-----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, GGmHW0oMBNqsr2f5cHqtYemZUuZ4M29S7ilCPM3Wf1san/VwBOMoN6BI4p6esEi5 XUXXaFwMBUeGdaLRWZAQjA== 0000737210-98-000004.txt : 19980401 0000737210-98-000004.hdr.sgml : 19980401 ACCESSION NUMBER: 0000737210-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 000-13203 FILM NUMBER: 98583007 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, 1997 number 0-13203 LNB Bancorp, Inc. (Exact name of the registrant as specified in its Charter) Ohio 34-1406303 (State of incorporation) (I.R.S. Employer Identification No.) 457 Broadway, Lorain, Ohio 44052-1769 (Address of principal executive offices) (Zip Code) (440) 244 - 6000 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934: Title of Each Class Name of Each Exchange on Which Registered Common Stock, Par Value $1.00 NASDAQ - 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, 1998 was approximately $79,596,000. The number of shares of Registrant's Common Stock outstanding on February 28, 1998 was 4,124,479. Portions of the 1997 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 23, 1998 are incorporated in Part III of this report. 1 LNB Bancorp, Inc. Form 10-K Report Table of Contents 1997 Page PART I Item 1 Business a. General Development of Business 2 b. Financial Information About Industry Segments 3 c. Description of LNB Bancorp, Inc.'s Business 3 d. Financial Information About Foreign and Domestic Operations and Export Sales 6 e. Statistical Disclosure by Bank Holding Companies 6 I. Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential 7 II. Investment Portfolio 7 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 a. Quantitative and Qualitative Disclosures about Market Risk 18 Item 8 Financial Statements and Supplementary Data 18 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III Item 10 Directors and Executive Officers of the Registrant 19 Item 11 Executive Compensation 19 Item 12 Security Ownership of Certain Beneficial Owners and Management 19 Item 13 Certain Relationships and Related Transactions 20 PART IV Item 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 21 SIGNATURES 22 EXHIBIT INDEX 24 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 8, 1989, the shareholders of the Corporation approved a two-for-one stock split, which reduced the par value to $1.25. On April 20, 1993, the shareholders of the Corporation approved a five-for-four stock split, which reduced the par value to $1.00. On April 18, 1995, the Corporation's Shareholders approved an amendment to the Articles of Incorporation to increase the 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. On September 15, 1997, Lorain National Bank, Lorain, Ohio, purchased and assumed $45.3 million in deposits and other liabilities of three branch offices, located in Lorain County, from KeyBank National Association (KeyBank), headquartered in Cleveland, Ohio. In addition to the deposits assumed, Lorain National Bank also acquired approximately $26.6 million in cash and $0.4 million in premises and equipment, and $18.3 million in consumer and commercial loans. Two of the banking offices acquired by the Lorain National Bank, located in Lorain County, are being operated as part of the Bank's branch office network. The third branch office located at 383 Broadway, Lorain, Ohio was closed on November 14, 1997 and then merged into our Main Office at 457 Broadway, Lorain, Ohio. 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. 3 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. c) DESCRIPTION OF LNB BANCORP, INC.'S BUSINESS LNB Bancorp, Inc. is a $490 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 twenty 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 including commercial loans, real estate loans, construction loans, consumer loans, Small Business Administration loans, Visa card and student loans. Other services offered include safe deposit boxes, night depository, U. S. savings bonds, travelers' checks, money orders, cashiers checks, bank-by-mail, automatic teller machine cash and transaction services, debit cards, wire transfers, electronic funds transfer, utility bill collections, notary public service, personal computer based cash management services, 24 hour telephone banking with bill paying service, discount brokerage services and other services tailored for both individuals and businesses. The Bank's electronic data processing department provides centralized electronic data processing services to local financial intermediaries. The Bank's residential mortgage lending activities consist primarily of loans for purchasing personal residences, home equity loans, local lender loans, or loans for commercial or consumer purposes secured by residential mortgages. Consumer lending activities consist of traditional forms of financing for automobile and personal loans. The Bank's range of deposit services include checking accounts,Checkinvest accounts, savings accounts, Holiday savings, money market accounts, Fortune Fifty accounts(a Senior Citizen program), individual retirement accounts, certificates of deposit, Keough plans, and overdraft protection. Deposits of the Bank are insured by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation. The Trust and Investment Management Division of the Bank performs complete trust administrative functions and offers agency and trust services and Mutual funds investment products 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. 4 Competition Lorain National Bank faces strong competition both in making loans and attracting deposits. The deregulation of the banking industry and the wide spread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking has created a highly competitive environment for financial services providers. Lorain National Bank competes with other national and state banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies and other financial intermediaries operating in its market and elsewhere, many of whom have substantially greater financial and managerial resources. The Lorain National Bank competes with seven other banks and bank holding companies operating in Lorain County which range in size from approximately $490 million to over $116 billion in assets. Other competition comes primarily from savings and loans, credit unions, and other financial intermediaries operating in Lorain County and counties adjacent to it. The Bank's market share of total deposits in Lorain County in all types of financial institutions increased to 15.19% in 1997 compared to 12.77% in 1996. The increase in market share in Lorain County is directly related to the Bank's purchase and assumption of three KeyBank offices which included deposits of $45.3 million. Lorain National Bank seeks to minimize the competitive effect of larger financial institutions through a community banking approach that emphasizes direct customer access to the Bank's president and other officers in an environment conducive to friendly, informed and courteous services. Management believes that Lorain National Bank is well positioned to compete successfully in its respective primary market area. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of the banking facilities and, in the case of loans to commercial borrowers, relative lending limits. Management believes that the commitment of Lorain National Bank to personal service, innovation and involvement in their respective communities and primary market areas, as well as their commitment to quality community banking service, are factors that contribute to it's competitive advantage. Supervision and Regulation LNB Bancorp, Inc., as a 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). 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. On September 29. 1994, the Act was amended by the Interstate Banking and Branch Efficiency Act of 1994 which authorizes interstate bank acquisitions anywhere in the country, effective one year after the date of enactment and interstate branching by acquisition and consolidation, effective June 1, 1997 in those states that have not opted out by that date. 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. The Act does not place territorial restrictions on the banking 5 subsidiaries of bank holding companies. LNB Bancorp, Inc.'s banking subsidiary is subject to limitations with respect to intercompany loans and investments. A substantial portion of the Corporation's cash revenues is derived from dividends paid by its subsidiary bank. These dividends are subject to various legal and regulatory restrictions as summarized in Note(14) on page 20 of the LNB Bancorp, Inc. 1997 Annual Report. This note is incorporated herein by reference. The Corporation and the Bank are subject to an extensive array of banking laws and regulations that are intended primarily for the protection of the customers and depositors of the Corporation's subsidiaries rather than holders of the Corporation's securities. These laws and regulations govern such areas as permissible activities, loans and investments, rates of interest that can be charged on loans and reserves. The Corporation and the Bank also are subject to general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio. Set forth below are brief descriptions of selected laws and regulations applicable to the Corporation and the Bank. The Bank is subject to the provisions of the National Bank Act. The Bank is subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (OCC). The Bank is also subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Under the 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 acquisitions or mergers involving banks and bank holding companies located in other states. Federal regulators adopted risk-based capital guidelines and leverage standards for banks and bank holding companies. A discussion of the impact of risk-based capital guidelines and leverage standards is presented on page 20 of the LNB Bancorp, Inc. 1997 Annual Report and is incorporated herein by reference. The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company and its controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of any FDIC assisted transaction involving an affiliated insured bank or savings association. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) 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 6 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 35 of the LNB Bancorp, Inc. 1997 Annual Report. Employees As of December 31, 1997, the Corporation and the Bank employed 234 full-time employees and 64 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. 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. 1997 Annual Report, portions of which are incorporated in this Form 10-K by reference. 7 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, 1997, 1996, and 1995 are included in the Condensed Consolidated Average Balance Sheets, within Management's Discussion and Analysis found on page 29 of the LNB Bancorp, Inc. 1997 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, 1997 and 1996 are included in Rate/Volume Analysis of Net Interest Income within Management's Discussion and Analysis found on page 29 of the LNB Bancorp, Inc. 1997 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) 1997 1996 1995 - ------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 11,155 $ 14,380 $ 14,768 Securities of other U.S. Government agencies and corporations 6,031 Equity securities 2,150 1,722 393 - ------------------------------------------------------------------------- Total securities available for sale 19,336 16,102 15,161 - ------------------------------------------------------------------------- Securities held to maturity: U.S. Treasury securities 66,945 69,673 69,422 Securities of other U.S. Government agencies and corporations 24,996 16,500 14,500 States and political subdivisions 4,097 2,685 5,483 - ------------------------------------------------------------------------- Total securities held to maturity 96,038 88,858 89,405 - ------------------------------------------------------------------------- Total securities $115,374 $104,960 $104,566 - ------------------------------------------------------------------------- 8 B. MATURITY DISTRIBUTION OF INVESTMENT SECURITIES Maturities of nonequity securities owned by the Corporation as of December 31, 1997 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 $ 9,059 $ 2,096 $ 0 $ 0 $ 11,155 U.S. Government agencies and corporations 0 5,023 1,008 0 6,031 - ------------------------------------------------------------------------- Total securities available for sale 9,059 7,119 1,008 0 17,186 - ------------------------------------------------------------------------- Securities held to maturity: U.S. Treasury securities 32,988 32,961 995 0 66,944 U.S. Government agencies and corporations 0 18,994 6,002 0 24,996 States and political subdivisions 972 1,869 285 972 4,098 - ------------------------------------------------------------------------- Total securities held to maturity 33,960 53,824 7,282 972 96,038 - ------------------------------------------------------------------------- Total securities $43,019 $60,943 $ 8,290 $ 972 $113,224 - ------------------------------------------------------------------------- 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, 1997: 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 5.35% 6.33% - % - % 5.53% U.S. Government agencies and corporations - 6.19 6.74 - 6.28 - ------------------------------------------------------------------------- Total securities available for sale 5.35 6.23 6.74 - 5.87 - ------------------------------------------------------------------------- Securities held to maturity: U.S. Treasury securities 5.80 6.60 7.96 - 6.20 U.S. Government agencies and corporations - 6.26 6.94 - 6.42 States and political subdivisions (1) 6.68 7.28 8.77 8.34 7.49 - ------------------------------------------------------------------------- Total securities held to maturity 5.82 6.50 7.15 8.34 6.33 - ------------------------------------------------------------------------- Total securities 5.72% 6.47% 7.10% 8.34% 6.25% 9 - ------------------------------------------------------------------------- 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, 1997. III. LOAN PORTFOLIO A. The following table summarized the distribution of the loan portfolio: December 31, --------------------------------------------------- (Amounts in Thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------- Commercial $120,892 $113,170 $105,847 $104,209 $105,289 Mortgage 142,223 138,455 124,012 114,611 100,140 Installment 37,250 27,683 23,310 19,933 18,554 Consumer revolving lines of credit 30,666 22,765 23,324 23,054 21,774 - -------------------------------------------------------------------------- TOTAL LOANS 331,031 302,073 276,493 261,807 245,757 Reserve for possible loan losses (4,168) (4,116) (4,002) (3,832) (3,714) - -------------------------------------------------------------------------- NET LOANS $326,863 $297,957 $272,491 $257,975 $242,043 ========================================================================== B. COMMERCIAL LOAN MATURITY AND REPRICING ANALYSIS AS OF DECEMBER 31, 1997 (Amounts in Thousands) 1997 - ---------------------------------------------- Maturing in one year or less $ 22,709 Maturing after one year, but within five years 20,758 Maturing beyond five years 77,425 - ---------------------------------------------- TOTAL COMMERCIAL LOANS $120,892 ============================================== Loans repricing beyond one year: Fixed rate 8,304 Variable rate 89,879 - ---------------------------------------------- TOTAL $ 98,183 ============================================== 10 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) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------- Nonaccrual loans: Real estate loans $ 383 $ 641 $ 511 $ 318 $ 438 Commercial loans 42 114 221 0 420 Consumer loans 0 10 0 0 0 - ----------------------------------------------------------------- Total nonaccrual loans 425 765 732 318 858 Restructured loans 0 0 0 0 0 Other Real Estate owned 90 39 0 0 0 Total nonperforming assets $ 515 $ 804 $ 732 $ 318 $ 858 - ----------------------------------------------------------------- Reserve for possible loan losses to nonperforming assets 809.3% 511.9% 546.7% 1,205.4% 432.8% ================================================================= Accruing loans past due 90 days $ 461 $ 357 $ 725 $ 419 $ 407 Potential problem loans 8,764 1,066 942 1,197 1,095 ================================================================= (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 1993 through 1997. The ratio of the reserve for possible loan loss to nonperforming assets decreased from 546.7% in 1995 to 511.9% in 1996 and increased to 809.3% in 1997. The 1997 increase is the result of net decreases in nonperforming loans in the amount of $289,000. 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, 1997, the interest income that would have been earned on the nonaccrual loans in the loan portfolio would have been approximately $43,000; however, the interest income actually earned and reported as income in 1997 amounted to approximately $21,000. 11 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. (2) Potential Problem Loans - As shown in the table on page 10 of Form 10-K, at December 31, 1997, there are approximately $8,764,000 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 1997 is primarily due to three large credits that the Bank is reviewing. Approximately $4,000,000 of the potential problem loan balance relates to extension of credit to a company that has a significant amount of business activity in Southeast Asia. The Bank is monitoring these credits as potential problem loans due to the current economic situation in Southeast Asia. Another $2,100,000 in potential problem loans relates to credit extended to finance the development of a single-family dwelling subdivision. These credits are being monitored by Management as potential problem loans due to changes in the borrowers ownership interest. However, Management does not anticipate any charge-offs relative to these potential problem loans. Another $1,500,000 of the potential problem loans relates to the extension of credit to a recreational entertainment center. These credits are being monitored by Management due to a decrease in net earnings. This decrease in net earnings was caused primarily by bad weather conditions in the spring and summer of 1997. The potential problem loans in 1993, 1994, 1995, and 1996 remained at a relatively constant level. (3) Foreign Outstandings - There were no foreign loans outstandings at December 31, 1997, 1996 or 1995. (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, 1997, there were no significant concentrations of credit risk in the loan portfolio. 12 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 (12) of the "Notes to Consolidated Financial Statements" which appears on pages 18 and 19 of the LNB Bancorp, Inc. 1997 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, 1997, 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 $90,000 and $39,000 in Other Real Estate Owned at December 31, 1997, and 1996, respectively. IV. SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes activity relating to the Reserve for Possible Loan Losses: December 31, ------------------------------------------- (Amounts in Thousands) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $ 4,116 $ 4,002 $ 3,832 $ 3,714 $ 3,406 Charge-offs: Commercial (190) (296) (100) (190) (177) Real Estate (359) (185) (209) (141) (222) Consumer (300) (191) (140) (68) (116) - ---------------------------------------------------------------------- Total charge-offs (849) (672) (449) (399) (515) Recoveries: Commercial 7 61 163 18 70 Real Estate 72 67 5 57 152 Consumer 72 58 51 42 101 - ---------------------------------------------------------------------- Total recoveries 151 186 219 117 323 - ---------------------------------------------------------------------- Net charge-offs (698) (486) (230) (282) (192) - ---------------------------------------------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 750 600 400 400 500 - ---------------------------------------------------------------------- BALANCE AT END OF YEAR $ 4,168 $4,116 $ 4,002 $ 3,832 $ 3,714 ====================================================================== 13 ANALYTICAL DATA BALANCES: Average total loans $315,215 $287,809 $272,011 $252,345 $237,671 Total loans at year end 331,031 302,073 276,493 261,807 245,757 Net charge-offs 698 486 230 282 192 Provision for possible loan losses 750 600 400 400 500 Reserve for possible loan losses at year end 4,168 4,116 4,002 3,832 3,714 RATIOS: Net charge-offs to: Average total loans .22% 0.17% 0.08% 0.11% 0.08% Total loans at year end .21 0.16 0.08 0.11 0.08 Provision for possible loan losses 93.07 81.00 57.50 70.50 38.40 Reserve for possible loan losses 16.75 11.81 5.75 7.36 5.17 Reserve for possible loan losses to: Average total loans 1.32 1.43 1.47 1.52 1.56 Total loans at year end 1.26 1.36 1.45 1.46 1.51 The higher amount of 1997 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 1998 is expected to be about $600,000 during 1998. 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 12 of the Form 10-K are presented in the following table: (Amounts in Thousands) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------ Commercial $183 $235 $(63) $172 $107 Real estate 287 118 204 84 70 Consumer 228 133 89 26 15 - ------------------------------------------------------------------ Total net charge-offs $698 $486 $230 $282 $192 ================================================================== 14 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) 1997 1996 1995 1994 1993 ---------------------------------------------------------------- Commercial $2,404 $1,429 $1,597 $1,487 $1,036 Real estate 733 803 651 623 485 Consumer 515 381 363 348 313 Off-balance sheet risk 200 250 250 250 250 Unallocated 316 1,253 1,141 1,124 1,630 - ------------------------------------------------------------------ TOTAL $4,168 $4,116 $4,002 $3,832 $3,714 ================================================================== This allocation is made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. The 1997, 1996 and 1995 provision for possible loan losses exceeded net charge-offs by $52,000, $114,000 and $170,000 respectively. The allocated portion of the reserve for possible loan losses has remained relatively consistent during 1993 through 1996. 