Annual Report (Form 10-K), fiscal year 1994

ITEM 1 - BUSINESS
a) GENERAL DEVELOPMENT OF BUSINESS
LNB Bancorp, Inc. (the Corporation), a bank holding company, was incorporated on October 11, 1983 under the laws of the State of Ohio at the direction of the Board of Directors of The Lorain National Bank (the Bank), a national banking association, for the purpose of acquiring all the outstanding common stock of the Bank. At a special meeting of the shareholders of the Bank, held on February 28, 1984, the shareholders approved the Plan of Reorganization, involving the merger of the Bank into the Lorain Interim Association, a national banking corporation, incorporated solely for the purpose of effecting the Reorganization Plan. Lorain Interim was a wholly-owned subsidiary of the Corporation.
Upon the consummation of the merger on March 30, 1984, under the Plan of Reorganization, the business of the Bank is conducted by the merged Bank under the name "The Lorain National Bank". Each outstanding share of common stock of the Bank, par value $2.50, was converted into one share of the Bancorp stock, par value $2.50. A total of 904,570 shares of corporate stock were issued at the effective date of the merger. On April 18, 1989, the shareholders of the Corporation approved a two-for-one stock split, which reduced the par value to $1.25. On April 20, 1993, the shareholders of the Corporation approved a five-for-four stock split, which reduced the par value to $1.00.
LNB Bancorp, Inc. has broader corporate powers than the Bank. These corporate powers principally include the power to engage in certain non-banking businesses closely related to banking, to own capital stock of banks located in Ohio and certain other states and to own capital stock of business corporations (other than banks) located within or outside Ohio. The Corporation has no present plans to engage in any non-banking activities or to acquire companies engaged in such activities.
b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Corporation and the Bank are engaged in commercial and retail banking. Reference is hereby made to Item 1e., Statistical Disclosure by Bank Holding Companies, and to Item 8 of this Form 10-K for financial information pertaining to the Corporation's business.
c) DESCRIPTION OF LNB BANCORP INC.'S BUSINESS
LNB Bancorp, Inc. is a $395 million locally owned one bank holding company headquartered in Lorain, Ohio. The Bancorp's predecessor, The Lorain National Bank, was formed as a result of the merger of The Lorain Banking Company and The National Bank of Lorain on January 1, 1961. The Lorain Banking Company was a state bank formed in 1905 and The National Bank of Lorain was a national bank receiving its national charter in 1934. On March 30, 1984, The Lorain National Bank became the wholly owned subsidiary of LNB Bancorp, Inc.
The Lorain National Bank has seventeen banking offices in Lorain, Elyria, Amherst, Avon Lake, Oberlin, Olmsted Township, Vermilion and Westlake.
The Bank is a full service bank offering a wide range of commercial and personal banking services. These services include checking accounts, savings accounts, certificates of deposit, IRA's, Fortune Fifty (a Senior Citizen program), Keogh plans, commercial loans, real estate loans, installment loans, home equity loans, Small Business Administration loans, Visa card, student loans, safe deposit boxes, night depository, U. S. savings bonds, travelers' checks, money orders, cashiers checks, bank-by-mail, automatic teller machine cash and transaction services, wire transfers, electronic funds transfer, utility bill collections, computer services, in-house trust department, trust representative, notary public service, and discount brokerage services.
The Trust Division of the Bank performs complete trust administrative functions and offers agency and trust services to individuals, partnerships, corporations, institutions and municipalities.
The Bank is not dependent upon any one significant customer or specific industry. The business of the Corporation is not seasonal to any material degree.
In the opinion of managment, LNB Bancorp, Inc. does not have exposure to material costs associated with environmental hazardous waste clean up.
Competition
The banking business is and will continue to be highly competitive. The Lorain National Bank competes with seven other banks and bank holding companies operating in Lorain County which range in size from approximately $350 million to over $24 billion in assets. Other competition comes primarily from savings and loans, credit unions, and other financial intermediaries operating in Lorain County and counties adjacent to it. The Bank's market share of total deposits in Lorain County in all types of financial institutions was approximately 11.69% and 12.17% in 1994 and 1993, respectively.
Supervision and Regulation
The Corporation, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the Act), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the Federal Reserve Board). Generally, the Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking and a proper incident thereto. The Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank and restricts interstate banking activities. The Act does not place territorial restrictions on the banking subsidiaries of bank holding companies. The Corporation's banking subsidiary is subject to limitations with respect to intercompany loans and investments.
The Corporation and the Bank are subject to an extensive scheme of banking laws and regulations that are intended primarily for the protection of the customers and depositors of the Corporation's subsidiaries rather than holders of the Corporation's securities. These laws and regulations govern such areas as permissible activities, loans and investments, rates of interest that can be charged on loans and reserves. The Corporation and the Bank also are subject to general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio. Set forth below are brief descriptions of selected laws and regulations applicable to the Corporation and the Bank.
A substantial portion of the Corporation's cash revenues is derived from dividends paid by its subsidiary bank. These dividends are subject to various legal and regulatory restrictions as summarized in Note (9) on page 16 of the LNB Bancorp, Inc. 1994 Annual Report. This note is incorporated herein by reference.
The Bank is subject to the provisions of the National Bank Act. The Bank is subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (COC). The Bank is also subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Under the Act, as amended, and under Regulations of the Federal Reserve Board pursuant thereto, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit.
The Corporation and its subsidiary bank are also subject to the state banking laws of Ohio. Ohio adopted nationwide reciprocal interstate banking effective October, 1988. However, banking laws of other states may restrict branching of banks to other counties within the state and acquisition or merger involving banks and bank holding companies located in other states.
Federal regulators adopted risk-based capital guidelines and leverage standards for banks and bank holding companies. A discussion of the impact of risk-based capital guidelines and leverage standards is presented on page 25 of the LNB Bancorp, Inc. 1994 Annual Report.
The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company and its controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation after the date of enactment of FIRREA and incurred in connection with the default involving any affiliated insured bank or savings association or the default of any FDIC assisted transaction involving an affiliated insured bank or savings association.
On December 19, 1991, the President signed the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) which covers an expanse of banking regulatory issues. FDICIA deals with the recapitalization of the Bank Insurance Fund, with deposit insurance reform including requiring the FDIC to establish a risk-based premium assessment system with a number of other regulatory and supervisory matters. The effective dates for the provisions of FDICIA are staggered, some effective on December 19, 1991, others effective at various times through December 31, 1994. The full effects of FDICIA generally on the financial services industry, and specifically on the Corporation, cannot currently be measured. However, the increased burden of regulatory compliance will result in marginal increases in the cost of resources which is dedicated to this activity.
Noncompliance to laws and regulations by bank holding companies and banks can lead to monetary penalties and/or 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 by reference on page 27 of the LNB Bancorp, Inc. 1994 Annual Report.
Employees
As of December 31, 1994, the Corporation and the Bank employed 228 full- time employees and 66 part-time employees. The Corporation is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be 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. 1994 Annual Report, portions of which are incorporated in this Form 10-K by reference.
LNB BANCORP, INC.'S STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND INTEREST DIFFERENTIAL
A. & B. The average balance sheet information and the related analysis of net interest earnings for the years ending December 31, 1994, 1993, and 1992 are included in the Condensed Consolidated Average Balance Sheets, within Management's Discussion and Analysis found on page 23 of the LNB Bancorp, Inc. 1994 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, 1994 and 1993 are included in Rate/Volume Analysis of Net Interest Income within Management's Discussion and Analysis found on page 23 of the LNB Bancorp, Inc. 1994 Annual Report and is incorporated into this Item I by reference.
II. INVESTMENT PORTFOLIO
A. Book values of securities at year end are as follows:
December 31, ----------------------------------- (Amounts in Thousands) 1994 1993 1992 ------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 9,767 $ -0- $ -0- Equity securities 370 343 343 ------------------------------------------------------------------------- Total securities available for sale 10,137 343 343 ------------------------------------------------------------------------- Investment securities: U.S. Treasury securities 80,112 88,291 81,100 Securities of other U.S. Government agencies and corporations 1,500 3,900 4,900 States and political subdivisions 7,775 10,552 10,288 ------------------------------------------------------------------------- Total investment securities 89,387 102,743 96,288 ------------------------------------------------------------------------- Total securities $99,524 $103,086 $96,631 -------------------------------------------------------------------------
B. MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
Maturities of nonequity securities owned by the Corporation as of December 31, 1994 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 $ 4,901 $ 4,866 $ -0- $ -0- $ 9,767 ------------------------------------------------------------------------- Total securities available for sale 4,901 4,866 -0- -0- 9,767 ------------------------------------------------------------------------- Investment securities: U.S. Treasury securities 32,955 46,163 994 -0- 80,112 Securities of other U.S. Government agencies and corporations -0- 1,500 -0- -0- 1,500 States and political subdivisions 3,761 1,789 2,081 144 7,775 ------------------------------------------------------------------------- Total investment securities 36,716 49,452 3,075 144 89,387 ------------------------------------------------------------------------- Total securities $41,617 $54,318 $ 3,075 $ 144 $99,154 -------------------------------------------------------------------------
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, 1994:
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 4.03 5.30 N/A N/A 4.66 ------------------------------------------------------------------------- Total securities available for sale 4.03 5.30 N/A N/A 4.66 ------------------------------------------------------------------------- Investment securities: U.S. Treasury securities 4.38 5.67 7.96 N/A 5.17 Securities of other U.S. Government agencies and corporations N/A 7.76 N/A N/A 7.76 States and political subdivisions (1) 8.31 8.37 8.47 7.38 8.35 ------------------------------------------------------------------------- Total investment securities 4.78 5.83 8.30 7.38 5.49 ------------------------------------------------------------------------- Total securities 4.69 5.78 8.30 7.38 5.40 -------------------------------------------------------------------------
(1) Yield 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. Government obligations, there were no investments in securities of any one issuer which exceeded 10% of the consolidated shareholders' equity of the Corporation at December 31, 1994.
III. LOAN PORTFOLIO
A. The following table summarized the distribution of the loan portfolio:
December 31, --------------------------------------------------- (Amounts in Thousands) 1994 1993 1992 1991 1990 ------------------------------------------------------------------------- Commercial $104,209 $105,289 $ 98,514 $ 91,760 $ 90,267 Mortgage 114,611 100,140 94,787 90,627 88,395 Installment 19,933 18,554 17,939 20,419 26,008 Consumer revolving lines of credit 23,054 21,774 22,530 20,455 17,270
-------------------------------------------------------------------------- TOTAL LOANS 261,807 245,757 233,770 223,940 221,940 Reserve for possible loan losses (3,832) (3,714) (3,406) (2,803) (2,696) -------------------------------------------------------------------------- NET LOANS $257,975 $242,043 $230,364 $220,458 $219,244 ==========================================================================
B. COMMERCIAL LOAN MATURITY AND REPRICING ANALYSIS AS OF DECEMBER 31, 1994
(Amounts in Thousands) 1994 ---------------------------------------------- Maturing in one year or less $ 12,998 Maturing after one year, but within five years 23,023 Maturing beyond five years 68,188 ---------------------------------------------- TOTAL COMMERCIAL LOANS $ 104,209 ==============================================
Loans repricing beyond one year: Fixed rate 10,440 Variable rate 80,771 ---------------------------------------------- TOTAL $ 91,211 ==============================================
C. LOAN PORTFOLIO RISK ELEMENTS
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, loans which have been restructured and other real estate, 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.
Other real estate consists of real estate acquired through foreclosure as satisfaction of debt and loans for which, in management's opinion in-substance foreclosure has occurred.
A summary of nonaccrual and other nonperforming assets at December 31, follows:
(Amounths in Thousands) 1994 1993 1992 1991 1990 --------------------------------------------------------------- Nonaccrual loans: Real estate loans $ 318 $ 438 $ 801 $ 967 $ 325 Commercial loans 0 420 90 27 0 Consumer loans 0 0 38 0 0 --------------------------------------------------------------- Total nonaccrual loans 318 858 929 994 325 Restructured loans 0 0 0 0 0 Other Real Estate Owned 0 0 0 0 210 Total nonperforming assets $ 318 $ 858 $ 929 $994 $ 535 --------------------------------------------------------------- Reserve for possible loan losses to nonperforming assets 1205.0% 432.9% 366.6% 282.0% 503.9% ===============================================================
The level of nonperforming assets remains at a relatively low level from 1992 through 1994. Total nonperforming assets decreased by 62.9% from 1993 to 1994 and by 7.6% from 1992 to 1993. The ratio of the reserve for possible loan loss to nonperforming assets increased from 366.6% in 1992 to 432.9% in 1993 and to 1205.0% in 1994. This increase is the result of decreases in nonperforming assets plus increases in the reserve for possible loan losses. The 1994 year end balance in the reserve for possible loan losses increased primarily due to low levels of net charge-offs during 1992 and 1993.
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, 1994, the interest income that would have been earned on the nonaccrual loans in the loan portfolio at year end, would have been approximately $41,000; however, the interest income actually earned and reported as income in 1994 amounted to approximately $12,000.
2) In addition to the nonperforming assets classified above, the loan review committee identifies 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.
A summary of loans past due 90 days plus potential problem loans follows:
(Amounts in Thousands) 1994 1993 1992 1991 1990 ------------------------------------------------------------ Loans 90 days past due $ 419 $ 407 $ 109 $ 149 $ 200 =========================================================== Potential problem loans $1,197 $1,095 $2,669 $1,902 $2,307 ===========================================================
The increase in potential problem loans during 1992 is due, in part, to the lag between the weakened condition of the local economy from 1990 through the first half of 1992 and its subsequent effect on local businesses which have borrowed from the Bank. The decrease in the potential problem loans in 1993 and 1994 is due in part to improved national and local economic conditions.
COMMITMENTS AND CONTINGENCIES
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. Also see Note (16) of the "Notes to Consolidated Financial Statements" and "Impacts of Accounting and Regulatory Pronouncements" which appear on pages 18 and 27, respectively of the LNB Bancorp, Inc. 1994 Annual Report.
3) Foreign outstandings - There were no foreign oustandings at December 31, 1994, 1993 or 1992.
4) 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. There are no loans outstanding due from any foreign individuals, businesses or governments. 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. Further, there are no interest-bearing assets which, if they were loans, should be disclosed as past due, nonaccrual, restructured or potential problem loans.
ASSET QUALITY AND NONPERFORMING ASSETS
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, 1994, there were no significant concentrations of credit risk in the loan portfolio.
The Corporation's credit policies and review procedures are intended to minimize the risk and uncertainties inherent in lending. In following these policies and procedures, management must rely upon estimates, appraisals and evaluations of loans and the possibility that changes in such estimates, appraisals and evaluations could occur quickly because of changing economic conditions and the economic prospects of borrowers.
D. Other interest-bearing assets - As of December 31, 1994, 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 no Other Real Estate Owned at December 31, 1994.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes activity relating to the Reserve for Possible Loan Losses: December 31, ------------------------------------------- (Amounts in Thousands) 1994 1993 1992 1991 1990 --------------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $ 3,714 $ 3,406 $ 2,803 $2,696 $ 2,514 Charge-offs: Commercial (190) (177) (71) (78) (1) Real Estate (141) (222) (71) (329) (18) Installment (68) (116) (230) (211) (252) ---------------------------------------------------------------------- Total charge-offs (399) (515) (372) (618) (479) Recoveries: Commercial 18 70 38 7 23 Real Estate 57 152 152 49 64 Installment 42 101 85 69 74 ---------------------------------------------------------------------- Total recoveries 117 323 275 125 161 ---------------------------------------------------------------------- Net charge-offs (282) (192) (97) (493) (318) ---------------------------------------------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 400 500 700 600 500 ---------------------------------------------------------------------- BALANCE AT END OF YEAR $3,832 $ 3,714 $ 3,406 $ 2,803 $ 2,514 ======================================================================
ANALYTICAL DATA
BALANCES: Average total loans 252,345 237,671 227,780 220,919 217,520 Total loans at year end 261,807 245,757 233,770 223,261 221,940 Net charge-offs 282 192 97 493 318 Provision for possible loan losses 400 500 700 600 500 Reserve for possible loan losses at year end 3,832 3,714 3,406 2,803 2,696 RATIOS: Net charge-offs to: Average total loans 0.11% 0.08% 0.04% 0.22% 0.15% Total loans at year end 0.11 0.08 0.04 0.22 0.14 Provision for possible loan losses 70.50 38.40 13.86 82.17 63.60 Reserve for possible loan losses 7.36 5.17 2.85 17.59 11.80 Reserve for possible loan losses to: Average total loans 1.52 1.56 1.50 1.27 1.24 Total loans at year end 1.46 1.51 1.46 1.26 1.21
The increasing trend in net charge-offs and in the provision charges to expenses which occurred from 1990 through 1991 resulted primarily from the influences of a slump in the local economy. The decreasing trend in the provision for possible loan losses charged to expenses which occured form 1992 through 1994 resulted primarily from the influences of an improvement in the local economy. The level of net charge-offs in 1995 is expected to be comparable to the 1994.
The Bank's policy is to maintain the allowance for possible loan losses at a level considered by management to be adequate for potential future losses. The evaluation performed by the Loan Review Committee is based upon a continuous review of delinquency trends; the amount of nonperforming loans (nonaccrual, restructured, and other real estate owned); loans past due 90 days or more and potential problem loans; historical and present trends in loans charged-off; changes in the composition and level of various loan categories; and current economic conditions.
Net charge-offs (recoveries) by portfolio type which are summarized from the analysis of the Reserve for Possible Loan Losses on page 13 of the Form 10-K are presented in the following table:
(Amounts in Thousands) 1994 1993 1992 1991 1990 ------------------------------------------------------------------ Commercial $172 $107 $ 33 $ 71 $(22) Real estate 84 70 (81) 280 162 Consumer 26 15 145 142 178 ------------------------------------------------------------------ Total net charge-offs $282 $192 $ 97 $493 $318 ==================================================================
Net charge-offs in 1992 decreased by $396,000 due to decreases in real estate charge-offs and increases in real estate recoveries. Net charge-offs in 1994 and 1993 increased due to increases in commercial and real estate charge-offs.
