-----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, UfCa8y/+crj6Bti7RPn54nOCFSMGAIMwN2e9SPFvVA6HjnGwFOBSMZMeYfrk17D6 QMEKy8fmB3sUu3POOc9yjw== 0000737210-99-000009.txt : 19990817 0000737210-99-000009.hdr.sgml : 19990817 ACCESSION NUMBER: 0000737210-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LNB BANCORP INC CENTRAL INDEX KEY: 0000737210 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341406303 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13203 FILM NUMBER: 99691738 BUSINESS ADDRESS: STREET 1: 457 BROADWAY CITY: LORAIN STATE: OH ZIP: 44052-1769 BUSINESS PHONE: 2162446000 10-Q 1 1 Form 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-13203 LNB Bancorp, Inc. (Exact name of the registrant as specified in its charter) Ohio 34-1406303 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 457 Broadway, Lorain, Ohio 44052 - 1769 (Address of principal executive offices) (Zip Code) (440) 244 - 6000 Registrant's telephone number, including area code Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at August 1, 1999: 4,122,775 shares Class of Common Stock: $1.00 par value 2 LNB Bancorp, Inc. Quarterly Report on Form 10-Q Quarter Ended June 30, 1999 Part I - Financial Information Item 1 - Financial Statements Interim financial information required by Requisition 210.10-01 of Regulation S-X is included in this Form 10-Q as referenced below: Page Number(s) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 5 Condensed Consolidated Statements of Cash Flows 9 Notes to the Condensed Consolidated Financial Statements 11 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 22 Part II - Other Information Item 1 - Legal Proceedings 23 Item 2 - Changes in Securities 23 Item 3 - Defaults upon Senior Securities 23 Item 4 - Submission of Matters to a Vote of Security Holders 23 Item 5 - Other Information 23 Item 6 - Exhibits and Reports on Form 8-K 23 Signatures 23 Exhibit Index 24 3 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS JUNE 30, DECEMBER 31, CONDENSED CONSOLIDATED BALANCE SHEETS 1999 1998 ------------- ------------- (Unaudited) (See Note 1) ASSETS: Cash and due from banks $ 25,427,000 $ 26,177,000 Federal funds sold and other interest- bearing instruments 12,849,000 6,624,000 Federal Home Loan Bank and Federal Reserve Bank stock, at cost 2,256,000 2,189,000 Securities: Available for sale, at fair value 75,061,000 78,128,000 Held to maturity, at cost (fair value $42,657,000 and $40,253,000, respectively) 44,543,000 38,202,000 ------------ ------------ Total Securities 121,860,000 118,519,000 ------------ ------------ Loans: Portfolio loans 399,867,000 359,475,000 Loans available for sale 10,976,000 10,391,000 ------------ ------------ Total Loans 410,843,000 369,866,000 Reserve for loan losses (3,774,000) (3,483,000) ------------ ------------ Net loans 407,069,000 366,383,000 ------------ ------------ Bank premises and equipment, net 11,224,000 10,989,000 Intangible assets 4,455,000 4,666,000 Accrued interest receivable 3,965,000 3,685,000 Other assets 3,412,000 3,303,000 Other real estate owned 209,000 1,400,000 ------------ ------------ TOTAL ASSETS $590,470,000 $541,746,000 ============ ============ STATEMENT CONTINUED ON NEXT PAGE 4 STATEMENT CONTINUED FROM PREVIOUS PAGE LIABILITIES AND SHAREHOLDERS' EQUITY: Noninterest-bearing deposits $ 82,760,000 $ 85,558,000 Interest-bearing deposits 381,417,000 358,290,000 ------------ ------------ Total deposits 464,177,000 443,848,000 ------------ ------------ Securities sold under repurchase agreements and other short-term borrowings 38,343,000 22,960,000 Federal Home Loan Bank advances 34,345,000 22,045,000 Accrued interest payable 1,656,000 1,487,000 Accrued taxes, expenses, and other liabilities 2,322,000 2,730,000 ------------ ------------ Total Liabilities 540,843,000 493,070,000 ------------ ------------ Shareholders' equity: Common stock $1.00 par: Shares authorized 5,000,000 Shares issued 4,222,775 and 4,222,575, respectively and Shares outstanding 4,122,775 and 4,122,575 respectively 4,223,000 4,223,000 Additional capital 22,604,000 22,602,000 Retained earnings 26,177,000 24,210,000 Accumulated other comprehensive income(loss) (477,000) 541,000 Treasury stock at cost, 100,000 shares (2,900,000) (2,900,000) ------------ ------------ Total Shareholders' Equity 49,627,000 48,676,000 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $590,470,000 $541,746,000 ============ ============ See notes to unaudited condensed consolidated financial statements. 5 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SIX MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS JUNE 30, OF INCOME (UNAUDITED) ------------------------ 1999 1998 INTEREST INCOME ------------------------ Interest and fees on loans: Taxable $16,429,000 $14,775,000 Tax-exempt 16,000 22,000 Interest and dividends on securities: Taxable 3,421,000 3,510,000 Tax-exempt 108,000 102,000 Interest on Federal funds sold and other interest-bearing instruments 85,000 94,000 ----------- ----------- TOTAL INTEREST INCOME 20,059,000 18,503,000 ----------- ----------- INTEREST EXPENSE: Interest on Certificates of Deposit of $100,000 and over 1,249,000 1,078,000 Interest on other deposits 4,920,000 5,155,000 Interest on securities sold under repurchase agreements and other short-term borrowings 528,000 552,000 Interest on Federal Home Loan Bank advances 617,000 65,000 ----------- ----------- TOTAL INTEREST EXPENSE 7,314,000 6,850,000 ----------- ----------- NET INTEREST INCOME 12,745,000 11,653,000 Provision for loan losses 700,000 425,000 NET INTEREST INCOME AFTER PROVISION ----------- ----------- FOR LOAN LOSSES 12,045,000 11,228,000 ----------- ----------- OTHER INCOME: Trust division income 1,074,000 1,026,000 Service charges on deposit accounts 1,526,000 1,294,000 Other charges, fees and exchanges 1,193,000 1,109,000 Other operating income 218,000 24,000 ----------- ----------- TOTAL OTHER INCOME 4,011,000 3,453,000 STATEMENT CONTINUED ON NEXT PAGE 6 STATEMENT CONTINUED FROM PREVIOUS PAGE OTHER EXPENSES: Salaries and employee benefits 4,915,000 4,503,000 Net occupancy expense of premises 790,000 671,000 Furniture and equipment expense 1,201,000 1,178,000 Amortization of intangible assets 210,000 224,000 Supplies and postage 509,000 543,000 FDIC deposit insurance premium 25,000 25,000 Ohio franchise tax 293,000 269,000 Other operating expenses 2,363,000 2,078,000 ------------ ----------- TOTAL OTHER EXPENSES 10,306,000 9,491,000 ------------ ----------- INCOME BEFORE FEDERAL INCOME TAXES 5,750,000 5,190,000 FEDERAL INCOME TAXES 1,954,000 1,758,000 ------------ ----------- NET INCOME $ 3,796,000 $ 3,432,000 ============ =========== PER SHARE DATA: BASIC EARNINGS PER SHARE $ .92 $ .83 ====== ====== DILUTED EARNINGS PER SHARE $ .92 $ .83 ====== ====== DIVIDENDS DECLARED PER SHARE $ .44 $ .40 ====== ====== See notes to unaudited condensed consolidated financial statements. 7 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THREE MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS JUNE 30, OF INCOME (UNAUDITED) ------------------------ 1999 1998 INTEREST INCOME ----------------------- Interest and fees on loans: Taxable $ 8,457,000 $ 7,491,000 Tax-exempt 8,000 11,000 Interest and dividends on securities: Taxable 1,710,000 1,790,000 Tax-exempt 54,000 51,000 Interest on Federal funds sold and other interest-bearing instruments 52,000 34,000 ----------- ----------- TOTAL INTEREST INCOME 10,281,000 9,377,000 ----------- ----------- INTEREST EXPENSE: Interest on Certificates of Deposit of $100,000 and over 638,000 521,000 Interest on other deposits 2,483,000 2,573,000 Interest on securities sold under repurchase agreements and other short-term borrowings 291,000 285,000 Interest on Federal Home Loan Bank advances 327,000 36,000 ----------- ----------- TOTAL INTEREST EXPENSE 3,739,000 3,415,000 ----------- ----------- NET INTEREST INCOME 6,542,000 5,962,000 Provision for loan losses 500,000 238,000 NET INTEREST INCOME AFTER PROVISION ----------- ----------- FOR LOAN LOSSES 6,042,000 5,724,000 ----------- ----------- OTHER INCOME: Trust division income 604,000 589,000 Service charges on deposit accounts 849,000 655,000 Other charges, fees and exchanges 601,000 572,000 Other operating income 207,000 15,000 ----------- ----------- TOTAL OTHER INCOME 2,261,000 1,831,000 STATEMENT CONTINUED ON NEXT PAGE 8 STATEMENT CONTINUED FROM PREVIOUS PAGE OTHER EXPENSES: Salaries and employee benefits 2,520,000 2,348,000 Net occupancy expense of premises 398,000 319,000 Furniture and equipment expense 593,000 600,000 Supplies and postage 253,000 288,000 FDIC deposit insurance premium 12,000 12,000 Ohio franchise tax 142,000 134,000 Amortization of intangible assets 105,000 112,000 Other operating expenses 1,275,000 1,096,000 ------------ ------------ TOTAL OTHER EXPENSES 5,298,000 4,909,000 ------------ ------------ INCOME BEFORE FEDERAL INCOME TAXES 3,005,000 2,646,000 FEDERAL INCOME TAXES 1 042,000 892,000 ------------ ------------ NET INCOME $ 1,963,000 $ 1,754,000 ============ ============ PER SHARE DATA: BASIC EARNINGS PER SHARE $ .48 $ .42 ====== ====== DILUTED EARNINGS PER SHARE $ .48 $ .42 ====== ====== DIVIDENDS DECLARED PER SHARE $ .22 $ .20 ====== ====== See notes to unaudited condensed consolidated financial statements. 