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 consumer loans increased in 1997 due to changes in credit risk in those areas. The following table shows the percentage of loans in each category to total loans at year end: 1997 1996 1995 1994 1993 - ------------------------------------------------------------- Commercial 36.5% 37.5% 38.3% 39.8% 42.8% Real estate 43.0 45.8 44.8 43.8 40.8 Consumer 20.5 16.7 16.9 16.4 16.4 ------------------------------------------ 100.0% 100.0% 100.0% 100.0% 100.0% ------------------------------------------ The loan portfolio mix has shifted during the past five years. Consumer loans as a percent of total loans remained relatively constant from 1993 through 1996. During 1997 the commercial loans as a percentage of total loans decreased by 1.0% and real estate loans decreased by 2.8% with a corresponding increase in consumer loans by 3.8%. The 1997 shift in the mix of the loan portfolio is a direct result of the acquisition of three branch offices from KeyBank which included the acquisition of $17.4 million in consumer loans and $.9 million in commercial loans. 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 15 The following table sets forth the classification of average deposits for the indicated period. December 31, ------------------------------------- (Amounts in Thousands) 1997 1996 1995 - ---------------------------------------------------------------- Demand deposits $ 62,040 $ 58,989 $ 55,456 NOW accounts 48,913 45,983 44,646 Money market accounts 19,473 21,650 25,578 Savings deposits 96,708 92,570 91,845 Time deposits 158,789 139,028 128,977 - ---------------------------------------------------------------- Total $385,928 $358,220 $346,502 ================================================================ 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, ---------------------------------------- 1997 1996 1995 - --------------------------------------------------------------- NOW accounts 1.50% 1.61% 1.89% Money market accounts 2.14 1.95 2.10 Savings deposits 2.20 2.20 2.27 Time deposits 5.29 5.25 5.52 ======================================== 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, 1997. Maturing within 3 months $ 17,449 After 3 but within 6 months 7,795 After 6 but within 12 months 7,449 After 12 months 3,858 - ---------------------------------------------- Total $ 36,551 ============================================== VI. RETURN ON EQUITY AND ASSETS Information relating to key operating ratios for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 is presented in the tabular form below. December 31, 1997 1996 1995 1994 1993 - ---------------------------------------------------------------- Return on average assets 1.41% 1.37% 1.21% 1.13% 1.08% Return on average equity 14.51 13.70 12.72 12.16 11.90 Dividend payout ratio 45.26 44.28 43.47 42.98 42.81 Average equity to average assets 9.71 10.01 9.55 9.31 9.11 Net interest margin 5.20 5.33 5.14 5.09 5.10 16 VII. SHORT-TERM BORROWINGS Information relating to short-term borrowings for the years ended December 31, 1997, 1996 and 1995 appears on page 18 of the LNB Bancorp, Inc. 1997 Annual Report under footnote (10)"Short-Term Borrowings" and is incorporated herein by reference. 17 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 seven 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. 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 Drive-In Office 200 Sixth Street, Lorain Pearl Avenue Office 2850 Pearl Avenue, Lorain Oberlin Office 40 East College Street, Oberlin West Park Drive Office 2130 West Park Drive, Lorain Second Street Office 221 Second Street, Elyria Cleveland Street Office 801 Cleveland Street, Elyria Oberlin Avenue Office 3660 Oberlin Avenue, Lorain Olmsted Township Office 27095 Bagley Road, Olmsted Township Westlake Office 30210 Detroit Road, Westlake Kendal at Oberlin Office 600 Kendal Drive, Oberlin The Renaissance Office 26376 John Road, Olmsted Township Westlake Village Office 28550 Westlake Village Drive, Westlake Cooper Foster Park Road Office 1920 Cooper Foster Park Road, Lorain Midway Mall Office 6395 Midway Mall, Elyria 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, 1997 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 20 of the LNB Bancorp, Inc. 1997 Annual Report and are incorporated herein by reference. HOLDERS The total number of shareholders was 2,066 as of February 28, 1998. 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 26 of the LNB Bancorp, Inc. 1997 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 26 - 35 of the LNB Bancorp, Inc. 1997 Annual Report. Also, see Item 8 - Financial Statements and Supplementary Data. (a) Quantitative and Qualitztive Disclosures about Market Risk are incorporated herein by reference to pages 32 - 34 of the LNB Bancorp, Inc. 1997 Annual Report to Shareholders. 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. 1997 Annual Report (Exhibit 13), pages 6 through 25. The supplementary financial information specified by Item 302 of Regulation S-K, selected quarterly financial data, is included on page 36 of the LNB Bancorp, Inc. 1997 Annual Report. Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 Report of Management 19 Independent Auditors' Report ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 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 23, 1998)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) (43) Chief Accounting Officer, LNB Bancorp, Inc. and The Lorain National Bank Gregory D. Friedman Senior Vice President, (Not a Director) (47) Chief Operating Officer and Chief Financial Officer, LNB Bancorp, Inc. and The Lorain National Bank Michael D. Ireland Senior Vice President, (Not a Director) (51) LNB Bancorp, Inc. and The Lorain National Bank Sandra L. Dubell Vice President and (Not a Director) (52) Chief Lending Officer, LNB Bancorp, Inc. and The Lorain National Bank Emma N. Mason Senior Vice President, (Not a Director) (60) LNB Bancorp, Inc. and The Lorain National Bank James H. Weber Senior Vice President, (Not a Director) (51) 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 23, 1998) is incorporated herein by reference. 20 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 23, 1998), relating to "Compliance with Section 16(A) of the Securities Exchange Act" is incorporated herein by reference. The information contained on pages 13 and 14 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 23, 1998), relating to "Beneficial Ownership of Shares" is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained on pages 6, 7 and 14 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 23, 1998) is incorporated herein by reference. Analysis of Loans to Related Parties: The information contained in Note (6) "Transactions with Related Parties" on page 16 of the LNB Bancorp, Inc. 1997 Annual Report is incorporated herein by reference. 21 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 27, 1998, appear on pages 6 through 25 of the LNB Bancorp, Inc. 1997 Annual Report and are incorporated herein by reference: (1) Financial Statements Consolidated Balance Sheets December 31, 1997 and 1996 Consolidated Statements of Income for Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity for Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements for Years Ended December 31, 1997, 1996 and 1995 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 23 of this Form 10-K. (b) Reports on Form 8-K On October 3, 1997, LNB Bancorp, Inc. filed a Form 8-K with the Securities and Exchange Commission pursuant to the purchase and assumption of certain assets and liabilities from KeyBank, National Association, (KeyBank) Cleveland, Ohio. On September 15, 1997, LNB Bancorp, Inc. acting through its wholly-owned subsidiary Lorain National Bank, acquired from KeyBank certain assets and assumed certain deposits and other liabilities of three KeyBank branch offices in Lorain County, Ohio. The acquisition was effected through the purchase and assumption of certain assets and liabilities of KeyBank by the Registrant, pursuant to a Branch Purchase and Assumption Agreement dated as of April 10, 1997. (c) Exhibits required by Item 601 Regulation S-K 22 Reference is made to the Exhibit Index which is found on page 24 of this Form 10-K. (d) See Item 14(a)(2) above. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LNB Bancorp, Inc. (Registrant) By /s/ Thomas P. Ryan ------------------------ Thomas P. Ryan Executive Vice President, Secretary/Treasurer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: /s/ James L. Bardoner DIRECTOR March 24, 1998 - ----------------------- James L. Bardoner /s/ Daniel P. Batista DIRECTOR March 24, 1998 - ----------------------- Daniel P. Batista /s/ Robert M. Campana DIRECTOR March 24, 1998 - ----------------------- Robert M. Campana /s/ Terry D. Goode DIRECTOR March 24, 1998 - ----------------------- Terry D. Goode /s/ Wellsley O. Gray DIRECTOR March 24, 1998 - ----------------------- Wellsley O. Gray /s/ David M. Koethe DIRECTOR March 24, 1998 - ----------------------- David M. Koethe /s/ Benjamin G. Norton DIRECTOR March 24, 1998 - ----------------------- Benjamin G. Norton /s/ Jeffrey F. Riddell DIRECTOR March 24, 1998 - ----------------------- Jeffrey F. Riddell 23 /s/ T. L. Smith, M.D. DIRECTOR March 24, 1998 - ----------------------- T. L. Smith, M.D. /s/ Eugene M. Sofranko DIRECTOR March 24, 1998 - ----------------------- Eugene M. Sofranko /s/ Paul T. Stack DIRECTOR March 24, 1998 - ----------------------- Paul T. Stack ABSENT - EXCUSED DIRECTOR March 24, 1998 - ----------------------- Leo Weingarten /s/ Stanley G. Pijor CHAIRMAN OF THE March 24, 1998 - ----------------------- BOARD AND DIRECTOR Stanley G. Pijor PRESIDENT, CHIEF March 24, 1998 /s/ James F. Kidd EXECUTIVE OFFICER - ----------------------- AND DIRECTOR James F. Kidd SENIOR VICE /s/ Gregory D. Friedman PRESIDENT, March 24, 1998 - ----------------------- CHIEF FINANCIAL Gregory D. Friedman OFFICER AND CHIEF OPERATING OFFICER /s/ Mitchell J. Fallis VICE PRESIDENT AND March 24, 1998 - ----------------------- CHIEF ACCOUNTING Mitchell J. Fallis OFFICER 24 LNB Bancorp, Inc. Exhibit Index Pursuant to Item 601 (a) of Regulation S-K S-K Reference Page Number Exhibit Number (3) LNB Bancorp, Inc. Articles of Incorporation and Code of N/A Regulations (amended). Previously, filed as Exhibit (3) to Annual Report Form 10-K (Commission File no.0-13203) for the year ended December 31, 1985, and incorporated herein by reference. (10) Material Contracts (a) Supplemental Retirement Agreement by and between N/A James F. Kidd and the Lorain National Bank dated July 30, 1996. Previously filed as Exhibit (99.1) to Form 10-K (Commission File no. 0-13203) filed October 3, 1997, and incoporated herein by reference. (b)Supplemental Retirement Agreement by and between N/A James F. Kidd and The Lorain National Bank dated July 30, 1996. Previously filed as Exhibit (10a) to Quarterly Report on Form 10-Q (Commission File no.0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference. (c)Supplemental Retirement Agreement by and between N/A Thomas P. Ryan and The Lorain National Bank dated July 30, 1996. Previously filed as Exhibit(10b) to Quarterly Report on Form 10-Q (Commission File no. 0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference. (d)Supplemental Retirement Agreement by and between N/A Gregory D. Friedman and The Lorain National Bank dated July 30, 1996. Previously filed as Exhibit (10.c) to Quarterly Report on Form 10-Q (Commission File no. 0-13203) for the quarter ended June 30, 1996, and incorporated herein by reference. (e)Employment Agreement by and between James F. Kidd N/A and LNB Bancorp, Inc. and The Lorain National Bank dated September 11, 1995. Previously filed as Exhibit (10a) to Quarterly Report on Form 10-Q (Commission File no. 0-13203) for the quarter ended September 30, 1995, and incorporated herein by reference. (f)Employment Agreement by and between Thomas P. Ryan N/A and LNB Bancorp, Inc. and The Lorain National Bank dated September 11, 1995. Previously filed as Exhibit (10b) to Quarterly Report on Form 10-Q (Commission File no. 0-13203) for the quarter ended September 30, 1995, and incorporated herein by reference. 25 S-K Reference Page Number Exhibit Number (g)Consultant Agreement by and between Lorain National N/A Bank, LNB Bancorp, Inc. and Stanley G. Pijor dated March 15, 1994. Previously filed as Exhibit (10) to Annual Report Form 10-K (Commission File no. 0-13203) for the year ended December 31, 1993 and incorporated herein by reference. (h)Supplemental Retirement Agreement by and between N/A Stanley G. Pijor and The Lorain National Bank dated December 31, 1987. Previously filed as Exhibit (10) to Annual Report on Form 10-K (Commission File no. 0-13203) for the year ended December 31, 1987, and incorporated herein by reference. (i)Employment Agreement by and between Lorain National N/A Bank, LNB Bancorp, Inc. and Stanley G. Pijor dated December 31, 1987. Previously filed as Exhibit (10) to Annual Report Form 10-K (Commission File no. 0-13203) for the year ended December 31, 1987 and incorporated herein by reference. (j)The Lorain National Bank 1985 Incentive Stock Option N/A Plan. Previously filed as Exhibit (10) to Annual Report on Form 10-K (Commission File no. 0-13203) for the year ended December 31, 1985, and incorporated herein by reference. (11) Computation of Shares Used for Earnings Per Share N/A Calculation. (13) LNB Bancorp, Inc. 1997 Annual Report to Shareholders. N/A (21) Subsidiary of LNB Bancorp, Inc. N/A (22) Notice of Annual Meeting to Shareholders and Proxy N/A Statement (dated March 23, 1998). (23) Consent of Independent Accountants. N/A (27) Financial Data Schedule. N/A (99.1) Annual report on Form 11-K of The Lorain National Bank N/A Employee Stock Ownership Plan (registration number 33-65034) for the plan year ended December 31, 1997 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 N/A Stock Purchase Plan (registration number 33-65034) for the plan year ended December 31, 1997 to be filed as an amendment to this annual report on Form 10-K. 26 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1997) S - K Reference Number (11) Computation of Shares Used for Earnings Per Share Calculation. Years Ended December 31, ------------------------------------- 1997 1996 1995 ------------------------------------- Weighted-Average Shares Outstanding 4,168,322 4,128,459 4,101,825 Common Stock Equivalents (Stock Options) 10,477 10,269 19,222 ----------- ----------- ----------- 4,178,799 4,138,728 4,121,047 =========== =========== =========== 27 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1997) S - K Reference Number (13) LNB Bancorp, Inc. 1997 Annual Report to Shareholders. 28 COVER DESCRIPTION 3/4 Page 1997 annual report LNB BANCORP, INC. "Familiar faces... Friendly places" Among 15 assorted photographs 29 Inside front cover 3/4 Page Shareholder Information CORPORATE HEADQUARTERS If you need to contact the Corporate headquarters of LNB Bancorp, Inc., call or write to: LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052-1739 (440) 244-6000 NOTICE OF ANNUAL MEETING The 1998 Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 10:00 a.m. on Tuesday, April 21, 1998 at The Lorain National Bank, 521 Broadway, Lorain, Ohio. ANNUAL AND QUARTERLY REPORTS AND FORM 10-K Copies of the LNB Bancorp, Inc.'s Annual or Quarterly Reports or the Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be furnished to shareholders upon written request to: Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052-1739 STOCK TRANSFER AGENT AND REGISTRAR Shareholders requesting information about their stock holdings should call or write to: Registrar and Transfer Company Investor Relations Department 10 Commerce Drive Cranford, New Jersey 07016-9982 (800) 368-5948 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. 30 MARKET MAKERS IN LNB BANCORP, INC. STOCK Akin Investment Services Group, Elyria, Ohio Everen Securities, Inc., Lorain, Ohio McDonald & Company Securities, Inc., Elyria, Sandusky and Cleveland, Ohio Mid-Ohio Securities Corp., Elyria, Ohio National Securities Corp., Lorain, Ohio The Ohio Company, Lorain and Cleveland, Ohio CASH DIVIDENDS 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. Since 1988, LNB Bancorp, Inc. has increased its declared dividend in the third quarter and declared EXTRA dividends in the fourth quarter. DIVIDEND REINVESTMENT AND CASH STOCK PURCHASE PLAN LNB Bancorp, Inc. shareholders who wish to apply quarterly cash dividends, or optional cash payments toward the purchase of additional LNB Bancorp, Inc. common stock, may take advantage of a dividend reinvestment plan available through The Registrar and Transfer Company. Inquiries or requests for a description of the dividend reinvestment plan should be made to: Registrar and Transfer Company Dividend Reinvestment Plans 10 Commerce Drive Cranford, New Jersey 07016-3572 (800) 368-5948 Photo Credits We'd like to thank the Lorain County Visitors Bureau and Terry Jonasson of Photo Imagery, Elyria for the use of their photographs on the cover and throughout the pages of this report. 31 Half Page Insert Our Mission 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. Our Vision Lorain National Bank's vision is to become recognized as the most progressive and dynamic, independent provider of financial services in our market. Bottom of insert: Familiar faces... Friendly places 32 Half Page insert Table of Contents Shareholder Information . . . . . . . . . . . . . . . . IFC Financial Highlights . . . . . . . . . . . . . . . . . . . 1 Common Stock Trading Ranges and Cash Dividends Declared . . . . . . . . . . . . . . . . 1 Corporate Profile . . . . . . . . . . . . . . . . . . . . 1 Message to Our Shareholders . . . . . . . . . . . . . . . 2 Consolidated Balance Sheets . . . . . . . . . . . . . . . 8 Consolidated Statements of Income . . . . . . . . . . . . 9 Consolidated Statements of Cash Flows . . . . . . . . . .10 Consolidated Statements of Shareholders' Equity . . . . .11 Notes to Consolidated Financial Statements . . . . . . . .12 Report of Management . . . . . . . . . . . . . . . . . . .25 Independent Auditors' Report . . . . . . . . . . . . . . .25 Five Year Consolidated Financial Summary . . . . . . . . .26 Management's Discussion and Analysis . . . . . . . . . . .27 Selected Quarterly Financial Data . . . . . . . . . . . .36 Banking Offices & ATMs . . . . . . . . . . . . . . . . . .37 Directors and Officers of LNB Bancorp, Inc.. . . . . . . .38 Directors Emeritus of Lorain National Bank . . . . . . . .38 Officers of Lorain National Bank . . . . . . . . . . . . .39 Earnings and Dividend Performance . . .. . . . . . . . . .40 33 Financial Highlights DECEMBER 31, 1997 1996 1987 - ---------------------------------------------------------------------- BANK OFFICES 20 16 16 BANK OFFICERS AND STAFF 298 285 288 SHAREHOLDERS 2,066 2,028 1,415 TOTAL ASSETS $490,217,000 $438,243,000 $284,535,000 TOTAL DEPOSITS $410,655,000 $366,380,000 $244,895,000 NET LOANS $326,863,000 $297,957,000 $168,069,000 ---------------------------------------------- TOTAL CAPITAL $ 44,985,000 $ 44,198,000 $ 21,180,000 ---------------------------------------------- NET INCOME $ 6,482,000 $ 5,852,000 $ 2,562,000 ---------------------------------------------- CASH DIVIDENDS DECLARED $ 2,934,000 $ 2,591,000 $ 867,000 ---------------------------------------------- SHARES OUTSTANDING 4,124,379 4,221,304 3,878,709 ---------------------------------------------- Shares outstanding have been adjusted for five-for-four stock splits in 1995 and 1993, a two-for-one stock split in 1989 and stock dividends. Common Stock Trading Ranges and Cash Dividends Declared 1997 1996 -------------------------------------------------------- Bid Price Bid Price -------------------------------------------------------- Dividend Dividend High Low Amount High Low Amount ------- ------ --------- ------- ------ -------- First Quarter $29.75 $29.00 $.16 $28.75 $27.75 $.13 Second Quarter 29.75 29.00 .16 28.00 27.75 .14 Third Quarter 29.75 28.75 .17 28.50 28.00 .16 Fourth Quarter 28.75 27.50 .22 29.00 28.50 .19 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 15, 1997 and April 16, 1996. Corporate Profile LNB Bancorp, Inc. is a $490 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. Lorain National Bank is a member of the Federal Reserve Bank of Cleveland, a voluntary member of the Federal Home Loan Bank of Cincinnati, with its deposits insured by the Federal Deposit Insurance Corporation. 