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) 1994 1993 1992 1991 1990 ---------------------------------------------------------------- Commercial $1,487 $1,036 $ 819 $ 925 $ 900 Real estate 623 485 469 430 415 Consumer 348 313 321 340 380 Off-balance sheet risk 250 250 150 0 0 Unallocated 1,124 1,630 1,647 1,108 1,001 ------------------------------------------------------------------ TOTAL $3,832 $3,714 $3,406 $2,803 $2,696 ==================================================================
This allocation is made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. The 1994, 1993 and 1992 provision for possible loan losses exceeded net charge-offs by $118,000, $308,000 and $603,000 respectively. The allocated portion of the reserve for possible loan losses has remained relatively consistent during the past five years. In 1992, the Bank began to allocate a portion of the reserve for possible loan losses to off-balance sheet risks which consist primarily of commitments to extend credit. The unallocated portion increased in 1993 and 1992 due to lower levels of net charge-offs.
The following table shows the percentage of loans in each category to total loans at year end:
1994 1993 1992 1991 1990 ------------------------------------------------------------- Commercial 39.8% 42.8% 42.1% 41.1% 40.7% Real estate 43.8% 40.8% 40.6% 40.6% 39.8% Consumer 16.4% 16.4% 17.3% 18.3% 19.5% ------------------------------------------ 100.0% 100.0% 100.0% 100.0% 100.0% ------------------------------------------
The loan portfolio mix has shifted during the past five years. Consumer loans as a percent of total loans has decreased each year from 1990 through 1993 and leveled off in 1994 while the commercial loans percentage has increased from 1990 through 1993. During 1994 the commercial loans a percentage of total loans decreased by three percent with a related increase in real estate loans of loans of three percent.
V. DEPOSITS
AVERAGE DEPOSITS BY CLASSIFICATION
The following table sets forth the classification of average deposits for the indicated period.
December 31, ------------------------------------- (Amounts in Thousands) 1994 1993 1992 ---------------------------------------------------------------- Demand deposits $ 53,287 $ 48,846 $ 43,483 NOW accounts 46,253 41,584 41,521 Money market accounts 33,034 37,535 36,589 Savings deposits 96,485 88,231 75,381 Time deposits 100,197 103,488 108,217 ---------------------------------------------------------------- Total $329,256 $319,684 $305,191 ================================================================
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, ---------------------------------------- 1994 1993 1992 --------------------------------------------------------------- NOW accounts 1.95% 2.04% 2.69% Money market accounts 2.18 2.33 3.03 Savings deposits 2.32 2.64 3.19 Time deposits 3.80 3.87 4.53 ========================================
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, 1994.
Maturing within 3 months $ 17,802 After 3 but within 6 months 3,357 After 6 but within 12 months 3,680 After 12 months 1,813 ---------------------------------------------- Total $ 26,652 ==============================================
VI. RETURN ON EQUITY AND ASSETS
Information relating to key operating ratios for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 is presented in the tabular form below.
December 31, 1994 1993 1992 1991 1990 ---------------------------------------------------------------- Return on average assets 1.13 1.08 1.07 1.02 1.01 Return on average equity 12.16 11.90 12.17 12.06 12.53 Dividend payout ratio 42.98 42.81 40.64 39.98 37.69 Average equity to average assets 9.31 9.11 8.78 8.48 8.09 Net interest margin 5.09 5.10 5.28 5.15 5.11
VII. SHORT-TERM BORROWINGS
Information relating to short-term borrowings for the years ended December 31, 1994, 1993 and 1992 follows:
(Amounts in Thousands) 1994 1993 1992 ---------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements At December 31: Outstanding $19,171 $19,400 $18,861 Interest Rate 5.36% 2.50% 2.57% Average for the period: Outstanding $21,106 $15,483 $19,426 Interest rate 3.58% 2.58% 3.06% Maximum month-end outstanding $30,750 $19,756 $27,537
Construction line of credit At December 31: Outstanding $ 0 $ 1,100 N/A Interest rate 0.000% 3.945% N/A Average for the period: Outstanding $ 2,061 $ 69 N/A Interest rate 4.895% 3.945% N/A Maximum month-end outstanding $ 2,750 $ 1,100 N/A
ITEM 2



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 four 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.
The Corporation began construction in August 1993 of a new corporate office facility in downtown Lorain for its bank subsidiary. The new building which was completed in August 1994 houses the executive offices, administration offices and commercial and mortgage lending offices. The total cost of the construction was approximately $2,900,000.
Listed below are the branches/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 Plaza Office 1147 Meister Road, Lorain Sixth Street Auto Bank 200 Sixth Street, Lorain Pearl Avenue Office 2850 Pearl Avenue, Lorain Oberlin Office 40 East College Street, Oberlin West Park Drive Office 2130 West Park Drive, Lorain Second Street Office 221 Second Street, Elyria Cleveland Street Office 801 Cleveland Street, Elyria Oberlin Avenue Auto Bank 3660 Oberlin Avenue, Lorain Olmsted Office 27095 Bagley Road, Olmsted Township Westlake Office 30210 Detroit Road, Westlake Computer Operations Center 2130 West Park Drive, Lorain Purchasing Building 2150 West Park Drive, Lorain Branch Administration Building 521 Broadway, Lorain Kendal at Oberlin 600 Kendal Drive, Oberlin
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 be utilized as the Bank continues to grow. The Corporation considers its Corporate offices, branch office 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

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

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1994 there were no matters submitted to a vote of security holders.
PART II
ITEM 5

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Common Stock trading ranges, cash dividend information and information relating to dividend restrictions appear on pages 1 and 16 of the LNB Bancorp, Inc. 1994 Annual Report and are incorporated herein by reference.
HOLDERS
The total number of shareholders was 1,874 as of February 28, 1995.
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

ITEM 6 - SELECTED FINANCIAL DATA
A Five Year Consolidated Financial Summary of selected financial data on page 31 of the LNB Bancorp, Inc. 1994 Annual Report is incorporated herein by reference.
ITEM 7

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis" is incorporated by reference to pages 22 - 27 of the LNB Bancorp, Inc. 1994 Annual Report. Also, see Item 8


Item 8 - Financial Statements and Supplementary Data.
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. 1994 Annual Report (Exhibit 13), pages 6 through 20. The supplementary financial information specified by Item 302 of Regulation S-K is included on page 21 of the LNB Bancorp, Inc. 1994 Annual Report.
Independent Auditors' Report
Report of Management
Consolidated Balance Sheets as of December 31, 1994 and 1993
Consolidated Statements of Income for Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements December 31, 1994, 1993 and 1992
ITEM 9

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10



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 20, 1995) 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
Gregory D. Friedman Senior Vice President and (Not a Director) (44) Chief Financial Officer, LNB Bancorp, Inc. and The Lorain National Bank
Michael D. Ireland Senior Vice President, (Not a Director) (48) LNB Bancorp, Inc. and The Lorain National Bank
Emma N. Mason Senior Vice President, (Not a Director) (57) LNB Bancorp, Inc. and The Lorain National Bank
James H. Weber Senior Vice President, (Not a Director) (48) LNB Bancorp, Inc. and The Lorain National Bank
ITEM 11

ITEM 11 - EXECUTIVE COMPENSATION
The information contained on pages 8 through 11 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 20, 1995) is incorporated herein by reference.
ITEM 12

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 20, 1995), relating to "Compliance with Section 16(A) of the Securities Exchange Act" is incorporated herein by reference.
The information contained on page 13 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 20, 1995) is incorporated herein by reference.
ITEM 13

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on pages 6, 7 and 15 of the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 20, 1995) is incorporated herein by reference.
Analysis of Loans to Related Parties
The information contained in Note (14) "Transactions with Related Parties" on page 18 of the LNB Bancorp, Inc. 1994 Annual Report is incorporated herein by reference. PART IV
ITEM 14

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 17, 1995, appear on pages 6 through 20 of the LNB Bancorp, Inc. 1994 Annual Report and are incorporated herein by reference:
(1) Financial Statements
Consolidated Balance Sheets December 31, 1994 and 1993
Consolidated Statements of Income for Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Shareholders' Equity for Years Ended December 31, 1994, 1993 and
Notes to Consolidated Financial Statements for Years Ended December 31, 1994, 1993 and 1992
Independent Auditors' Report
(2) Financial Statement Schedules
Financial statement schedules are omitted as they are not required or are not applicable or the required information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on From 8-K were filed during the last quarter of the year ending December 31, 1994
(c) Exhibits required by Item 601 Regulation S-K
Reference is made to the Exhibit Index which is found on page 26 of this Form 10-K.
(d) See subparagraph (a) 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 21, 1995 ----------------------- James L. Bardoner
/s/ Daniel P. Batista DIRECTOR March 21, 1995 ----------------------- Daniel P. Batista
/s/ Wesllsley O. Gray DIRECTOR March 21, 1995 ----------------------- Wellsley O. Gray
/s/ David M. Koethe DIRECTOR March 21, 1995 ----------------------- David M. Koethe
/s/ Benjamin G. Norton DIRECTOR March 21, 1995 ----------------------- Benjamin G. Norton
/s/ James H. Riddell DIRECTOR March 21, 1995 ----------------------- James H. Riddell
/s/ Don A. Sanborn DIRECTOR March 21, 1995 ----------------------- Don A. Sanborn
/s/ T.L. Smith DIRECTOR March 21, 1995 ----------------------- T. L. Smith, M.D.
/s/ Eugene M. Sofranko DIRECTOR March 21, 1995 ----------------------- Eugene M. Sofranko
/s/ Paul T. Stack DIRECTOR March 21, 1995 ----------------------- Paul T. Stack
Absent - Excused DIRECTOR March 21, 1995 ----------------------- Leo Weingarten
/s/ Stanley G. Pijor CHAIRMAN AND CHIEF March 21, 1995 ----------------------- EXECUTIVE OFFICER Stanley G. Pijor AND DIRECTOR
PRESIDENT AND CHIEF March 21, 1995 /s/ James F. Kidd OPERATING OFFICER ----------------------- AND DIRECTOR James F. Kidd
SENIOR VICE /s/ Gregory D. Friedman PRESIDENT AND March 21, 1995 ----------------------- CHIEF FINANCIAL Gregory D. Friedman OFFICER (ACTING CHIEF
LNB Bancorp, Inc.
Exhibit Index Pursuant to Item 601 (a) of Regulation S-K
S-K Reference Exhibit Number
(11) Computation of Shares Used for Earnings Per Share Calculation.
(13) LNB Bancorp, Inc. 1994 Annual Report to Shareholders.
(22) Subsidiary of LNB Bancorp, Inc.
(24) Consent of Independent Accountants.
(27) Financial Data Schedule.
(28) Notice of Annual Meeting to Shareholders and Proxy Statement (dated March 20, 1995).
(99.1) Annual report on Form 11-K of The Lorain National Bank Employee Stock Ownership Plan (registration number 33-65034) for the plan year ended December 31, 1994 to be filed as an amendment to this annual report on Form 10-K.
(99.2) Annual report on Form 11-K of The Lorain National Bank Stock Purchase Plan (registration number 33-65034) for the plan year ended December 31, 1994 to be filed as an amendment to this annual report on Form 10-K.
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1994)
S - K Reference Number (11)
Computation of Shares Used for Earnings Per Share Calculation
Years Ended December 31, ------------------------------------- 1994 1993 1992 ------------------------------------- Weighted-Average Shares Outstanding 3,195,132 3,177,849 3,147,824
Common Stock Equivalents (Stock Options) 33,152 34,000 52,848 ----------- ----------- ----------- 3,228,284 3,211,849 3,200,672 =========== =========== ===========
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1994)
S - K Reference Number (13)
LNB Bancorp, Inc. 1994 Annual Report to Shareholders.
COVER DESCRIPTION
Dark gray border on left hand side of front cover.
LNB BANCORP, INC.
1994 ANNUAL REPORT
Gray lettering set off on green blocks
Light gray background overall.
INSIDE FRONT COVER, LEFT FLAP
1994 Downtown Expansion In November, The Lorain National Bank completed construction of its new corporate office building and Main Office complex remodeling. These photographs depict our new Broadway streetscape, below, remodeled Main Office lobby, top right, and first floor entryway to the new office building.
NOTICE OF ANNUAL MEETING The 1995 Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 10:00 a.m. on Tuesday, April 18, 1995 at The Lorain National Bank, 521 Broadway, Lorain, Ohio.
FORM 10-K A copy of the LNB Bancorp, Inc.'s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be furnished to shareholders upon written request to:
Thomas P. Ryan Executive Vice President and Secretary LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052
REGISTRAR LNB Bancorp, Inc. 457 Broadway Lorain, Ohio 44052 (216) 244-6000
STOCK TRANSFER AGENT The Lorain National Bank 457 Broadway Lorain, Ohio 44052 (216) 244-6000
INSIDE FRONT COVER, RIGHT FLAP
Highlights . . . . . . . . . . . . . . . . . . . . . . . . 1
Common Stock Trading Ranges and Cash Dividends Declared . . . . . . . . . . . . . . . . 1
Corporate Profile . . . . . . . . . . . . . . . . . . . . 1
Message to Our Shareholder's . . . . . . . . . . . . . . . 2
Consolidated Financial Statements . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . .10
Report of Management . . . . . . . . . . . . . . . . . . .20
Independent Auditors' Report . . . . . . . . . . . . . . .20
Selected Quarterly Financial Data . . . . . . . . . . . .21
Management's Discussion and Analysis . . . . . . . . . . .22
Officers of Lorain National Bank . . . . . . . . . . . . .28
Bank Offices and Officers . . . . . . . . . . . . . . . .29
Directors and Officers of LNB Bancorp, Inc.. . . . . . . .30
Five Year Consolidated Financial Summary . . . . . . . . .31
Earnings and Stock Performance . . . . . . . . . . . . . .32
Highlights
DECEMBER 31, 1994 1993 1984 ---------------------------------------------------------------------- BANKING OFFICES 17 17 13 OFFICERS AND STAFF 294 299 225 SHAREHOLDERS 1,867 1,740 1,321 ASSETS $394,855,000 $379,616,000 $237,940,000 DEPOSITS $335,219,000 $321,012,000 $206,891,000 NET LOANS $257,975,000 $242,043,000 $129,192,000 ---------------------------------------------- TOTAL CAPITAL $ 37,511,000 $ 35,060,000 $ 16,257,000 ---------------------------------------------- NET INCOME $ 4,432,000 $ 4,029,000 $ 2,055,000 ---------------------------------------------- SHARES OUTSTANDING 3,200,054 3,190,688 2,950,647 ---------------------------------------------- CASH DIVIDENDS DECLARED $ 1,905,000 $ 1,725,000 $ 758,000 ----------------------------------------------
Shares outstanding have been adjusted for a five-for-four stock split in 1993 and a two-for-one stock split in 1989 and stock dividends.
Common Stock Trading Ranges and Cash Dividends Declared
1994 1993 -------------------------------------------------------- Bid Price Bid Price -------------------------------------------------------- Dividend Dividend High Low Amount High Low Amount ------- ------ --------- ------- ------ -------- First Quarter $27.75 $26.25 $.14 $22.40 $21.80 $.13 Second Quarter 29.25 27.75 .14 24.25 22.40 .13 Third Quarter 30.00 29.25 .15 24.75 24.25 .13 Fourth Quarter 30.13 30.00 .17 26.25 24.75 .15
The shares of common stock, par value $1.00 per share, of LNB Bancorp, Inc. are traded on the over-the-counter market primarily with brokers in the Corporation's service area.
Dividend amounts have been adjusted for the 3% stock dividend on April 19, 1994. Dividend amounts, bid prices, and par value have also been adjusted to reflect the five-for-four stock split on April 20, 1993.
The above quoted bid prices may reflect inter-dealer prices, without adjustments for retail markups, markdowns or commissions and may not represent actual transactions.
Corporate Profile
LNB Bancorp, Inc. is a $395 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 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 subsididary of LNB Bancorp, Inc.
The Lorain National Bank has seventeen banking offices in Lorain, Elyria, Amherst, Avon Lake, Oberlin, Olmsted Township, Vermilion, and Westlake which offer a wide range of commercial and personal banking services. The major services include checking, savings and time deposits, personal, mortgage, student and commercial loans, home equity loans, Small Business Administration loans, credit cards, an ATM network, and trust and investment management services. The Lorain National Bank is an equal opportunity employer.
END PUBLISHED PAGE 1
Message to Our Shareholders
It pleases us to report that once again, LNB Bancorp, Inc. and its subsidiary, The Lorain National Bank, experienced a highly successful year of operations. Once again the nation's interest rate structure has taken an upward turn, challenging the investment and borrowing strategies of bankers and consumers alike. Fortunately, we have prepared ourselves well to respond to these challenges and look forward to 1995 with optimism. As our market's leading locally owned, independent bank, we continue to enhance our position as a community leader, as a responsive lender and as a provider of outstanding customer service. Since this time last year, we have built new buildings, renovated others and have made significant strides in acquiring and employing technology to help us deliver high quality service to our customers.
Earnings Increase
In 1994 we posted our 13th consecutive year of increased earnings, as net income increased in 1994 by 10% over 1993, reaching $4,432,000. Earnings per share also increased to $1.37 for 1994 compared to $1.25 for 1993. Dividends declared per share amounted to $.60 in 1994 compared to $.56 in 1993. It should be noted that dividend amounts have been adjusted to reflect the 3% stock dividend in April of 1994 and the five-for-four stock split in April of 1993. Total cash dividends in 1994, including the EXTRA dividend declared by the Board of Directors in November, rose to almost $1,905,000. The cash dividends declared in 1994 represent a 51.2% increase over 1990, when $1,260,000 in cash dividends were paid. In each of the last 10 years, an increase in the regular cash dividend has been approved. Cash dividends declared increased 151% since 1984, when the payout totaled $758,000. The graphs on page 32 depict the performance of our stock, including accumulation of dividends and market value, over the past 10 years. The graphs display a hypothetical purchase of 100 shares of stock in 1984 and its approximate annual performance without further reinvestment. Also, you will find a graph which displays a history of earnings over the past 10 years on the same page. Other financial highlights as of December 31, 1994 include an increase in net loans to $258.0 million, up $15.9 million from 1993 and an increase in total deposits to $335.2 million, up $14.2 million from 1993. Total consolidated assets reached $394.9 million, which represents an increase of $15.3 million over 1993. The return on average assets of LNB Bancorp, Inc. rose from 1.08% in 1993 to 1.13% in 1994.
