bagley Road Olmsted Township, Ohio (216) 235-4600 100 Pearl Avenue Office 2850 Pearl Avenue Lorain, Ohio (216) 277-1103 The Renaissance Office** 26376 John Road Olmsted Township, Ohio (216) 427-0041 **Opened Bank Office in January 1997. Second Street Office 221 Second Street Elyria, Ohio (216) 323-4621 Vermilion Office 4455 Liberty Avenue Vermilion, Ohio (216) 967-3124 West Park Drive Office 2130 West Park Drive Lorain, Ohio (216) 989-3131 The Crossings of Westlake Office 30210 Detroit Road Westlake, Ohio (216) 892-9696 Westlake Village Office** 28550 Westlake Village Drive Westlake, Ohio 44145 (216) 808-0229 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 Community/St. Joseph Regional Health Center 205 W. 20th Street Lorain, Ohio Lorain County Community College 1005 N. Abbe Road Elyria, Ohio Lorain Plaza 1147 Meister Road Lorain, Ohio 101 Lowe's Home Improvement Warehouse 620 Midway Boulevard Elyria, Ohio Midway Mall Food Court 3343 Midway Mall Boulevard Elyria, Ohio Route 60 and Sailorway Drive 1317 State Route 60 Vermilion, Ohio * Drive-up ATM is available at Sixth Street Drive-In. All other offices feature ATMs, except Westlake Village Office and The Renaissance Office. END OF INSIDE BACK COVER Outside back cover Beige background LNB Bancorp, Inc. Dark brown lettering END OF PUBLISHED LNB BANCORP, INC. 1996 ANNUAL REPORT 102 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1996) S - K Reference Number (21) Corporate Organization Structure .............................. . LNB Bancorp, Inc. . . One Bank Holding Company . . an Ohio Corporation (1) . .............................. . . ............................. . The Lorain National Bank . . Wholly-Owned Subsidiary . . an Ohio Corporation (1) . ............................. . . ................................. . LNB Financial Services, Inc. . . Wholly-Owned Subsidiary . . an Ohio Corporation (1) . . (inactive) . ................................. (1) The physical location and legal mailing address for all entities is: 457 Broadway Lorain, Ohio 44052 103 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1996) S - K Reference Number (22) Notice of Annual Meeting to shareholders and Proxy Statement (dated March 17, 1997). 104 LNB BANCORP, INC. LORAIN, OHIO NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO THE SHAREHOLDERS OF LNB BANCORP, INC. March 17, 1997 The Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 521 Broadway, Lorain, Ohio 44052, on Tuesday, April 15, 1997, at 10:00 a.m., Eastern Daylight Savings Time, for the purpose of considering and voting upon the following matters as more fully described in the Proxy Statement. PROPOSALS: 1. ELECTION OF DIRECTORS - To elect five (5) directors to hold office until their term expires (April 18, 2000) or until their successors are elected and qualified. 2. STOCK DIVIDEND - Increase the outstanding common stock of LNB Bancorp, Inc. by declaration of a stock dividend consisting of approximately 82,771 shares of common stock of $1.00 par value each, and the terms and conditions thereof. 3. OTHER BUSINESS - To transact such other business as may properly come before the meeting. Shareholders of record at the close of business on March 7, 1997 will be entitled to vote the number of shares held of record in their names on that date. The transfer books will not be closed. We urge you to sign and return the enclosed proxy as promptly as possible, whether or not you plan to attend the meeting in person. This proxy may be revoked prior to its exercise. By Order of the Board of Directors /s/ Thomas P. Ryan Thomas P. Ryan Executive Vice President and Secretary/Treasurer YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND MAIL THE ENCLOSED PROXY FORM(S) WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. -1- 105 THIS PAGE LEFT INTENTIONALLY BLANK -2- 106 LNB BANCORP, INC. 457 BROADWAY LORAIN, OHIO 44052 PROXY STATEMENT MARCH 17, 1997 This proxy solicitation is made on behalf of the Board of Directors of LNB Bancorp, Inc., (hereinafter called the "Corporation") being a One Bank Holding Company owning all of the stock of The Lorain National Bank (hereinafter called the "Bank"). As of this date, the number of shares of Common Stock outstanding and entitled to vote at the Annual Meeting of Shareholders to be held on April 15, 1997, is 4,138,533. Only those shareholders of record at the close of business on March 7, 1997 shall be entitled to vote. This proxy may be revoked prior to its exercise. The cost of this solicitation is being paid by the Corporation. VOTING Each shareholder shall be entitled to one vote for each share of stock standing in their name on the books of the Corporation. No holder of shares of any class shall have the right to vote cumulatively in the election of directors. Shares held in accounts by the Bank's Trust and Investment Management Division will be voted by the trustee in accordance with written instructions from account administrators or account plan participants, and where no instructions are received, as the trustee deems proper. Shares of Common Stock represented by proxies in the accompanying form which are properly executed and returned to the Corporation will be voted at the Annual Meeting of Shareholders in accordance with the shareholders' instruction contained in such proxies. Where no such instructions are given, the shares will be voted for the election of directors as described herein; in support of the increase in the number of authorized shares; and at the discretion