34 The Lorain National Bank has 20 bank offices and 27 ATM's 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 Employment Opportunity/Affirmative Action Employer and an Equal Housing Lender. Logos for Federal Deposit Insurance Corporation, Federal Home Loan Bank System and Equal Housing Lender END PUBLISHED PAGE 1 354 Top right column black and white photograph of James F. Kidd, President and Chief Executive Officer Message to Shareholders We're pleased to announce that LNB Bancorp, Inc. and its subsidiary, The Lorain National Bank experienced another excellent year of operation, thanks to the support of our four publics - our shareholders, customers, employees and the communities we serve. Since this time a year ago, we have recorded increases in all significant areas of financial performance, including our 16th consecutive year of earnings growth, and record high cash dividends paid to our shareholders. A People Business We're successful because we realize that banking is more than bricks and mortar, more than debits and credits and more than rules and regulations. We're responding to the demands of a changing marketplace where the predominant baby boomers are 10 to 15 years away from retirement. We're operating in an interest rate environment which challenges us to offer savings and investment alternatives not previously considered. We're competing with new competitors in a changing business. What hasn't changed is the fact that we're still a people business. We have a core of nearly 300 hard-working employees who understand that no matter how good our products are, they're even better when delivered on a personal level. Serving individuals, whether they are consumers or business customers, is what we do well. At no time in our history has that position in the marketplace been more clear than it is today. Alone in a Crowd A year ago in this space, we talked about the drastic drop in the number of community banks. That pace has only quickened. The competition for quality loans is still here; the cost of business continues to rise and the size and nature of our competition is still changing. In order to remain successful, we have become flexible - a "niche bank" of sorts. We know we can't be all things to all people - but we can offer virtually any service a big bank can do on an individual basis. Today, the financial services landscape is changing and consumers are paying for those changes in higher fees and less service. We think public sentiment about "bigger being better" is shifting back toward value. It is our contention that value lies in quality products and services with delivery that exceeds customer expectations. Bigger is not always better. Lorain National is now the only locally owned, independent commercial bank serving Lorain County. As such, we will have an opportunity to strengthen our mission to become recognized as the most progressive and dynamic independent provider of financial services in our area. We will continue to open new doors throughout the county, including those of our newest office in the Village of LaGrange at mid-year 1998. To support our new growth, we dedicated significant funding and human resources to education and training programs in 1997. On average, every bank employee participated in three or more programs last year to enhance service skills and to improve technical capabilities. We view our employees as significant assets and we enrich our investment in them each year with rewarding education and training opportunities whenever possible. Preparedness When we're not busy training, we're investing in planning and technology. Because today's customers expect faster service through more 36 delivery channels, we're seeking new solutions to expand our services in an efficient manner. The answer lies in well-conceived planning and good use of technology. One of the greatest technological challenges facing all businesses will be the modification of computer software and hardware to accommodate the coming of the year 2000. Virtually all businesses and individuals who use computers will be confronted with a dilemma at midnight, December 31,1999, if they are not prepared. Without modification, computers could assume the new year is 1900 once again. END PUBLISHED PAGE 2 37 Top right column black and white picture of Stanley G. Pijor, Chairman of the Board This year, we assembled a strategic task force to review our systems to insure year 2000 compliance. All major vendors and suppliers to the bank are being examined to make sure they are year 2000 compliant. During 1998, we will begin testing and validating that these systems are year 2000 compliant. The project completion date for the year 2000 compliance is slated for June, 1999 to insure that we can welcome the new millennium without concern. Financial Performance In 1997 we posted our 16th consecutive year of increased earnings, as net income increased by 10.8% over 1996, reaching $6,482,000. Earnings per share also increased to $1.56 for 1997 compared to $1.39 for 1996. The graphs on page 40 depict our consolidated earnings and dividends over the past 10 years. Dividends declared per share amounted to $.71 in 1997 compared to $.62 in 1996. Total cash dividends in 1997, including the EXTRA dividend declared by the Board of Directors in November, rose to nearly $2,934,000. In each of the last 10 years, an increase in the regular cash dividend has been approved. The cash dividends declared in 1997 represent a 238% increase over 1987, when $867,000 in cash dividends were declared. Other financial highlights as of December 31, 1997 include an increase in net loans to $326.9 million, up $28.9 million from 1996 and an increase in total deposits to $410.7 million, up $44.3 million from 1996. Total assets of LNB Bancorp, Inc. reached $490.2 million, which represents a increase of $52.0 million over 1996. The return on average assets of LNB Bancorp, Inc. rose from 1.37% in 1996 to 1.41% in 1997. Total shareholders' equity increased $45.0 million at December 31, 1997. The ratio of total shareholders' equity to total assets was 9.2% at December 31, 1997. LNB Bancorp, Inc. and its subsidiary, Lorain National Bank, significantly exceed all current regulatory capital guidelines. In Memoriam It is with great sadness that we acknowledge the passing of James H. Riddell, a member of the Lorain National Bank and LNB Bancorp, Inc. boards of directors for a combined 25 years. We are grateful to Mr. Riddell for his many years of faithful service as Director and Director Emeritus. He will be greatly missed. TOTAL ASSETS millions of dollars (A Total Assets graph follows in printed version with assets on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) NET LOANS millions of dollars (A Net Loans graph follows in printed version with loans on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the reviously described grid.) 38 Total Assets Net Loans Year Millions of Dollars Millions of Dollars 1997 $490.2 $326.9 1996 $438.2 $298.0 1995 $421.6 $272.5 1994 $394.9 $258.0 1993 $379.6 $242.0 END PUBLISHED PAGE 3 39 1997 Highlights The acquisition of three KeyBank branch officers proved to be our most challenging activity in 1997. Along with the former KeyBank branch staff, we welcomed more than 5,000 new customers to the bank. Additionally, we acquired more than $45 million in deposits and $18 million in loans. The highly successful operation, which began in April and culminated in September, drew upon resources from all areas of the bank. New product literature and highly personalized attention to the conversion of former Key accounts was critical to the acquisition's success. An outstanding effort on the part of our branch and operations staff paid dividends in the form of a relatively smooth transition for our new customers. Loan demand remained strong in 1997. Excluding former KeyBank loans, nearly $50.4 million in new commercial loans were booked, $29.1 million in mortgage loans and another $20.1 million in consumer loans were approved. Mortgage interest rates, which fell to a 20-year low, fueled a new wave of refinancing in 1997. Nationally, the median price for existing homes increased 6.2% from December 1996 to December 1997, according to the National Association of Realtors. Our commercial specialty, small business lending, experienced solid growth last year. Lorain National led all area U.S. Small Business Administration (SBA) lenders in a record SBA lending year. More than $7.3 million in SBA loans were established in Lorain County and 40% of those were originated by Lorain National. According to the SBA, 83 jobs were created as a result of SBA lending in Lorain County. The Trust & Investment Management Division continued to grow with $248 million in assets under management, which represents an increase of 24.0% in 1997, over the year-end 1996 position. Direct revenues for the division in 1997 increased 18.1%. The division added a mutual funds program in 1997, designed to attract a broad spectrum of investors. The consistent, strong investment performance of portfolios managed by the Department has resulted in the addition of new monies into equity portfolios and attracted the attention of investment consultants. By increasing the use of technology and continuously raising standards, we continue to excel in meeting our client's investment objectives and providing high quality personalized service. In 1997, we upgraded our primary computer software five times to stay current with industry standards. Additionally, we increased the number of personal computers throughout the bank and supplied staff with state-of-the-art software and training. Every branch office and department is now connected by a computer-driven communications web which enables our staff to relay information quickly and serve our customers promptly. Our delivery systems continued to broaden and deepen in 1997. We acquired additional branch offices from KeyBank; completely renovated our Kansas Avenue office in Lorain and laid the groundwork for our new branch office in the Village of LaGrange in July 1998. We celebrated 10 years of service to our Westlake customers with a highly successful diamond giveaway promotion in October. TOTAL DEPOSITS millions of dollars (A Total Deposits graph follows in printed version with deposits on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) DIVIDENDS PER SHARE cents (A Dividends Per Share graph follows in printed version with loans on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical 40 bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) Total Deposits Dividend Per Share Year Millions of Dollars Cents 1997 $410.7 $0.71 1996 $366.4 $0.62 1995 $353.3 $0.52 1994 $335.2 $0.46 1993 $321.0 $0.42 *Adjusted for stock dividends and splits END PUBLISHED PAGE 4 41 We installed a new automated teller machine on Lorain's east side and added several additional phone lines to accommodate traffic coming into our rapidly-growing TeleBanker 24-hour banking system. Our product mix also expanded in 1997 with the addition of a telephone bill payment feature called Telepay; a bundled checking product called First Choice Checking for those with bankwide balances greater than $10,000 and a broader range of terms for selected certificates of deposit. A surprise product for 1997, the Access Check Card, experienced enormous growth in transaction volume and revenues. The redesigned debit card, formerly known as the MoneyMate Plus Card, increased in popularity throughout the year thanks in large part to heightened consumer awareness. The Access Check Card functions like a credit card but draws funds directly from the user's checking account. In 1997, we took steps to improve the efficiencies of shareholder transactions by outsourcing stock registrar and transfer work. We also implemented a new Dividend Reinvestment Program which will allow many of our shareholders to roll their dividends into the purchase of additional shares as our stock grows. Approximately 30% of our shareholders have already requested this new service. In 1998, we will continue to evaluate current product offerings and investigate new delivery channels and distribution sites as they become available. Looking Forward We are still enjoying a relatively healthy local economy, despite the employment reduction at the Lorain Ford Motor assembly plant. The absence of the Thunderbird and Cougar line in Lorain has not and will not impact the community as severely as it might have five or 10 years ago. The reason - growth in non auto-related industries and the foresight by area businesses to diversify. Unemployment has remained relatively low. According to the Ohio Bureau of Employment Services, there were fewer than 6,900 workers without jobs in Lorain County as of October, including those no longer employed by Ford. By county standards, that is a fairly favorable statistic, considering we've weathered unemployment as high as 24% in years passed. Our community has proven that it is resilient. No longer will one or two industries dictate our local employment. Many light manufacturing plants and small businesses are flourishing in Lorain County. The cost of doing business here is still relatively low compared to the Cleveland market and we can expect continued growth. We're encouraged by the entrepreneurial spirit of our local businesses. Their ownership and employees continue to raise the quality of life for our neighbors throughout the community. In closing, we thank you for your support of our activities and look forward to an exciting 1998. /s/James F. Kidd /s/Stanley G. Pijor James F. Kidd Stanley G. Pijor President and Chairman of the Board Chief Executive Officer Five assorted photographs END PUBLISHED PAGE 5 420 Financials This photo of the Washington Avenue Falls in Elyria entitled "Veiled Stones" courtesy of Terry Jonasson, Photo Imagery, Elyria END PUBLISHED PAGE 6 43 Report to Shareholders Photo of Washington Avenue Falls END PUBLISHED PAGE 7 43 Consolidated Balance Sheets December 31, 1997 1996 ------------------------------------------------------------------------- ASSETS: Cash and due from banks (note 3) $ 24,273,000 $ 18,890,000 Federal funds sold and other interest- bearing instruments 134,000 103,000 Securities (note 5): Securities available for sale 19,336,000 16,102,000 Investment securities held to maturity 96,038,000 88,858,000 ---------------------------- Total securities (Market value $116,197,000 and $105,639,000, respectively) 115,374,000 104,960,000 ---------------------------- Loans (notes 6 and 7): Portfolio loans 319,666,000 290,133,000 Loans available for sale 11,365,000 11,940,000 ---------------------------- Total loans 331,031,000 302,073,000 Reserve for possible loan losses (4,168,000) (4,116,000) ---------------------------- Net loans 326,863,000 297,957,000 ---------------------------- Bank premises and equipment, net (note 8) 11,321,000 10,893,000 Intangible assets (note 4) 5,114,000 -0- Accrued interest receivable 3,155,000 2,721,000 Other assets 3,983,000 2,719,000 ---------------------------- TOTAL ASSETS $490,217,000 $438,243,000 ---------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits (note 9): Demand and other noninterest-bearing deposits $ 68,565,000 $ 63,802,000 Savings and passbook accounts 172,936,000 159,589,000 Time deposits 169,154,000 142,989,000 ---------------------------- Total deposits 410,655,000 366,380,000 ---------------------------- Securities sold under repurchase agreements and other short-term borrowings (note 10) 28,950,000 23,386,000 Federal Home Loan Bank advances (note 11) 2,045,000 1,095,000 Accrued interest payable 1,379,000 1,263,000 Accrued taxes, expenses and other liabilities (notes 13 and 16) 2,203,000 1,921,000 ---------------------------- Total liabilities 445,232,000 394,045,000 ---------------------------- 45 Shareholders' equity: (note 14) Common stock, $1.00 par: Shares authorized 5,000,000 Shares issued 4,222,375 and 4,138,533, respectively and Shares outstanding 4,124,379 and 4,138,533, respectively (notes 17, 18 and 19) 4,222,000 4,138,000 Additional capital 22,599,000 20,178,000 Retained earnings (note 15) 20,937,000 19,873,000 Net unrealized gain on securities available for sale, net of tax 70,000 9,000 Treasury stock at cost, 97,996 and -0- shares, respectively (2,843,000) -0- ---------------------------- Total shareholders' equity 44,985,000 44,198,000 ---------------------------- Commitments and contingencies (notes 8 and 12) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $490,217,000 $438,243,000 ---------------------------- See accompanying notes to consolidated financial statements END PUBLISHED PAGE 8 46 Consolidated Statements of Income Years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans: Taxable $ 28,223,000 $ 25,851,000 $ 24,752,000 Tax exempt 49,000 59,000 75,000 Interest and dividends on securities: U.S. Treasury securities 5,157,000 5,107,000 5,104,000 U.S. Government agencies and corporations 1,299,000 949,000 408,000 States and political subdivisions 150,000 228,000 452,000 Other debt and equity securities 134,000 93,000 20,000 Interest on Federal funds sold and other interest bearing instruments 144,000 183,000 300,000 -------------------------------------------- TOTAL INTEREST INCOME 35,156,000 32,470,000 31,111,000 INTEREST EXPENSE: Interest on deposits: Time certificates of $100,000 and over 2,285,000 1,875,000 1,847,000 Other deposits 9,398,000 8,630,000 8,681,000 Interest on securities sold under repurchase agreements and other short-term borrowings 1,131,000 954,000 1,107,000 Interest on Federal Home Loan Bank advances 78,000 -0- -0- Other interest 98,000 19,000 1,000 -------------------------------------------- TOTAL INTEREST EXPENSE 12,990,000 11,478,000 11,636,000 -------------------------------------------- NET INTEREST INCOME 22,166,000 20,992,000 19,475,000 Provision for possible loan losses (note 7) 750,000 600,000 400,000 -------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 21,416,000 20,392,000 19,075,000 -------------------------------------------- OTHER INCOME: Trust and Investment Management division income 1,293,000 1,095,000 1,038,000 Service charges on deposit accounts 2,143,000 1,903,000 1,360,000 Other service charges, exchanges and fees 2,316,000 1,870,000 1,849,000 Gains (losses) on sales of securities (note 5) -0- (1,000) -0- Other operating income 51,000 58,000 40,000 -------------------------------------------- TOTAL OTHER INCOME 5,803,000 4,925,000 4,287,000 47 OTHER EXPENSES: Salaries and employee benefits (notes 16, 17, 18 and 19) 8,652,000 8,134,000 7,926,000 Net occupancy expense of premises (note 8) 1,274,000 1,224,000 1,211,000 Furniture and equipment expenses (note 8) 2,290,000 2,045,000 1,895,000 Supplies and postage 967,000 971,000 904,000 FDIC deposit insurance premium 47,000 2,000 385,000 Ohio franchise tax 483,000 554,000 508,000 Other operating expenses 3,674,000 3,635,000 3,194,000 -------------------------------------------- TOTAL OTHER EXPENSES 17,387,000 16,565,000 16,023,000 -------------------------------------------- INCOME BEFORE FEDERAL INCOME TAXES 9,832,000 8,752,000 7,339,000 -------------------------------------------- FEDERAL INCOME TAXES (note 13): Current 3,329,000 2,763,000 2,111,000 Deferred 21,000 137,000 225,000 -------------------------------------------- TOTAL FEDERAL INCOME TAXES 3,350,000 2,900,000 2,336,000 -------------------------------------------- NET INCOME $ 6,482,000 $ 5,852,000 $ 5,003,000 -------------------------------------------- BASIC EARNINGS PER SHARE (note 2) $ 1.56 $ 1.39 $ 1.20 -------------------------------------------- DILUTIVE EARNINGS PER SHARE (note 2) $ 1.55 $ 1.39 $ 1.19 -------------------------------------------- See accompanying notes to consolidated financial statements. END PUBLISHED PAGE 9 48 Consolidated Statements of Cash Flows Years ended December 31, 1997 1996 1995 ------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 34,741,000 $ 32,561,000 $ 30,734,000 Other income received 5,762,000 4,970,000 4,245,000 Interest paid (12,874,000) (11,465,000) (11,254,000) Cash paid for salaries and employee benefits (8,580,000) (8,015,000) (7,832,000) Net occupancy expense of premises paid (950,000) (935,000) (901,000) Furniture and equipment expenses paid (818,000) (787,000) (733,000) Cash paid for supplies and postage (967,000) (971,000) (904,000) Cash paid for other operating expenses (5,135,000) (3,829,000) (4,354,000) Federal income taxes paid (3,176,000) (2,974,000) (1,956,000) -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 8,003,000 8,555,000 7,045,000 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities 21,906,000 30,006,000 45,799,000 Proceeds from maturities of securities available for sale 5,475,000 7,764,000 2,953,000 Proceeds from sales of securities available for sale -0- 1,999,000 -0- Purchases of investment securities (29,319,000) (29,405,000) (45,914,000) Purchases of securities available for sale (8,511,000) (10,743,000) (7,702,000) Net (increase) decrease in credit card loans 43,000 (132,000) (119,000) Net (increase) in long-term loans (30,077,000) (26,214,000) (14,969,000) Purchases of bank premises, equipment and intangible assets (7,280,000) (1,407,000) (2,276,000) Proceeds from sales of bank premises and equipment 20,000 55,000 -0- -------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (47,743,000) (28,077,000) (22,228,000) 49 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and other noninterest-bearing deposits 4,763,000 3,639,000 3,067,000 Net increase (decrease) in savings and passbook deposits 13,347,000 142,000 (11,648,000) Net increase in time deposits 26,165,000 9,144,000 26,817,000 Net increase (decrease) in securities sold under repurchase agreements and other short-term borrowings 3,364,000 (762,000) 4,997,000 Proceeds from Federal Home Loan Bank advances 950,000 1,095,000 -0- Proceeds from line of credit 2,400,000 -0- -0- Cash paid on line of credit (200,000) -0- -0- Purchase of Treasury Stock (2,843,000) -0- -0- Proceeds from exercise of stock options 21,000 179,000 278,000 Dividends paid (2,813,000) (2,452,000) (2,073,000) -------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 45,154,000 10,985,000 21,438,000 -------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,414,000 (8,537,000) 6,255,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,993,000 27,530,000 21,275,000 -------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,407,000 $ 18,993,000 $ 27,530,000 -------------------------------------------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $ 6,482,000 $ 5,852,000 $ 5,003,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,660,000 1,547,000 1,473,000 Amortization of deferred loan fees and costs, net 378,000 280,000 173,000 Provision for possible loan losses 750,000 600,000 400,000 Decrease in deferred Federal income taxes 21,000 137,000 157,000 Amortization of Intangible Assets 136,000 -0- -0- (Increase) decrease in accrued interest receivable (434,000) 43,000 (373,000) (Increase) decrease in other assets (1,177,000) 302,000 (188,000) Increase in accrued interest payable 116,000 13,000 382,000 Increase (decrease) in accrued taxes, expenses and other liabilities 8,000 34,000 (424,000) Others, net 63,000 (253,000) 442,000 -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $8,003,000 $8,555,000 $7,045,000 -------------------------------------------- See accompanying notes to consolidated financial statements. END PUBLISHED PAGE 10 50 Consolidated Statements of Shareholders' Equity Net Unrealized Gains (Loss) Years Ended on Securities December 31, 1997 Common Additional Retained Available 1996 and 1995 Stock Capital Earnings for Sale ------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 $3,200,000 $18,415,000 $16,028,000 $(132,000) --------------------------------------------------------- Net income -0- -0- 5,003,000 -0- Cash dividends declared, $.54 per share -0- -0- (2,175,000) -0- Issuance of 36,601 shares of common stock under stock option plans 36,000 242,000 -0- -0- 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- Change in unrealized gain (loss) on securities available for sale, net of tax -0- -0- -0- 174,000 ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $4,039,000 $17,854,000 $18,856,000 $ 42,000 ----------------------------------------------------------- Years Ended Total December 31, 1997 Treasury Shareholders' 1996 and 1995 Stock Equity - ------------------------------------------------- BALANCE AT DECEMBER 31, 1994 -0- $37,511,000 ---------------------------------- Net income -0- 5,003,000 Cash dividends declared, $.54 per share -0- (2,175,000) Issuance of 36,601 shares of common stock under stock option plans -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 -0- -0- Change in unrealized gain (loss) on securities available for sale, net of tax -0- 174,000 -------------------------------- BALANCE AT DECEMBER 31, 1995 -0- $40,791,000 - ----------------------------------------------------------- 51 Net Unrealized Gains (Loss) Years Ended on Securities December 31, 1997 Common Additional Retained Available 1996 and 1995 Stock Capital Earnings for Sale - ------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $4,039,000 $17,854,000 $18,856,000 $ 42,000 ----------------------------------------------------------- Net income -0- -0- 5,852,000 -0- Cash dividends declared, $.63 per share -0- -0- (2,591,000) -0- Issuance of 18,307 shares of common stock under stock option plans 18,000 161,000 -0- -0- Market value of stock issued in payment of 2% stock dividend, 80,879 shares 81,000 2,163,000 (2,244,000) -0- Change in unrealized gain(loss) on securities available for sale, net of tax -0- -0- -0- (33,000) ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $4,138,000 $20,178,000 $19,873,000 $ 9,000 ----------------------------------------------------------- Years Ended Total December 31, 1997 Treasury Shareholders' 1996 and 1995 Stock Equity - ------------------------------------------------- BALANCE AT DECEMBER 31, 1995 -0- $40,791,000 ----------------------------------- Net income -0- 5,852,000 Cash dividends declared, $.63 per share -0- (2,591,000) Issuance of 18,307 shares of common stock under stock option plans -0- 179,000 Market value of stock issued in payment of 2% stock dividend, 80,879 shares -0- -0- Change in unrealized gain(loss) on securities available for sale, net of tax -0- (33,000) -------------------------------- BALANCE AT DECEMBER 31, 1996 -0- $44,198,000 ---------------------------------- 52 Net Unrealized Gains (Loss) Years Ended on Securities December 31, 1997 Common Additional Retained Available 1996 and 1995 Stock Capital Earnings for Sale - ------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $4,138,000 $20,178,000 $19,873,000 $ 9,000 ----------------------------------------------------------- Net income -0- -0- 6,482,000 -0- Cash dividends declared, $.71 per share -0- -0- (2,934,000) -0- Issuance of 1,052 shares of common stock under stock option plans 1,000 20,000 -0- -0- Market value of stock issued in payment of 2% stock dividend, 82,790 shares 83,000 2,401,000 (2,484,000) -0- Purchase of 97,996 shares Treasury Stock -0- -0- -0- -0- Change in unrealized gain(loss) on securities available for sale, net of tax -0- -0- -0- 61,000 ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $4,222,000 $22,599,000 $20,937,000 $ 70,000 ----------------------------------------------------------- Years Ended Total December 31, 1997 Treasury Shareholders' 1996 and 1995 Stock Equity - ------------------------------------------------- BALANCE AT DECEMBER 31, 1996 -0- $44,198,000 ---------------------------------- Net income -0- 6,482,000 Cash dividends declared, $.71 per share -0- (2,934,000) Issuance of 1,052 shares of common stock under stock option plans -0- 21,000 Market value of stock issued in payment of 2% stock dividend, 82,790 shares -0- -0- Purchase of 97,996 shares Treasury Stock (2,843,000) (2,843,000) Change in unrealized gain(loss) on securities available for sale, net of tax -0- 61,000 ------------------------------- BALANCE AT DECEMBER 31, 1997 $(2,843,000) $44,985,000 -------------------------------- See accompanying notes to consolidated financial statements. 