END PUBLISHED PAGE 2
Total shareholders' equity increased $2.4 million to $37.5 million, an increase of 6.8% over the year-end 1993 equity position. The ratios of total shareholders' equity to total assets were 9.5% and 9.2% at December 31, 1994 and 1993, respectively. LNB Bancorp, Inc. and its subsidiary, The Lorain National Bank, significantly exceed all current regulatory capital guidelines (for more detail, see Management's Discussion and Analysis on page 22.)
Investment Strategy
The recent upswing in interest rates has many financial institutions nationwide grappling with the prospect of decreased earnings as a result of past decisions to purchase securities with long-term maturities. Fortunately, we chose to take the conservative approach of staying short in our investment portfolio, due to historically low interest rates. Today, that strategy is working to our benefit as rates begin to edge higher. Of course we cannot predict what the future holds but we can rely on history to an extent to assist us in making future investment decisions.
Loan Division
The Loan Division experienced a great year, increasing its loan portfolio by almost $16 million in 1994. The combination of attractive interest rates, a growing business community, increased housing demand and a team of responsive lenders was largely responsible for our loan growth. We remain a leading local participant in the Federal government's Small Business Administration lending programs. As both Certified and Preferred SBA lenders, we have made a significant, positive impact on start-up, growth and development of many small businesses within our community. We take pride in watching the emergence and growth of many small to medium size businesses. As these businesses develop and grow, the community benefits by the creation of jobs for the area's workforce.
Trust and Investment Management Division
The Trust and Investment Management Division continues to grow, not only in terms of assets under management, but in the size and scope of its abilities to provide high quality service. In 1994, the Division expanded its private conference room space, found more effective ways to utilize computer technology and in doing so, enhanced its reputation for providing prompt, personal attention to the needs of its clients.
END PUBLISHED PAGE 3
The Trust and Investment Management Division's assets under management increased to $147.0 million, with a market value of $164.8 million. Direct revenues for the Division in 1994 were $916,000.
1994 Highlights
Our most ambitious building expansion project in many years became a reality in December when we celebrated the opening of our new corporate office building in downtown Lorain. The project included remodeling of the Main Office banking facility and construction of a new entrance to our Trust and Investment Management Division. The former Branch Administration building was also reconfigured as the Bank's employee training center. The downtown complex, which is now under one roof, provides much greater customer comfort and allows departments within the complex to interact more productively.
We also unveiled another new off-premise automated teller machine at the Lowe's home improvement warehouse near the Midway Mall in Elyria. The new ATM is located in a high traffic area and has already become one of our most popular locations. Both capital improvement projects have been nominated for recognition by the Lorain County Beautiful Awards program. Also in 1994, as a result of our tireless efforts to ascertain and meet the wants and needs of the community, we received an Outstanding performance rating from the Office of the Comptroller of the Currency on our first official Community Reinvestment Act examination. This rating recognizes the successful efforts of our employees to tailor deposit, loan, investment, trust and other banking services to the needs of the community which we serve.
Employees and Technology
In 1994, our employees participated in a record number of personal and professional enrichment programs designed to increase product knowledge and provide a higher level of quality customer service. In addition to training, we made a significant investment in technology to augment our employees' skills. In fact, at most of our employees' work stations you will find personal computers and/or terminals linked to our mainframe computer system, which will be upgraded in 1995. Technology coupled with advanced product knowledge is a powerful combination which enables us to meet customer needs quickly and allows our customers to make more informed decisions.
END PUBLISHED PAGE 4
In Memoriam
We regrettably acknowledge the passing in 1994 of four retired veterans of our organization. Our friends, Charles F. Friend, Janice E. Long, Mildred A. Rose and John F. Sauer, will be greatly missed. Their many years of dedicated service will not soon be forgotten.
Local Economy
We look forward to a favorable economic climate in Lorain County in 1995 thanks to continuing strength in new business start-ups, new housing and strong automobile sales. Our county continues to be a popular place to do business. Thanks to companies such as A.J. Rose, Inc., the Geon Corporation and Manco, Inc., more tax dollars and payroll will be infused into our county's revenue pool. Likewise, our unemployment rate at year-end leveled off at less than 5%, an outstanding figure compared to years passed. The Ford Motor Company continues to ride the crest of sales for its popular, locally produced products like Avon Lake's Mercury Villager/Nissan Quest minivans. Lorain's Thunderbird and Cougar 2-door coupes and sturdy Econoline vans are also steady sellers. Little, if any, overtime is forecast for Ford assembly workers in 1995, but indications are that Ford will experience another strong year. The nation's automakers produced 15.2 million vehicles in 1994 and that number is expected to increase slightly in 1995. Lorain's USS/KOBE Steel Company continues to improve its manufacturing capabilities by employing new technology like that found in its new continuous caster. The steelmaker remains a vital employer in Lorain County.
As for the Bank, we continue to make good use of our resources. We are finding new and innovative ways to bring high quality service to our customers while controlling expenses. We have been able to maintain staffing at a constant level over the past three years as assets continue to grow. We are also quite proud of our ability to provide a market return on our shareholders' investment while building for our future growth. We appreciate your continued support of our current activities and look forward to a rewarding 1995.
Stanley G. Pijor James F. Kidd
/s/ Stanley G. Pijor /s/ JF Kidd
Chairman and President and Chief Executive Officer Chief Operating Officer
END PUBLISHED PAGE 5
Consolidated Balance Sheets
December 31, 1994 1993 ------------------------------------------------------------------------- ASSETS: Cash and due from banks (note 2) $ 21,275,000 $ 14,876,000 Federal funds sold and other interest bearing instruments -0- 6,400,000 Securities (note 3): Securities available for sale 10,137,000 -0- Investment securities 89,387,000 103,086,000 ---------------------------- Total securities (Market value $ 97,080,000 and $103,952,000, respectively) 99,524,000 103,086,000 ---------------------------- Loans (notes 4 and 14): Portfolio loans 253,889,000 240,776,000 Loans available for sale 7,918,000 4,981,000 ---------------------------- Total loans 261,807,000 245,757,000 Reserve for possible loan losses (3,832,000) (3,714,000) ---------------------------- Net loans 257,975,000 242,043,000 ---------------------------- Bank premises and equipment, net (note 5) 10,682,000 8,338,000 Accrued interest receivable 2,391,000 2,274,000 Other assets 3,008,000 2,599,000 ---------------------------- TOTAL ASSETS $394,855,000 $379,616,000 ---------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits (note 6): Demand and other noninterest-bearing deposits $ 57,096,000 $ 50,241,000 Savings and passbook accounts 171,095,000 172,896,000 Time, including certificates of deposit over $100,000 totaling $26,652,000 and $17,445,000, respectively 107,028,000 97,875,000 ---------------------------- Total deposits 335,219,000 321,012,000 ---------------------------- Securities sold under repurchase agreements and other short-term borowings (note 7) 19,171,000 19,400,000 Construction line of credit (note 7) -0- 1,100,000 Accrued interest payable 868,000 788,000 Taxes and other liabilities (notes 8 and 10) 2,086,000 2,256,000 ---------------------------- Total liabilities 357,344,000 344,556,000
Shareholders' equity: Common stock, $1.00 par: Shares authorized 4,000,000 Shares issued and outstanding 3,200,054 and 3,097,755, respectively (notes 11, 12 and 13) 3,200,000 3,098,000 Additional capital 18,415,000 15,858,000 Retained earnings (note 9) 16,028,000 16,104,000 Net unrealized securities losses (132,000) -0- ---------------------------- Total shareholders' equity 37,511,000 35,060,000 ---------------------------- Commitments and contingencies (notes 5 and 16) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $394,855,000 $379,616,000 ----------------------------
See accompanying notes to consolidated financial statements
END PUBLISHED PAGE 6
Consolidated Statements of Income
Years ended December 31, 1994 1993 1992 -------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans: Taxable $ 21,353,000 $ 20,158,000 $ 20,725,000 Tax exempt 72,000 82,000 105,000 Interest and dividends on securities: U.S. Treasury securities 4,323,000 4,449,000 4,936,000 U.S. Government agencies and corporations 170,000 285,000 461,000 States and political subdivisions 595,000 624,000 863,000 Other debt and equity securities 20,000 20,000 19,000 Interest on Federal funds sold and other interest bearing instruments 297,000 274,000 356,000 -------------------------------------------- TOTAL INTEREST INCOME 26,830,000 25,892,000 27,465,000
INTEREST EXPENSE: Interest on deposits: Time certificates of $100,000 and over 793,000 740,000 971,000 Other deposits 6,968,000 7,398,000 8,656,000 Interest on securities sold under repurchase agreements and other short-term borrowings 755,000 400,000 594,000 Other interest 56,000 2,000 2,000 -------------------------------------------- TOTAL INTEREST EXPENSE 8,572,000 8,540,000 10,223,000 --------------------------------------------
NET INTEREST INCOME 18,258,000 17,352,000 17,242,000 Provision for possible loan losses (note 4) 400,000 500,000 700,000 -------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 17,858,000 16,852,000 16,542,000 -------------------------------------------- OTHER INCOME: Trust division income 916,000 825,000 756,000 Service charges on deposit accounts 1,300,000 1,284,000 1,257,000 Other service charges, exchanges and fees 1,837,000 1,642,000 1,580,000 Gains on sales of loans and securities 70,000 191,000 14,000 Other operating income 11,000 67,000 12,000 -------------------------------------------- TOTAL OTHER INCOME 4,134,000 4,009,000 3,619,000
OTHER EXPENSES: Salaries and employee benefits (notes 10, 12 and 13) 7,675,000 7,318,000 7,113,000 Net occupancy expense of premises (note 5) 1,112,000 1,091,000 1,156,000 Furniture and equipment expenses (note 5) 1,768,000 1,653,000 1,767,000 Supplies and postage 837,000 825,000 783,000 FDIC deposit insurance premium 722,000 699,000 683,000 Ohio franchise tax 475,000 474,000 444,000 Other operating expenses 3,090,000 2,957,000 2,839,000 -------------------------------------------- TOTAL OTHER EXPENSES 15,679,000 15,017,000 14,785,000 -------------------------------------------- INCOME BEFORE FEDERAL INCOME TAXES 6,313,000 5,844,000 5,376,000 -------------------------------------------- FEDERAL INCOME TAXES (BENEFIT) (note 8): Current 1,816,000 1,895,000 1,930,000 Deferred 65,000 (80,000) (380,000) -------------------------------------------- TOTAL FEDERAL INCOME TAXES 1,881,000 1,815,000 1,550,000 -------------------------------------------- NET INCOME $ 4,432,000 $ 4,029,000 $ 3,826,000 -------------------------------------------- NET INCOME PER SHARE (note 15) $ 1.37 $ 1.25 $ 1.20 --------------------------------------------
See accompanying notes to consolidated financial statements.
END PUBLISHED PAGE 7
Consolidated Statements of Cash Flows
Years ended December 31, 1994 1993 1992 ------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 26,732,000 $ 26,094,000 $ 27,787,000 Other income received 4,057,000 3,797,000 3,653,000 Interest paid (8,492,000) (8,638,000) (10,667,000) Cash paid for salaries and employee benefits (7,661,000) (7,434,000) (7,178,000) Net occupancy expense of premises paid (847,000) (842,000) (879,000) Furniture and equipment expenses paid (708,000) (697,000) (804,000) Cash paid for supplies and postage (837,000) (825,000) (783,000) Cash paid for other operating expenses (4,372,000) (3,894,000) (4,240,000) Federal income taxes paid (1,960,000) (1,838,000) (1,925,000) -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,912,000 5,723,000 4,964,000
CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales and maturities of securities available for sale 7,069,000 -0- -0- Proceeds from sales and maturities of investment securities 43,905,000 50,062,000 40,420,000 Purchases of securities available for sale (6,999,000) -0- -0- Purchases of investment securities (40,494,000) (56,371,000) (41,365,000) Net decrease in credit card loans 129,000 229,000 499,000 Net increase in long-term loans (16,528,000) (12,344,000) (11,088,000) Purchases of bank premises, equipment and software (4,052,000) (2,465,000) (1,527,000) Proceeds from sales of bank premises and equipment -0- 260,000 8,000 -------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (16,970,000) (20,629,000) (13,053,000)
CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand and other noninterest- bearing deposits 6,855,000 (1,815,000) 8,155,000 Net increase (decrease) in savings and passbook deposits (1,801,000) 12,514,000 19,339,000 Net increase (decrease) in time deposits 9,153,000 (7,417,000) (11,717,000) Net increase (decrease) in securities sold under re- purchase agreements and other short-term borrowings (249,000) 539,000 2,352,000 Proceeds from line of credit 1,668,000 1,100,000 -0- Cash paid on line of credit (2,768,000) -0- -0- Proceeds from exercise of stock options 56,000 204,000 143,000 Dividends paid (1,857,000) (1,671,000) (1,515,000) -------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 11,057,000 3,454,000 16,757,000 -------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,000) (11,452,000) 8,668,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,276,000 32,728,000 24,060,000 -------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,275,000 $ 21,276,000 $ 32,728,000 -------------------------------------------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET INCOME $ 4,432,000 $ 4,029,000 $ 3,826,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,325,000 1,207,000 1,238,000 Gain on sales of loans and securities (70,000) (191,000) (14,000) Amortization and accretion on securities, net 19,000 45,000 (72,000) Amortization of deferred loan fees and costs, net 67,000 (64,000) (17,000) Provision for possible loan losses 400,000 500,000 700,000 Increase (decrease) in deferred Federal income taxes 65,000 (80,000) (380,000) (Increase) decrease in accrued interest receivable (117,000) 157,000 394,000 (Increase) decrease in other assets (282,000) 467,000 (421,000) Increase (decrease) in accrued interest payable 80,000 (98,000) (444,000) Increase (decrease) in Federal income taxes payable (79,000) 23,000 (112,000) Increase (decrease) in accrued expenses 65,000 (251,000) 214,000 Others, net 7,000 (21,000) 52,000 -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $5,912,000 $5,723,000 $4,964,000 --------------------------------------------
See accompanying notes to consolidated financial statements.
END PUBLISHED PAGE 8
Consolidated Statements of Changes in Shareholders' Equity
Years ended Net Unrealized December 31, 1994 Common Additional Retained Securities 1993 and 1992 Stock Capital Earnings Losses Total ------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1991 $2,958,000 $13,802,000 $13,378,000 -0- $30,138,000 ----------------------------------------------------------- Net income -0- -0- 3,826,000 -0- 3,826,000 Cash dividends declared, $.51 per share -0- -0- (1,555,000) -0- (1,555,000) Issuance of 20,567 shares of common stock under stock option plans 20,000 123,000 -0- -0- 143,000 Market value of stock issued in payment of stock dividend, 88,883 shares 89,000 1,760,000 (1,849,000) -0- -0- ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1992 3,067,000 15,685,000 13,800,000 -0- 32,552,000 ----------------------------------------------------------- Net income -0- -0- 4,029,000 -0- 4,029,000 Cash dividends declared, $.56 per share -0- -0- (1,725,000) -0- (1,725,000) Issuance of 30,249 shares of common stock under stock option plans 31,000 173,000 -0- -0- 204,000 ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 3,098,000 15,858,000 16,104,000 -0- 35,060,000 -----------------------------------------------------------
BALANCES CONTINUED ON FOLLOWING PAGE
BALANCES CONTINUED FROM PREVIOUS PAGE
Consolidated Statements of Changes in Shareholders' Equity
Years ended Net Unrealized December 31, 1994 Common Additional Retained Securities 1993 and 1992 Stock Capital Earnings Losses Total -------------------------------------------------------------------------
Net income -0- -0- 4,432,000 -0- 4,432,000 Cash dividends declared, $.60 per share -0- -0- (1,905,000) -0- (1,905,000) Issuance of 9,334 shares of common stock under stock option plans 9,000 47,000 -0- -0- 56,000 Market value of stock issued in payment of stock dividend, 92,965 shares 93,000 2,510,000 (2,603,000) -0- -0- Net unrealized securities losses -0- -0- -0- (132,000) (132,000) ----------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 $3,200,000 $18,415,000 $16,028,000 $(132,000) $37,511,000 -----------------------------------------------------------
See accompanying notes to consolidated financial statements.
END PUBLISHED PAGE 9
Notes to Consolidated Financial Statements
December 31, 1994, 1993 and 1992
(1) Summary of Significant Accounting Policies:
(a) Principles of Consolidation: The consolidated financial statements include the accounts of LNB Bancorp, Inc. (the Corporation) and its wholly owned subsidiary, The Lorain National Bank (the Bank). All material intercompany transactions and balances have been eliminated in consolidation.
(b) Segment of Business: The Corporation's activities are considered to be a single industry segment for financial reporting purposes.
(c) Cash and Cash Equivalents: For purposes of reporting in the Consolidated Statements of Cash Flows, cash and cash equivalents include currency on hand, amounts due from banks, Federal funds sold, and securities purchased under resale agreements. Generally, Federal funds sold and securities purchased under resale agreements are for one day periods.
(d) Securities: Effective January 1, 1994, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires the Corporation to classify debt and equity securities as held to maturity, trading or available for sale. The cumulative effect on retained earnings at December 31, 1994 of adopting SFAS No. 115, is included as a separate component of shareholders' equity in the Consolidated Balance Sheets and represents the after-tax effect of adjusting securities available for sale to fair value. Prior to the adoption of SFAS No. 115, the Corporation recorded investment securities at amortized cost.
Investment securities which are classified as being held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Securities available for sale are carried at fair value with unrealized gains and losses included as a separate component of shareholders' equity, net of tax. Gains or losses on dispositions are based on net proceeds and the carrying value of securities sold, using the specific identification method.
(e) Loans Available for Sale: The Bank has identified certain commercial and student loans which may be sold prior to maturity. These loans are carried at the lower of amortized cost (carrying value) or estimated market value, determined on an aggregate basis for each type of loan available for sale.
(f) Provision 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.
(g) Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed generally on the straight-line method over the estimated useful lives of the assets.
(h) Other Real Estate Owned: Other real estate owned is carried in other assets at fair value, net of estimated costs to sell, not to exceed the cost of property acquired through foreclosure. Neither the Corporation nor the Bank carried any other real estate owned at December 31, 1994 or 1993.
(i) Additional Capital and Retained Earnings: The additional capital account includes amounts received in excess of par value of common stock sold and amounts voluntarily transferred from retained earnings. In the case of stock dividends, the Corporation transfers the market value of shares issued from retained earnings to the common stock and additional capital accounts.