of the proxy holders on such other matters as may come before the meeting. The Board of Directors has no reason to believe that any of the nominees will be unable to serve as a director. In the event, however, of the death or unavailability of any nominee or nominees, the proxy to that extent will be voted for such other person or persons as the Board of Directors may recommend. The results of votes taken at the Annual Meeting will be disclosed in the Corporation's First Quarterly Report for 1997 on Form 10-Q, as filed with the Securities and Exchange Commission (SEC). The disclosure will include for each proposal, the number of votes for, the number of votes against and the number of abstentions. In addition, the disclosure will set forth the number of votes received by each candidate running for a directorship and the percentage of these votes as to the total shares outstanding. ELECTION OF DIRECTORS Article III of the Code of Regulations of the Corporation provides that directors are to be divided into three (3) classes. Each class serves a term of three (3) years, or until their respective successors are elected and qualified. In that the term of office for five (5) members of the present Board of Directors will expire on April 15, 1997, the management has nominated the hereinafter named five (5) individuals for election to serve until April 18, 2000, or until their successors are elected and qualified. The affirmative vote of the holders of at least a majority of a quorum is required in order to elect each director. Under the Code of Regulations of the Corporation, a quorum is constituted by the presence, in person or by proxy, of a majority of the voting power of the Corporation. -3- 107 Other nominations may be made only in accordance with the notice procedures set forth in Article III of the Code of Regulations of the Corporation. The procedure states that nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of capital stock of the Corporation entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the existing management of the Corporation, shall be made in writing and shall be delivered or mailed to the President of the Corporation not less than fourteen (14) days nor more than fifty (50) days prior to any meeting of shareholders called for the election of directors, provided however, that if less than twenty-one (21) days notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the President of the Corporation no later than the close of business on the seventh (7th) day following the day on which the notice of the meeting was mailed. Such notification shall contain the following information as to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the Corporation that will be voted for each proposed nominee; (d) the name and resident address of the notifying shareholder; and (e) the number of shares of capital stock of the Corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, at his discretion, be disregarded by the Chairman of the meeting, and upon his instructions, the vote teller may disregard all votes cast for each such nominee. Unless otherwise instructed, it is the intention of the persons named in the proxy to vote for the election of the following five(5) nominees: 1) James F. Kidd 2) Jeffrey F. Riddell 3) Thomas P. Ryan 4) Paul T. Stack 5) Robert M. Campana THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH NOMINEE. The following individuals are directors whose term of office is scheduled to expire on April 21, 1998: 1) Daniel P. Batista 2) David M. Koethe 3) Stanley G. Pijor 4) Eugene M. Sofranko 5) Leo Weingarten The following individuals are directors whose term of office is scheduled to expire on April 20, 1999: 1) James L. Bardoner 2) Wellsey O. Gray 3) Benjamin G. Norton 4) T.L. Smith, M.D. -4- 108 DIRECTOR'S COMMITTEES The Bank has six (6) standing committees upon which members of the Board of Directors serve. They are: 1) The Audit Committee 4) The Pension/Fringe Benefit Committee 2) The Executive Committee 5) The Incentive Stock Option Committee 3) The Trust Committee 6) The Compensation Committee Membership of each of these committees is indicated by footnote on page 7. The Audit Committee met three (3) times during the last fiscal year. It establishes policies for the administration of the Bank's Audit Division. The Executive Committee met thirteen (13) times during the last fiscal year. This committee is authorized to approve matters relating to loans, the purchase of bills, notes, and other evidence of debt. The Trust Committee reviews the various trusts accepted by the Bank's Trust and Investment Management Division. It held six (6) meetings during the last fiscal year. The Pension/Fringe Benefit Committee reviews indirect compensation of officers and employees. It did not meet during the last fiscal year. The Incentive Stock Option Committee determines who will receive stock options and the number of shares to be granted under the terms of the Incentive Stock Option Plan. The actions of the Incentive Stock Option Committee are subject to the approval of the Compensation Committee. It did not meet during the last fiscal year. The Compensation Committee meets to review all officers' salaries. It held one (1) meeting during the last fiscal year. The Bank has no designated Nominating Committee. Nominees for the Board of Directors are determined by a vote of the total Board of Directors. The Bank held thirteen (13) Board of Directors meetings during the last fiscal year. Of