9 FORM 10-Q LNB BANCORP, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SIX MONTHS ENDED CONDENSED CONSOLIDATED STATEMENTS JUNE 30, OF CASH FLOWS (UNAUDITED) ------------------------- 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: ------------------------- Interest received $19,999,000 $18,366,000 Other income received 3,943,000 3,242,000 Interest paid (7,145,000) (6,720,000) Cash paid for salaries and employee benefits (4,707,000) (4,202,000) Net occupancy expense of premises paid (589,000) (485,000) Furniture and equipment expenses paid (418,000) (402,000) Cash paid for supplies and postage (509,000) (543,000) Cash paid for other operating expenses (2,466,000) (2,018,000) Federal income taxes paid (2,010,000) (1,839,000) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,098,000 5,399,000 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available for sale 11,497,000 17,307,000 Proceeds from maturities of securities held to maturity 122,000 4,401,000 Purchases of securities held to maturity (6,665,000) (155,000) Purchases of securities available for sale (9,471,000) (24,820,000) Net decrease in credit card loans 378,000 544,000 Net (increase) in long-term loans (41,804,000) (13,485,000) Purchases of bank premises, equipment and software (821,000) (458,000) Proceeds from sales of bank premises, and equipment -0- -0- Proceeds from liquidation of OREO 1,191,000 -0- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (45,573,000) (16,666,000) ----------- ----------- STATEMENT CONTINUED ON NEXT PAGE 10 STATEMENT CONTINUED FROM PREVIOUS PAGE CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand and other noninterest-bearing deposits (3,924,000) 9,245,000 Net increase in savings and passbook deposits 7,133,000 560,000 Net increase in time deposits 15,994,000 12,162,000 Net (decrease) in securities sold under repurchase agreements and other short-term borrowings (15,383,000) (5,147,000) Payment on line of credit -0- (600,000) Proceeds from Federal Home Loan Bank advances 12,300,000 -0- Purchase of Treasury Stock -0- (57,000) Proceeds from exercise of stock options 2,000 1,000 Dividends paid (1,938,000) (1,731,000) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 44,950,000 14,433,000 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 5,475,000 3,166,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32,801,000 24,407,000 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $38,276,000 $27,573,000 =========== =========== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $ 3,796,000 $ 3,432,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 984,000 962,000 Amortization of deferred loan fees and costs, net (139,000) 330,000 Provision for loan losses 700,000 425,000 Amortization of intangible assets 211,000 224,000 (Increase)in accrued interest receivable (280,000) (124,000) (Increase) in other assets (260,000) (2,000) Increase in accrued interest payable 167,000 130,000 Increase in accrued taxes, expenses and other liabilities 827,000 156,000 Others, net 90,000 (134,000) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,098,000 $ 5,399,000 =========== =========== See notes to unaudited condensed consolidated financial statements. 11 FORM 10-Q LNB Bancorp, Inc. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTRODUCTION The following areas of discussion pertain to the unaudited condensed consolidated financial statements of LNB Bancorp, Inc. (The Parent Company) and its wholly-owned subsidiary, Lorain National Bank (The Bank) at June 30, 1999, compared to December 31, 1998 and the results of its operations and cash flows for the three and six months ending June 30, 1999 compared to the same period in 1998. The term "the Corporation" refers to LNB Bancorp, Inc. and its wholly-owned subsidiary. It is the intent of this discussion to provide the reader with a more thorough understanding of the unaudited condensed consolidated financial statements and supporting schedules, and should be read in conjunction with those unaudited condensed consolidated financial statements. This report contains statements that constitute forward-looking statements and are subject to certain risks and uncertainties that could cause actual facts to differ materially from those presented in this report. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this report. LNB Bancorp, Inc. is not aware of any trends, events, or uncertainties that might have a material effect on the soundness of operations; neither is LNB Bancorp, Inc. aware of any proposed recommendations by regulatory authorities which would have a similar effect if implemented. BASIS OF PRESENTATION The unaudited condensed consolidated balance sheet as of June 30, 1999, the unaudited condensed consolidated statements of income and the unaudited condensed consolidated statements of cash flows for the three and six months ended June 30, 1999 and 1998 are prepared in accordance with generally accepted accounting principles for interim financial information. The above mentioned statements reflect all normal and recurring adjustments which are, in the opinion of Management, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The consolidated balance sheet at December 31, 1998 has been taken from the audited Financial Statements and condensed. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Corporation's December 31, 1998 Annual Report to Shareholders. The results of operations for the period ended June 30, 1999 are not necessarily indicative of the operating results for the full year. 12 RESERVE FOR LOAN LOSSES Because some loans may not be repaid in full, a reserve for loan losses is recorded. This reserve is increased by provisions charged to earnings and is reduced by loan charge-offs, net of recoveries. Estimating the risk of loss on any loan is necessarily subjective. Accordingly, the reserve is maintained by Management at a level considered adequate to cover probable loan losses that are currently anticipated based on Management's evaluation of several key factors including information about specific borrower situations, their financial position and collateral values, current economic conditions, changes in the mix and levels of the various types of loans, past charge-off experience and other pertinent information. The reserve for loan losses is based on estimates using currently available information, and ultimate losses may vary from current estimates due to changes in circumstances. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. While Management may periodically allocate portions of the reserve for specific problem situations, the entire reserve is available for any charge-offs that may occur. Charge-offs are made against the reserve for loan losses when Management concludes that it is probable that all or a portion of a loan is uncollectible. After a loan is charged-off, collection efforts continue and future recoveries may occur. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of the expected future cash flows discounted at the loans initial effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. The impairment reserve is established by either an allocation of the reserve for loan losses or by a provision for loan losses, depending upon the adequacy of the reserve for loan losses. RECLASSIFICATIONS Certain 1998 amounts have been reclassified to conform to 1999 presentation. 