(j) Interest and Fees on Loans: Interest income on loans is accrued on the principal balances of loans outstanding on a "simple interest" basis. Loan origination fees and certain direct origination costs are deferred and amortized over the contractual lives of the related loans on a level yield basis.
(k) Trust Division Assets and Income: Property held by the Corporation in fiduciary or agency capacity for its customers is not included in the accompanying financial statements, as such items are not assets of the Corporation. Income from the Trust Division is reported on an accrual basis.
(l) Federal Income Taxes: The Corporation follows the asset and liability method of accounting for income taxes as prescribed by Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes". Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be removed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(m) Reclassifications: Certain 1992 and 1993 amounts have been reclassified to conform to the 1994 presentation.
(2) Cash and Due From Banks: At December 31, 1994 and 1993, cash and due from banks included approximately $5,726,000 and $6,391,000, respectively, deposited with the Federal Reserve Bank and other banks to compensate for check-clearing, safekeeping, collection and other bank services.
During 1994 and 1993, the average balances on deposit with the Federal Reserve Bank to satisfy reserve requirements approximated $5,719,000 and $5,196,000, respectively.
END PUBLISHED PAGE 10 (3) Securities: The amortized cost, gross unrealized gains and losses and fair values of securities at December 31, 1994 and 1993 follow:
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1994 Cost Gains Losses Value ------------------------------------------------------------------------- Securities available for sale: U.S. Treasury securities $ 9,995,000 $ -0- $(228,000) $9,767,000 Equity securities 343,000 27,000 -0- 370,000 ------------------------------------------------ Total securities available for sale 10,338,000 27,000 (228,000) 10,137,000 ------------------------------------------------
Investment securities: U.S. Treasury securities 80,112,000 14,000 (2,427,000) 77,699,000 Securities of other U.S. Government agencies and corporations 1,500,000 2,000 (8,000) 1,494,000 States and political subdivisions 7,775,000 92,000 (117,000) 7,750,000 ------------------------------------------------- Total investment securities 89,387,000 108,000 (2,552,000) 86,943,000 ------------------------------------------------- Total securities $99,725,000 $135,000 $(2,780,000) $97,080,000 -------------------------------------------------
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1993 Cost Gains Losses Value ------------------------------------------------------------------------- Investment securities: U.S. Treasury securities $88,291,000 $570,000 $(105,000) $ 88,756,000 Securities of other U.S. Government agencies and corporations 3,900,000 59,000 -0- 3,959,000 States and political subdivisions 10,552,000 330,000 (13,000) 10,869,000 ------------------------------------------------- Total debt securities 102,743,000 959,000 (118,000) 103,584,000 ------------------------------------------------- Equity securities available for sale 343,000 25,000 -0- 368,000 ------------------------------------------------- Total securities $103,086,000 $984,000 $(118,000) $103,952,000 -------------------------------------------------
The amortized cost, fair values and yields of debt securities by contractual maturity date at December 31, 1994 follow: Fully-Tax Amortized Fair Equivalent December 31, 1994 Cost Value Yield ------------------------------------------------------------------------- U.S. Treasury securities available for sale: Due within 1 year $4,998,000 $4,901,000 4.03% After 1 but within 5 years 4,997,000 4,866,000 5.30 ------------------------------------------- 9,995,000 9,767,000 4.66 ------------------------------------------- Investment securities: Due within 1 year 36,716,000 36,264,000 4.78 After 1 but within 5 years 49,452,000 47,490,000 5.83 After 5 but within 10 years 3,075,000 3,054,000 8.30 After 10 years 144,000 135,000 7.38 ------------------------------------------- 89,387,000 86,943,000 5.49 ------------------------------------------- Total $99,382,000 $96,710,000 5.41%
=========================================== END PUBLISHED PAGE 11
(3) Securities (continued)
There were no sales of securities in 1994. Proceeds from the sale of securities during 1993 were $4,230,000 resulting in gross realized gains of $140,000 and realized losses of $-0-. Proceeds from the sale of securities during 1992 were $2,012,000 resulting in gross realized gains of $14,000 and realized losses of $-0-.All other redemptions during these three years were in the form of proceeds at maturity or calls by the issuers of debt. The carrying value of securities pledged to secure trust and public deposits and for other purposes required by law amounted to $76,430,000 and $69,951,000 at December 31, 1994 and 1993 respectively.
The fair values of securities are obtained form an independent valuation service. At December 31, 1994 the securities portfolio contained approximately $3,560,000 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 $3,495,000. 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 material impairment to their value as of December 31, 1994.
(4) Loans and Reserve for Possible Loan Losses: Loan balances at December 31, 1994 and 1993 are summarized as follows:
December 31, 1994 1993 -------------------------------------------------------------------------- Real estate loans (includes loans secured primarily by real estate only): Construction and land development $ 24,340,000 $ 19,963,000 One to four family residential 130,066,000 116,299,000 Multi-family residential 7,863,000 7,013,000 Non-farm non-residential properties 59,185,000 59,372,000 Commercial and industrial loans (except those secured primarily by real estate) 16,179,000 20,099,000 Personal loans to individuals: Auto, single payment and installment 17,393,000 15,974,000 Credit card and related plans 4,986,000 5,205,000 Obligations of states and political subdivisions other than securities 1,242,000 1,443,000 All other loans 553,000 389,000 ------------------------------------ TOTAL LOANS 261,807,000 245,757,000 Reserve for possible loan losses (3,832,000) (3,714,000) ------------------------------------ NET LOANS $257,975,000 $242,043,000 ------------------------------------
Activity in the reserve for possible loan losses for 1994, 1993 and 1992 is summarized as follows:
Years ended December 31, 1994 1993 1992 -------------------------------------------------------------------------- Balance at beginning of year $3,714,000 $3,406,000 $2,803,000 Provision for possible loan losses 400,000 500,000 700,000 Loans charged-off (399,000) (515,000) (372,000) Recoveries on loans previously charged-off 117,000 323,000 275,000 -------------------------------------------- BALANCE AT END OF YEAR $3,832,000 $3,714,000 $3,406,000 --------------------------------------------
At December 31, 1994 and 1993, $7,918,000 and $4,981,000 of commercial and student loans were available for sale in the secondary market.
At December 31, 1994, the Bank had firm commitments for the sale of approximately $1,257,000 of these loans. No provision for loss on the carrying value of these loans was necessary at December 31, 1994.
END PUBLISHED PAGE 12
(5) Bank Premises and Equipment:
Bank premises and equipment are summarized as follows: December 31, 1994 1993 ------------------------------------------------------------------------- Land $ 1,941,000 $ 1,901,000 Buildings 8,549,000 6,412,000 Equipment and furniture 10,920,000 9,376,000 Leasehold improvements 441,000 439,000 Construction in progress -0- 979,000 --------------------------------------------- 21,851,000 19,107,000 --------------------------------------------- Less accumulated depreciation and amortization 11,169,000 10,769,000 --------------------------------------------- TOTAL $10,682,000 $ 8,338,000 ---------------------------------------------
Depreciation and amortization of Bank premises and equipment charged to other expense amounted to $1,170,000 in 1994, $1,052,000 in 1993 and $1,086,000 in 1992.
Amortization of purchased software charged to other operating expenses amounted to $155,000 in 1994, $155,000 in 1993 and $152,000 in 1992.
At December 31, 1994, 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 ----------------------------------------------------------- 1995 $80,000 $66,000 1996 31,000 50,000 1997 14,000 39,000 1998 4,000 5,000 1999 and thereafter -0- -0- ------------------------
Rentals paid under leases on branch offices and equipment, respectively, amounted to $106,000 and $65,000 in 1994, $99,000 and $74,000 in 1993 and $98,000 and $80,000 in 1992.
(6) Deposits: Deposit balances at December 31, 1994 and 1993 are summarized as follows:
December 31, 1994 1993 -------------------------------------------------------------------------- Demand and other noninterest- bearing deposits: Individuals, partnerships and corporations $ 47,743,000 $ 43,321,000 U.S. Government 1,595,000 837,000 States and political subdivisions 4,032,000 2,246,000 Certified, official, travelers checks and other 3,726,000 3,837,000 ----------------------------------- Total demand and other noninterest- bearing deposits 57,096,000 50,241,000 ----------------------------------- Savings and passbook accounts: Individuals and non-profit organizations 152,126,000 152,985,000 Corporations and profit organizations 18,969,000 19,911,000 ----------------------------------- Total savings and passbook accounts 171,095,000 172,896,000 ----------------------------------- Time deposits: Individuals, partnerships and corporations 93,484,000 87,085,000 States and political subdivisions 13,544,000 10,790,000 ------------------------------------ Total time deposits 107,028,000 97,875,000 ------------------------------------ TOTAL DEPOSITS $335,219,000 $321,012,000 ------------------------------------
The maturity distribution of time certificates of deposit over $100,000 as of December 31, 1994 and 1993 follows:
After 3 After 6 Months Months Within 3 But Within But Within Months 6 Months 1 Year ------------------------------------------------------------------------- December 31, 1994 $17,802,000 $3,357,000 $ 3,680,000 ------------------------------------------------------------------------- December 31, 1993 $4,199,000 $2,908,000 $ 8,680,000 -------------------------------------------------------------------------
After 1 After 2 Year But Years But Within Within 2 Years 5 Years Total ------------------------------------------------------------------------- December 31, 1994 $ 600,000 $1,213,000 $26,652,000 ------------------------------------------------------------------------- December 31, 1993 $ 335,000 $1,323,000 $17,445,000 -------------------------------------------------------------------------
END PUBLISHED PAGE 13
(7) Short-Term Borrowings: Information relating to short-term borrowings for the years ended December 31, 1994 and 1993 follows:
1994 1993 -------------------------------------------------------------------------- Securities sold under repurchase agreements and other short-term borrowings At December 31: Outstanding $19,171,000 $19,400,000 Interest rate 5.360% 2.503% Average for the period: Outstanding $21,106,000 $15,483,000 Interest rate 3.575% 2.584% Maximum month-end outstanding $30,750,000 $19,756,000 Construction line of credit At December 31: Outstanding $ -0- $ 1,100,000 Interest rate 0.000% 3.945% Average for the period: Outstanding $ 2,061,000 $ 69,000 Interest rate 4.895% 3.945% Maximum month-end outstanding $ 2,750,000 $ 1,100,000
In December of 1993, the Corporation obtained a $3,000,000 construction line of credit from a commercial bank to fund the expansion of the Bank's main office complex. The Corporation made monthly draws on the line to pay billings from construction contractors. The term of the line was 15 months. The interest rate was based upon the current LIBOR rate plus fifty basis points and was adjustable monthly.
The line was collateralized with $3,400,000 of U.S. Treasury securities. During construction the interest and fee from the line were capitalized as part of the construction in progress. When the building was placed into service in August 1994, a total of approximately $61,000 in interest and fees had been capitalized. In December 1994 the line was paid off and no further draws are anticipated.
END PUBLISHED PAGE 14
(8) Federal Income Taxes: Effective January 1, 1993, the Corporation adopted SFAS No. 109 on a prospective basis. The cumulative effect of this change in accounting method did not have a material impact on the Corporation's consolidated financial position or results of operations.
In 1992 and prior years, deferred income taxes were reported under APB Opinion 11. Pursuant to the deferred method under APB Opinion 11, deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Under APB Opinion 11, deferred taxes are not adjusted for subsequent changes in tax rates. Federal income tax expense for prior years' financial statements has not been restated. Income taxes on gains from sales of loans and investment securities are provided at the statutory income tax rate and included in the current portion of the provision.
The components of deferred Federal income tax (benefit) are as follows:
Years ended December 31, 1994 1993 1992 ------------------------------------------------------------------------- Provision for possible loan losses $ (40,000) $(105,000) $(205,000) Depreciation 39,000 (8,000) (82,000) Accrued expenses 48,000 (22,000) (45,000) Pension expense 4,000 32,000 (24,000) Deferred loan fees and costs 2,000 23,000 (24,000) Other, net 12,000 0 0 --------------------------------------------- DEFERRED FEDERAL INCOME TAX (BENEFIT) $ 65,000 $ (80,000) $(380,000) ---------------------------------------------
The following presents a reconciliation of the total Federal income taxes as shown on the Consolidated Statements of Income with that which would be completed by applying the statutory Federal tax rate of 34 percent to income before Federal income taxes.
Years ended December 31, 1994 1993 1992 ------------------------------------------------------------------------- Computed "expected" tax expense $2,146,000 $1,987,000 $1,828,000 Increase (reduction) in income taxes resulting from: Tax exempt interest on obligations of states and political subdivisions (216,000) (212,000) (308,000) Other, net (49,000) 40,000 30,000 --------------------------------------------- TOTAL FEDERAL INCOME TAXES $1,881,000 $1,815,000 $1,550,000 ---------------------------------------------
Net deferred Federal tax assets of $1,101,000 and $1,098,000 at December 31, 1994 and 1993 respectively, are included in other assets on the consolidated balance sheets. Management believes that it is more likely than not that the deferred tax assets will be realized. The tax effect 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, 1994 1993 ------------------------------------------------------------------------- Deferred Federal tax assets: Reserve for possible loan losses 859,000 839,000 Deferred compensation 132,000 118,000 Accrued pension expense 106,000 109,000 Accrued vacation payable 105,000 102,000 Deferred loan fees and costs 162,000 160,000 Securities available for sale 68,000 -0- Other, net 2,000 2,000 ---------------------------- Total deferred Federal tax assets 1,434,000 1,330,000
Deferred Federal tax liabilities: Bank premises and equipment (147,000) (111,000) Deferred charges (186,000) (121,000) ---------------------------- Total deferred Federal tax liabilities (333,000) (232,000) NET DEFERRED FEDERAL TAX ASSETS 1,101,000 1,098,000 ---------------------------- END PUBLISHED PAGE 15
(9) Parent Company:
Substantially all of the retained earnings of the Corporation represent undistributed net income of its subsidiary. Dividends paid by the subsidiary are subject to restrictions by the Office of the Comptroller of the Currency.
As of December 31, 1994, retained earnings available for payment of dividends without obtaining regulatory approval amounted to approximately $4,026,000. Condensed financial information of LNB Bancorp, Inc. (Parent Company only) is as follows:
Condensed Balance Sheets
ASSETS: December 31, 1994 1993 -------------------------------------------------------------------------- Cash $ 941,000 $ 994,000 Investment in subsidiary at equity in underlying value of its net assets 32,879,000 30,512,000 Investment securities 4,181,000 4,353,000 Construction in progress -0- 979,000 Due from Bank -0- 979,000 Other assets 54,000 51,000 ----------------------------------- $38,055,000 $37,868,000 ----------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: December 31, 1994 1993 -------------------------------------------------------------------------- Dividends payable $ 544,000 $ 496,000 Other liabilities -0- 2,000 Construction line of credit -0- 1,100,000 Construction obligations -0- 1,210,000 Shareholders' equity: Common stock, $1.00 par 3,200,000 3,098,000 Additional capital 18,415,000 15,858,000 Retained earnings 16,028,000 16,104,000 Net unrealized securities losses (132,000) -0- ------------------------------------ Total shareholders' equity 37,511,000 35,060,000 ------------------------------------ $38,055,000 $37,868,000 ------------------------------------
Condensed Statements of Income Years ended December 31, 1994 1993 1992 -------------------------------------------------------------------------- INCOME: Cash dividends from subsidiary $1,841,000 $4,725,000 $1,555,000 Interest and other income 209,000 106,000 78,000 ---------------------------------------------- 2,050,000 4,831,000 1,633,000 EXPENSES: Other expenses 70,000 74,000 35,000 ---------------------------------------------- Income before Federal income taxes and equity in undistributed net income of subsidiary 1,980,000 4,757,000 1,598,000 Federal income tax expense 47,000 11,000 15,000 ---------------------------------------------- 1,933,000 4,746,000 1,583,000 Equity in undistributed net income of subsidiary 2,499,000 (717,000) 2,243,000 ---------------------------------------------- NET INCOME $4,432,000 $4,029,000 $3,826,000 ----------------------------------------------
Condensed Statements of Cash Flows Years ended December 31, 1994 1993 1992 -------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Dividends from subsidiary $1,841,000 $4,725,000 $1,555,000 Other, net 89,000 (23,000) 15,000 --------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,930,000 4,702,000 1,570,000 --------------------------------------------- CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES: Proceeds from maturities of investment securities 622,000 496,000 635,000 Purchases of investment scurities (450,000) (3,654,000) (799,000) Proceeds from sale of building to Bank 2,855,000 -0- -0- Construction of Bank permises (2,109,000) -0- -0- Cash paid on line of credit (2,768,000) -0- -0- Investment in construction in progress, net -0- (746,000) -0- Proceeds from line of credit 1,668,000 1,100,000 -0- Proceeds from exercise of stock options 56,000 204,000 143,000 Dividends paid (1,857,000) (1,671,000) (1,515,000) --------------------------------------------- NET CASH USED IN INVESTING AND FINANCING ACTIVITIES (1,983,000) (4,271,000) (1,536,000) --------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS (53,000) 431,000 34,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 994,000 563,000 529,000 --------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 941,000 $ 994,000 $ 563,000 END OF PUBLISHED PAGE 16 ---------------------------------------------
(10) Retirement Plan: The Bank maintains a non-contributory defined benefit pension plan covering substantially all of its employees. In general, benefits are based on years of service and the employee's level of compensation. The Bank's policy is to fund the pension plan according to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
The net periodic pension costs charged to other expenses amounted to $128,000 in 1994, $124,000 in 1993 and $72,000 in 1992. An analysis of net periodic pension cost for 1994, 1993 and 1992 is presented below.
An analysis which sets forth the plan's funded status at December 31, 1994 and 1993 is also 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 7.75% and 5.50%, respectively for 1994 and 7.25% and 5.25%, respectively for 1993. The expected long-term rate of return on assets was 8.0% for both 1994 and 1993.