the directors who served during 1996, Leo Weingarten attended fewer than 75% of the total number of meetings of the Board of Directors and all committee meetings of which the aforementioned director was a member. The Corporation held twelve (12) Board of Directors meetings during the last fiscal year. Of the directors who served during 1996, no one attended fewer than 75% of the total of twelve (12) meetings held. DIRECTOR'S COMPENSATION Each outside director of the Bank is entitled to receive an annual retainer fee of $2,500. Bank officers, who are also directors of the Bank, do not receive an annual retainer fee. All of the directors of the Corporation are also directors of the Bank. A director's fee of $500 is paid to outside directors for each meeting attended. Directors, who are also officers of the Corporation, receive a fee of $250 for their attendance at the Corporation's board meetings and receive no director's fees for their attendance at the meetings of the Bank's board. Mr. Stanley G. Pijor entered into a Consulting Agreement (The Agreement) with the Bank and the Corporation dated March 15, 1994. The Agreement provides that Mr. Pijor shall receive a consulting fee of $85,000 each year for a period of five (5) years commencing January 1, 1996. The Agreement also stipulates that Mr. Pijor will be provided with an automobile and will be reimbursed for reasonable expenses relative to his duties as a consultant during the term of the Agreement. Termination of the Agreement (by either party) would not prejudice Mr. Pijor's right to receive the benefits referred to above for a period of up to two (2) years. -5- 109 LORAIN NATIONAL BANK LNB BANCORP, PRINCIPAL OCCUPATION DIRECTOR INC. DIRECTOR NAME AND AGE FOR THE PAST FIVE YEARS SINCE SINCE JAMES L. BARDONER RETIRED, FORMER PRESIDENT 1974 1983 Age 78 Dorn Industries, Inc. (1-2-4-5-6) (Manufacturing Company) DANIEL P. BATISTA ATTORNEY/PARTNER 1976 1983 Age 62 Cook & Batista Co.,L.P.A.(A) (2-3-5-6) ROBERT M. CAMPANA MANAGING DIRECTOR 1996 1996 Age 37 P.C.Campana, Inc. (3) WELLSLEY O. GRAY SALES CONSULTANT 1973 1983 Age 63 Smith Dairy Company (1-3) JAMES F. KIDD PRESIDENT AND CHIEF 1989 1989 Age 57 EXECUTIVE OFFICER (2-3-4) LNB Bancorp, Inc. and The Lorain National Bank DAVID M. KOETHE CHAIRMAN OF THE BOARD 1975 1983 Age 61 The Lorain Printing Company(B) (2-3-4-5-6) BENJAMIN G. NORTON EMPLOYEE AND 1983 1983 Age 57 COMMUNITY RELATIONS MANAGER (3-7) RELTEC Corporation STANLEY G. PIJOR CHAIRMAN OF THE BOARD 1969 1983 Age 66 LNB Bancorp, Inc. and (2-3-4-6) The Lorain National Bank JEFFREY F. RIDDELL PRESIDENT 1995 1995 Age 45 Consumers Builders Supply (1) Company VICE PRESIDENT AND CHIEF EXECUTIVE OFFICER Consumeracq, Inc. THOMAS P. RYAN EXECUTIVE VICE PRESIDENT 1989 1989 Age 58 AND SECRETARY/TREASURER LNB Bancorp, Inc. EXECUTIVE VICE PRESIDENT AND SECRETARY The Lorain National Bank -6- 110 LORAIN NATIONAL BANK LNB BANCORP, PRINCIPAL OCCUPATION DIRECTOR INC. DIRECTOR NAME AND AGE FOR THE PAST FIVE YEARS SINCE SINCE T.L. SMITH, M.D RETIRED PHYSICIAN 1968 1983 Age 83 (1-2-4-5-6) EUGENE M. SOFRANKO PRESIDENT AND CHIEF 1974 1983 Age 66 EXECUTIVE OFFICER (1-2-4-5-6) Lorain Glass Company, Inc. PAUL T. STACK RETIRED MANUFACTURER'S 1974 1983 Age 67 REPRESENTATIVE (1-2-3-6) Coley's Inc. LEO WEINGARTEN RETIRED 1964 1983 Age 77 (2-4-5-6) (1) Member of Audit Committee (5) Member of Incentive Stock Option (2) Member of Executive Committee Committee (3) Member of Trust Committee (6) Member of Compensation Committee (4) Member of Pension/Fringe Benefit(7) Alternate Member of Executive Committee and Compensation Committees (A) The Bank has retained the law firm of Cook & Batista Co., L.P.A. as legal counsel for the last several years. During the last fiscal year, The Lorain National Bank has paid to Cook & Batista, Co., L.P.A. an amount of $115,634. It is anticipated that this relationship will continue during the current fiscal year. (B) During the last fiscal year, The Lorain National Bank has paid to The Lorain Printing Company an amount of $62,503 for printing services and supplies. It is anticipated that such business relationship will continue during the current fiscal year. (C) During the last fiscal year the Bank paid to Stanley G. Pijor the sum of $1,031,574 which constituted the lump sum distribution of his retirement benefits payable under the provisions of the Lorain National Bank Retirement Pension Plan. Mr. Pijor was also a party to a Consulting Agreement with the Bank dated March 15, 1994, which provides Mr. Pijor shall receive a consulting fee of $85,000 each year for a period of five (5) years commencing on January 1, 1996. The Agreement also stipulates that Mr. Pijor will be provided with an automobile and will be reimbursed for reasonable expenses relative to his duties as a consultant during the term of the Agreement. Termination of the Agreement (by either party) would not prejudice Mr. Pijor's rights to receive the benefits referred to above for a period of up to two (2) years. Mr. Pijor was also a party to a Supplemental Retirement Agreement entered into with the Bank on December 31, 1987. Under the terms of this Agreement, Mr. Pijor shall receive an annual supplemental retirement benefit in the amount of $50,000 for a period on ten (10) years. The payment of these supplemental retirement benefits commenced in January of 1996. -7- 111 EXECUTIVE COMPENSATION LNB Bancorp, Inc. did not pay any separate compensation, other than Corporation director fees, to its executive