13 2. EARNINGS PER SHARE DATA Earnings per share is calculated as follows: For the 6 Months ended June 30, 1999 Income Shares Per-Share (Numerator) (Denominator) Amount -------------------------------------- Net Income $3,796,000 Basic EPS Income available to common stockholders $3,796,000 4,122,688 $ .92 ===== Effect of Dilutive Securities Incentive Stock Options -0- 8,437 ---------- --------- Dilutive EPS Income available to common stockholders + assumed conversions $3,796,000 4,131,125 $ .92 ========== ========= ===== For the 6 Months ended June 30, 1998 Income Shares Per-Share (Numerator) (Denominator) Amount -------------------------------------- Net Income $3,432,000 Basic EPS Income available to common stockholders $3,432,000 4,123,078 $ .83 ===== Effect of Dilutive Securities Incentive Stock Options -0- 9,878 ---------- --------- Dilutive EPS Income available to common stockholders + assumed conversions $3,432,000 4,132,956 $ .83 ========== ========= ===== For the 3 Months ended June 30, 1999 Income Shares Per-Share (Numerator) (Denominator) Amount -------------------------------------- Net Income $1,963,000 Basic EPS Income available to common stockholders $1,963,000 4,122,737 $ .48 ===== Effect of Dilutive Securities Incentive Stock Options -0- 8,070 ---------- --------- Dilutive EPS Income available to common stockholders + assumed conversions $1,963,000 4,130,807 $ .48 ========== ========= ===== 14 For the 3 Months ended June 30, 1998 Income Shares Per-Share (Numerator) (Denominator) Amount -------------------------------------- Net Income $1,754,000 Basic EPS Income available to common stockholders $1,754,000 4,122,475 $ .42 ===== Effect of Dilutive Securities Incentive Stock Options -0- 9,390 ---------- --------- Dilutive EPS Income available to common stockholders + assumed conversions $1,754,000 4,131,865 $ .42 ========== ========= ===== 3. COMPREHENSIVE INCOME The Corporation adopted SFAS No. 130 "Reporting Comprehensive Income" on January 1, 1998. This statement requires companies to report all items that are recognized as components of comprehensive income under accounting standards. As required, the Corporation displays the accumulated balance of other comprehensive income as a separate component of shareholders' equity. The Corporation's comprehensive income for the six months ended June 30, 1999 and 1998 are as follows: For the six months ended June 30, 1999 1998 --------------------------------- Net income $3,796,000 $3,432,000 Other comprehensive income: Change in unrealized gain on securities available for sale, net of tax (credit) of $(525,000) and $49,000 (1,018,000) 96,000 ----------- ----------- Comprehensive Income $2,778,000 $3,528,000 The Corporation's comprehensive income for the three months ended June 30, 1999 and 1998 are as follows: For the three months ended June 30, 1999 1998 ----------------------------------- Net income $1,963,000 $1,754,000 Other comprehensive income: Change in unrealized gain on securities available for sale, net of tax (credit) of $(322,000) and $14,000 (624,000) 27,000 ----------- ------------ Comprehensive Income $1,339,000 $1,781,000 15 4. DIVIDEND REINVESTMENT AND CASH STOCK PURCHASE PLAN The Board of Directors adopted a dividend reinvestment and cash stock purchase plan on November 18, 1997. Under the plan, the first dividend reinvestment and cash stock purchase date was April 1, 1998. The plan allows shareholders to elect to use their quarterly cash dividends to purchase shares of LNB Bancorp, Inc. common stock. Additionally, cash can be contributed directly to the plan for the purchase of shares of common stock with a quarterly limit of $5,000. The dividend reinvestment plan authorized the sale of 150,000 shares of the Corporation's authorized but previously unissued common shares to shareholders who choose to invest all or a portion of their cash dividends plus additional cash payments. No shares were issued by the Corporation pursuant to the plan in the first half of 1999. In the first half of 1999, stock was purchased in the open market at the then current market price. 16 PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS FINANCIAL CONDITION Total assets of the Corporation increased $48,724,000 during the first half of 1999, to $590,470,000. This growth was funded by increases in savings deposits, certificates of deposit, federal funds purchased and Federal Home Loan Bank advances. Federal funds sold and other interest bearing investments increased by $6,225,000 during the first six months of 1999. Total securities increased $3,341,000 ending the first half at $121,860,000. At June 30, 1999 gross unrealized gains (losses) in the investment portfolio were approximately $62,000 and $(1,947,000), respectively. Net loans increased $40,686,000 during the first half to $407,069,000 at June 30, 1999, for a 11% increase. Consumer and commercial loan growth was strong accounting for 45% and 44% of total loan growth while mortgage loans accounted for 11% of total loan growth during the six months ended June 30, 1999. This loan increase was supported by a spring/summer home equity loan sale program. This home equity sale program resulted in new loans totaling over $2 million. The reserve for loan losses ended the quarter at $3,774,000 supported by a provision for loan losses of $700,000, recoveries of $118,000 and loan charge-offs of $528,000. The reserve for loan losses as a percentage of ending loans was .94% and .92% at December 31, 1998 and June 30, 1999, respectively. Corporate management believes that the reserve for loan losses as a percentage of ending loans at June 30, 1999 remains at an appropriate level. The ratio of the reserve for loan losses to nonperforming assets improved to 764.0% as of June 30, 1999. Also, Corporate management believes that the current level of the reserve for loan losses is adequate based upon quantitative analysis of identified risks and analysis of historical trends, and probable losses inherent in the loan portfolio at June 30, 1999. Nonperforming assets at June 30, 1999 totaled $494,000, down from $1,481,000 at March 31, 1999. The second quarter decrease in nonperforming assets of $987,000 resulted from loans being brought current in the amount of $423,000, loans charged-off in the amount of $105,000 liquidations of nonaccrual loans of $231,000, liquidations of other real estate owned of $424,000 and increases in nonaccrual loans of $196,000. The level of nonperforming assets decreased $1,006,000 during the first quarter 1999. The decrease in nonaccrual loans is due to decreases in nonaccrual principal balances of $168,000 which have been paid off or brought current, loans charged-off in the amount of $76,000 and liquidations of nonaccrual loans of $242,000 and increases in nonaccrual principal balances of $247,000. The decrease in nonaccrual loans in the first quarter of 1999 was due primarily to four commercial loan customers and six personal loan customers. The decrease in Other Real Estate Owned in the amount of $767,000 resulted from liquidation of assets. The level of nonperforming assets remains at relatively low levels and Corporate management believes nonperforming assets are well collateralized. 17 The table below presents the level of nonperforming assets at the end of the last four calendar quarters. Amounts in thousands 06/30/99 03/31/99 12/31/98 09/30/98 -------- -------- -------- -------- Nonperforming Assets: Nonaccrual $ 285 $ 848 $ 1,087 $ 2,707 Restructured 0 0 0 0 Other Real Estate Owned 209 633 1,400 0 ------ ------ ------ ------ Total Nonperforming Assets $ 494 $ 1,481 $ 2,487 $ 2,707 ====== ====== ====== ====== Reserve for possible loan losses to total nonperforming assets 764.0% 235.2% 140.1% 172.7% ====== ====== ====== ====== Accruing loans past due 90 days $ 494 $ 479 $ 213 $ 295 ====== ====== ====== ====== Potential problem loans are those loans identified on management's watch list in which Management has some doubt as to the borrower's ability to comply with the present repayment terms and loans which Management is actively monitoring due to changes in the borrower's financial condition. At June 30, 1999, potential problem loans totaled $3,199,000, an increase of $258,000 from the December 31, 1998 balance. The Corporation's credit policies are reviewed and modified on an ongoing basis in order to remain suitable for the management of credit risk within the loan portfolio as conditions change. At June 30, 1999 there are no significant concentrations of credit in the loan portfolio. The Corporation had outstanding loan and credit commitments to make loans totaling $98,525,000 and $76,927,000 at June 30, 1999 and December 31, 1998, respectively. The increase in outstanding loan commitments results in part from an increase in the unused portion of home equity lines of credits from a home equity loan sale program in the second quarter of 1999. Mortgage and commercial construction loan demand increased in the second quarter of 1999 as seasonal weather conditions improved and the construction season began. Consumer loan demand increased in the second quarter as demand for home improvement and automobile loans increased. Total deposits increased $20,329,000 during the first half to $464,177,000. Noninterest-bearing deposits decreased to $82,760,000, at June 30, 1999 for a decrease of $2,798,000, while interest-bearing deposits climbed to $381,417,000 for an increase of $23,127,000. Federal funds purchased and securities sold under agreements to repurchase increased $15,383,000 during the first half. Due to the volatility of customer repurchase agreements, most funds generated by repurchase activity enter the Corporation's