Components of Net Periodic Pension Cost: 1994 1993 1992 ------------------------------------------------------------------------- Service cost $ 229,000 $ 212,000 $ 198,000 Interest cost of projected benefit obligation 467,000 439,000 398,000 Actual return on plan assets (131,000) (483,000) (365,000) Net total of other components (437,000) (44,000) (159,000) --------------------------------------------- Net periodic pension cost $ 128,000 $ 124,000 $ 72,000 ---------------------------------------------
Actuarial Present Value of Benefit Obligations: 1994 1993 -------------------------------------------------------------------------- Accumulated benefit obligation including vested benefits of $(4,800,000) in 1994 and $(4,660,000) in 1993 $(4,924,000) $(4,806,000) ----------------------------------- Projected benefit obligation $(6,370,000) $(6,162,000) Plan assets at market value, primarily U. S. Government securities and investments in bond and equity funds 6,405,000 6,410,000 ----------------------------------- Plan assets in excess of projected benefit obligations 35,000 248,000 Unrecognized net (gains) losses subsequent to transition 183,000 (61,000) Unrecognized prior service cost (363,000) (311,000) Unrecognized net assets, being recognized over employees' average remaining service life (167,000) (198,000) ----------------------------------- Accrued pension cost $ (312,000) $ (322,000) -----------------------------------
(11) Stock Option Plan: The Corporation's shareholders approved incentive stock option plans on April 6, 1982 and April 16, 1985 for all officers at or above the position of Vice President or equivalent. Under each plan, 50,000 shares of stock were originally reserved. Options may be granted at fair market value at the date of the grant and, accordingly, no charges are reflected in salaries and employee benefits expense due to the granting of stock options. The excess of the option price over the par value of the shares purchased through the exercise of stock options is credited to additional capital. Options granted under the plans may not be outstanding for periods exceeding 10 years. On December 27, 1993, the remaining 17,165 options available for granting under the 1985 plan, were awarded to officers by the employee benefits committee, in accordance with the plan agreement. The grant price of the options was $25.49.
During 1994, stock options amounting to 9,334 shares were exercised at a price of $6.01. An analysis of the status of the stock option plans as of December 31, 1994 follows:
Plan Year 1985 1982 -------------------------------------------------------------------------- Options outstanding: Total 55,310 12,121 Vested 55,310 9,091 Options available for granting -0- -0- Range of exercise prices $6.01-$25.49 $19.04 -------------------------------------------------------------------------- Pursuant to the terms of the plans, share information and exercise prices have been adjusted to reflect the impact of stock splits and dividends subsequent to the granting dates of the options.
END PUBLISHED PAGE 17
(12) Employee Stock Ownership Plan: The Lorain National Bank Employee Stock Ownership Plan (ESOP) is a non-contributory plan that covers substantially all employees. Contributions by the Bank to the ESOP are discretionary and subject to approval by the Board of Directors. Contributions are expensed in the year in which they are approved and totaled $375,000, $327,000, and $351,000 in 1994, 1993, and 1992, respectively.
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, 1994 1993 1992 -------------------------------------------------------------------------- Cash dividend income $ 31,000 $ 23,000 $ 19,000 Stock dividend/split shares 1,350 8,419 836 Shares purchased 12,216 8,699 5,000 Shares distributed 101 3,826 551 Year end holdings: Shares 57,466 44,001 30,709 Market value $1,731,000 $1,155,000 $837,000 As a percentage of total plan assets 57.6% 49.3% 42.5%
(13) Stock Purchase Plan: The Bank maintains a voluntary Stock Purchase Plan. Under provisions of the plan, a participating employee can contribute up to 6% of their compensation. The Bank then makes a contribution equal to 50% of each participant's contribution. The plan uses the contributions to purchase Corporation common stock at fair market value. The common stock is distributed to plan participants, under provisions of the plan, based upon the participant's cumulative prorata share of plan assets.
The Bank's 50% matching contributions are expensed in the year in which the associated participant contributions are made and totaled $105,000, $88,000 and $86,000 in 1994, 1993 and 1992, respectively. At December 31, 1994, 189 Bank employees were participating in the plan.
Transactions by the Stock Purchase Plan relating to the activity in the Corporation's common stock are summarized below:
Years ended December 31, 1994 1993 1992 -------------------------------------------------------------------------- Cash dividend income $ 63,000 $ 54,000 $ 56,000 Stock dividend/split shares 3,052 19,955 2,495 Shares purchased 18,991 3,130 11,417 Shares distributed 8,765 14,534 11,496 Year end holdings: Shares 109,419 96,141 87,590 Market value $3,296,000 $2,524,000 $2,387,000 As a percentage of total plan assets 96.9% 87.5% 94.3%
(14) Transactions With Related Parties: The Corporation makes no loans to officers, directors and their affiliates other than on substantially the same terms and conditions as transactions with other parties.
An analysis of loans outstanding to related parties follows:
Years ended December 31, 1994 1993 ------------------------------------------------------------------------- Aggregate amount at beginning of year $3,186,000 $2,744,000 Additions (deductions): New loans 31,000 768,000 Repayments (444,000) (325,000) Changes in directors and officers and/or their affiliations, net -0- (1,000) ------------------------------------------------------------------------- Aggregate amount at end of year $2,773,000 $3,186,000 -------------------------------------------------------------------------
(15) Per Share Data: Earnings per common and common equivalent shares (stock options) have been computed using the weighted average number of shares outstanding during each year after giving consideration to the dilutive effect of shares granted under incentive stock option plans, the 3% stock dividend in 1994 and the five-for-four stock split in 1993.
(16) Commitments and Contingencies: In the normal course of business, the Corporation is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These instruments are currently limited to commitments to extend credit and standby letters of credit.
These instruments possess credit risk characteristics which are essentially the same as that involved in extending loans to customers and are subject to the Corporation's normal credit policies.
The Corporation's maximum potential obligation to extend credit for financial instruments with off-balance sheet risk at December 31, 1994 was:
Commitments to extend credit $62,752,000 Standby letters of credit 1,368,000 ----------- Total $64,120,000 ----------- Most of the Corporation's business activity is with customers located within the Corporation's defined market area. As of December 31, 1994, the Corporation had no significant concentrations of credit risk in its loan portfolio. The Corporation also has no exposure to highly leveraged transactions and no foreign credits in its loan portfolio.
There are pending against the Corporation various lawsuits and claims which arise in the normal course of business. In the opinion of management, any liabilities that may result from pending lawsuits and claims will not materially affect the financial position of the Corporation.
(17) Recent Accounting and Regulatory Pronouncements: The Financial Accounting Standards Board and Federal regulators have issued several pronouncements which are or will be impacting the Corporation. These pronouncements are briefly discussed on page 27 of this report.
END PUBLISHED PAGE 18
(18) Estimated Fair Value of Financial Instruments: Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures about Fair Value of Financial Instruments" requires that the Corporation disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and due from banks and Federal funds sold and other interest-bearing instruments: For those short-term investments, the carrying amount is a reasonable estimate of fair value.
Securities: The fair value of securities is based on quoted prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments.
Loans: For variable rate loans with interest rates that may be adjusted on a quarterly, or more frequent basis, the carrying amount is a reasonable estimate of fair market value. The fair value of other types of loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Accrued interest, accounts receivable and other financial assets: For these short-term financial instruments, the carrying amount is a reasonable estimate of fair value.
Deposits: Under SFAS No. 107, the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market, checking and NOW accounts, is equal to the amount payable on demand as of December 31, for each year presented. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. For variable rate certificates of deposit, the carrying amount is a reasonable estimate of fair value.
Securities sold under repurchase agreements and other short-term borrowings: For this short term debt, the carrying amount is a reasonable estimate of fair value.
Accrued dividends and interest and other financial liabilities: For these short-term financial instruments, the carrying amount is a reasonable estimate of fair value.
Commitments to extend credit and standby letters of credit: The difference between the notional amount and the estimated fair value of these commitments is not material.
Limitations: Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Estimates of fair value are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has a substantial trust division that contributes net fee income annually. The Trust Division is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include property, plant, and equipment and deferred tax liabilities. In addition, it is not practicable for the Corporation to estimate the tax ramifications related to the realization of the unrealized gains and losses and they have not been reflected in any of the estimates of fair value. The impact of these tax ramifications can have a significant effect on estimates of fair value.
The estimated fair values of the Corporation's financial instruments at December 31, 1994 and 1993 are summarized as follows:
December 31, 1994 1993 ------------------------------------------------------------------------- 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 $ 21,275,000 $ 21,275,000 $ 21,276,000 $ 21,276,000 instruments ============ ============ ============ ============
Securities $ 99,524,000 $ 97,080,000 $103,086,000 $103,952,000 ============ ============ ============ ============ Loans $261,807,000 $245,757,000 Reserve for possible loan (3,832,000) (3,714,000) losses ------------ ------------ Net loans $257,975,000 $258,456,000 $242,043,000 $245,528,000 ============ ============ ============ ============ Accrued interest, accounts receivable and other financial assets $ 3,823,000 $ 3,823,000 $ 3,464,000 $ 3,464,000 ============ ============ ============ ============ Financial liabilities: Deposits: Demand deposits, savings accounts and money market deposits $228,191,000 $228,191,000 $223,137,000 $223,137,000 Certificates of 107,028,000 106,881,000 97,875,000 99,122,000 deposit ------------ ------------ ------------ ------------ Total deposits $335,219,000 $335,072,000 $321,012,000 $322,259,000 ============ ============ ============ ============ Securities sold under repurchase agree- ments and other short-term borrowings 19,171,000 $ 19,171,000 $ 19,400,000 $ 19,400,000 repurchase ============ ============ ============ ============ Accrued dividends and interest and other financial $ 2,336,000 $ 2,336,000 $ 3,438,000 $ 3,438,000 liabilities ============ ============ ============ ============
END PUBLISHED PAGE 19
Report of Management
To The Shareholders of LNB Bancorp, Inc. January 17, 1995
The integrity of the financial statements and other financial information contained in this Annual Report is the responsibility of the management of LNB Bancorp, Inc. Such financial information has been prepared in accordance with generally accepted accounting principles, based on the best estimates and judgement of management.
LNB Bancorp, Inc. maintains an internal control structure designed to provide reasonable assurance that transactions are executed and recorded in accordance with management's authorizations, that assets are properly safeguarded, that financial information is objective and reliable and that compliance with laws and regulations is maintained. Because of the inherent limitations in any system of internal control there can be no absolute assurance that errors or irregularities will not occur. Nevertheless, management believes that the internal control structure and related control procedures provide reasonable assurance that the objectives cited above are being attained.
The internal control structure includes the careful delineation of functions, the proper selection and training of staff, the communication of policies and procedures consistent with the highest standards of business conduct and the maintenance of an internal audit function that independently evaluates and formally reports on the adequacy and effectiveness of the system.
The Audit Committee of the Board of Directors is composed entirely of outside directors who are independent of management and meets periodically with both internal and independent auditors to review the results and recommendations of their audits. The Committee selects the independent auditor with approval by the shareholders.
The accounting firm of KPMG Peat Marwick LLP has been engaged by LNB Bancorp, Inc. to audit its financial statements and their report follows.
/s/ Stanley G. Pijor /s/ Gregory D. Friedman
Stanley G. Pijor Gregory D. Friedman Chairman and Senior Vice President and Chief Executive Officer Chief Financial Officer
Independent Auditors' Report KPMG Peat Marwick LLP (LOGO)
The Board of Directors 1500 National City Center LNB Bancorp, Inc. 1900 East Ninth Street Cleveland, OH 44114-3495
We have audited the accompanying consolidated balance sheets of LNB Bancorp, Inc. and subsidiary as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in cash flows and shareholders' equity for each of the years in the three-year period ended December 31, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in the notes to consolidated financial statements, in 1994 the Corporation changed its method of accounting for certain investments in debt and equity securities and in 1993 changed its method of accounting for income taxes.
/s/ KPMG Peat Marwick LLP
January 17, 1995
END PUBLISHED PAGE 20
Selected Quarterly Financial Data
Quarterly financial and per share data for the years ended December 31, 1994, 1993 and 1992 are summarized as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter -------------------------------------------------------------------------- Total interest income 1994 $6,197,000 $6,480,000 $6,901,000 $7,252,000 1993 6,501,000 6,462,000 6,507,000 6,422,000 1992 6,958,000 6,935,000 6,873,000 6,699,000 -------------------------------------------------------------------------- Total interest expense 1994 1,928,000 1,972,000 2,176,000 2,496,000 1993 2,226,000 2,156,000 2,134,000 2,024,000 1992 2,840,000 2,671,000 2,396,000 2,316,000 -------------------------------------------------------------------------- Net interest income 1994 4,269,000 4,508,000 4,725,000 4,756,000 1993 4,275,000 4,306,000 4,373,000 4,398,000 1992 4,118,000 4,264,000 4,477,000 4,383,000 -------------------------------------------------------------------------- Provision for possible 1994 100,000 100,000 100,000 100,000 loan losses 1993 150,000 100,000 125,000 125,000 1992 150,000 150,000 150,000 250,000 -------------------------------------------------------------------------- Net interest income 1994 4,169,000 4,408,000 4,625,000 4,656,000 after provision for 1993 4,125,000 4,206,000 4,248,000 4,273,000 loan losses 1992 3,968,000 4,114,000 4,327,000 4,133,000 -------------------------------------------------------------------------- Other income 1994 929,000 1,033,000 1,060,000 1,112,000 1993 918,000 1,052,000 1,009,000 1,030,000 1992 848,000 913,000 889,000 969,000 -------------------------------------------------------------------------- Other expenses, 1994 4,064,000 4,360,000 4,552,000 4,584,000 including Federal 1993 4,041,000 4,276,000 4,237,000 4,278,000 income taxes 1992 3,914,000 4,050,000 4,250,000 4,121,000 -------------------------------------------------------------------------- Net income 1994 $1,034,000 $1,081,000 $1,133,000 $1,184,000 1993 1,002,000 982,000 1,020,000 1,025,000 1992 902,000 977,000 966,000 981,000 -------------------------------------------------------------------------- Net income per share 1994 $ .32 $ .34 $ .35 $ .36 1993 .31 .30 .32 .32 1992 .28 .31 .30 .31 --------------------------------------------------------------------------
END PUBLISHED PAGE 21
Management's Discussion and Analysis
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 1994 Annual Report to Shareholders. LNB Bancorp, Inc. is a locally owned one bank holding company whose wholly owned banking subsidiary is The Lorain National Bank (the Bank). LNB Bancorp, Inc. is headquartered in Lorain, Ohio and the Bank operates seventeen banking offices in Lorain and western Cuyahoga counties. It is a full service commercial bank offering personal, trust and business services and products. The Bank is committed to enhance its position as a community leader by providing quality customer service.
Earnings Summary: LNB Bancorp, Inc.'s consolidated 1994 net income reached a record high of $4,432,000, compared to $4,029,000 in 1993 and $3,826,000 in 1992. Net income for 1994 and 1993 was favorably affected by a reduction in the provision for possible loan losses and increased noninterest income. Earnings per share totaled $1.37 for 1994 compared to $1.25 for 1993 and $1.20 for 1992. Prior period earnings per share data have been restated to reflect the five-for-four stock split in 1993 and the 3% stock dividend in 1994. The return on average assets increased to 1.13% in 1994 from 1.08% in 1993 and 1.07% in 1992.
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 77.4% in 1993 to 79.1% in 1994. The amount of non-performing loans remained at relatively low levels during the period from 1992 through 1994. This is the result of management's aggressive approach to loan collections and charge-offs. Non-performing loans did not have a material impact on interest income during 1992, 1993 or 1994. Additional information regarding the loan portfolio is presented on page 12. Interest and dividends on securities and Federal funds sold, as a percentage of total interest income, on a fully-tax equivalent basis, decreased from 22.6% in 1993 to 20.9% in 1994. This decrease results from a lower yield on the securities portfolio, even though the average balance of the security portfolio increased from 1992 to 1994. The market rates on securities decreased from 1992 through 1994. The lower yield of the security portfolio is the result of 1993 and some 1994 purchases of securities with lower interest rates than those securities that matured in 1993 and 1994. This trend began to reverse during the second half of 1994 when interest rates on securities started to rise. The cost of interest-bearing liabilities in 1994 was $8,572,000 compared to $8,540,000 and $10,223,000 in 1993 and 1992, respectively. The favorable impact of decreases in rates more than offset increases in volume and caused interest expense to drop from 1992 through 1993. Repricing of interest-bearing liabilities from 1992 through 1994 resulted in a significant net favorable change in interest expense during 1993. The favorable impact of decreases in deposit rates began to diminish during 1994 and were offset by increases in volume. This caused interest expense to remain relatively constant from 1993 to 1994.
Net interest margin 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 interest rate movements, economic conditions and credit demand. A summary of the impacts of volume and rate changes on the Corporation's net interest margin is presented on the next page. Changes in net interest margin 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 margin on a fully-tax equivalent basis increased by $901,000 in 1994 from $17,652,000 in 1993 to $18,553,000 in 1994. Net interest margin in 1994 was affected by increases in the volume of interest-bearing assets and liabilities plus increases in market interest rates. The cost of funds dropped from 2.98% in 1993 to 2.87% in 1994, or a total of 11 basis points. During the same period, the yield on earning assets fell 12 basis points to 7.45% in 1994, compared to 7.57% in 1993, resulting in a slight decrease in the interest spread. Net interest margin in 1993 increased by $4,000 from $17,648,000 in 1992 to $17,652,000 in 1993. This increase was affected by increases in the volume of interest-bearing assets and liabilities plus decreases in market interest rates. The cost of funds dropped from 3.64% in 1992 to 2.98% in 1993, or a total of 66 basis points. During the same period, the yield on earning assets fell 77 basis points to 7.57% in 1993, compared to 8.34% in 1992, resulting in a decrease in the interest spread by 11 basis points in 1993. However, the decrease in the interest spread was equally offset by increases in the volume of earning assets, which were greater than the increases in the volume of interest-bearing liabilities. Thus, net interest margin from 1992 to 1993 was relatively constant.