officers during 1996, 1995, and 1994. All executive compensation was paid by Lorain National Bank. The information which follows discloses the annual and long term compensation for services in all capacities to the Corporation and the Bank for the fiscal years ended December 31, 1996, 1995 and 1994, for all persons who were, during 1996, (i) the chief executive officer and (ii) the other most highly compensated Officers of the Bank who made in excess of $100,000 during 1996 (the Named Executive Officers). SUMMARY COMPENSATION TABLE The named executive officers disclosure requirements affect the Chief Executive Officer and those executive officers earning more than $100,000 in salary and bonuses. In 1996, 1995 and 1994, Mr. James F. Kidd, President and Chief Executive Officer, and Mr. Thomas P. Ryan, Executive Vice President and Secretary/Treasurer, met the criteria for disclosure. The following table discloses the annual salary, bonuses and all other compensation awards and payouts for services in all capacities to the Corporation and the Bank for the fiscal years ended December 31, 1996, 1995 and 1994. Compensation (1) ----------------------------------------------- Annual Name and -------------------------------- All Principal Position Year Salary Bonuses Other (2) ---------------------------------------------------------------------- James F. Kidd 1996 $151,154 $32,500 $20,600 President and Chief 1995 $124,000 $15,000 $18,427 Executive Officer 1994 $104,556 $15,000 $15,646 Thomas P. Ryan 1996 $104,050 $15,375 $18,755 Executive Vice President 1995 $ 99,375 $15,000 $15,693 and Secretary/Treasurer 1994 $ 92,323 $15,000 $14,450 (1) The aggregate of Other Annual Compensation is less than 10% of the total of annual salary and bonus for all individuals for all years presented and therefore is not required to be reported under the SEC rules. (2) All Other Compensation consisted of the following: James F. Kidd: 1996 1995 1994 Contribution, in Mr. Kidd's behalf to: The Bank's Stock Purchase Plan $ 4,500 $ 4,176 $ 3,909 The Bank's Employee Stock Ownership Plan $10,925 $10,236 $ 8,860 Mr. Kidd's Supplemental Life Insurance $ 2,250 $ 2,239 $ 2,077 Corporation director's fees $ 2,925 $ 1,775 $ 800 Thomas P. Ryan: 1996 1995 1994 Contribution, in Mr. Ryan's behalf to: The Bank's Stock Purchase Plan $ 3,583 $ 3,431 $ 3,508 The Bank's Employee Stock Ownership Plan $ 8,698 $ 8,518 $ 7,993 Mr. Ryan's Supplemental Life Insurance $ 2,079 $ 1,969 $ 1,949 Corporation director's fees $ 2,700 $ 1,775 $ 1,000 Anniversary Stock Award $ 1,695 $ 0 $ 0 OPTION GRANTS TABLE (last fiscal year) There were no stock options granted by the Corporation or the Bank in 1996. LONG TERM INCENTIVE PLAN AWARD TABLE (last fiscal year) There were no long term incentive plans or plan awards in 1996. -8- 112 OPTION EXERCISES AND YEAR END VALUE TABLE (last fiscal year) AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE(1) Value of Number of Unexercised Unexercised In-the-Money Option Option Shares Shares Shares Acquired Value at FY-End(#) at FY-End ($) on Realized Exercisable/ Exercisable/ Name Exercise(#) ($)(2) Unexercisable Unexercisable(2) -------------------------------------------------------------------------- James F. Kidd 0 $0 2,101/0 $18,933/$0 Thomas P. Ryan 0 $0 2,101/0 $18,933/$0 (1) All amounts reflect the 2% stock dividend in April of 1996. (2) Market value of underlying securities at exercise date or year end, as the case may be, minus the exercise or price of "in-the-money" options. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of: James L. Bardoner, Daniel P. Batista, David M. Koethe, Stanley G. Pijor, T.L. Smith, Eugene M. Sofranko, Paul T. Stack and Leo Weingarten. Mr. Batista is a shareholder of the law firm of Cook and Batista Co., L.P.A., which performs legal services for the Bank. During 1996, the Bank paid to Cook and Batista Co., L.P.A. legal fees in the amount of $115,634. The amount of Mr. Batista's interest in such fees cannot be practicably determined. Mr. Koethe is the Chairman of The Board of The Lorain Printing Company. During 1996, the Bank paid to The Lorain Printing Company an amount of $62,530 for printing services and supplies. The amount of Mr. Koethe's interest in such payments cannot be practicably determined. During 1996, the Bank paid to Stanley G. Pijor the sum of $1,031,574 which constituted the lump sum distribution for his retirement benefits payable under the provisions of the Lorain National Bank Retirement Pension Plan. Mr. Pijor was also a party to a Consulting Agreement with the Bank dated March 15, 1994, which provides Mr. Pijor shall receive a consulting fee of $85,000 each year for a period of five (5) years, said payments having commenced on January 1, 1996. This Consulting Agreement also stipulates that Mr. Pijor will be provided with an automobile and will be reimbursed for reasonable expenses relative to his duties as a consultant during the term of the Agreement. Mr. Pijor was also a party to a Supplemental Retirement Agreement entered into with the Bank on December 31, 1987. Under the terms of this Supplemental Retirement Agreement, Mr. Pijor is to receive supplemental retirement benefits in the amount of $50,000 per year, for a period of ten (10) years. The payment of these supplemental retirement benefits commenced in January of 1996. COMPENSATION COMMITTEE REPORT The Lorain National Bank's Compensation Committee has the responsibility of evaluating and recommending to the Board of Directors, for