earning assets as short-term investments. LIQUIDITY Liquidity measures a corporation's ability to generate cash or otherwise obtain funds at reasonable prices to fund commitments to borrowers as well as the demand of depositors and debt holders. Principal internal sources of liquidity for the Corporation and the Bank are cash and cash equivalents, Federal funds sold, and the maturity structures of investment 18 securities and portfolio loans. Securities and loans available for sale provide another source of liquidity through the cash flows of these interest-bearing assets as they mature or are sold. The Corporation continues to maintain a relatively high liquid position in order to take advantage of interest rate fluctuations. As of June 30, 1999, short-term security investments with maturities of one year or less totalled $17,329,000, which represented 14.2% of total securities. Adding cash and due from banks of $25,427,000, and Federal Funds sold and other interest bearing instruments of $12,849,000, total liquid assets represented 9.4% of total assets. CAPITAL RESOURCES LNB Bancorp, Inc. continues to maintain a strong capital position. Total shareholders' equity increased to $49,627,000, at June 30, 1999. The increase resulted primarily from $3,796,000 of net income generated from the first half of operations less a cash dividend declared to shareholders of $1,814,000. The slight increase in interest rates experienced in the first half of 1999 has caused a decrease in the overall market value of available for sale securities which resulted in a decrease in shareholders' equity of $1,018,000 for the six months ended June 30, 1999. As of June 30, 1999, the LNB Bancorp, Inc. held 100,000 shares of common stock as treasury stock. LNB Bancorp, Inc. purchased 2,004 of these shares in the first quarter of 1998 and 97,996 shares in 1997 for a total cost of $2,900,000. The Corporation continues to monitor growth to stay within the constraints established by the regulatory authorities. Under Federal banking regulations, an institution is deemed to be well-capitalized if it has a Risk-based Tier 1 capital ratio of 6.00 percent or greater, a Risk-based Total capital ratio of 10.00 percent or greater and a Leverage ratio of 5.00 percent or greater. The Corporation's Risk-based capital and Leverage ratios along with the ratios required to be adequately capitalized have exceeded the ratios for a well-capitalized financial institution for all periods presented above. The Corporation's capital and leverage ratios as of June 30, 1999 and 1998 follow together with those ratios required for the Corporation to be considered adequately capitalized. June 30, --------------------- 1999 1998 ------ ------ Tier I capital ratio 11.64% 13.19% Required Tier I capital ratio 4.00% 4.00% Total capital ratio 12.61% 14.44% Required total capital ratio 8.00% 8.00% Leverage ratio 8.21% 8.47% Required leverage ratio 3.00% 3.00% The Corporation regularly evaluates acquisition opportunities and conducts due diligence activities in connection with possible acquisition in markets near or within the Corporation's current geographic market. As a result, acquisition discussions and, in some cases, take place and future acquisitions could occur. Corporate management believes that it's current capital resources are sufficient to support any foreseeable acquisition activity. 19 RESULTS OF OPERATIONS Interest and fees on loans for the first half of 1999 increased $1,648,000 when compared to the first half of 1998. Increased loan income was the result of the impact of increases in the loan portfolio of $40,686,000 offset slightly by decreases in interest rates. Interest and dividends on securities was $3,529,000 for the first half of 1999 for a decrease of $83,000 over the same period in 1998. Interest and dividends on securities represented 17.6% of total interest income at June 30, 1999 compared to 19.5% at June 30, 1998. Interest on Federal funds sold and other interest bearing instruments was $85,000 at June 30, 1999 compared to $94,000 at June 30, 1998. The decrease resulted from lower interest rates plus a decrease in the average balance invested in these forms of financial instruments. Total interest expense increased by $464,000 when compared to the first half of 1998. The interest expense increase was fueled by an increase in interest expense from Federal Home Loan Bank advances of $552,000, offset by decreases in deposit account interest of $64,000. Total interest expense for the first half of 1999 was impacted by decreases in interest rates paid on savings accounts and certificate of deposit accounts when compared to the first half of 1998. Total other income increased by $558,000 when compared to the first half of 1998. This increase resulted from increases in income from fiduciary fees of $48,000, increases in service charges of $232,000, increases in other service charges, exchanges and fees of $84,000 and a non-recurring increase on gain on sale of building of $158,000. The Corporation continuously monitors noninterest expenses for greater profitability. The entire staff is geared to improving productivity at all levels. Noninterest expense for the six months ended June 30, 1999 was $10,306,000, 8.6% above the first six months of 1998. This increase was due primarily to certain loan collection expenses incurred in the first half of 1999, increases in salaries and benefits, increases in credit card and merchant expenses plus the operating expenses of one additional branch office which was placed in service in June of 1998. The effective tax rate increased slightly from 33.9% during the first half of 1998 to 34.0% during the first half of 1999. The increase in the effective tax rate is due primarily to the decreases in tax exempt interest income to total interest income. Net income was $3,796,000 and $3,432,000 for the six months ended June 30, 1999 and 1998, respectively. Net income per basic and diluted share was $.92 and $.83 for the six months ended June 30, 1999 and 1998, respectively. YEAR 2000 ISSUE Several of the Corporation's and Bank's regulators including the Securities 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 has developed an implementation plan to resolve the issue. The Year 2000 problem is the 20 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 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 1998 through 1999 will not exceed $250,000. 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 year to have a material effect on the financial position, liquidity or results of operations. 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 developed strategies and plans to test and validate that these systems are year 2000 compliant. The Corporation has completed successful upgrades, testing and validation of internal mission critical systems and they are Y2K compliant. The Corporation's customer awareness program includes providing: seminars to the business and non-profit entities, Year 2000 information on statements and maintaining a phone number for customer inquiries. The Corporation provides quarterly updates to the Board of Directors regarding the status of the year 2000 issue. The project completion date for the year 2000 issue is slated for September, 1999. Financial institutions may experience increases in problem loans and credit losses in the event that borrowers fail to properly respond to the "Year 2000" issue. Cost of funds may become greater, if customers react to publicity about this issue by withdrawing deposits. Accordingly, the Corporation has formed an internal task force to assess potential problems relating to credit, liquidity, and third party risk, and where appropriate, develop contingency plans. This task force is conducting a survey of significant credit and deposit relationships to determine their "Year 2000" readiness and to evaluate the potential of credit and liquidity risk to the Corporation. Also, the "Year 2000" issue 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. Based upon testing of mission critical hardware and software, the Corporation does not anticipate that it will have to rely on a contingency plan relating to these areas. However, the Corporation is in the process of developing a contingency plan that would cover the failure of mission critical hardware and software. The contingency plan is also being developed to cover Y2K failure(s) that might result from a failure(s) outside of the control of the Corporation; such as a utility company failure. The Corporation's contingency plan for Y2K failure of its core processing systems will be to handle and process customer transactions manually until the system failure is corrected. In the most reasonably likely worst case scenario where any of the Corporation's mission critical systems, either internal or external, would fail, the Corporation will be operating in a manual mode. In preparation for the unlikely event of the 21 most reasonably likely worst case scenario, the Corporation is in the process of planning and training all of its' employees and will have all customer records backed up to ensure the accuracy of our customer records. IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS Corporate management is not aware of any current recommendations by the Financial Accounting Standards Board or by regulatory authorities which, if they were implemented, would have a material effect on the liquidity, capital resources or operations of the Corporation. 