END PUBLISHED PAGE 22
Condensed Consolidated Average Balance Sheets Fully-Tax Equivalent Interest Rate and Interest Differential
December 31, 1994 -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate ---------------------------------------------- ASSETS: Securities $ 93,658 $ 4,513 4.82% Securities-tax exempt 11,113 859 7.73 Federal funds sold and other interest-bearing instruments 7,140 297 4.16 Loans 251,017 21,353 8.51 Loans-tax exempt 1,328 103 7.76 ---------------------------------------------- TOTAL EARNING ASSETS 364,256 27,125 7.45 ---------------------------------------------- Reserve for possible loan losses (3,836) Cash and due from banks 16,277 Other assets 14,627 ---------------------------------------------- TOTAL ASSETS $391,324 ---------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $275,968 7,761 2.81 Short-term borrowings 23,167 811 3.50 ---------------------------------------------- TOTAL INTEREST- 299,135 8,572 2.87 BEARING LIABILITIES ---------------------------------------------
Noninterest-bearing deposits 53,143 Other liabilities 2,626 Shareholders' equity 36,420 ---------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $391,324 ---------------------------------------------- NET INTEREST INCOME $18,553 ---------------------------------------------- NET YIELD ON EARNING ASSETS 5.09% ----------------------------------------------
Condensed Consolidated Average Balance Sheets Fully-Tax Equivalent Interest Rate and Interest Differential
December 31, 1993 -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate -------------------------------------------- ASSETS: Securities $ 88,037 $ 4,754 5.40% Securities-tax exempt 11,089 889 8.02 Federal funds sold and other interest-bearing instruments 9,179 274 2.99 Loans 236,058 20,158 2.54 Loans-tax exempt 1,613 117 7.25 ---------------------------------------------- TOTAL EARNING ASSETS 345,976 26,192 7.57 ---------------------------------------------- Reserve for possible loan losses (3,670) Cash and due from banks 16,450 Other assets 12,779 ---------------------------------------------- TOTAL ASSETS $371,535 ----------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $271,030 8,138 3.00 Short-term borrowings 15,483 402 2.60 ---------------------------------------------- TOTAL INTEREST- 286,513 8,540 2.98 BEARING LIABILITIES ----------------------------------------------
Noninterest-bearing deposits 48,572 Other liabilities 2,592 Shareholders' equity 33,858 ---------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $371,535 ---------------------------------------------- NET INTEREST INCOME $17,652 ---------------------------------------------- NET YIELD ON EARNING ASSETS 5.10% ----------------------------------------------
Condensed Consolidated Average Balance Sheets Fully-Tax Equivalent Interest Rate and Interest Differential
December 31, 1992 -------------------------------------------------------------------------- (Dollars in Thousands) Balance Interest Rate ---------------------------------------------- ASSETS: Securities $ 81,954 $ 5,416 6.61% Securities-tax exempt 14,042 1,226 8.73 Federal funds sold and other interest-bearing instruments 10,414 356 3.42 Loans 225,851 20,725 9.18 Loans-tax exempt 1,929 148 7.67 ---------------------------------------------- TOTAL EARNING ASSETS 334,190 27,871 8.34 ---------------------------------------------- Reserve for possible loan losses (3,124) Cash and due from banks 15,608 Other assets 11,980 ---------------------------------------------- TOTAL ASSETS $358,654 ---------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $261,708 9,627 3.68 Short-term borrowings 19,426 596 3.07 ---------------------------------------------- TOTAL INTEREST- 281,134 10,223 3.64 BEARING LIABILITIES ----------------------------------------------
Noninterest-bearing deposits 43,426 Other liabilities 2,645 Shareholders' equity 31,449 ---------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $358,654 ---------------------------------------------- NET INTEREST INCOME $17,648 ---------------------------------------------- NET YIELD ON EARNING ASSETS 5.28% ----------------------------------------------
Rate/Volume Analysis of Net Interest Income Fully-Tax Equivalent
Years ended December 31, 1994 and 1993 ------------------------------------------------------------------------- (Dollars in Thousands) Increase (Decrease) In Interest Income/Expense --------------------------------------------- Volume Rate Total ---------------------------------------------
Securities $ 304 $ (545) $ (241) Securities-tax exempt 2 (32) (30) Federal funds sold and other interest- bearing instruments (61) 84 23 Loans 1,277 (82) 1,195 Loans-tax exempt (21) 7 (14) --------------------------------------------- TOTAL INTEREST INCOME 1,501 (568) 933 --------------------------------------------- Interest-bearing deposits 148 (525) (377) Short-term borrowings 197 212 409 --------------------------------------------- TOTAL INTEREST EXPENSE 345 (313) 32 --------------------------------------------- NET INTEREST INCOME $ 1,156 $ (255) $ 901 ---------------------------------------------
Rate/Volume Analysis of Net Interest Income Fully-Tax Equivalent
Years ended December 31, 1993 and 1992 ------------------------------------------------------------------------- (Dollars in Thousands) Increase (Decrease) In Interest Income/Expense --------------------------------------------- Volume Rate Total ---------------------------------------------
Securities $ 402 $(1,064) $ (662) Securities-tax exempt (258) (79) (337) Federal funds sold and other interest- bearing instruments (42) (40) (82) Loans 937 (1,504) (567) Loans-tax exempt (24) (7) (31) --------------------------------------------- TOTAL INTEREST INCOME 1,015 (2,694) (1,679) --------------------------------------------- Interest-bearing deposits 343 (1,832) (1,489) Short-term borrowings (121) (73) (194) --------------------------------------------- TOTAL INTEREST EXPENSE 222 (1,905) (1,683) --------------------------------------------- NET INTEREST INCOME $ 793 $ (789) $ 4 ---------------------------------------------
END PUBLISHED PAGE 23
Results from Operations (continued): The net yield on earning assets in 1994 was 5.09% compared to 5.10% in 1993 and 5.28% in 1992. 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. Total other income in 1994 increased by $125,000 to $4,134,000 as compared to 1993. This increase resulted from increases in trust division income of $91,000 and increases of other service charges of $195,000. The increase in other service charge is the result of pricing increases in credit card and merchant fees. Other operating income and gains on sales of loans and securities decreased by $56,000 and $121,000, respectively. Total other income in 1993 increased to $4,009,000 compared to $3,619,000 in 1992 for an increase of $390,000. This increase primarily results from increases from Trust Division income of $69,000, service charges of $89,000, security gains of $140,000 and gains on sales of loans of $51,000. Total other expenses increased 4.4% in 1994 compared to 1993 after a 1.6% increase for 1993 compared to 1992. A significant poriton of the increases in 1994 and 1993 were the result of the affects of inflation on salaries and benefits plus increases in furniture and equipment expenses. Total other expenses in 1993 were also affected by increases in Ohio franchise taxes and postage and supplies. This increase was more than offset by decreases in net occupancy expense of premises and furniture and equipment expenses. The effective tax rate of the Corporation was 29.8%, 31.1%, and 28.8% in 1994, 1993, and 1992, respectively. The increase in the effective tax rate in 1993 was primarily due to lower levels of tax-exempt income. The decrease in the effective tax rate in 1994 was due primarily to the favorable outcome of a Federal tax examination. A detailed analysis of Federal income taxes is presented on page 15. The Corporation's consolidated statements of income reflect the effects of inflation. Since interest rates, loan demand and deposit levels are related to inflation, the resulting changes in interest sensitive assets and liabilities are reflected in net interest income. Similarly, operating expenses such as salaries, rents and maintenance are affected by inflation. The only major expense items which do not reflect inflation are depreciation and amortization as these expenses are based on original purchase costs. Selected quarterly financial data for 1994, 1993 and 1992 is presented on page 21. There were no significant intra-quarter fluctuations except for fourth quarter increases in other income in 1994 and 1992. The increase in other income reflects the realization of annual Trust Division billings which are based on year end market values. The fourth quarter of 1992 also reflects the impact of a $100,000 increase in the provision for possible loan losses. Management decided that it would be prudent to increase the general provision for possible loan losses due to the potential impacts of the weak economy.
Financial Condition: The earning assets mix has changed considerably from December 31, 1993 to December 31, 1994. During this period, loans increased by $16,050,000 and investment securities increased by $3,562,000. Increases in loans and are primarily funded by growth in deposits, current retained arnings, and reductions in Federal funds sold. The economy showed moderate rowth during 1994 which stimulated loan demand. The maturity distribution of investment securities at amoritized cost which appears on page 11 of this report, indicates that $89,243,000, or 99.8%, of investment securities mature within the next five year period with $36,716,000, or 41.1% maturing during 1995. At the close of 1993 and 1992 there were no significant differences between the book and fair values of the investment securities portfolio. The net amortized cost of the investment securities portfolio exceeded its fair value by $2,444,000 or 2.7%, at the close of 1994. The reserve for possible loan losses is determined by management based on an analysis of individual credits, prior and current loss experience, overall growth in the loan portfolio, current local and national economic conditions and other factors. Credit card loans are charged-off within industry norms while personal, mortgage, and commercial loans are evaluated individually. 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, 1994, there were no significant concentrations of credit risk in the loan portfolio.
END PUBLISHED PAGE 24
Financial Condition (continued): The reserve for possible loan losses as a percentage of loans was 1.46%, 1.51% and 1.46% at the end of 1994, 1993 and 1992, respectively. The provision for possible loan losses was $400,000, $500,000 and $700,000 in 1994, 1993 and 1992, respectively. The 1994 and 1993 decrease in the level of the provision for possible loan losses resulted from low levels of net charge-offs in 1994, 1993 and 1992. Net charge-offs were $282,000, $192,000 and $97,000 in 1994, 1993, and 1992, respectively. Net charge- offs as a percentage of average loans outstanding remained at low levels of less than .11% during 1994, 1993, and 1992. Corporate management continuously reviews and evaluates the loan portfolio and the reserve for possible loan losses and believes that the reserve is adequate. Total deposits held by the Corporation increased $14,207,000 during 1994 compared to an increase of $3,282,000 during 1993. Interest-bearing deposits represented 83.0% and 84.4% of total deposits at December 31, 1994 and 1993, respectively. Noninterest-bearing deposits increased by $6,855,000 while interest-bearing deposits increased by $7,352,000 during 1994. During 1993, noninterest-bearing deposits decreased by $1,815,000 while interest-bearing deposits increased by $5,097,000. In both 1994 and 1993, as long-term deposits matured and new funds were deposited, these funds were primarily placed in short-term deposits. Total other borrowings, primarily repurchase agreements, decreased by $229,000 during 1994, following an increase of $539,000 in 1993. Due to the volatility of customer repurchase agreements all funds generated by repurchase agreement activity enter the Bank's earning assets as short-term investments.
Capital Resources: The capital resources of the Corporation and the Bank continue to grow stronger. The percentages of average equity to average assets were 9.31%, 9.11%, and 8.78% for 1994, 1993, and 1992, respectively. Federal regulators adopted risk-based capital guidelines for banks and bank holding companies. The guidelines require that percentages be applied to various assets, including off-balance sheet assets, in relation to the regulators' perceived risk. The guidelines establish two components of capital, Tier I and Tier II. For the reporting purposes of the Corporation, Tier I capital consists of shareholders' equity excluding net unrealized securities losses and Tier II capital consists of the allowable portion of the reserve for possible loan losses. Under "Prompt Corrective Action" regulations adopted in September of 1992, the FDIC has defined five categories of capitalization (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized). The Corporation meets the "well capitalized" definition which requires a Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10%, and a leverage ratio of at least 5% and the absence of any written agreement, order, or directive from any regulatory agency. "Well capitalized" status affords the Corporation the ability to operate with the greatest flexibility under current laws and regulations. The Corporation exceeds all applicable capital requirements. An analysis of the Corporation's risk-based capital position at December 31, 1994 and 1993 follows:
December 31, 1994 1993 ------------------------------------------------------------------------- Tier I capital - Shareholders' equity $ 37,645 $ 35,060 Tier II capital - Allowable portion of the reserve for possible loan losses 2,735 2,552 ---------- ---------- Total capital $ 40,380 $ 37,612 ---------- ---------- Risk-weighted assets $218,819 $204,193 Risk weighted off-balance sheet exposure 12,699 9,910 ---------- ---------- Total risk-weighted exposure $231,518 $214,103 ---------- ---------- Tier I capital ratio 16.26% 16.38% Required Tier I capital ratio 4.00 4.00 Total capital ratio 17.44 17.57 Required capital ratio 8.00 8.00 Leverage ratio - Tier I capital as a percentage of average assets 9.62 9.44 Required leverage ratio 3.00 3.00
The Corporation returns a portion of the income it earns to its shareholders in the form of cash dividends. Dividends declared as a percentage of net income were 43.0%, 42.8% and 40.6% in 1994, 1993 and 1992, respectively.
The Corporation also retains a portion of the income it earns to accommodate current operational and regulatory capital requirements and to fund future growth opportunities. A part of future growth depends on capital expenditure programs. Capital expenditures of approximately $2,250,000 are planned in 1995.
END PUBLISHED PAGE 25
Interest Rate Sensitivity Management: Interest rate sensitivity is a measurement of the risk inherent in net interest income attributable to fluctuations in market interest rates. The Corporation manages the repricing of interest rate sensitive assets and liabilities to stabilize interest margins and reduce the risk resulting from fluctuations of interest rates. Differences in the repricing of interest rate sensitive assets and liabilities over a period of time is referred to as the interest rate gap. If more rate sensitive assets reprice than rate sensitive liabilities during a given period of time, the period is said to have a positive interest rate gap. If the opposite relationship exists, the period is said to have a negative interest rate gap. When rates are increasing a positive interest rate gap will, with all other factors held constant, result in an increase in the net interest margin. When rates are decreasing, a negative interest rate gap will, with all other factors held constant, also result in an increase in the net interest margin.
The table below presents an analysis of the interest rate sensitivity of the Corporation at December 31, 1994. However, this table does not necessarily indicate the impact of general interest rate movements on the Corporation's net interest yield because repricing of various categories of assets and liabilities is discretionary and is subject to competition and other external factors. At December 31, 1994 the Corporation was in a moderate asset-sensitive gap position as illustrated in the following table:
Interest Rate Sensitivity Analysis After 3 After 6 Months Months Within 3 But Within But Within December 31, 1994 Months 6 Months 1 Year -------------------------------------------------------------------------- (Dollars in Thousands) Interest earning assets: Loans $ 126,331 $ 14,138 $ 25,996 Securities 10,095 7,194 24,698 Federal funds sold and other interest-bearing assets -0- -0- -0- ------------------------------------------------------- Total interest earning assets $ 136,426 21,332 50,694 ------------------------------------------------------- Interest-bearing liabilities: Savings and other non-time deposits 74,793 5,927 -0- Time deposits 38,744 18,415 16,303 Short-term borrowings and other interest bearing liabilities 19,171 -0- -0- ------------------------------------------------------- Total interest bearing liabilities 132,708 24,342 16,303 ------------------------------------------------------- INTEREST RATE SENSITIVITY GAP $ 3,718 $ (3,010) $ 34,391 ------------------------------------------------------ CUMULATIVE INTEREST RATE SENSITIVITY $ 3,718 $ 708 $ 35,099 GAP ------------------------------------------------------- CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL INTEREST EARNING ASSETS 1.03% .20% 9.71% -------------------------------------------------------
After 1 Year But Within After 5 December 31, 1994 5 Year Years Total -------------------------------------------------------------------------- (Dollars in Thousands) Interest earning assets: Loans $ 85,065 $ 10,277 $ 261,807 Securities 54,318 3,219 99,524 Federal funds sold and other interest-bearing assets -0- -0- -0- ------------------------------------------------------- Total interest earning assets 139,383 13,496 361,331 ------------------------------------------------------- Interest-bearing liabilities: Savings and other non-time deposits 90,375 -0- 171,095 Time deposits 33,566 -0- 107,028 Short-term borrowings and other interest bearing liabilities -0- -0- 19,171 ------------------------------------------------------- Total interest- bearing liabilities 123,941 -0- 297,294 ------------------------------------------------------- INTEREST RATE SENSITIVITY GAP $ 15,442 $ 13,496 $ 64,037 ------------------------------------------------------ CUMULATIVE INTEREST RATE SENSITIVITY GAP $ 50,541 $ 64,037 ------------------------------------------------------- CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL INTEREST EARNING ASSETS 13.99% 17.72% -------------------------------------------------------
Liquidity Managment: 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, 1994, cash and cash equivalents equaled $21,275,000 or 5.4% of total assets. The change in cash and cash equivalents is shown in the Consolidated Statement of Cash Flows and arises from operating, investing and financing activities. The adjustements to reconcile 1994 net income to net cash provided by operating activities primarily consists of depreciation and amortization of $1,325,000 and a provision of possible loan losses of $400,000 less gains on sales of loans and securities of $70,000. These items represent income and expenses included in net income which do not represent an expenditure or receipt of cash.
END PUBLISHED PAGE 26
Liquidity Management (continued): The cash flows from investing activities relate primarily to securities, loans and purchases of capital assets. Net cash used in investing activities was $16,970,000. Cash provided by investing activities resulted from decreases in securities of $3,481,000. Cash used in investing activities included net loan increases of $16,399,000 and purchases of capital assets of $4,052,000 which includes about $3,000,000 in costs of the new corporate office building and remodeling of other parts of the main office complex. Net cash provided by financing activities was $11,057,000. Cash provided by financing activities included increases in deposits of $14,207,000 and proceeds from a line of credit of $1,668,000. Cash used by financing activities primarily included payments on the line of credit of $2,768,000 and dividends paid of $1,857,000. These cash flows resulted in a $1,000 reduction in cash and cash equivalents from December 31, 1993 to December 31, 1994. The Corporation can obtain additional liquidity from off-balance sheet sources which include the purchase of Federal funds from correspondent banks and borrowing from the Federal Reserve Bank's discount window. At year-end, the Bank had available Federal funds facilities in excess of $9,000,000 at three correspondent banks. The internal and external sources of funds for liquidity, in the opinion of management, satisfy the liquidity needs of the Corporation.
Impacts of Accounting and Regulatory Pronouncements: Corporate management is not aware of any current recommendations by regulatory authorities which, if they were implemented, would have a material effect on the liquidity, capital resources, or operations of the Corporation. However, the potential impact of certain accounting and regulatory pronouncements warrant further discussion.
The Financial Accounting Standards Board (FASB) has issued:
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" Implementation date by the Corporation: January 1, 1995 Impact on the Corporation: This Statement will impact the accounting by creditors for impairment of certain loans. It requires that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price of the fair value of the collateral. Corporate management does not believe that adoption of SFAS No. 114 will have a significant impact on the carrying value of impaired loans or on net income.
All other applicable Statements of Financial Accounting Standards that have been issued and have effective dates impacting 1994 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.
Significant actions by the Federal government and its agencies, affecting the financial institutions industry in general, are currently having and will continue to have an impact on the Corporation. A discussion of these actions follows:
"Omnibus Budget Reconciliation Act of 1993" Effective date of impact on the Corporation: August 10, 1993
Impact on the Corporation: Although the cost of tax compliance will increase, Corporate management does not anticipate that this tax act will have a material impact on net income.