its approval, the amount of compensation, including salary, bonus, and other benefits, for all officers of the Bank, including the named Executive Officers and the Chief Executive Officer. It is the philosophy and policy of the Compensation Committee to establish a compensation program for Bank officers to attract, motivate and retain a highly qualified management team. The criteria used to determine the recommended compensation of Bank officers includes their level of responsibility, performance, experience, the Committee's 113 judgment as to the past performance and expected further contribution. -9- 114 A comparison to the industry peer group as well as national and regional surveys are also used. In addition, Mr. James F. Kidd, as the Bank's Chief Executive Officer, evaluates the performance of other officers and presents his evaluations and salary recommendations for all officers, other than himself, to the Compensation Committee. The Committee is also advised by independent compensation consultants, concerning compensation of Bank officers. Based upon the foregoing, the Compensation Committee prepares a report on recommended base salaries for all officers. In addition, in some cases, the Compensation Committee recommends bonuses for certain officers of the Bank, based upon the attainment of preestablished performace goals. The recommendations of the Compensation Committee regarding base salaries and bonuses for all officers are sublect to approval by the Board of Directors. As to the Chief Executive Officer, Mr. James F. Kidd's compensation, including salary, bonus, and other benefits is also based upon a recommendation of the Compensation Committee, which is then approved by the Board of Directors. The factors and criteria considered by the Compensation Committee included the pay level for CEOs of comparable banks, the financial performance of the Bank, and the individual performance and leadership of Mr. Kidd. Based upon the foregoing, and based upon the attainment of preestablished performance goals established by the Compensation Committee, the Compensation Committee recommended a base salary and bonus for Mr. Kidd for 1996, in the amounts set forth in the Summary Compensation Table, which amounts were approved by the Board of Directors. The members of the Compensation Committee are: James L. Bardoner T.L. Smith, M.D. Daniel P. Batista Eugene M. Sofranko David M. Koethe Paul T. Stack Stanley G. Pijor Leo Weingarten EMPLOYMENT AGREEMENTS As of September 1, 1995, Mr. James F. Kidd entered into an Employment Agreement with LNB Bancorp, Inc. and The Lorain National Bank. The Agreement provides for Mr. Kidd's employment until he reaches the age of 65 as President. Mr. Kidd shall be compensated at the initial rate of One Hundred and Twenty Four Thousand Dollars ($124,000) with an annual compensation review each year thereafter. Mr. Kidd will continue to receive his present fringe benefits and such additional benefits as are set forth in the Bank's Employee Benefit Program. If the Agreement is terminated earlier, other than for just cause, or by Mr. Kidd, then he will be entitled to the salary and benefits described above for a period of up to two (2) years. As of September 1, 1995, Mr. Thomas P. Ryan entered into an Employment Agreement with LNB Bancorp, Inc. and The Lorain National Bank. The Agreement provides for Mr. Ryan's employment until he reaches the age of 65 as Executive Vice President. Mr. Ryan shall be compensated at the initial rate of Ninety Seven Thousand Five Hundred Dollars ($97,500) with an annual compensation review each year thereafter. Mr. Ryan will continue to receive his present fringe benefits and such additional benefits as are set forth in the Bank's Employee Benefit Program. If the Agreement is terminated earlier, other than for just cause, or by Mr. Ryan, then he will be entitled to the salary and benefits described above for a period of up to two (2) years. PENSION PLAN The Bank sponsors The Lorain National Bank Retirement Pension Plan (the Plan) covering substantially all employees of the Bank. An employee is eligible to participate on January 1 or July 1 after the 115 attainment of age twenty-one (21) and completion of one year of service, as defined in the Plan. The Bank's 1996 contribution to the Plan was $249,461. The amount of contributions with respect to a specific person is not and cannot readily be calculated on an individual basis. -10- Participants are eligible for normal retirement upon reaching age sixty-five (65). Annual benefit payments are determined as a percentage for the five (5) consecutive plan years that yield the highest average salary. Participants in the Plan prior to January 1, 1989 will have annual benefit payments reduced if they have less than fifteen (15) years of continuous employment upon retirement. Participants who join the Plan after January 1, 1989 will have benefit payments reduced if they have less than twenty-five (25) years of continuous employment upon retirement. The normal form of benefit payment is a joint and survivor annuity. Benefits become fully vested after a participant has completed five (5) years of service. The Plan also provides for the payment of early retirement, death, disability, and deferred vested benefits in the form of a lump sum distribution, or monthly annuity. Annual benefit payments under the provisions of the Plan are computed by a formula, the factors of which include annual compensation, years of service and the social