53 Five assorted photographs END PUBLISHED PAGE 11 54 Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (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 (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and 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: Debt and equity securities are classified as held to maturity, trading, or available for sale. 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. 55 (g) Reserve for Possible Loan Losses: Under GAAP, 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 ossible loan losses, depending upon the adequacy of the reserve for possible loan losses. 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. (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) Intangible Assets: Intangible assets arise from branch acquisitions and include Goodwill and Core Deposit Intangibles. Goodwill is the excess of purchase price over identified net assets in branch acquisitions. Core Deposit Intangibles represent the value of depositor relationships purchased. Goodwill is being amortized using the straight-line method over a period of fifteen years. Core Deposit Intangibles are being amortized using an accelerated method over a period of ten years for 1997 branch acquisitions. Goodwill and Core Deposit Intangibles are reviewed for possible impairment, for events or changes in circumstances that indicate the carrying amount of the asset may not be recoverable, and written down if necessary. (j) Other Real Estate Owned: Other real estate owned is carried in other assets on the Balance Sheet at fair value, net of estimated costs to sell, not to exceed the cost of property acquired through foreclosure. (k) Additional Capital and Retained Earnings: The additional capital account includes amounts received in excess of par value of common stock sold and amounts voluntarily transferred from etained earnings. In the case of stock dividends, the Corporation transfers the market value of shares issued from retained earnings to the common stock and additional capital accounts. END PUBLISHED PAGE 12 56 (1) Summary of Significant Accounting Policies (continued) (l) Interest and Fees on Loans: Interest income on loans is accrued on the principal balances of loans outstanding on a "simple interest" basis. The Bank's policy is to cease accruing interest on any loans where the principal and/or interest remains unpaid for 90 days or more, unless the loan is both well secured and in the process of collection. Loan origination fees and certain direct origination costs are deferred and amortized over the contractual lives of the related loans using the interest method. (m) 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. (n) Interest on Deposit Accounts: Interest on deposit accounts is accrued and charged to expense monthly and is paid or credited in accordance with the terms of the respective accounts. (o) 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. (p) Reclassifications: Certain 1995 and 1996 amounts have been reclassified to conform to the 1997 presentation. (q) Employee Stock Ownership Plan and Stock Purchase Plan: These two qualified defined contribution plans are accounted for under the provisions of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions". (r) Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities: Effective January 1, 1997, the Corporation adopted the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," not deferred by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." The adoption of SFAS No. 125 did not impact the Corporation's financial condition or results of operations. (2) Earnings Share Data: Earnings per common and common equivalent shares (stock options) have been computed using the weighted average number of shares outstanding during each period after giving consideration to the dilutive effect of incentive 57 stock options, a two percent stock dividend in 1997 and 1996 and a five-for-four stock split in 1995. The Corporation adopted SFAS No. 128 "Earnings Per Share" on January 1, 1997. This Statement specifies the computation, presentation and disclosure requirements for earnings per share, for entities with publicly held common stock or potential common stock. In accordance with SFAS No. 128, earnings per share is calculated as follows: For the Years ended December 31, 1997 - -------------------------------------------------------------------------- Weighted Earnings Net Average Per Income Shares Share ----------------------------------------- Income before extraordinary item and accounting change $6,482,000 ----------------------------------------- Basic EPS Income available to common stockholders $6,482,000 4,168,322 $1.56 Effect of Dilutive Securities Incentive Stock Options 10,477 ----------------------------------------- Dilutive EPS Income available to common stockholders and assumed conversions $6,482,000 4,178,799 $1.55 ----------------------------------------- For the Years ended December 31, 1996 - ------------------------------------------------------------------------- Weighted Earnings Net Average Per Income Shares Share ----------------------------------------- Income before extraordinary item and accounting change $5,852,000 ----------------------------------------- Basic EPS Income available to common stockholders $5,852,000 4,211,028 $1.39 Effect of Dilutive Securities Incentive Stock Options 10,475 ----------------------------------------- Dilutive EPS Income available to common stockholders and assumed conversions $5,852,000 4,221,503 $1.39 ----------------------------------------- 58 For the Years ended December 31, 1995 - ------------------------------------------------------------------------- Weighted Earnings Net Average Per Income Shares Share ----------------------------------------- Income before extraordinary item and accounting change $5,003,000 ----------------------------------------- Basic EPS Income available to common stockholders $5,003,000 4,183,862 $1.20 Effect of Dilutive Securities Incentive Stock Options 19,606 ----------------------------------------- Dilutive EPS Income available to common stockholders and assumed conversions $5,003,000 4,203,468 $1.19 ----------------------------------------- END PUBLISHED PAGE 13 59 (3) Cash and Due From Banks: In order to meet deposit reserve requirements, the Bank is required to maintain cash on hand and reserve balances at the Federal Reserve Bank. Cash and due from banks included approximately $6,951,000 and $6,252,000 at December 31, 1997 and 1996, 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 $6,959,000 and $6,271,000, during 1997 and 1996 respectively. (4) Acquisition and Intangible Assets: On September 15, 1997, Lorain National Bank acquired three branch offices on Lorain County, Ohio from KeyBank, National Association (KeyBank), headquartered in Cleveland, Ohio. The transaction included the acquisition of approximately $45,000,000 in deposits, $18,000,000 in personal and commercial loans, as well as certain property and equipment. The transaction was accounted for as a branch purchase and accordingly the acquired assets and liabilities were recorded at their fair values on the acquisition date. The effect of the KeyBank acquisition is included in the results of operation prospectively from the date of the acquisition. The intangible assets arising from the KeyBank branch acquisition and included in the accompanying Consolidated Balance Sheets are summarized as follows at December 31, net of accumulated amortization: 1997 ---------- Goodwill $3,883,000 Core deposit intangible $1,231,000 ---------- Total intangible assets $5,114,000 ========== Amortization expense for intangible assets totaled $136,000 in 1997. (5) Securities: The amortized cost, gross unrealized gains and losses and fair values of securities at December 31, 1997 and 1996 follow: Gross Gross Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value - -------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 11,154,000 $ 26,000 $ (25,000) $11,155,000 U.S. Government agencies and corporations 6,003,000 28,000 -0- 6,031,000 Equity securities 2,072,000 78,000 -0- 2,150,000 -------------------------------------------------- Total securities available for sale 19,229,000 132,000 (25,000) 19,336,000 -------------------------------------------------- 60 Investment securities held-to-maturity: U.S. Treasury securities 66,945,000 679,000 (37,000) 67,587,000 U.S. Government agencies and corporations 24,996,000 122,000 (17,000) 25,101,000 States and political subdivisions 4,097,000 82,000 (6,000) 4,173,000 --------------------------------------------------- Total investment securities held- to-maturity 96,038,000 883,000 (60,000) 96,861,000 ----------------------------------------------------- Total securities $115,267,000 $1,015,000 $ (85,000) $116,197,000 ----------------------------------------------------- December 31, 1996 - -------------------------------------------------------------------------- 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 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 ----------------------------------------------------- END PUBLISHED PAGE 14 61 (5) Securities (continued): The amortized cost, fair values and yields of debt securities by contractual maturity date at December 31, 1997 follow: Fully-Tax Amortized Fair Equivalent December 31, 1997 Cost Value Yield ------------------------------------------------------------------------- Securities available for sale: Due within 1 year $ 9,076,000 $ 9,059,000 5.35% After 1 but within 5 years 7,081,000 7,119,000 6.23 After 5 but within 10 years 1,000,000 1,008,000 6.74 Equity securities 2,072,000 2,150,000 6.46 ------------------------------------------- Total 19,229,000 19,336,000 5.87 ------------------------------------------- Investment securities held-to-maturity: Due within 1 year 33,960,000 33,973,000 5.82 After 1 but within 5 years 53,824,000 54,409,000 6.50 After 5 but within 10 years 7,282,000 7,504,000 7.15 After 10 years 972,000 975,000 8.34 ------------------------------------------- 96,038,000 96,861,000 6.33 ------------------------------------------- Total $115,267,000 $116,197,000 6.25% =========================================== There were no sales of securities in 1997 and 1995. 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. All other redemptions during these three years were in the form of proceeds at maturity or calls by the issuers of debt. The carrying value of securities pledged to secure trust, public deposits, securities sold under repurchase agreements, line of credit, and for other purposes required by law amounted to $104,445,000 and $94,173,000 at December 31, 1997 and 1996, 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, 1997 the securities portfolio contained approximately $3,364,000 in non-rated securities of state and political subdivisions. Based upon yield, term to maturity and market risk, the valuation service estimated the fair value of these securities to be $3,702,000. 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, 1997. Five assorted photographs END PUBLISHED PAGE 15 62 (6) Transactions with Related Parties: The Corporation, through its subsidiary Bank, makes loans to its officers, directors and their affiliates. These loans are made with substantially the same terms and conditions as transactions with nonrelated parties. An analysis of loans outstanding to related parties follows: Years ended December 31, 1997 1996 ------------------------------------------------------------------------- Aggregate amount beginning of year $3,884,000 $2,907,000 Additions (deductions): New loans 974,000 1,271,000 Repayments (1,070,000) (1,342,000) Changes in directors and officers and/or their affiliations, net 2,619,000 1,048,000 ------------------------------- Aggregate amount end of year $6,407,000 $3,884,000 ------------------------------- (7) Loans and Reserve for Possible Loan Losses: Loan balances at December 31, 1997 and 1996 are summarized as follows: December 31, 1997 1996 - -------------------------------------------------------------------------- Real estate loans (includes loans secured primarily by real estate only): Construction and land development $ 27,018,000 $ 26,188,000 One to four family residential 173,169,000 153,178,000 Multi-family residential 9,803,000 10,062,000 Non-farm non-residential properties 66,040,000 63,292,000 Commercial and industrial loans 21,697,000 19,055,000 Personal loans to individuals: Auto, single payment and installment 27,067,000 23,631,000 Credit card and related plans 5,152,000 5,195,000 Obligations of states and political subdivisions 685,000 842,000 All other loans 400,000 630,000 ------------------------------------ TOTAL LOANS 331,031,000 302,073,000 Reserve for possible loan losses (4,168,000) (4,116,000) ------------------------------------ NET LOANS $326,863,000 $297,957,000 ------------------------------------ Activity in the reserve for possible loan losses for 1997, 1996 and 1995 is summarized as follows: Years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------- Balance at beginning of year $4,116,000 $4,002,000 $3,832,000 Provision for possible loan losses 750,000 600,000 400,000 Loans charged-off (849,000) (672,000) (449,000) Recoveries on loans previously charged-off 151,000 186,000 219,000 -------------------------------------------- BALANCE AT END OF YEAR $4,168,000 $4,116,000 $4,002,000 -------------------------------------------- At December 31, 1997 and 1996, $11,365,000 and $11,940,000 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, 1997 and 1996. The market value of loans 63 available for sale equaled or exceeded its carrying value. At December 31, 1997, the Bank had firm commitments for the sale of approximately $559,000 of these loans. 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 Disclosure" were adopted on January 1, 1995. Information required under SFAS No. 114 and SFAS No. 118 is as follows: Years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------- Year-end impaired loans with no allowance for loan losses allocated $ -0- $305,000 $814,000 Year-end impaired loans with allowance for loan losses allocated -0- 911,000 699,000 Amount of the allowance allocated -0- 152,000 239,000 Average of impaired loans during the year 820,000 983,000 910,000 Interest income recognized during impairment 43,000 66,000 103,000 Cash-basis interest income recognized 21,000 7,000 24,000 - ------------------------------------------------------------------------- END PUBLISHED PAGE 16 64 (8) Bank Premises and Equipment: Bank premises and equipment are summarized as follows: December 31, 1997 1996 ------------------------------------------------------------------------- Land $ 1,941,000 $ 1,941,000 Buildings 9,490,000 9,159,000 Equipment and furniture 12,192,000 11,462,000 Leasehold improvements 532,000 311,000 --------------------------------------------- 24,155,000 22,873,000 --------------------------------------------- Less accumulated depreciation and amortization 12,834,000 11,980,000 --------------------------------------------- TOTAL $11,321,000 $10,893,000 --------------------------------------------- Depreciation and amortization of Bank premises and equipment charged to other expense amounted to $1,446,000 in 1997, $1,332,000 in 1996 and $1,299,000 in 1995. Amortization of purchased software charged to other operating expenses amounted to $213,000 in 1997, $215,000 in 1996 and $174,000 in 1995. At December 31, 1997, 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 ----------------------------------------------------------- 1998 $126,000 $46,000 1999 120,000 12,000 2000 106,000 12,000 2001 105,000 12,000 2002 and thereafter 220,000 12,000 ------------------------ Total $677,000 $94,000 Rentals paid under leases on branch offices and equipment, respectively, amounted to $85,000 and $45,000 in 1997, $101,000 and $54,000 in 1996 and $115,000 and $68,000 in 1995. (9) Deposits: Deposit balances at December 31, 1997 and 1996 are summarized as follows: December 31, 1997 1996 - -------------------------------------------------------------------------- Demand and other noninterest- bearing deposits: Individuals, partnerships and corporations $ 58,511,000 $ 54,899,000 U.S. Government 379,000 693,000 States and political subdivisions 4,779,000 4,411,000 Certified, official, travelers checks and other 4,896,000 3,799,000 ----------------------------------- 65 Total demand and other noninterest- bearing deposits 68,565,000 63,802,000 ----------------------------------- Savings and passbook accounts: Individuals and non-profit organizations 155,972,000 141,978,000 Corporations and profit organizations 16,964,000 17,611,000 ----------------------------------- Total savings and passbook accounts 172,936,000 159,589,000 ----------------------------------- Time deposits: Individuals, partnerships and corporations 150,900,000 116,364,000 States and political subdivisions 18,254,000 26,625,000 ------------------------------------ Total time deposits 169,154,000 142,989,000 ------------------------------------ TOTAL DEPOSITS $410,655,000 $366,380,000 ------------------------------------ The aggregate amount of certificates of deposit in denominations of $100,000 or more amounted to $36,551,000 and $38,333,000 at December 31, 1997 and 1996, respectively. The maturity distribution of time certificates of deposit as of December 31, 1997 and 1996 follows: After 3 After 6 Months Months Within 3 But Within But Within Months 6 Months 1 Year ------------------------------------------------------------------------- December 31, 1997 $53,785,000 $33,634,000 $44,134,000 ------------------------------------------------------------------------ December 31, 1996 $60,553,000 $23,053,000 $25,110,000 ------------------------------------------------------------------------- After 1 After 2 Year But Years But Within Within 2 Years 5 Years Total ------------------------------------------------------------------------- December 31, 1997 $20,747,000 $16,854,000 $169,154,000 ------------------------------------------------------------------------- December 31, 1996 $22,707,000 $11,566,000 $142,989,000 ------------------------------------------------------------------------- END PUBLISHED PAGE 17 66 (10) Short-Term Borrowings: Information relating to short-term borrowings for the years ended December 31, 1997 and 1996 follows: December 31, 1997 1996 1995 - -------------------------------------------------------------------------- Securities sold under repurchase agreements and other short-term borrowings At December 31: Outstanding $26,750,000 $23,386,000 $24,148,000 Interest rate 6.03% 4.22% 4.98% Average for the period: Outstanding $23,885,000 $21,465,000 $22,864,000 Interest rate 4.74% 4.75% 4.85% Maximum month-end outstanding $36,938,000 $34,076,000 $29,121,000 Line of credit At December 31 Outstanding $ 2,200,000 N/A N/A Interest rate 6.40% N/A N/A Average for the period: Outstanding $ 1,422,000 N/A N/A Interest rate 6.51% N/A N/A Maximum month-end outstanding $ 2,400,000 N/A N/A - -------------------------------------------------------------------------- In May of 1997, the Corporation obtained a $4,100,000 line of credit from a commercial bank to fund the purchase of Treasury Stock. The interest rate was based upon the current Eurodollar rate plus fifty basis points and is adjustable every six months. Interest is payable on a quarterly basis. The outstanding balance of the line is collateralized with $3,000,000 of U.S. Treasury securities. The line of credit expires in May of 1998 and is renewable. (11) Federal Home Loan Bank Advances: Lorain National Bank is a voluntary member of the Federal Home Loan Bank of Cincinnati (FHLB). Advances from the FHLB with maturities and fixed interest rates thereon at December 31, 1997 and 1996 are as follows: Maturity Interest Rate 1997 1996 --------------------------------------------------------------- 2001 6.85% $ 360,000 $ 360,000 2001 6.25% 735,000 735,000 2002 6.31% 950,000 -0- --------------------------- Total $2,045,000 $1,095,000 --------------------------- The Bank