"The President's Reform Plan for the Savings and Loan Industry" and subsequent action by the FDIC: Effective date (direct impact on the Corporation): January 1, 1990
Impact on the Corporation: The deposit insurance premium rates which the Bank pays were increased during 1990 and 1991. The premium increases caused an increase in pretax premium expense of approximately $271,000 in 1991 and an additional $163,000 in 1992. During 1992, 1993 and 1994, the FDIC did not increase deposit insurance premium rates. During 1992, a risk-related assessment system was developed by the FDIC. Effective, January 1, 1993, the Bank was assigned to the lowest deposit insurance assessment rate which is currently possible. Under the system, the FDIC will reevaluate the Bank's deposit insurance rate on a semi-annual basis. No increase in the premium paid by the Bank, other than from changes in deposit volume and mix, is anticipated in 1995.
END PUBLISHED PAGE 27
Officers of Lorain National Bank
Executive Offices
Stanley G. Pijor Chairman and Chief Executive Officer
James F. Kidd President and Chief Operating Officer
Thomas P. Ryan Executive Vice President and Secretary
Administration
James H. Weber Senior Vice President
Debra R. Brown Vice President
Carol A. Mesko Assistant Vice President
James E. Long Assistant Vice President
Susan I. Tuttle Assistant Cashier
Marianne Kocak Assistant Cashier
Robert J. Witkowski Maintenance Officer
Teresa E. George Administration Officer
Audit Division
David P. Krebs Vice President
Gary W. Sedlak Assistant Vice President and Compliance Officer
Carol A. Cavanaugh Senior Staff Auditor
Randy E. Lottman E.D.P. Auditor
Loan Division
Willard H. DoBrunz Senior Vice President
Edwin F. Klenz Vice President
Sandra L. Kotradi Vice President
Bruce Diso Vice President
Kenneth P. Wayton Vice President
Ellen M. Walsh Assistant Vice President
Joan M. Raymond Assistant Vice President
Karen L. Borer Assistant Vice President
Denise M. Kosakowski Assistant Cashier
Eunice F. Ramirez Installment Loan Officer
Fiscal Division
Gregory D. Friedman Senior Vice President and Chief Financial Officer
Mitchell J. Fallis Vice President and Controller
Patricia A. Adams Financial Accounting Officer
Marketing Division
Steven F. Cooper Assistant Vice President
Trust and Investment Management Division
Emma N. Mason Senior Vice President
Gerald S. Falcon Vice President
Edward J. Baker Vice President
Brian D. Morgan Vice President
Patrick E. Sheridan Investment Officer
James E. Carpenter Assistant Trust Officer
Jodi L. Penwell Assistant Trust Officer
Operations and Consumer Revolving Credit Divisions
Michael D. Ireland Senior Vice President
Larry R. Johnson Vice President
Frances V. Lesniak Vice President
Larry A. Hill Assistant Vice President
Donna Jean Phillips Assistant Vice President
Jeanne C. Maschari Assistant Vice President
Patricia L. Cole Operations Officer
END PUBLISHED PAGE 28
Bank Offices and Officers
Amherst Office G. Dale Rosenkranz Vice President Fred W. Zemanek Assistant Cashier 1175 Cleveland Avenue Amherst, Ohio (216) 988-4423
Avon Lake Office Charles A. DeAngelis Assistant Vice President 240 Miller Road Avon Lake, Ohio (216) 933-2186
Cleveland Street Office Timothy J. Gallagher Vice President 801 Cleveland Street Elyria, Ohio (216) 365-8397
Kansas Avenue Office Jennifer M. Nickolls Assistant Vice President 1604 Kansas Avenue Lorain, Ohio (216) 288-9151
Lake Avenue Office Christine M. Weber Branch Manager 42935 E. North Ridge Road Elyria, Ohio (216) 233-7196
Main Office* Joel A. Krueck Assistant Vice President and CRA Officer Patricia A. Wolanczyk Assistant Branch Manager 457 Broadway Lorain, Ohio (216) 244-6000
Sixth Street Drive-In Joel A. Krueck Assistant Vice President and CRA Officer 200 Sixth Street Lorain, Ohio (216) 244-6000
Oberlin Office Marilyn R. Krasienko Assistant Vice President 40 East College Street Oberlin, Ohio (216) 775-1361
Kendal at Oberlin Office Marilyn R. Krasienko Assistant Vice President 600 Kendal Drive Oberlin, Ohio (216) 244-6000
Olmsted Office Diana L. Schmittgen Branch Manager 27095 Bagley Road Olmsted Twp., Ohio (216) 235-4600
Pearl Avenue Office Keith H. Kapanke Assistant Cashier 2850 Pearl Avenue Lorain, Ohio (216) 277-1103
Lorain Plaza Office Edward R. Olah Vice President 1147 Meister Road Lorain, Ohio (216) 282-9196
W. 37th and Oberlin Avenue Auto Bank Edward R. Olah Vice President 3660 Oberlin Avenue Lorain, Ohio (216) 282-9196
Second Street Office James E. Schmittgen Assistant Vice President 221 Second Street Elyria, Ohio (216) 323-4621
Vermilion Office Robert B. White Assistant Vice President 4455 Liberty Avenue Vermilion, Ohio (216) 967-3124
The Crossings of Westlake Office Susan M. Neiding Vice President 30210 Detroit Road Westlake, Ohio (216) 892-9696
West Park Drive Office Evi C. Sklarek Branch Manager 2130 West Park Drive Lorain, Ohio (216) 989-3131
Community Based Automated Teller Machine Locations
Lakeland Medical Center 3700 Kolbe Road, Lorain, Ohio
Lorain County Community College 1005 N. Abbe Road, Elyria, Ohio
Lowe's Home Improvement Warehouse 620 Midway Boulevard, Elyria, Ohio
Route 60 and Sailorway Drive 1317 State Route 60, Vermilion, Ohio
Lorain Community/St. Joseph Regional Health Center 205 W. 20th Street, Lorain, Ohio
*Drive-up ATM is available at Sixth Street Drive-In. All other offices feature ATMs.
END PUBLISHED PAGE 29
Directors and Officers of LNB Bancorp, Inc.
Directors
James L. Bardoner Retired, Former President Dorn Industries, Inc.
Daniel P. Batista Attorney/Partner Cook & Batista Co., L.P.A.
Wellsley O. Gray Sales Consultant Smith Dairy Company
James F. Kidd President and Chief Operating Officer LNB Bancorp, Inc. Lorain National Bank
David M. Koethe Chairman of the Board The Lorain Printing Company
Benjamin G. Norton Employee and Community Relations Manager Reliance Comm/Tec - Lorain Products
Stanley G. Pijor Chairman and Chief Executive Officer LNB Bancorp, Inc. Lorain National Bank
James H. Riddell Chairman of the Board Consumers Builders Supply Company President, Consumeracq, Inc.
Thomas P. Ryan Executive Vice President and Secretary/Treasurer LNB Bancorp, Inc. Executive Vice President and Secretary Lorain National Bank
Don A. Sanborn Retired
T. L. Smith, M.D. Physician
Eugene M. Sofranko President and Chief Executive Officer Lorain Glass Company, Inc.
Paul T. Stack Manufacturer's Representative Coley's Inc. and A-1 Welding and Fabricating, Inc.
Leo Weingarten Retired
Officers
Stanley G. Pijor Chairman and Chief Executive Officer
James F. Kidd President and Chief Operating Officer
Thomas P. Ryan Executive Vice President and Secretary/Treasurer
Willard H. DoBrunz Senior Vice President
Gregory D. Friedman Senior Vice President and Chief Financial Officer
Michael D. Ireland Senior Vice President
Emma N. Mason Senior Vice President
James H. Weber Senior Vice President
END PUBLISHED PAGE 30
Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31, 1994 1993 1992 -------------------------------------------------------------------------- Total interest income $26,830,000 $25,892,000 $27,465,000 Total interest expense 8,572,000 8,540,000 10,223,000 --------------------------------------------- Net interest income 18,258,000 17,352,000 17,242,000 Provision for possible loan losses 400,000 500,000 700,000 Other income 4,064,000 3,818,000 3,605,000 Gains from sales of loans and securities 70,000 191,000 14,000 Other expense 15,679,000 15,017,000 14,785,000 --------------------------------------------- Income before Federal income taxes 6,313,000 5,844,000 5,376,000 Federal income taxes 1,881,000 1,815,000 1,550,000 --------------------------------------------- NET INCOME $ 4,432,000 $ 4,029,000 $ 3,826,000 ---------------------------------------------
CONDENSED BALANCE SHEETS - DECEMBER 31, 1994 1993 1992 -------------------------------------------------------------------------- Cash and cash equivalents $ 21,275,000 $ 21,276,000 $ 32,728,000 Securities 99,524,000 103,086,000 96,631,000 Net loans 257,975,000 242,043,000 230,364,000 Other assets 16,081,000 13,211,000 12,503,000 --------------------------------------------- TOTAL ASSETS $394,855,000 $379,616,000 $372,226,000 --------------------------------------------- Total deposits $335,219,000 $321,012,000 $317,730,000 Other borrowings 19,151,000 19,400,000 18,861,000 Other liabilities 2,974,000 4,144,000 3,083,000 --------------------------------------------- Total liabilities 357,344,000 344,556,000 339,674,000 --------------------------------------------- Total shareholders' equity 37,511,000 35,060,000 32,552,000 --------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $394,855,000 $379,616,000 $372,226,000 --------------------------------------------- SHARE DATA 1994 1993 1992 -------------------------------------------------------------------------- Per share data (1): Net income $ 1.37 $ 1.25 $ 1.20 Cash dividends $ .60 $ .56 $ .51 Cash dividends declared $1,905,000 $1,725,000 $1,555,000 Net increase in shareholders' equity $2,451,000 $2,508,000 $ 2,414,000 Book value per share (1) $11.72 $11.32 $10.61 Number of shares out- standing at end of year (1) 3,200,054 3,190,688 3,159,531 --------------------------------------------------------------------------
Five Year Consolidated Financial Summary CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31, 1991 1990 -------------------------------------------------------------------------- Total interest income $30,080,000 $31,046,000 Total interest expense 14,087,000 15,968,000 ------------------------------ Net interest income 15,993,000 15,078,000 Provision for possible loan losses 600,000 500,000 Other income 3,612,000 3,584,000 Gains from sales of loans and securities -0- -0- Other expense 14,164,000 13,789,000 ------------------------------ Income before Federal income taxes 4,841,000 4,373,000 Federal income taxes 1,329,000 1,030,000 ------------------------------ NET INCOME $ 3,512,000 $ 3,343,000 ------------------------------
CONDENSED BALANCE SHEETS - DECEMBER 31, 1991 1990 -------------------------------------------------------------------------- Cash and cash equivalents $24,060,000 $22,581,000 Securities 95,600,000 82,498,000 Net loans 220,458,000 219,244,000 Other assets 11,611,000 12,270,000 ------------------------------ TOTAL ASSETS $351,729,000 $336,593,000 ------------------------------ Total deposits $301,953,000 $285,907,000 Other borrowings 16,509,000 19,762,000 Other liabilities 3,129,000 3,066,000 ------------------------------ Total liabilities 321,591,000 308,735,000 ------------------------------ Total shareholders' equity 30,138,000 27,858,000 ------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $351,729,000 $336,593,000 ------------------------------
SHARE DATA 1991 1990 -------------------------------------------------------------------------- Per share data (1): Net income $ 1.10 $ 1.06 Cash dividends $ .46 $ .42 Cash dividends declared $ 1,404,000 $ 1,260,000 Net increase in shareholders' equity $ 2,280,000 $ 2,347,000 Book value per share (1) $9.89 $9.23 Number of shares out- standing at end of year (1) 3,138,203 3,107,716 -------------------------------------------------------------------------- (1) All share and per share data have been adjusted to reflect the five- for-four stock split in 1993, the two-for-one stock split in 1989 and 3 percent stock dividends in all other years presented. END PUBLISHED PAGE 31 EARNINGS AND STOCK PERFORMANCE
10 Year Earnings History
The graph above depicts the earnings history of LNB Bancorp, Inc. from 1985 through 1994.
The Corporation's management team is proud of its record of continuously increasing profits over this ten year period.
Market Value of Cumulative Shares
100 Shares Purchased December 31, 1994 - Cost: $1,850.00 312 Shares Currently Held December 31, 1994 - Market Value: $9,399.00
Cumulative Cash Dividends Declared
Total Cash Dividends Declared 1985 - 1994: $1,267.79
For the information of our shareholders, the bottom two graphs reflect a 10 year chronological record of stock and dividend performance following a hypothetical purchase of 100 shares of LNB Bancorp, Inc. stock without further reinvestment.
Purchase of 100 shares of LNB Bancorp, Inc. stock at $18.50 per share in 1984:
Total market value..........................$1,850.00
Through two stock spilts and several stock dividends over the years, the shareholder in this example now owns 312 shares of LNB Bancorp, Inc. stock with a market value of $30.13 per share as of December 31, 1994.
Total market value..........................$9,399.00
In addition, our hypothetical shareholder would have benefited from the cash dividends declard on the stock.
Cumulative cash dividends declared ........ $1,267.79
END PUBLISHED PAGE 32 END OF PUBLISHED LNB BANCORP, INC. 1994 ANNUAL REPORT
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1994)
S - K Reference Number (22)
Corporate Organization Structure
.............................. . LNB Bancorp, Inc. . . One Bank Holding Company . . an Ohio Corporation . .............................. . . ............................. . The Lorain National Bank . . Wholly-Owned Subsidiary . . an Ohio Corporation . ............................. . . ................................. . LNB Financial Services, Inc. . . Wholly-Owned Subsidiary . . an Ohio Corporation . . (inactive) . .................................
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1994)
S - K Reference Number (24)
Consent of Independent Accountants.
KPMG Peat Marwick, LLP (LOGO) EXHIBIT 24 Certified Public Accountants 1500 National City Center 1900 East Ninth Street Cleveland, Ohio 44114-3495
Consent of Independent Accountants
The Board of Director LNB Bancorp, Inc. and Subsidiary
We consent to incorporation by reference in the registration statement (No. 33-64034) on Form S-8 of LNB Bancorp, Inc. of our report dated January 17, 1995, relating to the consoli- dated balance sheets of LNB Bancorp, Inc. and subsidiary as of December 31, 1994 and 1993, 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, 1994, which report appears in the December 31, 1994 annual report on Form 10-K of LNB Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick
Cleveland, Ohio March 21, 1995
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1994)
S - K Reference Number (27)
Financial Data Schedule
[ARTICLE] 9 [CIK] 0000737210 [NAME] LNB BANCORP, INC. [MULTIPLIER] 1000 [CURRENCY] U.S.
LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 1994)
S - K Reference Number (28)
Notice of Annual Meeting to shareholders and Proxy Statement (dated March 20, 1995).
LNB BANCORP, INC. LORAIN, OHIO
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF LNB BANCORP, INC. March 20, 1995
The Annual Meeting of Shareholders of LNB Bancorp, Inc. will be held at 521 Broadway, Lorain, Ohio 44052, on Tuesday, April 18, 1995, 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 21, 1998) or until their successors are elected and qualified. 2. INCREASE AUTHORIZED SHARES AND FIX PAR VALUE AT $1.00 PER SHARE - Consideration of an amendment to the Articles of Incorporation of LNB Bancorp, Inc. which would increase the authorized number of shares from 4,000,000 to 5,000,000 and fix the par value of the Common Stock at $1.00 per share to allow for a five-for- four stock split of the Common Stock of LNB Bancorp, Inc. if this proposal is approved. 3. OTHER BUSINESS - To transact such other business as may properly come before the meeting.
Shareholders of record at the close of business on March 10, 1995 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.
LNB BANCORP, INC. 457 BROADWAY LORAIN, OHIO 44052 PROXY STATEMENT MARCH 20, 1995
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 18, 1995, is 3,210,765. Only those shareholders of record at the close of business on March 10, 1995 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 his name on the books of the Corporation. No holder of shares of any class shall have the right to vote cumulatively in the election of directors. Shares held in accounts by the Bank's Trust and Investment Management Division will be voted by the trustee in accordance with written instructions from account administrators or account plan participants, and where no instructions are received, as the trustee deems proper. Shares of Common Stock represented by proxies in the accompanying form which are properly executed and returned to the Corporation will be voted at the Annual Meeting of Shareholders in accordance with the shareholders' instruction contained in such proxies. Where no such instructions are given, the shares will be voted for the election of directors as described herein; in support of the increase in the number of authorized shares; and at the discretion of the proxy holders on such other matters as may come before the meeting. The Board of Directors has no reason to believe that any of the nominees will be unable to serve as a director. In the event, however, of the death or unavailability of any nominee or nominees, the proxy to that extent will be voted for such other person or persons as the Board of Directors may recommend. The results of votes taken at the Annual Meeting will be disclosed in the Corporation's First Quarterly Report for 1995 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 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 18, 1995, the management has nominated the hereinafter named five (5) individuals for election to serve until April 21, 1998, or until their successors are elected and qualified. The affirmative vote of the holders of at least a majority of a quorum is required in order to elect each director. Under the Code of Regulations of the Corporation a quorum is constituted by the presence, in person or by proxy, of a majority of the voting power of the Corporation.
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 16, 1996: 1) James L. Bardoner 2) Wellsley O. Gray 3) Benjamin G. Norton 4) Don A. Sanborn 5) T.L. Smith, M.D.
The following individuals are directors whose term of office is scheduled to expire on April 15, 1997: 1) James F. Kidd 2) James H. Riddell 3) Thomas P. Ryan 4) Paul T. Stack
DIRECTOR'S COMMITTEES The Bank has five (5) 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
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 and also serves as the Compensation Committee. 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 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 1994, Leo Weingarten and James H. Riddell attended fewer than 75% of the total number of meetings of the Board of Directors and all committee meetings of which the aforementioned directors were a member. The Corporation held five (5) Board of Directors meetings during the last fiscal year. Of the directors who served during 1994, Leo Weingarten and James H. Riddell, attended fewer than 75% of the total of five (5) meetings held. All of the directors of the Corporation are also directors of the Bank. A director's fee of $400.00 is paid to those directors, who are not officers, for each meeting attended. Directors, who are also officers, receive a fee of $200.00 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.