security taxable wage base. The Plan was amended, effective January 1, 1995, to allow the payment of accrued benefits in the form of a lump sum distribution upon retirement at normal retirement age. The estimated present value of the accrued benefit using the Plan's actuarial equivalence assumptions for the Named Executive Officers ranged from $308,000 to $315,000 as of December 31, 1996. Assuming the participant selects the benefit payable in a ten (10) year Certain and Life Annuity at normal retirement date, the following table reflects annual benefits payable to the employee based upon average annual compensation levels and twenty-five (25) years of service. Employee's Annual Estimated Pension Final Average Payments Assuming Minimum of Annual Compensation 25 Years of Service $250,000* $76,144 200,000* 76,144 150,000 76,144 100,000 49,269 *The current annual compensation limit with respect to determining an employee's annual pension payment is currently limited by the Internal Revenue Code to $150,000. The Plan reflects the annual compensation limit and this results in a maximum annual pension payment of $76,144. Therefore, an employee's annual estimated pension payment for final average compensation levels of $150,000 and above remains at the $76,144 level. Pension benefits accrued prior to 1995 are grand fathered, if their calculated benefit is greater than $76,144. These pension payments do not reflect any additional retirement benefits which the employee may receive in the form of Social Security and other forms of supplemental retirement benefits. Messrs. Kidd and Ryan have thirty-two (32) and thirty-five (35) credited years of service respectively, under the provisions of the Plan. Benefit payments under the provisions of the Plan are computed using formulas, the factors of which include annual compensation, years of 116 service, social security taxable wage base, and, in the case of a lump sum distribution, current interest rates are also taken into consideration. On July 30, 1996, the Bank entered into Supplemental Retirement Agreements (SRA) with Mr. James F. Kidd and Mr. Thomas P. Ryan. The purpose of the SRA is to provide supplemental retirement benefits to Messrs. Kidd and Ryan in addition to the benefits provided by the Bank's qualified retirement plan, to assist the Bank in retaining their services through their normal retirement dates. The SRA provides for payments, monthly or annually, at Messrs. Kidd and Ryan's election, in the event of: (a) normal retirement; **(b) reduced supplemental retirement benefits in the event of early retirement; (c)disability prior to retirement; (d) death; or (e) discharge "without cause." -11- 117 Under the terms of their SRA, Messrs. Kidd and Ryan will receive supplemental retirement benefits for a period of ten (10) years. The full benefit amount is equal to seventy percent (70%) of the compensation paid in the final year of employment, minus the Bank's pension benefit and Social Security benefits. Mr. Kidd and Mr. Ryan are entitled to the full benefit amount if they retire on their normal retirement date;** 75% of the full benefit amount if they retire at age 64; 50% of the full benefit amount if they retire at age 63; 25% of the full benefit amount if they retire at age 62; and no SRA benefit if they retire prior to age 62. In the event of disability prior to retirement, the disabled individual would receive their full SRA benefit amount beginning at age 65. In the event of death prior to retirement, after meeting the eligibility and employment requirements, the applicable benefit (based upon the decedent's age) is payable to his designated beneficiary. In the event of discharge "without cause", the discharged individual would receive their full SRA benefit amount, as if he retired at age 65, commencing at the recipient's discretion. The SRA is a non-qualified defined benefit agreement. As of December 31, 1996, the monthly benefits that would be paid at normal retirement age, would be $8,287 and $2,151 for Mr. Kidd and Mr. Ryan respectively. **Mr. Kidd's normal retirement date is November 1, 2004 **Mr. Ryan's normal retirement date will be April 1, 2003 PERFORMANCE GRAPH The graph which follows compares the five (5) year cumulative total return from investing $100 on December 31, 1991 in each of LNB Bancorp, Inc. common stock, the Standard & Poor's 500 index (S&P 500 Index) of companies and the National Association of Securities Dealers Association Quotation System Bank Index (NASDAQ Bank Index) of companies, with dividends assumed to be reinvested when received. Comparison of Five Year Cumulative Total Return* AMONG LNB BANCORP, INC, THE S&P 500 INDEX AND NASDAQ BANK INDEX (PERFORMANCE GRAPH FOLLOWS IN PRINTED VERSION WITH YEARS 1991 THROUGH 1996 ON THE X-AXIS AND CUMULATIVE INVESTMENT ON THE Y-AXIS IN $100 INCREMENTS RANGING FROM $0 TO $400. 