maintains a $15,000,000 line of credit with the FHLB which matures on September 10, 1998. At December 31, 1997, pledged as collateral for FHLB advances were all of the shares of FHLB stock owned by the Bank, with a carrying value of $1,722,000, and qualified mortgage loans totaling $3,068,000. At December 31, 1997, Lorain National Bank was approved for $34,450,000 of FHLB advances, based upon the carrying value of FHLB stock owned by the Bank. 67 (12) 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. END PUBLISHED PAGE 18 67 (12) Commitments, Credit Risk, and Contingencies continued: The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on management's credit evaluation of the applicant. Collateral held is generally single-family residential real estate, and commercial real estate. Substantially all of the obligation to extend credit are variable rate commitments. The Corporation's maximum potential obligation to extend credit for financial instruments with off-balance sheet risk at December 31, 1997 and 1996 was: 1997 1996 ------------------------------- Commitments to extend credit $49,487,000 $44,518,000 Credit card arrangements 17,394,000 17,380,000 Standby letters of credit 1,825,000 1,686,000 ------------------------------- Total $68,706,000 $63,584,000 ------------------------------- Most of the Bank's business activity is with customers located within the Bank's defined market area. As of December 31, 1997, the Bank had no significant concentrations of credit risk in its loan portfolio. The Bank also has no exposure to highly leveraged transactions and no foreign credits in its loan portfolio. The nature of the Corporation's business results in a certain amount of litigation. Management, after reviewing with counsel all actions and proceedings pending against or involving LNB Bancorp, Inc. and Lorain National Bank, considers that the aggregate liability or loss, if any, resulting from them will not be material to the Corporation's financial position. (13) 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, 1997 1996 1995 ------------------------------------------------------------------------- Computed "expected" tax expense $3,343,000 $2,976,000 $2,495,000 Increase (reduction) in income taxes resulting from: Tax exempt interest on obligations of states and political subdivisions (60,000) (89,000) (162,000) Other, net 67,000 13,000 3,000 --------------------------------------------- TOTAL FEDERAL INCOME TAXES $3,350,000 $2,900,000 $2,336,000 --------------------------------------------- At December 31, 1997 and 1996, the net deferred Federal tax assets were $675,000, and $712,000, respectively of which $(43,000) and $(27,000) of deferred tax (liability), respectively, is included in unrealized gain on securities available for sale. Net deferred Federal tax assets are included in Other assets on the Consolidated Balance Sheets. Management 69 believes that it is more likely than not that the deferred Federal tax assets will be realized. The tax effects of temporary differences that give rise to significant portions of the deferred Federal tax assets and deferred Federal tax liabilities are presented below. December 31, 1997 1996 - ------------------------------------------------------------------------- Deferred Federal tax assets: Reserve for possible loan losses $ 974,000 $ 956,000 Deferred compensation 177,000 127,000 Accrued vacation payable 131,000 135,000 Intangible Asset Amortization 6,000 -0- Other, net 7,000 2,000 ------------------------------------ Total deferred Federal tax assets 1,295,000 1,220,000 Deferred Federal tax liabilities: Bank premises and equipment depreciation (361,000) (265,000) Deferred charges (114,000) (168,000) FHLB stock dividends (63,000) (25,000) Unrealized gain on securities available for sale (43,000) (27,000) Prepaid pension expense (11,000) (15,000) Accrued loan fees and costs (28,000) (8,000) ------------------------------------- Total deferred Federal tax liabilities (620,000) (508,000) ------------------------------------- NET DEFERRED FEDERAL TAX ASSETS $ 675,000 $ 712,000 ------------------------------------- END PUBLISHED PAGE 19 70 (14) Shareholders' Equity and Regulatory Capital: On April 15, 1997, the Corporation distributed a 2% stock dividend recorded at the per share fair market value at the declaration date. As a result of the stock dividend, common stock issued increased by 82,790 shares. On May 20, 1997, the Board of Directors authorized the repurchase of up to 100,000 shares of common stock. The repurchased shares will be used primarily for qualified employee benefit plans, incentive stock option plans, stock dividends and other Corporate purposes. LNB Bancorp Inc. purchased 97,996 shares of stock under this plan during the year ended December 31, 1997. During 1997, no shares were issued out of Treasury Stock. The Board of Directors adopted a dividend reinvestment plan on November 18, 1997. The plan allows shareholders to elect to use their quarterly cash dividends to purchase shares of LNB Bancorp, Inc. common stock. Additionally, cash can be contributed directly to the plan for the purchase of shares of common stock with a quarterly limit of $5,000. Dividends paid by the Bank are the primary source of funds available to the Corporation for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Corporation is subject to restrictions by the Office of the Comptroller of Currency. These restrictions generally limit dividends to the current and prior two year's retained earnings. At December 31, 1997, approximately $1,193,000 of the Bank's retained earnings were available for dividends to the Corporation. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below the Corporation's regulatory capital requirements and minimum regulatory guidelines. These restrictions do not presently limit the Corporation from paying normal dividends. The Corporation and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the consolidated financial statements. The prompt corrective action regulations provide for five categories which in declining order are: "well capitalized", "adequately capitalized", undercapitalized", "significantly undercapitalized", and "critically undercapitalized." To be considered "well capitalized", an institution must generally have a leverage capital ratio of at least 5 percent, a Tier 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, 1997, and 1996, 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, 1997, the most recent notification from the Comptroller of 71 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. An analysis of the Corporation's and Bank's risk-based capital position at December 31, 1997 and 1996 and regulatory capital requirements follows: Analysis of Lorain National Bank and LNB Bancorp, Inc.'s Regulatory Capital and Regulatory Capital Requirements Minimum Required Minimum Required Actual To Be Well Capitalized Capital - -------------------------------------------------------------------------- (amounts in thousands) Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------- 1997 Total capital (to risk weighted assets) Consolidated $43,529 14.34% $30,391 10.0% $24,313 8.0% Bank $40,788 13.81% $29,631 10.0% $23,704 8.0% Tier 1 capital (to risk weighted assets) Consolidated $39,801 13.11% $18,235 6.0% $12,157 4.0% Bank $29,090 9.85% $17,778 6.0% $11,852 4.0% Tier 1 capital (to average assets) Consolidated $39,801 8.65% $15,196 5.0% $12,157 4.0% Bank $29,090 6.39% $14,815 5.0% $11,852 4.0% 1996 Total capital (to risk weighted assets) Consolidated $47,462 18.18% $26,186 10.0% $20,949 8.0% Bank $42,216 16.70% $25,375 10.0% $20,300 8.0% Tier 1 capital (to risk weighted assets) Consolidated $44,189 16.93% $15,711 6.0% $10,474 4.0% Bank $31,044 12.28% $15,225 6.0% $10,150 4.0% Tier 1 capital (to average assets) Consolidated $44,189 10.36% $13,093 5.0% $10,474 4.0% Bank $31,044 7.38% $12,687 5.0% $10,150 4.0% END PUBLISHED PAGE 20 72 (15)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, 1997 1996 - -------------------------------------------------------------------------- Cash $ 948,000 $ 831,000 Interest bearing instruments 134,000 103,000 Investment in subsidiary at equity in underlying value of its net assets 34,287,000 31,097,000 Securities available for sale 4,638,000 4,864,000 Equity securities 7,000 -0- Notes receivable - subsidiary 8,000,000 8,000,000 Accrued interest receivable 110,000 66,000 Other assets 4,000 23,000 ----------------------------------- Totals $48,128,000 $44,984,000 ----------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: December 31, 1997 1996 - -------------------------------------------------------------------------- Dividends payable $ 907,000 $ 786,000 Other liabilities 36,000 -0- Line of credit 2,200,000 -0- Shareholders' equity: Common stock, $1.00 par 4,222,000 4,138,000 Additional capital 22,599,000 20,178,000 Retained earnings 20,937,000 19,873,000 Net unrealized gain on securities available for sale, net of tax 70,000 9,000 Treasury stock at cost (2,843,000) -0- ----------------------------------- Total shareholders' equity 44,985,000 44,198,000 ----------------------------------- Totals $48,128 000 $44,984,000 ----------------------------------- Condensed Statements of Income Years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------- INCOME: Cash dividends from subsidiary $ 2,934,000 $10,509,000 $2,094,000 Interest and other income 807,000 258,000 235,000 ---------------------------------------------- 3,741,000 10,767,000 2,329,000 EXPENSES: Other expenses 218,000 70,000 92,000 ---------------------------------------------- 73 Income before Federal income taxes and equity in undistributed net income of subsidiary 3,523,000 10,697,000 2,237,000 Federal income tax expense 201,000 63,000 49,000 Equity in undistributed net income of subsidiary (1) 3,160,000 (4,782,000) 2,815,000 ---------------------------------------------- NET INCOME $ 6,482,000 $5,852,000 $5,003,000 ---------------------------------------------- (1) Amount in parentheses represents the excess of dividends declared over net income of subsidiary. Condensed Statements of Cash Flows Years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Dividends from subsidiary $ 2,934,000 $10,509,000 $2,094,000 Other, net 399,000 107,000 77,000 --------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,333,000 10,616,000 2,171,000 --------------------------------------------- CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES: Proceeds from maturities of securities available for sale 467,000 965,000 -0- Proceeds from maturities of investment securities -0- -0- 470,000 Purchases of securities available for sale (217,000) (1,127,000) (1,034,000) Cash paid on line of credit (200,000) -0- -0- Advance to subsidiary -0- (8,000,000) -0- Proceeds from line of credit 2,400,000 -0- -0- Purchase of Treasury Stock (2,843.000) -0- -0- Proceeds from exercise of stock options 21,000 179,000 278,000 Dividends paid (2,813,000) (2,452,000) (2,073,000) --------------------------------------------- NET CASH USED IN INVESTING AND FINANCING ACTIVITIES ( 3,815,000) (10,435,000) (2,359,000) -------------------------------------------- NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS 148,000 181,000 (188,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 934,000 753,000 941,000 --------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,082,000 $ 934,000 $ 753,000 --------------------------------------------- END OF PUBLISHED PAGE 21 74 (16) 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 $39,000 in 1997, $55,000 in 1996 and $92,000 in 1995. At December 31, 1997 there were 273 participants in the plan. An analysis of net periodic pension cost for 1997, 1996 and 1995 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 5.50%, respectively for 1997 and was 6.50% and 5.00%, respectively for 1996 and 1995. The expected long-term rate of return on assets was 8.50% for 1997, 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, 1997 and 1996 is also presented below. Components of Net Periodic Pension Cost: 1997 1996 1995 - ------------------------------------------------------------------------- Service cost $ 278,000 $ 257,000 $ 184,000 Interest cost of projected benefit obligation 469,000 435,000 466,000 Actual return on plan assets (1,626,000) (1,097,000) (1,410,000) Net total of other components 918,000 460,000 852,000 --------------------------------------------- Net periodic pension cost $ 39,000 $ 55,000 $ 92,000 --------------------------------------------- Actuarial Present Value of Benefit Obligations: 1997 1996 - -------------------------------------------------------------------------- Accumulated benefit obligations including vested benefits of $(5,550,000) in 1997 and $(5,433,000) in 1996 $(5,518,000) $(5,455,000) ----------------------------------- Projected benefit obligation $(7,951,000) $(7,025,000) Plan assets at market value, primarily U. S. Government securities and investments in bond and equity funds 8,772,000 7,666,000 ----------------------------------- Plan assets in excess of projected benefit obligations 821,000 641,000 Unrecognized net (gains) losses subsequent to transition (472,000) (220,000) Unrecognized prior service cost (260,000) (294,000) Unrecognized net assets, being recognized over employees' average remaining service life (56,000) (87,000) ----------------------------------- Prepaid (accrued) pension liability $ 33,000 $ 40,000 ----------------------------------- 75 (17) 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. There were no stock options granted or available for granting under any of the Corporation's Incentive Stock Option Plans during 1997, 1996 and 1995. Additionally, no stock-based compensation, as defined by the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), was generated under any of the Corporation's other stock-based benefit plans during the same period. Therefore the Corporation has no additional compensation to report under SFAS No. 123, for the years ended December 31, 1997, 1996 and 1995. 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. There were no new options granted or forfeitures in the three year period ended December 31, 1997. All stock option shares granted are vested. Stock options exercised were 1,071, 18,307 and 36,601 shares in 1997, 1996 and 1995, respectively. An analysis of the status of the stock option plans as of December 31, 1997 follows: Plan Year 1985 1982 ---------------------------------------------------------------- Options outstanding: Total 17,032 9,961 Vested 17,032 9,961 Options available for granting -0- -0- Exercise price $19.60 $14.64 ----------------------------------------------------------------- END PUBLISHED PAGE 22 76 (18) 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, $400,000 and $360,000 in 1997, 1996, and 1995, respectively. At December 31, 1997 there were 263 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, 1997 1996 1995 ------------------------------------------------------------------------- Cash dividend income $ 89,000 $ 62,000 $ 44,000 Stock dividend/split shares 2,226 1,865 13,845 Shares purchased 20,628 22,542 18,958 Shares distributed 2,307 4,246 3,420 Year end holdings: Shares 127,557 107,010 86,849 Market value $3,540,000 $3,103,000 $2,388,000 As a percentage of total plan assets 89.7% 86.0% 68.6% - -------------------------------------------------------------------------- (19) 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 $123,000, $110,000 and $105,000 in 1997, 1996 and 1995, respectively. At December 31, 1997, there were 219 participants in the plan. 77 Transactions by the Stock Purchase Plan, relating to the activity in the Corporation's common stock are summarized below: Years ended December 31, 1997 1996 1995 ------------------------------------------------------------------------- Cash dividend income $ 88,000 $ 76,000 $ 66,000 Stock dividend/split shares 2,467 2,427 25,537 Shares purchased 11,893 19,447 5,552 Shares distributed 17,288 13,394 21,238 Year end holdings: Shares 124,822 127,750 119,270 Market value $3,465,000 $3,705,000 $3,280,000 As a percentage of total plan assets 99.1% 99.8% 90.8% ------------------------------------------------------------------------- (20) 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 35 of this report. Five assorted photographs END PUBLISHED PAGE 23 78 (21) 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. Portfolio loans, net and loans available for sale, net: For variable rate loans with interest rates that may be adjusted on a quarterly, or more frequent basis, the carrying amount is a reasonable estimate of fair market value. The fair value of other types of loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market, checking and NOW accounts, is equal to the amount payable on demand as of December 31, for each year presented. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. For variable rate certificates of deposit, the carrying amount is a reasonable estimate of fair value. Securities sold under repurchase agreements and other short-term borrowings and Accrued interest payable and other financial liabilities: For these short term financial instruments, the carrying value is a reasonable estimate of fair value. Federal Home Loan Bank advances: The fair value of these long-term financial instruments is estimated by discounting future cash flows using current FHLB rates for the remaining term to maturity. Commitments to extend credit and standby letters of credit: The difference between the notional amount and the estimated fair value of these commitments is not material. Limitations: Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot 79 be determined with precision. Changes in assumptions could significantly affect the estimates. Estimates of fair value are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a substantial trust division that contributes net fee income annually. The Trust Division is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include property, plant, and equipment and deferred tax liabilities. In addition, it is not practicable for the Corporation to estimate the tax ramifications related to the realization of the unrealized gains and losses and they have not been reflected in any of the estimates of fair value. The impact of these tax ramifications can have a significant effect on estimates of fair value. The estimated fair values of the Corporation's financial instruments at December 31, 1997 and 1996 are summarized as follows: December 31, 1997 1996 ------------------------------------------------------------------------- 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 $ 24,407,000 $ 24,407,000 $ 18,993,000 $ 18,993,000 instruments ============ ============ ============ ============ Securities $115,374,000 $116,197,000 $104,960,000 $105,639,000 ============ ============ ============ ============ Portfolio loans, net $315,498,000 $315,746,000 $286,017,000 $285,977,000 ============ ============ ============ ============ Loans available for sale, net $ 11,365,000 $ 11,365,000 $ 11,940,000 $ 11,940,000 ============ ============ ============ ============ Accrued interest, accounts receivable and other financial assets $ 5,819,000 $ 5,819,000 $ 3,965,000 $ 3,965,000 ============ ============ ============ ============ Financial liabilities: Deposits: Demand deposits, savings accounts and money market deposits $241,501,000 $241,501,000 $223,391,000 $223,391,000 Certificates of 169,154,000 169,838,000 142,989,000 143,569,000 deposit ------------ ------------ ------------ ------------ Total deposits $410,655,000 $411,339,000 $366,380,000 $366,960,000 ============ ============ ============ ============ Securities sold under repurchase agree- ments and other short-term borrowings $ 28,950,000 $ 28,950,000 $ 23,386,000 $ 23,386,000 ============ ============ ============ ============ Federal Home Loan Bank advances $ 2,045,000 $ 2,057,000 $ 1,095,000 $ 1,103,000 ============ ============ ============ ============ 80 Accrued interest payable and other financial $ 3,167,000 $ 3,167,000 $ 2,849,000 $ 2,849,000 liabilities ============ ============ ============ ============ END PUBLISHED PAGE 24 81 Report of Management To The Shareholders of LNB Bancorp, Inc. January 26, 1998 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 82 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Cleveland, Ohio January 27, 1998 END PUBLISHED PAGE 25 83 Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------- Total interest income $35,156,000 $32,470,000 $31,111,000 Total interest expense 12,990,000 11,478,000 11,636,000 --------------------------------------------- Net interest income 22,166,000 20,992,000 19,475,000 Provision for possible loan losses 750,000 600,000 400,000 Other income 5,803,000 4,926,000 4,287,000 Gains (losses) from sales of securities -0- (1,000) -0- Other expense 17,387,000 16,565,000 16,023,000 --------------------------------------------- Income before Federal income taxes 9,832,000 8,752,000 7,339,000 Federal income taxes 3,350,000 2,900,000 2,336,000 --------------------------------------------- NET INCOME $ 6,482,000 $ 5,852,000 $ 5,003,000 --------------------------------------------- CONDENSED BALANCE SHEETS - DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------- Cash and cash equivalents $ 24,407,000 $ 18,993,000 $ 27,530,000 Securities 115,374,000 104,960,000 104,566,000 Net loans 326,863,000 297,957,000 272,491,000 Other assets 23,573,000 16,333,000 17,016,000 --------------------------------------------- TOTAL ASSETS $490,217,000 $438,243,000 $421,603,000 --------------------------------------------- Total deposits $410,655,000 $366,380,000 $353,455,000 Other borrowings 30,995,000 24,481,000 24,148,000 Other liabilities 3,582,000 3,184,000 3,209,000 --------------------------------------------- Total liabilities 445,232,000 394,045,000 380,812,000 --------------------------------------------- Total shareholders' equity 44,985,000 44,198,000 40,791,000 --------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $490,217,000 $438,243,000 $421,603,000 --------------------------------------------- PER SHARE DATA 1997 1996 1995 - -------------------------------------------------------------------------- Basic earnings(2) $ 1.56 $ 1.39 $ 1.20 Cash dividends(1) $ .71 $ .62 $ .52 Book value per share(1) $10.91 $10.47 $ 9.71 Cash dividends declared $2,934,000 $2,591,000 $2,175,000 Shares outstanding at end of year(1) 4,124,379 4,221,304 4,202,537 - -------------------------------------------------------------------------- 84 FINANCIAL RATIOS 1997 1996 1995 - -------------------------------------------------------------------------- Net interest margin(3) 5.20% 5.33% 5.14% Return on assets(4) 1.41 1.37 1.21 Return on shareholders' equity(4) 14.51 13.70 12.72 Shareholders' equity