22 PART I - OTHER INFORMATION ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market indices such as interest rates, foreign exchange rates and equity prices. The Corporation's principal market risk exposure is interest rate risk, with no material impact on earnings from changes in foreign exchange rates or equity prices. There have been no material changes in the asset and liability mix of the Corporation since December 31, 1998, which would impact the Corporation's level of market risk. Interest rate risk is the exposure to changes in market interest rates. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The Corporation monitors the interest rate sensitivity of its on - and - off balance sheet positions by examining its near-term sensitivity and its longer term gap position. Corporate management has determined no significant changes in the Corporation's interest rate risk profile since December 31, 1998. With the Federal Reserve Board's recent announcement to increase the federal funds rate to 5.25% on June 29, 1999, the Corporation does not anticipate any changes in net interest margin. Also, Corporate management does not anticipate any significant changes in the Corporation's market risk or interest rate risk profiles. 23 Part II - OTHER INFORMATION ITEM 1 - Legal Proceedings None ITEM 2 - Changes in Securities None ITEM 3 - Defaults Upon Senior Securities None ITEM 4 - Submission of Matters to a Vote of Security Holders None ITEM 5 - Other Information None ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibit (11) - Computation of Shares Used for Earnings Per Share Calculation. Exhibit (13) - Second Quarter Report to shareholders of LNB Bancorp, Inc., June 30, 1999. (b) Reports on Form 8-K There were no reports on Form 8-K filed for the six months ended June 30, 1999. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LNB BANCORP, INC. (registrant) Date: August 16, 1999 /s/ Gregory D. Friedman _________________________ Gregory D. Friedman, Senior Vice President, Chief Operating Officer and Chief Financial Officer Date: August 16, 1999 /s/ Mitchell J. Fallis _________________________ Mitchell J. Fallis, Vice President and Chief Accounting Officer 24 LNB Bancorp, Inc. Form 10-Q Exhibit Index Pursuant to Item 601 (a) of Regulation S-K S-K Reference Exhibit (10) Material Contract Amended Supplemental Retirement Agreement by and between James F. Kidd and The Lorain National Bank dated July 30, 1999. (11) Computation of Shares Used for Earnings Per Share Calculations Footnote 2 Earnings Per Share on pages 12- 13 of this Form 10Q is incorporated by reference. (12) Second Quarter Report to Shareholders of LNB Bancorp, Inc. June 30, 1999 - EDGAR Version (27) Financial Data Schedule 25 LNB Bancorp, Inc. Exhibit to Form 10-Q (For the six months ended June 30, 1999) S - K Reference Number (10) Amended Supplemental Retirement Agreement by and between James F. Kidd and the Lorain National Bank dated July 30, 1999. 26 SUPPLEMENTAL RETIREMENT AGREEMENT FOR JAMES F. KIDD THIS AGREEMENT, made and entered into this 15th day of June, 1999, by and between LORAIN NATIONAL BANK (hereinafter referred to as the "Bank"), a national banking association organized and existing under the laws of the United States, whose principal place of business is Lorain, Ohio, and JAMES F. KIDD (hereinafter referred to as the "Executive"). WHEREAS, the Executive has rendered valuable services to the Bank for many years and it is the desire of the Bank to provide him with certain Supplemental Retirement Benefits in addition to the retirement benefits provided to him under the Lorain National Bank Retirement Pension Plan; and WHEREAS, the Executive has performed his duties in a capable and efficient manner, resulting in substantial growth and progress to the Bank; and WHEREAS, the Bank desires to retain the services of the Executive, and realizes that if the Executive were to leave the Bank it could suffer a substantial financial loss; and WHEREAS, the Executive is willing to continue in the employ of the Bank if the Bank will agree to pay certain benefits in accordance with the provisions and conditions hereinafter set forth; and WHEREAS, Bank and Executive entered into a Supplemental Retirement Agreement dated July 30, 1996, and amended March 3, 1999; and WHEREAS, The Board of Directors of Bank has authorized the Bank to enter into a new and restated Supplemental Retirement Agreement with Executive. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein, this Agreement is to be effective as of June 1, 1999, and the parties agree as follows: 1. Employment of the Executive The Executive shall continue to perform duties for the Bank in such senior executive capacity as its Board of Directors may designate from time to time. The Executive's employment shall continue until terminated pursuant to Employment Agreement entered into between Bank and Executive, dated September 11, 1995. The Executive shall devote his best efforts to the performance of his duties for the Bank. 2. Compensation The Executive shall be compensated for the performance of his duties as provided for in the above referred to Employment Agreement. 3. Supplemental Retirement Benefit If the Executive's employment with Bank should cease for any reason other than discharge for cause (as hereinafter defined), the Executive or his beneficiary, as the case may be, shall be entitled to receive the 27 Supplemental Retirement Benefit or a form thereof. (a) Retirement If the Executive remains in the continuous employ of the Bank and retires from active employment with the Bank on or after January 1, 2000, the Executive and/or his beneficiary will be entitled to receive a Supplemental Retirement Benefit in the amount of Fifty Three Thousand Four Hundred Seventy Four Dollars ($53,474.00), per annum for a period of ten (10) years. Provided Executive has retired by said date, the first annual payment shall be due and payable to Executive on March 1, 2000, and thereafter payable on the first day of March of each year until March 1, 2009, which shall be the date of payment of the last installment. In the event Executive has not retired by March 1, 2000, then in that event, the first annual payment shall be due and payable on the first day of the second month following his retirement, and thereafter payable on the first day of the same month each year until Executive shall have received ten (10) annual payments. (b) Death Benefit In the event the Executive should die at any time after the date of this Agreement, he shall be entitled to the full benefit as provided for in subparagraph (a) hereof, and any amounts due or remaining to be paid shall be paid to such beneficiary or beneficiaries as the Executive may have designated by filing with the Bank a notice in writing in a form acceptable to the Bank. In the absence of any such designation, such unpaid amounts shall be paid to the Executive's surviving spouse, or, if the Executive should die without a spouse surviving, to the Executive's estate, and shall be payable in the same manner as provided for in subparagraph (a) hereof. (c) Discharge Without Cause If the Executive is discharged without cause, the Executive shall be entitled to receive the Supplemental Retirement Benefit provided for in subparagraph (a) hereof. Supplemental Retirement Benefit payments shall commence to be paid to Executive on March 1, 2000, and thereafter at the same time and in the same amounts as provided for in subparagraph (a) above. (d) Resignation Due to Change in Control In the event the Executive resigns due to a change in control of the Bank, the Supplemental Retirement Benefit shall be the total amount payable for the 10-year period as provided for in paragraph (a) above reduced by a 6% "present value" discount and payable to Executive within sixty (60) days of his resignation. For purposes of this Agreement, the term "discharge without cause" shall mean a termination of the Executive's employment by reason of his commission of any material act of dishonesty during his employment, or breach of