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.) * $100 INVESTED ON 12/31/91 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS. DECEMBER 31, --------------------------------------------------------------------------- 1991 1992 1993 1994 1995 1996 --------------------------------------------------------------------------- LNB Bancorp, Inc. $100 $115 $141 $187 $200 $218 --------------------------------------------------------------------------- S&P 500 Index $100 $108 $118 $120 $165 $203 --------------------------------------------------------------------------- NASDAQ Bank Index $100 $146 $166 $165 $246 $326 --------------------------------------------------------------------------- -12- 118 BENEFICIAL OWNERSHIP OF SHARES The following table reflects as of December 31, 1996, any person known to the Corporation to be the beneficial owner of more than five percent (5%) of any class of the Corporation's voting securities, consisting of common stock only, as well as the total number of shares of common stock beneficially owned by each director, nominee, and the director and executive officers of the Corporation as a group. Five Percent Beneficial Ownership Amount and Nature Percent Name and Address of of Beneficial of Beneficial Owner Ownership Class Standen and Co. as nominee for The Lorain National Bank 613,091(1) 14.81% 457 Broadway Lorain, Ohio 44052 (1) The Bank, a wholly owned subsidiary of LNB Bancorp, Inc. (a U. S. Corporation) disclaims beneficial ownership of all shares. The shares were held by the Bank in various accounts administered by it, as fiduciary, for the benefit of beneficiaries, donors, or principals of such accounts. The Bank, as fiduciary, had (a) sole power to vote 111,583 shares; (b) sole investment power to purchase/sell, but no power to vote on 243,748 shares; (c)shared investment power with sole power to vote with respect to 33,446 shares; and (d) no investment power and no power to vote on 224,314 shares. Shares of the Corporation held by the Bank in various fiduciary capacities will be voted only in accordance with directions, approvals or instructions where called by the governing instruments or by law, and in the absence of special factors affecting any individual account, will be voted in accordance with management's recommendations where the Bank as fiduciary has authority to determine the manner of voting. BENEFICIAL OWNERSHIP OF MANAGEMENT (As of December 31, 1996) Sole Shared Total Amount Investment and Investment and of Beneficial Percent Name Voting Power Voting Power Ownership of Class James L. Bardoner 8,326 609 8,935 .22% Daniel P. Batista 22,882 44,474 67,356 1.63% Robert M. Campana 4,361 0 4,361 .11% Wellsley O. Gray 8,073 4,642 12,715 .31% James F. Kidd 47,215 0 47,215 1.14% David M. Koethe 53,500 180 53,680 1.30% Benjamin G. Norton 44,072 45,461 89,533 2.16% Stanley G. Pijor 61,550 32,507 94,057 2.27% Jeffrey F. Riddell 11,117 26,747 37,864 .91% Thomas P. Ryan 32,473 1,244 33,717 .81% T. L. Smith, M.D. 12,997 8,932 21,929 .53% Eugene M. Sofranko 6,560 21,422 27,982 .68% Paul T. Stack 8,801 1,220 10,021 .24% Leo Weingarten 103,553 8,519 112,072 2.71% Executive Officers who are not Directors 109,736 385 110,121 2.66% ------- -------- ------- ------ All Directors and Executive Officers as a Group 535,216 196,342 731,558 17.68% ======= ======== ======= ====== -13- 119 INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS Some of the directors of the Corporation and the companies with which they are associated, are customers of and had banking transactions with the Bank in the ordinary course of the Bank's business during 1996. Loans and commitments to loans included in such transactions were made on substantially the same terms, including interest rates and collateral, as were those prevailing at the time for comparable transactions with other persons, and in the opinion of the management of the Bank, do not involve more than a normal risk of collectibility or present other unfavorable features. STOCK DIVIDEND The Board of Directors has the authority to declare and implement common stock dividends without shareholder approval. However, as it has in prior years, the Board has elected to seek shareholder approval for the proposed stock dividend. A stock dividend of approximately 82,771 shares of common stock (2%) is recommended by the Board of Directors. THE BOARD HAS STIPULATED THAT THE PROPOSED 2% STOCK DIVIDEND WOULD REQUIRE APPROVAL, IN THE FORM OF AN AFFIRMATIVE VOTE BY SHAREHOLDERS OWNING TWO-THIRDS OR MORE OF THE STOCK OF THE CORPORATION. The stock dividend will be payable to shareholders of record April 15, 1997. This stock dividend is recommended as a distribution of earnings of the Corporation and to conserve the cash assets. The stock dividend will consist of approximately 82,771 shares which will increase the total number of shares outstanding to approximately 4,221,304. As a result of the stock dividend, a transfer of approximately $82,771 will be made from retained earnings increasing the common stock of the Corporation to approximately $4,221,000. An additional amount of approximately $2,348,000 will be transferred from retained earnings to surplus. The stock dividend will not change the common stock par value or the total equity capital of the Corporation. The number of shares to be issued and the dollar amounts discussed above are based upon shares outstanding and stock bid prices as of March 3, 1997. The actual stock dividend will be calculated based upon shares outstanding and stock bid prices on the record date. No fractional shares will be issued. The Corporation will sell full shares representing all the fractions to the highest bidder after having solicited sealed bids from at least three (3) licensed stockbrokers. The proceeds of the sale shall be distributed pro rata to shareholders who otherwise would be entitled to fractional shares. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE DECLARATION OF A 2% STOCK DIVIDEND. PRINCIPAL ACCOUNTANTS The independent accounting firm of KPMG Peat Marwick LLP has served as the principal accountants for the Bank since 1972. A representative of the firm will be present at the Annual Meeting and will be available to respond to questions. -14- 120 SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING Shareholders may submit proposals appropriate for shareholder action at the Corporation's Annual Meeting consistent with the regulations of the Securities and Exchange Commission. For proposals to be considered for inclusion in the Proxy Statement for the 1998 Annual Meeting, they must be received by the Corporation no later than December 1, 1997. Such proposals should be directed to LNB Bancorp, Inc., Attention: Shareholder Relations, 457 Broadway, Lorain, Ohio 44052. OTHER BUSINESS Management is not aware of any other matter which may be presented for action at the meeting other than the matters set forth herein. Should any matter other than those set forth herein be presented for a vote of the shareholders, the proxy in the enclosed form directs the persons voting such proxy to vote in accordance with their judgement. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT Section 16(a) of the Securities Exchange Act requires the Corporation's officers and directors to file reports of ownership and changes of ownership of the Corporation's registered securities on Forms 3, 4 and 5 with the Securities and Exchange Commission (SEC). The Corporation believes that all officers and directors complied with all filing requirements applicable to them with respect to transactions during fiscal year 1996. ANNUAL REPORT A copy of the Corporation's Annual Report has been mailed to shareholders prior to the meeting. The Annual Report is not intended to be part of this Proxy Statement. A report of the operations of the Corporation and the Bank for the fiscal year ended December 31, 1996 will be presented at the meeting. A copy of the Corporation's Annual Report on Form 10-K under the Securities Exchange Act of 1934 is available to shareholders without charge upon request to Thomas P. Ryan, Executive Vice President and Secretary/Treasurer, LNB Bancorp, Inc., 457 Broadway, Lorain, Ohio 44052. By Order of the Board of Directors /s/ Thomas P. Ryan Thomas P. Ryan Executive Vice President and Secretary/Treasurer -15- 121 PROXY ANNUAL MEETING LNB BANCORP, INC., LORAIN, OHIO This Proxy is Solicited on Behalf of the Board of Directors The undersigned hereby appoint JAMES L. BARDONER, DAVID M. KOETHE and DANIEL P. BATISTA, as Proxies, each with the power to appoint his substitute, and hereby authorize them to represent and to vote, as designated below, all the shares of Common Stock of the LNB Bancorp, Inc. held on record by the undersigned on March 7, 1997, at the Annual Meeting of Shareholders to be held on April 15, 1997 or any adjournment thereof. 1. ELECTION OF DIRECTORS [ ] FOR all nominees listed below (except as marked to the contrary below) [ ] WITHHOLD AUTHORITY to vote for all nominees listed below James F. Kidd, Jeffrey F. Riddell, Thomas P. Ryan, Paul T. Stack, Robert M. Campana (Instruction: To withhold authority to vote for any individual nominee write that nominee's name on the space provided below.) ----------------------------------------------------------------- 2. STOCK DIVIDEND - Increase the outstanding common stock of LNB Bancorp, Inc. by declaration of a stock dividend consisting of approximately 82,771 shares of common stock of $1.00 par value each, and the terms and conditions thereof. [ ] FOR [ ] AGAINST [ ] ABSTAIN END PUBLISHED PROXY CARD FRONT SIDE In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. 122 This proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, this proxy will be voted for proposals 1 and 2. Dated -----------, 1997 Number of shares in my/our name --------- -------------------------- (L.S.) -------------------------- (L.S.) NOTE: Please sign exactly as name appears above. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY FORM WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. Please read and vote on other side. 123 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1996) S - K Reference Number (23) Consent of Independent Accountants. 124 KPMG Peat Marwick, LLP (LOGO) EXHIBIT 23 Certified Public Accountants 1500 National City Center 1900 East Ninth Street Cleveland, Ohio 44114-3495 Consent of Independent Accountants The Board of Director LNB Bancorp, Inc. and Subsidiary We consent to incorporation by reference in the registration statement (No. 33-64034) on Form S-8 of LNB Bancorp, Inc. of our report dated January 24, 1997, relating to the consoli- dated balance sheets of LNB Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of LNB Bancorp, Inc. Our report refers to the Corporation's adoption of the provisions of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, and No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, in 1995, and No. 115, Accounting for Certain Investments in Debt and Equity Securities, in 1994. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick Cleveland, Ohio March 27, 1997 125 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1996) S - K Reference Number (27) Financial Data Schedule EX-27 2
9 0000737210 LNB BANCORP, INC. 1000 U.S. 12-MOS DEC-31-1996 DEC-31-1996 1 18,890 102 0 0 16,102 88,858 89,537 302,073 4,116 438,243 366,380 23,386 3,184 1,095 0 0 4,138 40,060 438,243 25,910 6,377 183 32,470 10,505 11,478 20,992 600 (1) 16,565 8,752 5,852 0 0 5,852 1.41 1.41 5.33 765 357 0 1,066 4,002 672 186 4,116 2,867 0 1,253
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