to assets(4) 9.71 10.01 9.55 Cash dividends to net income 45.26 44.28 43.47 Gross loans to deposits 80.61 82.45 78.23 Allowance for loan losses to total loans 1.26 1.36 1.45 Non-performing loans to total loans .27 .37 .53 Net loans to equity 7.27 6.74 6.68 Deposits to equity 9.13 8.29 8.67 - -------------------------------------------------------------------------- Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31, 1994 1993 - -------------------------------------------------------------------------- Total interest income $26,830,000 $25,892,000 Total interest expense 8,572,000 8,540,000 ------------------------------ Net interest income 18,258,000 17,352,000 Provision for possible loan losses 400,000 500,000 Other income 4,064,000 3,818,000 Gains (losses) from sales of securities 70,000 191,000 Other expense 15,679,000 15,017,000 ------------------------------ Income before Federal income taxes 6,313,000 5,844,000 Federal income taxes 1,881,000 1,815,000 ------------------------------ NET INCOME $ 4,432,000 $ 4,029,000 ------------------------------ CONDENSED BALANCE SHEETS - DECEMBER 31, 1994 1993 - -------------------------------------------------------------------------- Cash and cash equivalents $ 21,275,000 $ 21,276,000 Securities 99,524,000 103,086,000 Net loans 257,975,000 242,043,000 Other assets 16,081,000 13,211,000 ------------------------------ TOTAL ASSETS $394,855,000 $379,616,000 ------------------------------ Total deposits $335,219,000 $321,012,000 Other borrowings 19,171,000 19,400,000 Other liabilities 2,954,000 4,144,000 ------------------------------ Total liabilities 357,344,000 344,556,000 ------------------------------ Total shareholders' equity 37,511,000 35,060,000 ------------------------------ 85 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $394,855,000 $379,616,000 ------------------------------ PER SHARE DATA 1994 1993 - -------------------------------------------------------------------------- Basic earnings(2) $ 1.05 $ .96 Cash dividends(1) $ .46 $ .42 Book value per share(1) $ 9.01 $ 8.45 Cash dividends declared $1,905,000 $1,725,000 Shares outstanding at end of year(1) 4,161,670 4,149,490 - -------------------------------------------------------------------------- FINANCIAL RATIOS 1994 1993 - -------------------------------------------------------------------------- Net interest margin(3) 5.09% 5.10% Return on assets(4) 1.13 1.08 Return on shareholders' equity(4) 12.16 11.90 Shareholders' equity to assets(4) 9.31 9.11 Cash dividends to net income 42.98 42.81 Gross loans to deposits 78.10 76.56 Allowance for loan losses to total loans 1.46 1.51 Non-performing loans to total loans .29 .52 Net loans to equity 6.88 6.90 Deposits to equity 9.47 9.16 ------------------------------------------------------------------------- (1) All share and per share data have been adjusted to reflect the 2 percent stock dividend in 1997 and 1996, the five-for-four stock split in 1995 and 1993, and the 3 percent stock dividend in 1994. (2) Basic earnings per share is computed using the weighted average number of shares outstanding during each year. (3) Tax Equivalent Basis. (4) Ratios based on average annual balances. END PUBLISHED PAGE 26 86 Management's Discussion & Analysis Introduction: The following is management's discussion and analysis of the financial condition and results of operations of LNB Bancorp, Inc. (the Corporation). It is intended to amplify certain financial information regarding LNB Bancorp, Inc. and should be read in conjunction with the Consolidated Financial Statements, related Notes, and other financial information and discussions included in the 1997 Annual Report to Shareholders. On September 15, 1997, Lorain National Bank (the Bank), a wholly-owned subsidiary of LNB Bancorp, Inc., Lorain, Ohio, purchased and assumed $45.3 million in deposits and other liabilities of three branch offices, located in Lorain County, from KeyBank National Association (KeyBank), headquartered in Cleveland, Ohio. In addition to the deposits assumed, Lorain National Bank also acquired approximately $26.6 million in cash and $0.4 million in premises and equipment, and $18.3 million in consumer and commercial loans. Two of the banking offices acquired by the Lorain National Bank, located in Lorain County, are being operated as part of the Bank's branch office network. The third branch office located at 383 Broadway, Lorain, Ohio was closed on November 14, 1997 and then merged into our Main Office at 457 Broadway, Lorain, Ohio. Management believes that the purchase will enhance the Bank's long-term profitability and has projected a positive impact on net income of approximately $450,000 for the 1998 fiscal year. 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 1997 net income reached a record high of $6,482,000, compared to $5,852,000 in 1996 and $5,003,000 in 1995. Net income for 1997 and 1996 was favorably affected by an increase in net interest income and increased noninterest income. Net income in 1997, 1996 and 1995 was favorably affected by reductions in FDIC Deposit Insurance Premiums. Basic earnings per share totaled $1.56 for 1997 compared to $1.39 for 1996 and $1.20 for 1995. Prior period earnings per share data have been 87 restated to reflect the 2% stock dividend in 1997 and 1996 and the five-for-four stock split in 1995. The return on assets, a measure of profitability, increased to 1.41% in 1997 from 1.37% in 1996 and 1.21% in 1995. Return on average shareholders' equity measures how profitable the shareholders' invested capital is employed. Return on average equity was 14.51% for 1997 compared to 13.70% and 12.72% in 1996 and 1995. EARNINGS PER SHARE dollars (An Earnings Per Share graph follows in printed version with earnings percent on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) RETURN ON ASSETS percent (A Return On Assets graph follows in printed version with return percent on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) RETURN ON EQUITY percent (A Return On Equity graph follows in printed version with return percent on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) Earnings Per Share Return on Assets Return on Equity Year Dollars Percent Percent 1997 $1.56 1.41% 14.52% 1996 $1.39 1.37% 13.70% 1995 $1.20 1.21% 12.72% 1994 $1.05 1.13% 12.16% 1993 $0.96 1.08% 11.90% *Adjusted for stock dividends and splits END PUBLISHED PAGE 27 88 Net Interest Income: Net interest income, the difference between interest and loan fee income on earnings assets and the interest paid on deposits and borrowed funds,is the principal source of earnings for the Corporation. Throughout this discussion net interest income is presented on a fully taxable equivalent (FTE) basis which restates interest on tax-exempt securities and loans as if such interest was subject to federal income tax at the statutory rate. Net interest income is affected by market interest rates on both earning assets and interest bearing liabilities, the level of earning assets being funded by interest bearing liabilities, non-interest bearing liabilities and shareholders' equity and the growth in earning assets. In addition, net interest income is affected not only by management's asset/liability strategies to alter the volume and mix of earning assets and sources of funds, but also such external factors as economic conditions and credit demand. A summary of the impacts of volume and rate changes on the Corporation's net interest income is presented on 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 (FTE) in 1997 increased by $1,136,000 from $21,100,000 in 1996 to $22,236,000 in 1997. This increase was affected by increases in the volume of interest-bearing assets and liabilities plus increases in market interest rates. The cost of funds increased from 3.58% in 1996 to 3.71% in 1997, or a total of 13 basis points. During the same period, the yield on earning assets increased 1 basis point to 8.24% in 1997, compared to 8.23% in 1996, resulting in a decrease in the net yield on earning assets by 12 basis points in 1997. 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 1996 to 1997 from increases in volumes, which was partially offset by changes in rates. Net interest income (FTE) increased by $1,426,000 in 1996 from $19,674,000 in 1995 to $21,100,000 in 1996. Net interest income in 1996 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 an increase in the net yield on earning assets by 17 basis points in 1996. The net yield on earning assets in 1997 was 5.20% compared to 5.33% in 1996 and 5.14% in 1995. This relatively constant yield reflects the fact that the Corporations's portfolio of earning assets and interest bearing liabilities are well matched and that Corporate management is responsive to the impacts of competition and regulation. Results from Operations: The Corporation's primary source of interest income is from loans. The relationship of loan income to total interest income, on a fully-tax equivalent basis, was relatively constant, increasing from 79.6% in 1996 to 80.3% in 1997. Interest and dividends on securities and Federal funds sold, as a percentage of total interest income, on a fully-tax equivalent basis, decreased from 20.4% in 1996 to 19.7% in 1997. This decrease results from a lower growth rate in the average balance in the security portfolio and Federal funds from 1996 to 1997, as compared to the growth rate of the loan portfolio from 1996 through 1997. The cost of interest bearing liabilities in 1997 was $12,990,000 89 compared to $11,478,000 and $11,636,000 in 1996 and 1995, respectively. The unfavorable impact of increases in rates plus increases in volume caused interest expense to increase from 1996 through 1997. The favorable impact of decreases in deposit rates plus increases in volume caused interest expense to decrease from 1995 to 1996. Repricing of interest bearing liabilities from 1995 through 1996 resulted in a significant net favorable change in interest expense in 1996. Total other income in 1997 increased to $5,803,000 compared to $4,925,000 in 1996 for an increase of $878,000. This increase results from increases from Trust Division income of $198,000, increases in service charges on deposit accounts of $240,000, and increases in other service charges of $446,000. The increase in service charges is due, in part, to reevaluating the assessment of transaction account charges. The increase in other charges is the result of pricing increases in credit card and merchant fees and ATM fees. Total other income in 1996 increased by $638,000 to $4,925,000 as compared to 1995. This increase resulted from increases in Trust division income of $57,000 and service charges of $543,000. Total other expenses increased 5.0% in 1997 compared to 1996 after a 3.4% increase for 1996 compared to 1995. A significant portion of the increases in 1997 and 1996 were the result of the effects of inflation on salaries and benefits plus increases in furniture and equipment expenses. Total other expenses in 1997 also increased due to the impact of the cost of acquisition of KeyBank branches. Total other expenses in 1996 were also affected by decreases in FDIC Deposit Insurance Premiums. The effective tax rate of the Corporation was 34.1%, 33.1%, and 31.8% in 1997, 1996, and 1995, respectively. The increase in the effective tax rate in 1997 and 1996 was primarily due to lower levels of tax-exempt interest income. A detailed analysis of Federal income taxes is presented on page 19. 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 END PUBLISHED PAGE 28 90 Condensed Consolidated Average Balance Sheets Fully-Tax Equivalent (FTE) Interest Rate and Interest Differential December 31, 1997 - -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate -------------------------------------------- ASSETS: Securities $106,938 $ 6,590 6.16% Securities-tax exempt 2,922 200 6.84 Federal funds sold and other interest-bearing instruments 2,579 145 5.62 Commercial loans 116,289 11,162 9.60 Commercial loans - tax exempt 760 68 8.95 Mortgage loans 141,642 11,158 7.88 Consumer loans 56,524 5,903 10.44 ---------------------------------------------- TOTAL EARNING ASSETS 427,654 35,226 8.24% ---------------------------------------------- Reserve for possible loan losses (4,217) Cash and due from banks 18,195 Other assets 18,635 ---------------------------------------------- TOTAL ASSETS $460,267 ----------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Certificates of deposit $158,789 $ 8,402 5.29% Savings deposits 96,708 2,130 2.20 Interest-bearing demand 68,386 1,151 1.68 Short-term borrowings 25,307 1,224 4.84 Long-term borrowings 1,225 83 6.78 ---------------------------------------------- TOTAL INTEREST- 350,415 12,990 3.71% BEARING LIABILITIES -------------------------------------------- Noninterest-bearing deposits 62,040 Other liabilities 3,124 Shareholders' equity 44,688 --------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $460,267 --------------------------------------------- NET INTEREST INCOME (FTE) $22,236 Taxable equivalent adjustment (70) --------------------------------------------- NET INTEREST INCOME PER FINANCIAL STATEMENTS $22,166 --------------------------------------------- NET YIELD ON EARNING ASSETS 5.20% --------------------------------------------- 91 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% ---------------------------------------------- 92 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 ---------------------------------------------- 89 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% ---------------------------------------------- 93 Rate/Volume Analysis of Net Interest Income Fully-Tax Equivalent Years ended December 31, 1997 and 1996 ------------------------------------------------------------------------- Dollars in Thousands) Increase (Decrease) In Interest Income/Expense --------------------------------------------- Volume Rate Total --------------------------------------------- Securities $ 508 $ 26 $ 534 Securities-tax exempt (101) (12) (113) Federal funds sold and other interest bearing instruments (131) -0- (131) Commercial loans 716 119 835 Commercial loans-tax exempt (15) 1 (14) Mortgage loans 926 (137) 789 Consumer loans 902 (154) 748 --------------------------------------------- TOTAL INTEREST INCOME 2,805 (157) 2,648 --------------------------------------------- Certificates of deposit 1,038 62 1,100 Savings deposits 91 (2) 89 Interest-bearing demand 13 (24) (11) Short-term borrowings 171 99 270 Long-term borrowings 61 3 64 --------------------------------------------- TOTAL INTEREST EXPENSE 1,374 138 1,512 --------------------------------------------- NET INTEREST INCOME $ 1,431 $ (295) $ 1,136 --------------------------------------------- 94 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 --------------------------------------------- END PUBLISHED PAGE 29 95 Results from Operations (continued): 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 1997, 1996 and 1995 is presented on page 36. There were no significant intra-quarter fluctuations except for fourth quarter increases in the provision for possible loan losses in 1996 and 1997. Total interest income and total interest expense increased in the fourth quarter of 1997 due to the September 15, 1997 acquisition of loans and deposits from Key Bank. The increase in other income reflects the realization of annual Trust Division billings which are based on year-end market values. 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 possible loan losses on December 31, 1997, was $4,168,000, or 1.26% of outstanding loans, compared to $4,116,000, or 1.36% at year-end 1996. The provision for possible loan losses charged to operating expense was $750,000 and $600,000 in 1997 and 1996, 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 1997 were $698,000, as compared to $486,000 for 1996, while net charge-offs as a percentage of average loans outstanding for 1997 was 0.22%, compared to 0.17% for 1996. Non-performing loans at year-end 1997 were $886,000 compared to $1,122,000 at year-end 1996. 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, 1997, 41% of non-performing loans were Commercial Loans, 5% were personal loans and 54% were Residential Mortgage Loans. This compares to 63% for commercial loans and 37% for mortgage loans at year-end 1996. Non-performing loans did not have a material impact on interest income during 1997, 1996 or 1995. The overall quality of the loan portfolio remains high, as the ratio of non-performing loans to total loans decreased from 0.37% at year-end 1996 to 0.27% at year-end 1997. 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, 1997, there were no significant concentrations of credit risk in the loan portfolio. Additional information regarding the loan portfolio is presented on page 16. Financial Condition: The earning assets mix has changed considerably from December 31, 1996 96 to December 31, 1997. During this period, gross loans increased by $28,958,000 and securities increased by $10,414,000. 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 1997 which stimulated loan demand. The maturity distribution of debt securities which appears on page 15 of this report, indicates that $103,962,000, or 91.8%, of debt securities mature within the next five year period with $43,032,000, or 38.0% maturing during 1998. At the close of 1997 and 1996 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 $852,000 or 0.7%, at the close of 1997. Total deposits held by the Corporation increased $44,275,000 during 1997 compared to an increase of $12,925,000 during 1996. Interest-bearing deposits represented 83.3% and 82.6% of total deposits at December 31, 1997 and 1996, respectively. Noninterest-bearing deposits increased by $4,763,000 while interest-bearing deposits increased by $39,512,000 during 1997. During 1996, noninterest-bearing deposits increased by $3,639,000 while interest-bearing deposits increased by $9,286,000. In both 1997 and 1996, as long-term deposits matured and new funds were deposited, these funds were primarily placed in short-term deposits. Total other borrowings, primarily repurchase agreements, increased by $5,564,000 during 1997, following a decrease of $762,000 in 1996. 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. END PUBLISHED PAGE 30 97 Capital Resources: Total shareholder's equity was $44,985,000 at December 31, 1997 compared to $44,198,000 at December 31, 1996, an increase of $787,000, or 1.8%. This increase was primarily attributable to net income of $6,482,000, less dividends declared to shareholders of $2,934,000, less the purchase of 97,996 shares of Treasury Stock at a cost of $2,843,000. The book value per share of common stock was $10.91 at year-end 1997 compared to $10.47 at year-end 1996, a 2.0% increase, adjusted for the April 15, 1997, 2% stock dividend. Cash dividends declared on the common stock of LNB Bancorp, Inc. during the year ended December 31, 1997 totaled $2,934,000 or $.71 per share. This compared to $2,591,000, or $.62 per share for the year ended December 31, 1996. In addition to the regular fourth quarter dividend of $.17 per share, an EXTRA cash dividend of $.05 per share was declared by the Board of Directors. The 1997 dividends per share represent an increase of 17.0% over the cash dividend declared in 1996. Dividends declared in 1997 represented a payout ratio of 45.3% of net income compared to 44.3% in 1996. In addition to cash dividends declared in 1997, the Board of Directors approved a 2% stock dividend to its shareholders which was paid on April 15, 1997. As discussed in Note 14 to the Consolidated Financial Statements, the Corporation's primary source of funds for the payment of dividends is its Bank subsidiary. During December of 1996, the Bank paid an additional $8,000,000 in dividends to the Corporation in order for it to have sufficient equity capital to take advantage of future acquisition opportunities and to pay future dividends. In order for the Bank to fund its balance sheet and remain well capitalized, the Corporation and the Bank entered into a subordinated debt agreement on December 30, 1996 for $8,000,000, payable on January 1, 2007 at an interest rate of 6.80%. The Bank, which is limited by regulation as to the amount of a dividend which can be paid, remains within these regulatory restrictions. Under regulations issued by the Federal Reserve Board and the Office of the Comptroller of the Currency, bank holding companies and banks are required to maintain certain minimum capital ratios in order to be considered "well capitalized." These guidelines require a minimum total risk-based capital ratio of 10%, a Tier 1 capital ratio of 6% and leverage ratio of 5%. All of the Corporation's assets, which include various risk-weighted percentages of assets on the balance sheet, as well as off-balance sheet exposures of unused commitments and letters of credit, are expressed as a percentage of risk-adjusted assets and compared to its capital. Tier 1 capital consists of shareholders' equity, exclusive of net unrealized gain (loss) on securities available for sale. Total risk-based capital consists of shareholders' equity, exclusive of net gain (loss) on securities available for sale, plus the allowable portion of the reserve for possible loan losses and subordinated debt. The allowance included in total risk-based capital cannot exceed 1.25% of risk-weighted assets. As of December 31, 1997, LNB Bancorp, Inc. had a total risk-based capital ratio of 14.34%, with a Tier 1 capital ratio of 13.11% compared to 18.18% and 16.93%, respectively, at December 31, 1996. Both of these risk-based capital ratios are well above minimum regulatory requirements. In addition to risk-based capital, a leverage ratio test must also be met. This ratio evaluates capital adequacy on the basis of Tier 1 capital-to-total average assets (unadjusted for risk). On December 31, 1997, LNB Bancorp, Inc.'s leverage ratio was 8.65%, which substantially exceeds the Corporation's minimum regulatory requirement. For additional information on the Corporation and Bank's capital ratios, refer to Note 14, Shareholders Equity on page 20. On an ongoing basis the Corporation analyzes acquisition opportunities in markets which are adjacent to or within the Corporation's current 98 geographical market. Corporate management believes that its current capital resources are sufficient to support any foreseeable acquisition activity. The Corporation also retains a portion of the net income it earns to accommodate current operational and regulatory capital requirements and to fund future growth opportunities. A part of future growth depends upon capital expenditure programs. Capital expenditures of approximately $2,500,000 are projected for 1998, including the cost of opening a new full service banking office in the Village of