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 76 Dorn Industries, Inc. (1-2-4-5) (Manufacturing Company)
DANIEL P. BATISTA ATTORNEY/PARTNER 1976 1983 Age 60 Cook & Batista Co. L.P.A. (2-3-5-7)
WELLSLEY O. GRAY SALES CONSULTANT 1973 1983 Age 61 Smith Dairy Company (1-3)
JAMES F. KIDD PRESIDENT AND CHIEF 1989 1989 Age 55 OPERATING OFFICER LNB Bancorp, Inc. and The Lorain National Bank
DAVID M. KOETHE CHAIRMAN OF THE BOARD 1975 1983 Age 59 The Lorain Printing Company (2-3-4-5-8)
BENJAMIN G. NORTON EMPLOYEE AND 1983 1983 Age 55 COMMUNITY RELATIONS MANAGER (3-6) Reliance Comm/Tec - Lorain Products
STANLEY G. PIJOR CHAIRMAN AND CHIEF 1969 1983 Age 64 EXECUTIVE OFFICER (2-3-4) LNB Bancorp, Inc. and The Lorain National Bank
JAMES H. RIDDELL CHAIRMAN OF THE BOARD 1970 1983 Age 68 Consumers Builders Supply (1-4-5-6) Company PRESIDENT Consumeracq, Inc.
THOMAS P. RYAN EXECUTIVE VICE PRESIDENT 1989 1989 Age 56 AND SECRETARY/TREASURER LNB Bancorp, Inc. EXECUTIVE VICE PRESIDENT AND SECRETARY The Lorain National Bank
DON A. SANBORN RETIRED 1971 1983 Age 71 (1-3)
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 PHYSICIAN 1968 1983 Age 81 (1-2-4-5)
EUGENE M. SOFRANKO PRESIDENT AND CHIEF 1974 1983 Age 64 EXECUTIVE OFFICER (1-2-4-5) Lorain Glass Company, Inc.
PAUL T. STACK MANUFACTURER'S 1974 1983 Age 65 REPRESENTATIVE (1-2-3) Coley's Inc. and A-1 Welding and Fabricating, Inc.
LEO WEINGARTEN RETIRED 1964 1983 Age 75 (2-4-5)
(1) Member of Audit Committee (2) Member of Executive Committee (3) Member of Trust Committee (4) Member of Pension/Fringe Benefit Committee (5) Member of Incentive Stock Option Committee (6) Executive Committee Alternate (7) 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 $112,461.81. It is anticipated that this relationship will continue during the current fiscal year. (8) During the last fiscal year, The Lorain National Bank has paid to The Lorain Printing Company an amount of $51,500.98 for stationery, supplies and other printed material. It is anticipated that such business relationship will continue during the current fiscal year. Note: The Executive Committee also serves as the Compensation Committee.
EXECUTIVE COMPENSATION During 1992 and 1993, the Securities and Exchange Commission (SEC) adopted new rules with regard to reporting executive compensation in proxy and information statements and other commission filings. The Corporation and the Bank do not have, nor has there been in the past, any Stock Appreciation Rights or Long Term Incentive Plans. The information which follows incorporates the disclosure requirements of these new rules.
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 1994, 1993 and 1992, Mr. Stanley G. Pijor, Chairman and Chief Executive Officer, met the criteria requiring disclosure. In 1994 and 1993, Mr. James F. Kidd, President and Chief Operating Officer, met the criteria for disclosure. In 1994, Mr. Thomas P. Ryan, Executive Vice President and Secretary/Treasurer, met the criteria for disclosure. The following table discloses the annual salary, bonuses and all other compensation awards and payouts for services in all capacities to the Corporation and the Bank for the fiscal years ended December 31, 1994, 1993 and 1992. Compensation (1) ----------------------------------------------- Annual Name and -------------------------------- All Principal Position Year Salary Bonus Other (2) ---------------------------------------------------------------------- Stanley G. Pijor 1994 $186,044 $15,000 $63,591 Chairman and 1993 $177,334 $10,000 $66,366 Chief Executive Officer 1992 $171,618 $10,000 $65,042
James F. Kidd 1994 $104,556 $15,000 $15,646 President and Chief 1993 $ 94,634 $10,000 $11,903 Operating Officer
Thomas P. Ryan 1994 $ 92,323 $15,000 $14,450 Executive Vice President and Secretary/Treasurer
(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:
Stanley G. Pijor: 1994 1993 1992 Contribution, in Mr. Pijor's behalf to: The Bank's Stock Purchase Plan $ 5,202 $ 5,390 $ 5,358 The Bank's Employee Stock Ownership Plan $10,939 $12,494 $12,801 Mr. Pijor's Supplemental Retirement Agreement $37,441 $37,441 $37,441 Mr. Pijor's Supplemental Life Insurance $ 6,901 $ 7,758 $ 6,309 Corporation director's fees $ 1,000 $ 1,175 $ 1,025
James F. Kidd: 1994 1993 Contribution, in Mr. Kidd's behalf to: The Bank's Stock Purchase Plan $ 3,909 $ 2,796 The Bank's Employee Stock Ownership Plan $ 8,860 $ 6,959 Mr. Kidd's Supplemental Life Insurance $ 2,077 $ 1,348 Corporation director's fees $ 800 $ 800
Thomas P. Ryan: 1994 Contribution, in Mr. Ryan's behalf to: The Bank's Stock Purchase Plan $ 3,508 The Bank's Employee Stock Ownership Plan $ 7,993 Mr. Ryan's Supplemental Life Insurance $ 1,949 Corporation director's fees $ 1,000
OPTION GRANTS TABLE (last fiscal year) There were no stock options granted by the Corporation or the Bank in 1994.
LONG TERM INCENTIVE PLAN AWARD TABLE (last fiscal year) There were no long term incentive plans or plan awards in 1994.
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 ($) on Realize Exercisable/ Exercisable/ Name Exercise(#) ($)(2) Unexercisable Unexercisable(2) --------------------------------------------------------------------------
Stanley G. Pijor -0- $0 8,385/0 $184,549/$0 James F. Kidd -0- $0 1,648/0 $ 7,646/$0 Thomas P. Ryan -0- $0 1,648/0 $ 7,646/$0
(1) All amounts reflect the 3% stock dividend in April 1994.
(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 REPORT The Executive Committee of the Bank meets annually to review all officer's salaries. The criteria used in determining salaries and bonuses of all officers (other than the Chief Executive Officer, Mr. Stanley G. Pijor) is based upon industry peer group, national surveys and performance judgements as to the past and expected future contributions of the individual officers. In addition, the Committee periodically is advised by independent compensation consultants concerning salary competitiveness.
The compensation paid to the Chief Executive Officer (Mr. Stanley G. Pijor) is based upon an "Employment Agreement", a "Supplemental Retirement Agreement", and a "Consulting Agreement". The terms and conditions of these three (3) agreements are more fully discussed in the following paragraphs. In 1994, Fifteen Thousand Dollar ($15,000.00) bonuses were granted to Messrs. Pijor, Kidd and Ryan in addition to the compensation called for under the terms of the aforementioned agreements and criteria. The Executive Committee granted these bonuses based upon the Committee's assessment of the individual performance of Messrs. Pijor, Kidd and Ryan during 1994 and their contributions to the successful management of the Corporation and the Bank. Messrs. Pijor, Kidd and Ryan were not present during discussion of this bonus payment.
The members of the Executive 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
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1994, Mr. Stanley G. Pijor, Chairman and Chief Executive Officer, served on the Executive Committee of the Bank. The Executive Committee also serves as the Compensation Committee of the Bank. Mr. Pijor did not participate in any of the deliberation relative to his compensation.
EMPLOYMENT AGREEMENT On December 31, 1987, an Employment Agreement was entered into between Mr. Stanley G. Pijor and The Lorain National Bank. The Agreement became effective January 1, 1988 and shall remain in effect through December 31, 1995. The Agreement provides for Mr. Pijor to maintain the highest executive position in the organization. Mr. Pijor shall be compensated at the initial rate of One Hundred Twenty Nine Thousand Six Hundred Seventy Five Dollars ($129,675.00) with a five percent (5%) raise effective June 1st of each year thereafter. Mr. Pijor will continue to receive his present fringe benefits and such additional benefits as are set forth in the Bank's Employee Benefit Program. In determining the compensation payable under the Agreement, the Board of Directors reviewed compensation paid to presidents of financial institutions similar in size to The Lorain National Bank.
SUPPLEMENTAL RETIREMENT AGREEMENT On December 31, 1987, the Bank entered into a Supplemental Retirement Agreement (SRA) with Mr. Stanley G. Pijor. The purpose of the SRA is to provide supplemental retirement benefits to Mr. Pijor in addition to the benefits provided by the Bank's qualified retirement plans. The SRA has been adopted to assist the Bank in retaining the services of Mr. Pijor through his normal retirement date. The SRA is designed to provide for the monthly payment or annual payment (at Mr. Pijor's election) in the event of: (a) normal retirement on or after July 1, 1995; (b) permanent disability1; (c) death2; or (d) discharge "without cause"3. Under terms of this agreement, Mr. Pijor will receive annual supplemental retirement benefits for 10 years of $50,000 if he retires at age 65 or after. The SRA is fully funded by means of a corporate owned life insurance policy which was paid for in eight (8) equal annual premium payments of Thirty Seven Thousand Four Hundred Thirty One Dollars and Twenty Cents ($37,431.20) from 1987 through 1994.
Notes: 1 If disability occurs prior to July 1, 1995, Mr. Pijor will receive the Fifty Thousand Dollar ($50,000.00) supplemental benefit as if he had retired on or after July 1, 1995. 2 If death occurs after Mr. Pijor has established eligibility benefits (i.e., meeting the age requirements) then the applicable benefit, based on the corresponding age, will be paid to the appropriate beneficiaries. 3 If discharge "without cause" occurs, Mr. Pijor will receive the Fifty Thousand Dollar ($50,000.00) supplemental benefit as if he had remained employed until his normal retirement date (i.e., July 1, 1995).
CONSULTING AGREEMENT On March 15, 1994, the Bank and the Corporation entered into a Consulting Agreement (The Agreement) with Mr. Stanley G. Pijor. 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 two (2) years.
PENSION PLAN The Bank sponsors the Lorain National Bank Retirement Pension Plan (the Plan) covering substantially all employees of the Bank. An employee is eligible to participate on January 1 or July 1 after the attainment of age twenty-one (21) and completion of one year of service, as defined in the Plan. Participants are eligible for normal retirement upon reaching are 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. 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. Assuming the participant selects the benefit payable in a ten (10) year Certain and Life Annuity at normal retirement date, the following table reflects annual benefits payable to the employee based upon average annual compensation levels and twenty-five (25) years of service.
Employee's Annual Estimated Pension Final Average Payments Assuming Minimum of Annual Compensation 25 Years of Service
$250,000* $76,725 200,000* 76,725 150,000 76,725 100,000 49,850
*The current annual compensation limit with respect to determining an employee's annual pension payment is limited in 1994 by the Internal Revenue Code to $150,000. The Plan reflects the annual compensation limit and this results in a maximum annual pension payment of $76,725. Therefore, an employee's annual estimated pension payment for final average compensation levels of $150,000 and above remains at the $76,725 level. Pension benefits accrued prior to 1994 are grandfathered, if their calculated benefit is greater than $76,725. 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. Pijor, Kidd and Ryan have thirty-nine (39), thirty (30) and thirty-three (33) credited years of service respectively, under the provisions of the Plan.
The Bank's 1994 contribution to the Plan was $138,282. The amount of contributions with respect to a specific person is not and cannot readily be calculated on an individual basis.
PERFORMANCE GRAPH
The Performance Graph is submitted under Form SE pursuant to Regulation S-T subpart 232.300 paragraph 232.304(d)(1), Graphic and image material.
BENEFICIAL OWNERSHIP OF SHARES The following table reflects as of December 31, 1994, 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 directors 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 445,835(1) 13.93% 457 Broadway Lorain, Ohio 44052
(1) The Bank, a wholly owned subsidiary of LNB Bancorp, Inc. (a U. S. Corporation) disclaims beneficial ownership of all shares. The shares were held by the Bank in various accounts administered by it, as fiduciary, for the benefit of beneficiaries, donors, or principals of such accounts. The Bank, as fiduciary, had (a) sole power to vote 110,213 shares; (b) sole investment power to purchase/sell, but no power to vote on 166,885 shares; (c) shared investment power with sole power to vote with respect to 42,912 shares; and (d) no investment power and no power to vote on 162,907 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, 1994)
Sole Shared Total Amount Investment and Investment and of Beneficial Percent Name Voting Power Voting Power Ownership of Class
James L. Bardoner 6,531 479 7,010 .22% Daniel P. Batista 17,237 37,369 54,606 1.71% Wellsley O. Gray 6,366 3,550 9,916 .31% James F. Kidd 35,754 660 36,414 1.14% David M. Koethe 44,153 142 44,295 1.38% Benjamin G. Norton 34,567 35,656 70,223 2.19% Stanley G. Pijor 55,028 25,606 80,634 2.52% James H. Riddell 18,005 2,194 20,199 .63% Thomas P. Ryan 30,033 976 31,009 .97% Don A. Sanborn 9,746 -0- 9,746 .30% T. L. Smith, M.D. 10,968 7,806 18,774 .59% Eugene M. Sofranko 5,146 16,804 21,950 .69% Paul T. Stack 7,562 878 8,440 .26% Leo Weingarten 82,966 6,683 89,649 2.80% Executive Officers who are not Directors 55,693 321 56,014 1.75% ------- -------- ------- ------ All Directors and Executive Officers as a Group 419,755 139,124 558,879 17.46% ======= ======== ======= ======
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 1994. 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.
INCREASE AUTHORIZED SHARES AND FIX PAR VALUE AT $1.00 PER SHARE The Board of Directors recommends that the shareholders approve an amendment to Articles of Incorporation which would fix the par value of the Common Stock of the Corporation at $1.00 per share and increase the authorized number of shares from 4,000,000 to 5,000,000. Ratification of the appointment of the increase in the number of shares requires the affirmative vote of a majority of the shares of Common Stock of the Corporation voting in person or by proxy at the Annual Meeting of Shareholders. If the shareholders should not ratify the increase in the number of authorized shares, the Board of Directors will reconsider this action. The purpose of this amendment is to allow for a split of the Common Stock of the Corporation on a basis of five-for-four. The shareholders of record on April 18, 1995, will be issued additional shares on a five-for-four basis respective to their holding of Common Stock of the Corporation on that date assuming the shareholders approve the aforementioned amendment. This would increase the number of shares outstanding by 802,692 shares and result in an increase in the total number of shares outstanding from 3,210,765 to 4,013,457. The five-for-four stock split combined with the impact of having the par value of Common Stock fixed a $1.00 per share would result in an equity transaction in which $802,692 would be transferred from additional capital to Common Stock. This equity transaction would have no impact on retained earnings. The calculation of the actual number of shares to be issued and the amount of the resulting equity transaction will be based upon the number of shares outstanding on the record date. This action is recommended to allow more of our present and future customers to acquire additional shares or become new shareholders of LNB Bancorp, Inc. No fractional shares will be issued. The Corporation will sell full shares representing all the fractions to the highest bidder after having solicited sealed bids from at least three (3) licensed stockbrokers. The proceeds of the sale shall be distributed pro rata to shareholders who would otherwise be entitled to fractional shares.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSED AMENDMENT OF THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
COMMON STOCK PRICES Trading Ranges of Common Stock-Bid Price
1994 1993 HIGH LOW HIGH LOW First Quarter $27.75 $26.25 $22.40 $21.80 Second Quarter 29.25 27.75 24.25 22.40 Third Quarter 30.00 29.25 24.75 24.25 Fourth Quarter 30.13 30.00 26.25 24.75
Bid prices are taken from those published daily by a newspaper of general circulation in Lorain County, Ohio.
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 and issue a statement if so desired.
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 1996 Annual Meeting they must be received by the Corporation no later than December 1, 1995. 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 1994.
ANNUAL DISCLOSURE STATEMENT Financial information regarding The Lorain National Bank is available to our customers, shareholders and the general public upon request. In accordance with Federal regulation to facilitate more informed decision making by depositors, and the general public, we will provide, upon request, an Annual Disclosure Statement containing financial information for the last two (2) years. To obtain a copy of the Annual Disclosure Statement, please contact Gregory D. Friedman, Senior Vice President and Chief Financial Officer, The Lorain National Bank, 457 Broadway, Lorain, Ohio 44052.
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, 1994 will be presented at the meeting. A copy of the Corporation's Annual Report on Form 10-K under the Securities Exchange Act of 1934 is available to shareholders without charge upon request to Thomas P. Ryan, Executive Vice President and Secretary/Treasurer, LNB Bancorp, Inc., 457 Broadway, Lorain, Ohio 44052.
By Order of the Board of Directors
/s/ Thomas P. Ryan
Thomas P. Ryan Executive Vice President and Secretary/Treasurer
PROXY ANNUAL MEETING LNB BANCORP, INC., LORAIN, OHIO This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoint JAMES L. BARDONER, DAVID M. KOETHE and DANIEL P. BATISTA, as Proxies, each with the power to appoint his substitute, and hereby authorize them to represent and to vote, as designated below, all the shares of Common Stock of the LNB Bancorp, Inc. held on record by the undersigned on March 10, 1995, at the Annual Meeting of Shareholders to be held on April 18, 1995 or any adjournment thereof.
1. ELECTION OF DIRECTORS [ ] FOR all nominees listed below (except as marked to the contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below 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 write that nominee's name on the space provided below.)
-----------------------------------------------------------------
2. INCREASE AUTHORIZED SHARES AND FIX PAR VALUE AT $1.00 PER SHARE - Consideration of an amendment to the Articles of Incorporation of LNB Bancorp, Inc. which would increase the authorized number of shares from 4,000,000 to 5,000,000 and fix the par value of the Common Stock at $1.00 per share to allow for a five-for-four stock split of the Common Stock of LNB Bancorp, Inc. if this proposal is approved.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the Proxies are authorized to vote upon such other business as may properly 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 proposals 1 and 2.
Dated -----------, 1995 Number of shares in my/our name ---------
-------------------------- (L.S.)
-------------------------- (L.S.)
NOTE: Please sign exactly as name appears above. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person.
YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY FORM WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
Please read and vote on other side.