the terms of his Employment Agreement, which, in the good faith opinion of the Board of Directors of the Bank, adversely affects the interests of the Bank or his conviction by a court of last resort of a felony involving moral turpitude committed during his employment. The Agreement does not contain a provision with respect to "permanent disability" as Bank has in place a plan of compensation and benefits for 28 employees who become permanently disabled during employment with Bank, and to which Executive is entitled. It is intended that the events which shall give rise to an entitlement on the part of the Executive or his beneficiary to receive the Supplemental Retirement Benefit or a form thereof shall include: (i) The retirement of the Executive on or after January 1, 2000. (ii) The death of the Executive. (iii) Discharge of the Executive without cause. (iv) Resignation due to change in control of the Bank. For purposes of this Agreement, "change in control of the Bank" shall mean the occurrence of any one of the following events: (i.) Individuals who, on August 1, 1995, constitute the Employer's Board of Directors (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Employer's Board of Directors, provided that any person becoming a director subsequent to August 1, 1995, whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Employer in which such person is named as a nominee for director, without written objection by such Incumbent Directors to such nomination) shall be deemed to be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Employer initially as a result of an actual or threatened election contest with respect to directors of any other actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies by or on behalf of any persons other than the Board shall be deemed to be an Incumbent Director; (ii.) Any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Employer representing 15% or more of the combined voting power of the Employer's then outstanding securities eligible to vote for the election of the Board (the "Employer Voting Securities"); provided, however, that the event described in this paragraph 2 shall not be deemed to be a Change in Control of the Employer by virtue of any of the following acquisitions: (a) by the Employer or any Subsidiary, (b) by any employee benefit plan sponsored or maintained by the Employer or any Subsidiary, or by an employee stock benefit trust created by the Employer or any Subsidiary, by any underwriter temporarily holding securities pursuant to an offering of such securities; or (d) a transaction (other than one described in 3 below) in which Employer Voting Securities are acquired from the Employer, if a majority of the Incumbent Directors approves a resolution providing expressly that the acquisition pursuant to this clause (d) does not constitute a Change in Control under this paragraph 2; (iii.) The consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Employer, or any of its Subsidiaries that requires the approval of the Employer's shareholders, whether for such transaction or the issuance of securities 29 in the transaction (a "Business Combination"), unless immediately following such Business Combination: (a) more than 50% of the total voting power of the corporation resulting from the consummation of such Business Combination (the "Surviving Corporation"), or if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Employer Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, represented by shares into which such Employer Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Employer Voting Securities among the holders thereof immediately prior to the Business Combination, (b) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation or any employee stock benefit trust created by the surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 15% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation); and at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval for the execution of the initial agreement providing for such Business Combination (any Business Combination must satisfy the criteria specified in (a), (b) and above so as to not constitute a "Change in Control of the Corporation"); or (iv.) The occurrence of a complete liquidation or dissolution of the Employer or any of its Subsidiaries, or a sale of all or substantially all of the assets of the Employer, or any of its Subsidiaries. Notwithstanding the foregoing, a Change in Control of the Employer shall not be deemed to occur solely because any persons acquire beneficial ownership of more than 15% of the Employer Voting Securities as a result of the acquisition of Employer Voting Securities by the Employer, which reduces the number of Employer Voting Securities outstanding; provided, that if after such acquisition by the Employer, such person becomes the beneficial owner of additional Employer Voting Securities that increases the percentage of outstanding Employer Voting Securities beneficially owned by such person, a Change in Control of the Employer shall then occur. 4. Non-alienation of Benefits The right of the Executive, or any other person, to the payment of benefits under this Agreement shall not be assigned, transferred, pledged or encumbered, any attempt to do so shall be void. 5. Executive's Rights Under This Agreement to be Those of an Unsecured Creditor of the Bank The rights of the Executive under this Agreement, and of any beneficiary of the Executive, shall be solely those of an unsecured creditor of the Bank. Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind or a fiduciary relationship between the Bank and the Executive or his beneficiaries. Any funds, insurance contracts or other assets of the Bank, whether designated by the 30 Bank to provide the benefits contemplated herein or not, shall at all times continue to be a part of the general funds of the Bank and no person other than the Bank shall, by virtue of this Agreement, have any interest in such funds or assets. 6. General Provisions This Agreement shall not be deemed to constitute a contract of employment between the parties, nor shall any provisions hereof restrict the right of the Bank to terminate the Executive's services or restrict the right of the Executive to terminate his services. The Board of Directors shall have the full power and authority to interpret, construe and administer this Agreement, and all actions taken by the Board of Directors in good faith shall be binding and conclusive on all persons concerned. No member of the Board of Directors shall be liable to any person or any action taken or omitted in connection with the interpretation or administration of this Agreement unless attributable to his own willful misconduct or lack of good faith. This Agreement shall be binding upon and inure to the benefit of the Bank, its successors and assigns, and the Executive, his heirs, executors, administrators and legal representatives. This Agreement shall be construed in accordance with and governed by the laws of the State of Ohio. IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto set his hand as of the date first above written. IN THE PRESENCE OF: BANK LORAIN NATIONAL BANK: /s/Daniel Batista /s/Stanley G. Pijor _____________________________ BY:________________________ Chairman /s/Suzanne M. Ludwig _____________________________ EXECUTIVE /s/Daniel Batista /s/James F. Kidd _____________________________ ____________________________ James F. Kidd /s/Suzanne M. Ludwig _____________________________ 31 SUPPLEMENTAL RETIREMENT AGREEMENT DESIGNATION OF BENEFICIARY EXECUTIVE: JAMES F. KIDD I designate the following as Beneficiary or Beneficiaries to receive, in accordance with the method indicated, any payments to which my Beneficiary or Beneficiaries may be entitled under my Supplemental Retirement Agreement, in the event of my death, either prior to or after my retirement. This designation is subject to my right at any time to change such Beneficiary or Beneficiaries as provided in the Plan. For the purposes of this form, a "primary" beneficiary is the first person to receive these benefits if I die, and a "secondary" beneficiary is a person who will take only if the primary beneficiary is not surviving at the time of my death. X _____ Method No. 1 - Designation of one primary beneficiary. In the event of the death of the primary beneficiary, then 100% to the first person then living in the following list of secondary beneficiaries. If this method is used, name the beneficiaries in the order of your preference and leave the "Share of Payment" blank. _____ Method No. 2 - Designation of two or more primary beneficiaries, (i.e., to the persons designated in the proportions indicated). In the event of the death of any one or more of these beneficiaries, their share(s) shall be apportioned to the remaining living beneficiaries in proportion to the shares provided for each of them. If this method is used, name each beneficiary and show the "Share of Payment" for each beneficiary. _____ Method No. 3 - Designation of a primary beneficiary and two or more secondary beneficiaries, (i.e., to the person first named if surviving; if not, to the remaining persons designated in the proportions indicated). In the event of the death of any one or more of these beneficiaries, their shares shall be apportioned to the remaining living beneficiaries in proportion to the shares provided for each of them. If this method is used, name each of the beneficiaries and show for the primary beneficiary (for example, your wife) 100% and also the "Share of Payment" for each secondary beneficiary. 