LaGrange. TOTAL SHAREHOLDERS' EQUITY millions of dollars (A Total Shareholders' Equity graph follows in printed version with total equity on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) AVERAGE EQUITY TO AVERAGE ASSETS percent (An Average Equity to Average Assets graph follows in printed version with average equity on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) BOOK VALUE PER SHARE dollars (A Book Value Per Share graph follows in printed version with book value on the x-axis and years 1993 through 1997 on the y-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) Total Shareholders' Average Equity to Book Value Equity Average Assets Per Share Year Millions of Dollars Percent Dollars 1997 $45.0 9.71% $10.91 1996 $44.2 10.01% $10.47 1995 $40.8 9.55% $ 9.71 1994 $37.5 9.31% $ 9.01 1993 $35.1 9.11% $ 8.45 *Adjusted for stock dividends and splits END PUBLISHED PAGE 31 99 Asset/Liability Management: The mission of the Asset/Liability Management Committee of Lorain National Bank is to effectively monitor and manage the Bank's exposure to interest rate risk, liquidity risk, and repricing risk and thereby provide the Bank with a stable net interest margin. Asset/liability management is the measurement and analysis of the Bank's exposure to changes in the interest rate environment. The Bank is subject to interest rate risk to the extent its liabilities reprice more rapidly than its assets. The Bank manages this risk on a continuing basis through the use of a number of objectives and strategies as an ongoing part of its strategic financial plan. The Bank's Asset/Liability Management Committee, which includes executive and senior management representatives, meets monthly. Objectives include monitoring and methods of managing the rate sensitivity and repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of net interest income. The Bank's asset and liability management program defined by the Board of Directors is designed to minimize the impact of significant changes in interest rates on net interest income. Strategies include attempting to market variable-rate loans, growth in the consumer loan portfolio which tend to have shorter terms to maturity, match fixed rate commercial loans with Federal Home Loan Bank advances, and utilizing deposit promotions in an effort to extend the term to maturity of its liabilities. Management may, at times place greater emphasis on maximizing net interest margin rather than merely concentrating on interest rate risk depending on the relationship between short-and long-term interest rates, market conditions and consumer preference. Management believes that increased net income resulting from a moderate contrast between the maturity of its assets and liabilities can provide high enough returns to justify the increased risk exposure during periods of stable interest rates. The Corporation's net yield on earning assets was 5.20% and 5.33% for the years ended December 31, 1997 and 1996, respectively. The Asset/Liability Management Committee has established limits on the amount of its interest rate risk exposure, however, there can be no assurance that management's efforts to limit interest rate risk will be successful. One measure of exposure to interest rate risk is interest rate sensitivity gap analysis. The Bank uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of the interest-rate-sensitive liabilities, and is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. Generally, during a period of rising interest rates, with all factors held constant, a negative gap would adversely affect net interest income; while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, with all factors held constant, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. The Corporation's one year gap was 4.88% at December 31, 1997, 1.35% at December 31, 1996 and 3.15% at December 31, 1995. The increased level of interest rate risk at December 31, 1997 compared to December 31, 1996, 100 measured under gap analysis, was due to an increase in assets maturing or otherwise repricing in one year or less totaling $42,194,000 (due to an increase in loans and securities repricing during that period) partially offset by an increase in liabilities maturing or otherwise repricing in one year or less totaling $25,981,000 (due primarily to an increase in certificates of deposit and short-term borrowings during that period). The reduced level of interest rate risk at December 31, 1996 compared to December 31, 1995, measured under gap analysis, was due to an increase in liabilities maturing or otherwise repricing in one year or less totaling $846,000. The December 31, 1996 increase in liabilities maturing in one year or less was more than offset by a decrease in assets maturing or otherwise repricing during the same period totaling $5,681,000 (due to an increase in loans repricing offset by a decrease in securities repricing during that period). The table on the page 33 sets forth the repricing dates of the Corporation's interest earning assets and interest-bearing liabilities at December 31, 1997 and the interest rate sensitivity "gap" percentages at the dates indicated. END PUBLISHED PAGE 32 101 Gap Analysis (Dollars in Thousands) - -------------------------------------------------------------------------- Expected Maturity/Repricing Date 1998 1999 2000 2001 - -------------------------------------------------------------------------- Fixed rate commercial, mortgage and consumer loans $25,260 $ 8,718 $ 6,462 $ 4,618 Weighted average yield 9.34% 9.47% 9.42% 9.37% Variable rate commercial and consumer loans 103,349 23 352 Weighted average yield 9.74% 10.25% 10.25% Semi-variable mortgage loans(1) 44,817 26,792 8,442 24,768 Weighted average yield 7.76% 7.36% 7.82% 7.25% Variable rate consumer loans 27,857 125 104 26 Weighted average yield 10.55% 8.58% 8.83% 9.30% Other semi-variable rate loans(1) 4,991 830 733 331 Weighted average yield 8.15% 8.60% 8.31% 7.87% Securities and other(2) 44,876 24,171 25,070 2,510 Weighted average yield 5.67% 6.47% 5.87% 5.47% - -------------------------------------------------------------------------- Total interest-earning assets 251,150 60,659 51,163 32,253 - -------------------------------------------------------------------------- Certificates of deposit 131,513 20,789 7,416 9,122 Weighted average yield 5.19% 5.79% 5.89% 6.06% Savings deposits 39,640 39,640 19,821 Weighted average yield 2.22% 2.22% 2.22% Interest-bearing demand 29,354 29,354 15,127 Weighted average yield 1.61% 1.61% 1.61% Short-term borrowings 28,950 Weighted average yield 4.89% Long-term borrowings 1,095 Weighted average yield 6.62% - ------------------------------------------------------------------------- Total interest-bearing liabilities 229,457 89,783 42,364 10,217 - ------------------------------------------------------------------------- Interest-earning assets less Interest-bearing liabilities 21,693 (29,124) 8,799 22,036 Cumulative interest-rate sensitive gap 21,693 (7,431) 1,368 23,404 Cumulative interest-rate gap as a percentage of total earning assets at December 31, 1997 4.88% Cumulative interest-rate gap as a percentage of total earning assets at December 31, 1996 1.35% Cumulative interest-rate gap as a percentage of total earning assets at December 31, 1995 3.15% - -------------------------------------------------------------------------- 102 Gap Analysis (Dollars in Thousands) - ------------------------------------------------------------------------- Expected Maturity/Repricing Date Fair 2002 Thereafter Total Value(3) - -------------------------------------------------------------------------- Fixed rate commercial, mortgage and consumer loans $ 2,219 $ 7,928 $55,205 $54,621 Weighted average yield 9.07% 8.36% 9.22% Variable rate commercial and consumer loans 103,724 103,724 Weighted average yield 9.74% Semi-variable mortgage loans(1) 17,995 132,814 132,447 Weighted average yield 7.54% 7.56% Variable rate consumer loans 57 28,169 28,169 Weighted average yield 10.59% 10.53% Other semi-variable rate loans(1) 310 1,816 9,011 9,050 Weighted average yield 7.89% 7.76% 8.10% Securities and other(2) 9,192 9,689 115,508 116,331 Weighted average yield 6.37% 6.82% 6.03% - ------------------------------------------------------------------------- Total interest-earning assets 29,773 19,433 444,431 444,342 - ------------------------------------------------------------------------- Certificates of deposit 263 51 169,154 169,838 Weighted average yield 5.63% 7.98% 5.34% Savings deposits 99,101 99,101 Weighted average yield 2.22% Interest-bearing demand 73,835 73,835 Weighted average yield 1.61% Short-term borrowings 28,950 28,950 Weighted average yield 4.89% Long-term borrowings 950 2,045 2,057 Weighted average yield 6.31% 6.44% - -------------------------------------------------------------------------- Total interest-bearing liabilities 1,213 51 373,085 373,781 - ------------------------------------------------------------------------- Interest-earning assets less Interest-bearing liabilities 28,560 19,382 71,346 Cumulative interest- rate sensitive gap 51,964 71,346 (1)Semi-variable mortgage loans include mortgages in which the loan is fixed for the first three or five years pf the loan and its interest rate is adjustable thereafter. (2)Securities available for sale are shown at amortized cost. (3)Fair value of loans are gross of deferred fees and allowance for loan losses. END PUBLISHED PAGE 33 103 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. On December 31, 1997, cash and cash equivalents equaled $24,407,000 or 5.0% of total assets. The change in cash and cash equivalents is shown in the Consolidated Statement of Cash Flows on page 10 and arises from operating, investing and financing activities. The adjustments to reconcile 1997 net income to net cash provided by operating activities primarily consists of depreciation and amortization of $1,796,000 and a provision for possible loan losses of $750,000. These items represent expenses included in net income which do not represent an expenditure or receipt of cash. The cash flows from investing activities relate primarily to securities, loans and purchases of capital assets. Net cash used in investing activities was $47,743,000. Cash used in investing activities resulted from net increases in securities of $10,499,000. Cash used in investing activities included net loan increases of $30,034,000 and purchases of capital and intangible assets of $7,280,000. Net cash provided by financing activities was $45,154,000. Cash provided by financing activities included increases in deposits of $44,275,000, increases in securities sold under repurchase agreements and other short-term borrowings of $3,364,000, Federal Home Loan Bank advances of $950,000, line of credit advances of $2,400,000 and proceeds from stock options exercised of $21,000. Cash used by financing activities primarily included the purchase of Treasury Stock in the amount of $2,843,000 and dividends paid of $2,813,000. These cash flows resulted in a $5,414,000 increase in cash and cash equivalents from December 31, 1996 to December 31, 1997. 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. Additionally, the Bank has a $15,000,000 cash management advance line of credit with the Federal Home Loan Bank of Cincinnati. The internal and external sources of funds for liquidity, in the opinion of management, satisfy the liquidity needs of the Corporation and the Bank. Five assorted photographs END PUBLISHED PAGE 34 104 Impacts of Accounting and Regulatory Pronouncements: Corporate management is not aware of any proposed regulations or 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. Financial Accounting Standards Board: The Financial Accounting Standards Board (FASB) has issued: SFAS No. 130, "Reporting Comprehensive Income" Implementation date by the Corporation: January 1, 1998 Impact on the Corporation: This Statement provides accounting and reporting standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Corporate management believes that adoption of SFAS No. 130 will not have a significant impact on net income, but will increase reporting requirements. SFAS No. 131, "Disclosures about segments of an Enterprise and Related Information" Implementation date by the Corporation: January 1, 1998 Impact on the Corporation: This Statement provides accounting and reporting standards for the way public business are to report information about operating segments in annual financial statements and requires those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Corporate management believes that adoption of SFAS No. 131 will not have a significant impact on net income but will increase disclosure requirements. All other applicable Statements of Financial Accounting Standards that have been issued and have effective dates impacting 1997 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. However, there is the issue of year 2000 compliance that warrants discussion. Year 2000 Issue: Several of the Corporation's and Bank's regulators including the Security and Exchange Commission, Federal Reserve Board, and the Office of the Comptroller of Currency have issued guidance relative to the management and disclosures for year 2000 issues. A discussion of the year 2000 issue as it relates to the Corporation, the Bank and their customers, suppliers and vendors follows. The Corporation has formed a strategic task force to perform a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Corporation's programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The Corporation has notified its commercial customers of the year 2000 105 issue and is in contact with its' suppliers and third party vendors. The Corporation expects to incur internal staff costs, consulting, and other expenses to identify, correct or reprogram, and test the systems for the year 2000 compliance issue. The Corporation estimates that compliance costs for the year 2000 issue from 1997 through 1999 will not exceed $100,000, while 1997 compliance expenses totaled $5,000. The Corporation continues to evaluate appropriate courses of corrective action, including replacement of certain systems whose associated costs would be recorded as assets and amortized. Accordingly, the Corporation does not expect that year 2000 compliance costs to be expensed over the next two years to have a material effect on the financial position, liquidity or results of operation. To date, the Corporation is in the process of obtaining formal notifications from all of its major vendors and suppliers that their systems are year 2000 compliant. During 1998, the Corporation will begin testing and validating that these systems are year 2000 compliant. The project completion date for the year 2000 issue is slated for June, 1999. This "Year 2000 Computer Problem" creates risk for the Corporation from unforeseen problems in its own computer systems and from third parties with whom the Corporation deals on financial transactions. Such failures of the Corporation, and/or third parties' computer systems could have a material impact on the Corporation's ability to conduct its business, and especially to process and account for the transfer of funds electronically. END PUBLISHED PAGE 35 106 Selected Quarterly Financial Data Consolidated quarterly financial and per share data for the years ended December 31, 1997, 1996 and 1995 are summarized as follows: First Second Third Fourth Quarter Quarter Quarter Quarter Totals - -------------------------------------------------------------------------- Total 1997 $8,256,000 $8,594,000 $8,900,000 $9,406,000 $35,156,000 interest 1996 7,892,000 8,032,000 8,187,000 8,359,000 32,470,000 income 1995 7,346,000 7,789,000 7,900,000 8,076,000 31,111,000 - -------------------------------------------------------------------------- Total 1997 2,999,000 3,157,000 3,302,000 3,532,000 12,990,000 interest 1996 2,878,000 2,770,000 2,890,000 2,940,000 11,478,000 expense 1995 2,716,000 2,992,000 2,932,000 2,996,000 11,636,000 - -------------------------------------------------------------------------- Net 1997 5,257,000 5,437,000 5,598,000 5,874,000 22,166,000 interest 1996 5,014,000 5,262,000 5,297,000 5,419,000 20,992,000 income 1995 4,630,000 4,797,000 4,968,000 5,080,000 19,475,000 - -------------------------------------------------------------------------- Provision 1997 125,000 125,000 125,000 375,000 750,000 for 1996 125,000 175,000 125,000 175,000 600,000 possible 1995 100,000 100,000 100,000 100,000 400,000 loan losses - -------------------------------------------------------------------------- Net 1997 5,132,000 5,312,000 5,473,000 5,499,000 21,416,000 interest 1996 4,889,000 5,087,000 5,172,000 5,244,000 20,392,000 income 1995 4,530,000 4,697,000 4,868,000 4,980,000 19,075,000 after provision for possible loan losses - -------------------------------------------------------------------------- Other 1997 1,293,000 1,399,000 1,544,000 1,567,000 5,803,000 income 1996 1,221,000 1,227,000 1,254,000 1,223,000 4,925,000 1995 1,078,000 1,005,000 1,089,000 1,115,000 4,287,000 - -------------------------------------------------------------------------- Other 1997 4,900,000 5,116,000 5,357,000 5,364,000 20,737,000 expenses 1996 4,784,000 4,863,000 4,923,000 4,895,000 19,465,000 includinge 1995 4,521,000 4,524,000 4,648,000 4,666,000 18,359,000 Federal income taxes - -------------------------------------------------------------------------- Net income 1997 1,525,000 1,595,000 1,660,000 1,702,000 6,482,000 1996 1,326,000 1,451,000 1,503,000 1,572,000 5,852,000 1995 1,087,000 1,178,000 1,309,000 1,429,000 5,003,000 - -------------------------------------------------------------------------- Basic 1997 .37 .38 .40 .41 1.56 Earnings 1996 .32 .35 .35 .37 1.39 Per share 1995 .26 .28 .32 .34 1.20 (2) - -------------------------------------------------------------------------- Dividends 1997 .16 .16 .17 .22 .71 Paid Per 1996 .13 .14 .16 .19 .62 Share (1) 1995 .12 .12 .13 .15 .52 - -------------------------------------------------------------------------- (1) All share and per share data have been adjusted to reflect the 2 percent stock dividend in 1997 and 1996, and the five-for-four stock split in 1995. (2) Basic earnings per share is computed using the weighted average number of shares outstanding during each year. END PUBLISHED PAGE 36 107 Banking Offices & ATMs ATM service available wherever you see this symbol Lorain banking offices Main Office 457 Broadway Lorain, Ohio 44052 244-7185 Sixth Street Drive-In Office 200 Sixth Street Lorain, Ohio 44052 244-7242 Kansas Avenue Office 1604 Kansas Avenue Lorain, Ohio 44052 288-9151 Oberlin Avenue Office 3660 Oberlin Avenue Lorain, Ohio 44053 282-9196 Cooper-Foster Park Road Office 1920 Cooper-Foster Park Rd Lorain, Ohio 44053 282-1252 Pearl Avenue Office 2850 Pearl Avenue Lorain, Ohio 44055 277-1103 Lake Avenue Office 42935 N. Ridge Road Elyria Township, Ohio 44035 233-7196 West Park Drive Office 2130 West Park Drive Lorain, Ohio 44053 989-3131 Amherst banking office Amherst Office 1175 Cleveland Avenue Amherst, Ohio 988-4423 Avon Lake banking office Avon Lake Office 240 Miller Road Avon Lake, Ohio 44012 933-2186 108 Elyria banking offices Second Street Office 221 Second Street Elyria, Ohio 44035 323-4621 Cleveland Street Office 801 Cleveland Street Elyria, Ohio 44035 365-8397 Midway Mall Office 6395 Midway Mall Blvd. Elyria, Ohio 44035 324-6530 Oberlin banking offices Oberlin Office 40 E College Street Oberlin, Ohio 44074 775-1361 Kendal at Oberlin Office 600 Kendal Drive Oberlin, Ohio 44074 774-5400 Olmsted Township banking offices Olmsted Township Office 27095 Bagley Road Olmsted Township, Ohio 44138 235-4600 The Renaissance Office 26376 John Road Olmsted Township, Ohio 44138 427-0041 Vermilion banking office Vermilion Office 4455 E. Liberty Avenue Vermilion, Ohio 44089 967-3124 Westlake banking offices Crossings of Westlake Office 30210 Detroit Road Westlake, Ohio 44145 892-9696 Westlake Village Office 28550 Westlake Village Drive Westlake, Ohio 44145 808-0229 109 Other offices Executive Offices 457 Broadway Lorain, Ohio 44052 244-7123 Administration 457 Broadway Lorain, Ohio 44052 244-7253 Operations 2130 West Park Drive Lorain, Ohio 44053 989-3315 Human Resources 2130 West Park Drive Lorain, Ohio 44053 989-3139 Marketing 457 Broadway Lorain, Ohio 44052 244-7332 Purchasing 2150 West Park Drive Lorain, Ohio 44053 989-3260 All other departments & information not listed Lorain 244-6000 1-800-860-1007 Elyria/Cleveland 236-5047 Community-based automated teller machine locations Captain Larry's Marathon 1317 State Route 60 Vermilion, Ohio Convenient Food Mart 5375 West Erie Avenue Lorain, Ohio Gateway Plaza Convenient 3451 Colorado Avenue Lorain, Ohio Lakeland Medical Center 3700 Kolbe Road Lorain, Ohio 110 Lorain County Community College 1005 N. Abbe Road Elyria, Ohio Lorain Plaza Shopping Center 1147 Meister Road Lorain, Ohio Lowe's Home Improvement Warehouse 620 Midway Boulevard Elyria, Ohio Midway Mall Food Court Midway Mall Elyria, Ohio END PUBLISHED PAGE 37 111 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. Terry D. Goode Vice President Lorain County Title Company Wellsley O. Gray Retired 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 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 112 T. L. Smith, M.D. Retired Physician Eugene M. Sofranko President and Chief Executive Officer Lorain Glass Company, Inc. Paul T. Stack Retired Leo Weingarten Retired Officers Stanley G. Pijor Chairman of the Board LNB Bancorp, Inc. and Lorain National Bank James F. Kidd President and Chief Executive Officer Thomas P. Ryan Executive Vice President and Secretary/Treasurer Sandra L. Dubell Senior Vice President and Chief Lending Officer 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 Directors Emeritus of Lorain National Bank Don A. Sanborn Retired END PUBLISHED PAGE 38 113 Officers of Lorain National Bank Executive Officers 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 Senior Officers Sandra L. Dubell Senior Vice President and Chief Lending Officer Michael D. Ireland Senior Vice President Operations Emma N. Mason Senior Vice President Trust and Investment Management James H. Weber Senior Vice President Marketing Branch and Trust Officers Branch Administration Debra R. Brown Vice President Teresa E. George Assistant Vice President Branch Officers Main Office & 6th Street Drive-In Office Keith H. Kapanke Assistant Vice President Amherst Office G. Dale Rosenkranz Vice President 114 Avon Lake Office Charles A. DeAngelis Assistant Vice President Cleveland Street Office Timothy J. Gallagher Vice President Cooper-Foster Park Road Office Linda Buehner Assistant Vice President Kansas Avenue Office Connie Sklarek Assistant Cashier Lake Avenue Office Christine M. Weber Assistant Vice President Midway Mall Office Carrie Hartman Assistant Vice President Kimberly S. Plzak Assistant Vice President Carol Snyder Branch Staff Officer & Assistant Branch Manager Oberlin Avenue Office Jennifer M. Nickolls Assistant Vice President Oberlin Office & Kendal at Oberlin Office Marilyn R. Krasienko Assistant Vice President Olmsted Township Office & The Renaissance Office Diana L. Schmittgen Assistant Vice President Pearl Avenue Office Patricia A. Wolanczyk Assistant Cashier Second Street Office James E. Schmittgen Vice President Vermilion Office Robert B. White Vice President 115 West Park Drive Office Rita M. Hoyt Branch Manager The Crossings of Westlake Office & Westlake Village Office Susan M. Neiding Vice President Trust and Investment Management Edward J. Baker Vice President Gerald S. Falcon Vice President Brian D. Morgan Vice President Patrick E. Sheridan Vice President Jodi L. Penwell Assistant Trust Officer Carol A. Cavanaugh Assistant Employee Benefits Officer Loan Officers Commercial Loans John A. Funderburg Vice President Denise M. Kosakowski Vice President Ellen M. Walsh Vice President Kenneth P. Wayton Vice President Consumer Loans Bruce Diso Vice President Robert D. Asik Consumer Loan Officer Kelly A. Dunfee Assistant Cashier 116 Credit Card Loans Frances V. Lesniak Vice President Jeanne Maschari Assistant Vice President Mortgage Loans Edwin F. Klenz Vice President Joel A. Krueck Assistant Vice President and CRA Officer Loan Services Cynthia M. Marks Assistant Cashier Joan M. Raymond Assistant Vice President Joyce L. Wasela Commercial Loans Operation and Support Officers Accounting Mitchell J. Fallis Vice President and Chief Accounting Officer Mary L. Kapanke Fiscal Operations Officer Auditing Gary E. Sedlak Vice President, Auditor and Compliance Officer Randy E. Lottman Assistant Vice President and E.D.P. Auditor Daniel P. Dudziak Senior Staff Auditor Cash Management Patricia L. Cole Assistant Cashier 117 Computer Administration David P. Krebs Vice President Deposit Services Donna J. Phillips Assistant Vice President E.D.P. Services Larry R. Johnson Vice President Larry A. Hill Assistant Vice President Human Resources Carol A. Mesko Assistant Vice President Teresa E. Kreger Employment Officer Maintenance Robert J. Witkowski Maintenance Officer Marketing Steven F. Cooper Vice President Debra L. Temerario Marketing Operations Officer Purchasing Susan I. Tuttle Assistant Cashier Security James E. Long Assistant Vice President Training Marianne Kocak Assistant Vice President END PUBLISHED PAGE 39 118 Earnings and Dividend Performance 10 Year Earnings History (10 Year Earnings History graph follows in printed version with years 1988 through 1997 on the X-axis and earnings on the Y-axis in $2,500,000.00 increments ranging from $0 to $7,500,000.00. 