32 DESIGNATION OF BENEFICIARIES (Continued) NOTE: (If your Beneficiary is a trust, please state the name and address of the trustee). Share of Payment % JoLyn Kidd ###-##-#### _______ _____________________________________ __________ Primary Name SSN 1027 E. Erie Ave., Lorain, Oh _____________________________________ Address _______ _____________________________________ __________ Primary Name SSN _____________________________________ Address James Kidd Trust UTD 7694 _______ _____________________________________ __________ Secondary Name SSN L.N.B. Trust Dept., 457 Broadway, Lorain OH _____________________________________ Address _______ _____________________________________ __________ Primary Name SSN _____________________________________ Address _______ _____________________________________ __________ Secondary Name SSN _____________________________________ Address DESIGNATION OF BENEFICIARIES (Continued) I have designated my Beneficiary or Beneficiaries and the method of payment to such on the upper half of this form. This Beneficiary Designation shall be applicable to the sums, if any, payable to my Beneficiaries under my Supplemental Retirement Agreement. /s/James F. Kidd ###-##-#### ____________________________ ___________________________ James F. Kidd Social Security Number 6-15-99 ____________________________ Date ___________________________ Spouse's signature (if community property state and Primary Beneficiary other than Spouse is to receive more than a 50% share). 33 LNB Bancorp, Inc. Exhibit to Form 10 - Q (For the six months ended June 30, 1999) S - K Reference Number (13) Second Quarter Report to Shareholders of LNB Bancorp, Inc. (dated June 30, 1998) EDGAR Version DESCRIPTION: Three sided pamphlet: Outside cover: blue with white stripe Second Quarter Report LNB Bancorp, Inc. Logo on right hand side LNB Bancorp, Inc. June 30, 1999 Inside contains: Message to shareholders, Unaudited EDGAR version Consolidated Balance Sheets for period ending June 30, 1999 and June 30, 1998, respectively, Unaudited EDGAR version Consolidated Statements of Income for the Six Months ended June 30, 1999 and June 30, 1998, respectively, Gary C. Smith Joins Lorain National Bank. Directors and Officers of LNB Bancorp, Inc. 34 Message to Shareholders It's a pleasure, once again, to report on the progress of LNB Bancorp, Inc., and its wholly owned subsidiary, The Lorain National Bank, after the first half of 1999. We are pleased to announce that earnings have increased 10.6 % for the first half of the year, compared to the same period one year ago. Earnings for the first six months of 1999 reached $3,796,000, up from $3,432,000 during the first half of 1998. Basic earnings per share for the first half of 1999, reached $.92, a 10.8% increase over the $.83 amount reported for the first half of 1998. Earnings for the first half of 1999 were higher than a year ago because of higher net interest income, non-interest income, and the gain on sale of a branch building, offset in part by higher operating expenses and loan loss provision. Increases in net interest income were fueled by robust loan growth. Cash dividends declared per share for the first half of 1999 increased 10% compared to the first half of 1998. The year to date cash dividends declared per share in 1999 increased by $.04 to $.44 per share, up from $.40 per share in 1998. Total shareholders' equity increased by $2.9 million to $49.6 million during the twelve months ended June 30, 1999. The return on average shareholders' equity rose to 15.53% for the first half of 1999 from 14.60% for the first half of 1998. Asset growth remains solid. Total assets climbed 16% to $590.5 million as of June 30, 1999 up $82.1 million from June 30, 1998. Net loans grew by $67.9 million from one year ago to $407.1 million at June 30, 1999 for a 20 percent increase. Consumer loan growth was strong accounting for 63% of total loan growth while commercial and mortgage loans accounted for 26% and 11% of total loan growth during the twelve months ended June 30, 1999. Total deposits climbed by 7 percent to $464.2 million, up $31.6 million from one year ago. Increases in demand, savings and certificates of deposit accounted for the deposit increase. Lorain National Bank operates 21 retail branches and 29 ATMs in nine local communities. As we reported in the first quarter report, the relocation of our Second Street Branch Office to Ely Square occurred on June 1, 1999. Lorain National Bank reconfigured the Ely Square office floor space to accommodate the delivery of Commercial Lending, Trust & Investment Management and retail banking services. We look forward to serving our existing and new customers six days a week in the heart of Elyria. We would like to welcome Gary C. Smith, Senior Executive Vice President to Lorain National Bank. Gary Smith brings over 17 years of executive level community bank experience to Lorain National Bank. Also, we would like to welcome and congratulate our newly elected members to the Board of Directors, James R. Herrick, President of Liberty Ford Lincoln Mercury, Inc., and John W. Schaeffer, M.D., President of North Ohio Heart Center. We thank you for your continued support and look forward to addressing you after the completion of our third quarter of operations. 35 Sincerely, /s/ J. F. Kidd /s/ Stanley G. Pijor ------------------------ --------------------- James F. Kidd Stanley G. Pijor President and Chairman of the Board Chief Executive Officer NET INCOME millions of dollars (A Net Income graph follows in printed version with net income on the y- axis and years 1995 through 1999 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) DIVIDENDS PER SHARE dollars* (A Dividends Per Share graph follows in printed version with dividends per share on the y-axis and years 1995 through 1999 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) BASIC EARNINGS PER SHARE dollars* (A Basic Earnings Per Share graph follows in printed version with earnings per share on the y-axis and years 1995 through 1999 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) Basic Earnings Net Income Dividends Per Share Per Share Year Millions of Dollars Dollars* Dollars* 1999 $3,796 $ .44 $0.92 1998 $3,432 $ .40 $0.83 1997 $3,120 $ .32 $0.74 1996 $2,777 $ .27 $0.67 1995 $2,265 $ .24 $0.56 *Adjusted for stock dividends and splits 36 Consolidated Balance Sheets June 30 1999 1998 - ------------------------------------------------------------------------- ASSETS: Cash and Due From Banks $ 25,427,000 $ 25,298,000 Federal Funds Sold and Other Interest-Bearing Instruments 12,849,000 2,275,000 Federal Home Loan Bank and Federal Reserve Bank Stock, at Cost 2,256,000 2,121,000 Securities Held to Maturity, at Cost 44,543,000 81,021,000 Securities Available for Sale, at Fair Value 75,061,000 35,384,000 Loans 410,843,000 343,738,000 Reserve for Loan Losses (3,774,000) (4,525,000) - ------------------------------------------------------------------------ NET LOANS 407,069,000 339,213,000 - ------------------------------------------------------------------------ Premises, Equipment and Intangible Assets, (net) 15,679,000 15,757,000 Accrued Interest Receivable and Other Assets 7,586,000 7,325,000 - ------------------------------------------------------------------------ TOTAL ASSETS $590,470,000 $508,394,000 - ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Noninterest-Bearing Deposits $ 82,760,000 $ 77,810,000 Interest-Bearing Deposits 381,417,000 354,812,000 - ------------------------------------------------------------------------- TOTAL DEPOSITS 464,177,000 432,622,000 - ------------------------------------------------------------------------- Securities Sold under Repurchase Agreements and Other Short-term Borrowings 38,343,000 23,204,000 Federal Home Loan Bank Advances 34,345,000 2,045,000 Accrued Interest, Taxes, Expenses and Other Liabilities 3,978,000 3,785,000 - ------------------------------------------------------------------------- TOTAL