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 1988 through 1997. The Corporation's management team is proud of its record of continuously increasing profits over this ten year period. Return on Average Assets (Return on Average Assets graph follows in printed version with years 1988 through 1997 on the X-axis and percentages on the Y-axis in 0.40% increments ranging from 0.40% to 1.60%. 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 return on average assets of LNB Bancorp, Inc. from 1988 through 1997. Senior Management has worked diligently to bring about the rapid increase in this performance ratio over the past five years. Cumulative Cash Dividends Declared Total Cash Dividends Declared 1988 - 1997: $1,625.00 (Cumulative Cash Dividends Declared graph follows in printed version with years 1988 through 1997 on the X-axis and Dividends Declared on the Y-axis in $600.00 increments ranging from $0 to $1,800.00. 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 above graph reflects a 10 year chronological record of dividend performance following a hypothetical purchase of 100 shares of LNB Bancorp, Inc., stock without further reinvestment. Over the 10 year period, our hypothetical shareholder would have benefited from the cumulative cash dividends declared on the stock in the amount of $1,625.00. 119 The data points used to plot the three (3) graphs previously described follows: NET INCOME RETURN ON CUMULATIVE CASH YEAR IN THOUSANDS AVERAGE ASSETS DIVIDENDS DECLARED 1997 $6,480,000.00 1.41% $1,625.00 1996 $5,852,000.00 1.37% $1,359.00 1995 $5,003,000.00 1.21% $1,137.00 1994 $4,432,000.00 1.13% $ 932.00 1993 $4,029,000.00 1.08% $ 759.00 1992 $3,826,000.00 1.07% $ 602.00 1991 $3,512,000.00 1.02% $ 459.00 1990 $3,343,000.00 1.01% $ 329.00 1989 $3,217,000.00 1.03% $ 210.00 1988 $2,881,000.00 0.98% $ 101.00 END PUBLISHED PAGE 40 120 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. Card on left-hand side reads 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__________ Card on right-hand side reads as follows: To: Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. 457 Broadway, Lorain, Ohio 44052 Yes, I am interested in obtaining information on LNB Bancorp, Inc.'s Dividend Reinvestment and Cash Stock Purchase Plan. Name_________________________ Address______________________ City____State____Zip______Phone________ HALF PAGE INSERT BACK SIDE Two postage paid postcards Card on left-hand side reads as follows: Lorain National Bank Attn: Thomas P. Ryan 457 Broadway Lorain Oh 44052-9986 Card on right-hand side reads as follows: Lorain National Bank Attn: James F. Kidd 457 Broadway Lorain Oh 44052-9986 121 COVER DESCRIPTION Inside Back Cover Bottom right Familiar faces... Friendly places END OF INSIDE BACK COVER Outside back cover White background LNB Bancorp, Inc. Dark green lettering END OF PUBLISHED LNB BANCORP, INC. 1997 ANNUAL REPORT 122 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1997) 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 123 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1997) S - K Reference Number (22) Notice of Annual Meeting to shareholders and Proxy Statement (dated March 23, 1998). 124 LNB BANCORP, INC. LORAIN, OHIO NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO THE SHAREHOLDERS OF LNB BANCORP, INC. March 23, 1998 The Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 521 Broadway, Lorain, Ohio 44052, on Tuesday, April 21, 1998, 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 17, 2001) or until their successors are elected and qualified. 2. OTHER BUSINESS - To transact such other business as may properly come before the meeting. Shareholders of record at the close of business on March 9, 1998 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- 125 THIS PAGE LEFT INTENTIONALLY BLANK -2- 126 LNB BANCORP, INC. 457 BROADWAY LORAIN, OHIO 44052 PROXY STATEMENT MARCH 23, 1998 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 21, 1998, is 4,124,479. Only those shareholders of record at the close of business on March 9, 1998 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, 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 1998 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 21, 1998, the management has nominated the hereinafter named five (5) individuals for election to serve until April 17, 2001, 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 127 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- 128 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) Daniel P. Batista 2) David M. Koethe 3) Stanley G. Pijor 4) Eugene M. Sofranko 5) Leo Weingarten 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 20, 1999: 1) James L. Bardoner 2) Terry D. Goode 3) Wellsley O. Gray 4) Benjamin G. Norton 5) T.L. Smith, M.D. The following individuals are directors whose term of office is scheduled to expire on April 18, 2000: 1) Robert M. Campana 2) James F. Kidd 3) Jeffrey F. Riddell 4) Thomas P. Ryan 5) Paul T. Stack -4- 129 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 1997, 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 thirteen (13) Board of Directors meetings during the last fiscal year. Of the directors who served during 1997, Leo Weingarten attended fewer than 75% of the total of thirteen (13) 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- 130 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 79 Dorn Industries, Inc. (1-2-4-5-6) (Manufacturing Company) DANIEL P. BATISTA ATTORNEY/PARTNER 1976 1983 Age 63 Cook & Batista Co.,L.P.A.(A) (2-3-5-6) ROBERT M. CAMPANA MANAGING DIRECTOR 1996 1996 Age 38 P.C.Campana, Inc. (3) TERRY D. GOODE VICE PRESIDENT 1997 1997 Age 43 Lorain County Title Company (1) WELLSLEY O. GRAY RETIRED 1973 1983 Age 64 (1-3) JAMES F. KIDD PRESIDENT AND 1989 1989 Age 58 CHIEF EXECUTIVE OFFICER (2-3-4) LNB Bancorp, Inc. and The Lorain National Bank DAVID M. KOETHE CHAIRMAN OF THE BOARD 1975 1983 Age 62 The Lorain Printing Company(B) (2-3-4-5-6) BENJAMIN G. NORTON EMPLOYEE AND 1983 1983 Age 58 COMMUNITY RELATIONS MANAGER (3-7) RELTEC Corporation STANLEY G. PIJOR CHAIRMAN OF THE BOARD 1969 1983 Age 67 LNB Bancorp, Inc. and (2-3-4-6) The Lorain National Bank JEFFREY F. RIDDELL PRESIDENT 1995 1995 Age 46 Consumers Builders Supply Company (1) PRESIDENT AND CHIEF EXECUTIVE OFFICER Consumeracq, Inc. THOMAS P. RYAN EXECUTIVE VICE PRESIDENT 1989 1989 Age 59 AND SECRETARY/TREASURER LNB Bancorp, Inc. EXECUTIVE VICE PRESIDENT AND SECRETARY The Lorain National Bank -6- 131 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 84 (1-2-4-5-6) EUGENE M. SOFRANKO PRESIDENT AND CHIEF 1974 1983 Age 67 EXECUTIVE OFFICER (1-2-4-5-6) Lorain Glass Company, Inc. PAUL T. STACK RETIRED 1974 1983 Age 68 (1-2-3-6) LEO WEINGARTEN RETIRED 1964 1983 Age 78 (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 $130,982. 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 $128,007 for printing services and supplies. It is anticipated that such business relationship will continue during the current fiscal year. (C) Mr. Pijor entered into a Consulting Agreement with the Bank dated March 15, 1994. The agreement provides that Mr. Pijor 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- 132 EXECUTIVE COMPENSATION LNB Bancorp, Inc. did not pay any separate compensation, other than Corporation director fees, to its executive officers during 1997, 1996, and 1995. 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, 1997, 1996 and 1995, for all persons who were, during 1997, (i) the chief executive officer and (ii) the other most highly compensated officers of the Bank who made in excess of $100,000 during 1997 (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 1997, 1996 and 1995, 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. In 1997, Mr. Gregory D. Friedman, Senior Vice President, Chief Operating Officer and Chief Financial Officer, and Mrs. Emma N. Mason, Senior Vice President, 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, 1997, 1996 and 1995. Compensation (1) ----------------------------------------------- Annual Name and -------------------------------- All Principal Position Year Salary Bonuses Other (2) ---------------------------------------------------------------------- James F. Kidd 1997 $180,962 $42,000 $22,441 President and 1996 $151,154 $32,500 $20,600 Chief Executive Officer 1995 $124,000 $15,000 $18,427 Thomas P. Ryan 1997 $109,250 $16,350 $18,752 Executive Vice President 1996 $104,050 $15,375 $18,755 and Secretary/Treasurer 1995 $ 99,375 $15,000 $15,693 Gregory D. Friedman 1997 $ 91,021 $13,365 $11,078 Senior Vice President Chief Operating Officer and Chief Financial Officer Emma N. Mason 1997 $ 89,185 $13,350 $12,870 Senior Vice President (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: 1997 1996 1995 Contribution, in Mr. Kidd's behalf to: The Bank's Stock Purchase Plan $ 4,800 $ 4,500 $ 4,176 The Bank's Employee Stock Ownership Plan $11,141 $10,925 $10,236 Mr. Kidd's Supplemental Life Insurance $ 2,250 $ 2,250 $ 2,239 Corporation director's fees $ 4,250 $ 2,925 $ 1,775 -8- 134 Thomas P. Ryan: 1997 1996 1995 Contribution, in Mr. Ryan's behalf to: The Bank's Stock Purchase Plan $ 3,768 $ 3,583 $ 3,431 The Bank's Employee Stock Ownership Plan $ 8,746 $ 8,698 $ 8,518 Mr. Ryan's Supplemental Life Insurance $ 2,238 $ 2,079 $ 1,969 Corporation director's fees $ 4,000 $ 2,700 $ 1,775 Anniversary Stock Award $ 0 $ 1,695 $ 0 Gregory D. Friedman: 1997 Contribution, in Mr. Friedman's behalf to: The Bank's Stock Purchase Plan $ 3,132 The Bank's Employee Stock Ownership Plan $ 7,269 Mr. Friedman's Supplemental Life Insurance $ 677 Emma N. Mason: 1997 Contribution, in Mrs. Mason's behalf to: The Bank's Stock Purchase Plan $ 3,076 The Bank's Employee Stock Ownership Plan $ 7,140 Mrs. Mason's Supplemental Life Insurance $ 2,654 OPTION GRANTS TABLE (last fiscal year) There were no stock options granted by the Corporation or the Bank in 1997. LONG TERM INCENTIVE PLAN AWARD TABLE (last fiscal year) There were no long term incentive plans or plan awards in 1997. 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 2143/0 $17,475/$0 Thomas P. Ryan 0 $0 2143/0 $17,475/$0 Gregory D. Friedman 0 $0 2985/0 $30,843/$0 Emma N. Mason 0 $0 0/0 $0/$0 (1) All amounts reflect the 2% stock dividend in April of 1997. (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 1997, the Bank paid to Cook and Batista Co., L.P.A. legal fees in the amount of $130,982. The amount of Mr. 135 Batista's interest in such fees cannot be practicably determined. Mr. Koethe is the Chairman of The Board of The Lorain Printing Company. During 1997, the Bank paid to The Lorain Printing Company -9- 136 an amount of $128,007 for printing services and supplies. The amount of Mr. Koethe's interest in such payments cannot be practicably determined. Mr. Stanley G. Pijor entered into a Consulting Agreement with the Bank dated March 5, 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 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. 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 shall 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 judgment as to the past performance and expected further contribution. 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 the 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 performance goals. The recommendations of the Compensation Committee regarding base salaries and bonuses for all officers are subject 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 1997, 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 -10- 137 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 eligibleto participate on January 1 or July 1 after the attainment of age twenty-one (21) and completion of one year of service, as defined in the Plan. The Bank's 1997 contribution to the Plan was $31,981. The amount of contributions with respect to a specific person is not and cannot readily be calculated on an individual basis. 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 $384,000 to $397,000 as of December 31, 1997. 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. -11- 138 Employee's Annual Estimated Pension Final Average Payments Assuming Minimum of Annual Compensation 25 Years of Service $250,000* $81,238 200,000* 81,238 160,000 81,238 100,000 48,988 *The current annual compensation limit with respect to determining an employee's annual pension payment is currently limited by the Internal Revenue Code to $160,000. The Plan reflects the annual compensation limit and this results in a maximum annual pension payment of $81,238. Therefore, an employee's annual estimated pension payment for final average compensation levels of $160,000 and above remains at the $81,238 level. Pension benefits accrued prior to 1995 are grand fathered, if their calculated benefit is greater than $81,238. 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. James F. Kidd, Thomas P.Ryan and Gregory D. Friedman have thirty-three (33), thirty-six (36) and twelve (12) credited years of service respectively, under the provisions of the Plan. Mrs. Emma N. Mason has nineteen (19) credited years of service 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 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, Mr. Thomas P. Ryan and Mr. Gregory D. Friedman. The purpose of the SRA is to provide supplemental retirement benefits to Messrs. Kidd, Ryan and Friedman 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, Ryan and Friedman'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." Under the terms of their SRA, Messrs. Kidd, Ryan and Friedman 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. Messrs. Kidd, Ryan and Friedman 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, 1997, the monthly benefits that would be paid at normal retirement age, would be $10,133, $2,276 and $7,397 for Messrs. Kidd, Ryan and Friedman respectively. **Mr. Kidd's normal retirement date is November 1, 2004 **Mr. Ryan's normal retirement date is April 1, 2003 **Mr. Friedman's normal retirement date is August 1, 2015 -12- 140 PERFORMANCE GRAPH The graph which follows compares the five (5) year cumulative total return from investing $100 on December 31, 1992 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 1992 THROUGH 1997 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 12/31/92 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS. DECEMBER 31, - -------------------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------- LNB Bancorp, Inc. $100 $124 $150 $176 $192 $192 - -------------------------------------------------------------------------- S&P 500 Index $100 $110 $112 $153 $189 $252 - -------------------------------------------------------------------------- NASDAQ Bank Index $100 $114 $114 $169 $223 $377 - -------------------------------------------------------------------------- BENEFICIAL OWNERSHIP OF SHARES The following table reflects as of December 31, 1997, 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 669,494(1) 16.20% 457 Broadway Lorain, Ohio 44052 -13- 141 (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 87,971 shares; (b) sole investment power to purchase/sell, but no power to vote on 258,255 shares; (c)shared investment power with sole power to vote with respect to 37,173 shares; and (d) no investment power and no power to vote on 286,095 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, 1997) Sole Shared Total Amount Investment and Investment and of Beneficial Percent Name Voting Power Voting Power Ownership of Class James L. Bardoner 8,492 621 9,113 .22% Daniel P. Batista 23,318 45,363 68,681 1.67% Robert M. Campana 4,369 0 4,369 .11% Terry D. Goode 14,454 2,402 16,856 .41% Wellsley O. Gray 5,816 3,294 9,110 .22% James F. Kidd 48,715 0 48,715 1.18% David M. Koethe 53,500 183 53,683 1.30% Benjamin G. Norton 44,953 46,370 91,323 2.22% Stanley G. Pijor 57,518 32,982 90,500 2.19% Jeffrey F. Riddell 15,516 27,278 42,794 1.04% Thomas P. Ryan 32,592 1,268 33,860 .82% T. L. Smith, M.D. 11,901 9,110 21,011 .51% Eugene M. Sofranko 6,960 22,379 29,339 .71% Paul T. Stack 9,028 1,275 10,303 .25% Leo Weingarten 103,153 8,688 111,841 2.71% Executive Officers who are not Directors 84,285 392 84,677 2.05% ------- -------- ------- ------ All Directors and Executive Officers as a Group 524,570 201,605 726,175 17.61% ======= ======== ======= ====== 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 1997. 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. -14- 142 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. 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 1999 Annual Meeting, they must be received by the Corporation no later than December 1, 1998. 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 1997. 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, 1997 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 44052-1739. By Order of the Board of Directors /s/ Thomas P. Ryan Thomas P. Ryan Executive Vice President and Secretary/Treasurer -15- 145 [X] PLEASE MARK VOTES REVOCABLE PROXY AS IN THIS EXAMPLE LNB BANCORP, INC. PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 21, 1998 The undersigned hereby appoints James L. Bardoner, Daniel P. Batista and David M. Koethe, and each of them, with the power of substitution, proxies and agents of the undersigned to vote at the Annual Meeting of Shareholders of LNB Bancorp, Inc. (the "Bank"), to be held at The Lorain National Bank, 457 Broadway, Lorain, Ohio 44052 on April 21, 1998, at 10:00 a.m., and at any adjournment thereof, all shares of common stock of the Corporation which the undersigned would be entitled to vote if personnaly present for the following matters. The Board of Directors recommends a vote FOR each of the following: 1. ELECTION OF DIRECTORS for a three-year term expiring in 2001 (except as marked to the contrary below): For [ ] Withhold [ ] For All Except [ ] Daniel P. Batista, David M. Koethe, Stanley G. Pijor, Eugene M. Sofranko and Leo Weingarten INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark "For All Except" and write that (those) nominee's name(s) in the space provided below. _________________________________________________________________ 2. To transact such other business as properly may come before the meeting. In their discretion, the proxies are authorized to vote upon such other business as properly may come before the meeting. 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 Proposal 1. The undersigned acknowledges receipt of the Notice of Annual Meeting of Shareholders and the related Proxy Statement. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. 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 an authorized person. Please be sure to sign and date this Proxy in the box below. Date [ ] [ ] Shareholder sign above Co-holder (if any) sign above Detach above card, sign, date and mail in postage paid envelope provided. LNB BANCORP, INC. PLEASE ACT PROMPTLY SIGN, DATE & MAIL YOUR PROXY CARD TODAY 144 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1997) S - K Reference Number (23) Consent of Independent Accountants. 145 EXHIBIT 23 Consent of Independent Accountants The Board of Directors LNB Bancorp, Inc. We consent to incorporation by reference in the registration statements No.33-64034 on Form S-8 and No. 333-43441 on Form S-3 of LNB Bancorp, Inc. of our report dated January 27, 1998, relating to the consolidated balance sheets of LNB Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, 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, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of LNB Bancorp, Inc. /s/ KPMG Peat Marwick LLP Cleveland, Ohio March 27, 1998 146 LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 1997) S - K Reference Number (27) Financial Data Schedule EX-27 2
9 0000737210 LNB BANCORP, INC. 1000 U.S. 12-MOS DEC-31-1997 DEC-31-1997 1 24,273 134 0 0 19,336 96,038 96,861 331,031 4,168 490,217 410,655 28,950 3,582 2,045 0 0 4,222 40,763 490,217 28,272 6,740 144 35,156 12,814 12,990 22,166 750 0 17,387 9,832 6,482 0 0 6,482 1.56 1.55 5.20 515 461 0 8,764 4,116 849 151 4,168 3,852 0 316
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