LIABILITIES 540,843,000 461,656,000 - ------------------------------------------------------------------------- Common Stock 4,223,000 4,222,000 Additional Capital 22,604,000 22,600,000 Retained Earnings 26,177,000 22,720,000 Accumulated Other Comprehensive Income (477,000) 96,000 Treasury Stock at Cost (2,900,000) (2,900,000) - ------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 49,627,000 46,738,000 - ------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $590,470,000 $508,394,000 - ------------------------------------------------------------------------- 37 TOTAL ASSETS millions of dollars (A Total Assets graph follows in printed version with total assets on the y-axis and years 1995 through 1999 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) TOTAL SHAREHOLDERS' EQUITY millions of dollars (A Total Shareholder's Equity graph follows in printed version with total shareholder's equity on the y-axis and years 1995 through 1999 on the x-axis. The graph is a vertical bar graph. The co-ordinates, by year, which are presented in the table below are plotted on the previously described grid.) Total Shareholders' Total Assets Equity Year Millions of Dollars Millions of Dollars 1999 $590.5 $49.6 1998 $508.4 $46.7 1997 $457.0 $43.6 1996 $424.5 $42.4 1995 $413.2 $39.0 (LOGO) LNB Bancorp, Inc. and its subsidiary Lorain National Bank 38 Consolidated Statements of Income Six Months Ended June 30 1999 1998 - ------------------------------------------------------------------------- INTEREST INCOME: Interest and Fees on Loans $16,445,000 $14,797,000 Interest and Dividends on Securities: 3,529,000 3,612,000 Interest on Federal Funds Sold and Other Interest-Bearing Instruments 85,000 94,000 - ------------------------------------------------------------------------- TOTAL INTEREST INCOME 20,059,000 18,503,000 - ------------------------------------------------------------------------- INTEREST EXPENSE: Interest on Deposits 6,169,000 6,233,000 Interest on Securities Sold under Repurchase Agreements and Other Short-Term Borrowings 528,000 552,000 Interest on Federal Home Loan Bank Advances 617,000 65,000 - ------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 7,314,000 6,850,000 - ------------------------------------------------------------------------- NET INTEREST INCOME 12,745,000 11,653,000 Provision for Loan Losses 700,000 425,000 - ------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,045,000 11,228,000 - ------------------------------------------------------------------------- OTHER INCOME: Trust and Investment Management Division Income 1,074,000 1,026,000 Fees and Service Charges 2,719,000 2,403,000 Gains From Sales of Loans, Securities, and Buildings 158,000 -0- Other Operating Income 60,000 24,000 - ------------------------------------------------------------------------- TOTAL OTHER INCOME 4,011,000 3,453,000 - ------------------------------------------------------------------------- OTHER EXPENSES: Salaries and Employee Benefits 4,915,000 4,503,000 Net Occupancy Expense of Premises 790,000 671,000 Furniture and Equipment Expenses 1,201,000 1,178,000 Supplies and Postage 509,000 543,000 Ohio Franchise Tax 293,000 269,000 Other Operating Expenses 2,598,000 2,327,000 - ------------------------------------------------------------------------- TOTAL OTHER EXPENSES 10,306,000 9,491,000 - ------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 5,750,000 5,190,000 - ------------------------------------------------------------------------- Income Taxes 1,954,000 1,758,000 - ------------------------------------------------------------------------- NET INCOME $ 3,796,000 $ 3,432,000 - ------------------------------------------------------------------------- PER SHARE DATA: - ------------------------------------------------------------------------- BASIC EARNINGS PER SHARE $ .92 $ .83 DILUTED EARNINGS PER SHARE $ .92 $ .83 - ------------------------------------------------------------------------- DIVIDENDS DECLARED PER SHARE $ .44 $ .40 - ------------------------------------------------------------------------- 39 Inside cover Gary C. Smith Joins Lorain National Bank Top left column black and white photograph of Gary C. Smith, Senior Executive Vice President During the second quarter, Lorain National welcomed its new Senior Executive Vice President, Gary C. Smith to the bank. Gary, 52, brings with him more than 30 years of banking experience, 17 of which were served on the executive level of other community banks in Ohio. He joins the bank's senior management team as an essential part of Lorain National's management succession plan. Gary's addition to our staff enhances our management group's skill set and underscores the bank's commitment to future growth in a highly-competitive financial services industry. "I am truly looking forward to the challenge of maintaining the strong commitment of Lorain County's only established, locally owned and locally managed commercial bank," Gary says. "My task is to help coordinate the activities of Lorain National Bank for the purpose of serving the best interests of our dedicated shareholders and our loyal customers, through our well-trained staff." James F. Kidd, President & Chief Executive Officer of LNB Bancorp, Inc. and Lorain National Bank, said he is looking forward to working with the bank's new executive . "We were fortunate to find someone like Gary, who shares our vision of what a community bank represents," Kidd said. Smith has been a member of the Lorain County banking community for many years, and as recently as 1996, represented EST National Bank, in Elyria as the Senior Lending Officer and Chairman of the Board of Directors Loan Committee. He most recently served as President of Bank First National, in Newark, Ohio. He has been a member of the Lorain County Chamber of Commerce, Elyria Rotary, Sales and Marketing Executives International, Lorain County Joint Vocational School Foundation Board, Avon Lake Kiwanis, Avon Lake Business Association and Robert Morris Associates. Actively involved in youth-at-risk organizations, such as Big Brother & Big Sisters, Gary is also an avid outdoorsman and is well known for his volunteer efforts with various wildlife conservation groups. He and Beth, his wife of 30 years, have three grown children. The Smiths reside in Avon Lake. 40 Back Cover: White background with blue along top of page Three column format Directors and Officers of LNB Bancorp, Inc. Directors: - --------------------------------------------------------- Stanley G. Pijor Benjamin G. Norton Chairman of the Board H.R. Consultant LNB Bancorp, Inc. and Lorain Technology, Inc. Lorain National Bank Jeffrey F. Riddell Daniel P. Batista President and Attorney/Partner Chief Executive Officer, Cook & Batista Co., L.P.A. Consumeracq, Inc. and Consumers Builders Supply Co. Robert M. Campana Managing Director Thomas P. Ryan P.C. Campana, Inc. Executive Vice President and Secretary/Treasurer Terry D. Goode LNB Bancorp, Inc. Vice President Executive Vice President Lorain County Title Company and Secretary Lorain National Bank Wellsley O. Gray Retired John W. Schaeffer, M.D. President James R. Herrick North Ohio Heart Center President Liberty Ford Lincoln Mercury, Inc. Eugene M. Sofranko President and James F. Kidd Chief Executive Officer President and Lorain Glass Company, Inc. Chief Executive Officer LNB Bancorp, Inc. and Paul T. Stack Lorain National Bank Retired David M. Koethe Leo Weingarten Chairman of the Board Retired The Lorain Printing Company Directors Emeritus of Lorain National Bank: - ------------------------------------------- James L Bardoner T.L. Smith, M.D. Retired Former President Retired Physician Dorn Industries, Inc. Officers: - --------------------------- Stanley G. Pijor Chairman of the Board LNB Bancorp, Inc. and Lorain National Bank James F. Kidd President and Chief Executive Officer 41 Gary C. Smith Senior Executive Vice President 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 (Logo) LNB Bancorp, Inc. Mail: LNB Bancorp, Inc.*457 Broadway*Lorain, Ohio 44052-1739 E-Mail: emailservices@4LNB.com*Internet:www.4LNB.com Telephone: (440) 244-6000*Toll Free: (800) 860-1007 Telefax: (440) 244-4815*Telebanker: (440) 245-4562 42 LNB Bancorp, Inc. Exhibit to Form 10 - Q (For the six months ended June 30, 1999) S - K Reference Number (27) Financial Data Schedule EX-27 2
9 0000737210 LNB BANCORP, INC. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 25,427 12,849 0 0 75,061 46,799 44,913 410,843 3,774 590,470 464,177 48,343 3,978 24,345 4,223 0 0 45,404 590,470 16,445 3,529 85 20,059 6,169 7,314 12,745 0 0 10,306 5,750 5,750 0 0 3,796 .92 .92 4.80 285 494 0 3,199 3,483 528 119 3,774 2,787 0 987
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