LNB Bancorp, Inc.
Exhibit to Form 10 - K
(for the fiscal year ended December 31, 2002)
S - K Reference Number (13)
LNB Bancorp, Inc. 2002 Annual Report
to Shareholders.
COVER DESCRIPTION
2002 ANNUAL REPORT
Color photograph of compass
Background - Map of Lorain, eastern Cuyahoga and western Erie counties
(Logo)LNB
Bancorp, Inc.
and subsidiaries
Front of Cover Flap
CORPORATE PROFILE
(Logo)LNB
Bancorp, Inc.
LNB Bancorp, Inc., (the Bancorp), is a $715 million financial holding company
headquartered in Lorain, Ohio. The Bancorp is a public company whose stock
is traded on The Nasdaq National Stock Market@ under the ticker symbol LNBB.
Its 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 chartered bank
founded in 1905. 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 Bancorp received
its financial holding company status on March 13, 2000.
The Bancorp's primary subsidiary, The Lorain National Bank, specializes in
personal, mortgage, and commercial banking products and services along with
investment management and trust services. Lorain National Bank operates 21
banking centers and 27 ATMs in the nine communities of Lorain, Elyria,
Amherst, Avon Lake, LaGrange, Oberlin, Olmsted Township, Vermilion, and
Westlake located in Ohio's Lorain, eastern Erie, and western Cuyahoga
counties. Lorain National Bank offers products and services by telephone
through its 24-hour Telebanker and Telepay systems,(800) 610-9033 and
provides Internet banking at www.4LNB.com. Lorain National Bank also
provides services to state and local governments, schools and colleges,
foundations, and not-for-profit associations. Lorain National Bank is a
member of the Federal Reserve Bank of Cleveland, a voluntary member of the
Federal Home Loan Bank of Cincinnati, with its deposits insured by the
Federal Deposit Insurance Corporation; and an Equal Employment Opportunity,
Affirmative Action Employer and Equal Housing Lender.
LNB Bancorp, Inc., offers life, accident and health insurance, and fixed
annuity products through its wholly owned insurance subsidiary Charleston
Insurance Agency, Inc.; and traditional title services through its 49 percent
owned subsidiary Charleston Title Agency, LLC. In addition, pursuant to an
agreement between Lorain National Bank and Raymond James Financial Services,
Inc., member NASD/SIPC, Raymond James offers brokerage services including
stock, mutual funds and variable annuity products to Lorain National Bank
customers through the LNB Investment Center.
On July 15, 2002, Lorain National Bank established a wholly-owned subsidiary,
North Coast Community Development Corporation, which received its Community
Development Entity (CDE) status from the United States Department of Treasury
on December 10, 2002. North Coast Community Development Corporation's
mission is to provide commercial investment in low and medium income
communities. Upon the approval of North Coast Community Development
Corporation's application for New Markets Tax Credit Allocation, investments
by North Coast Community Development Corporation can commence.
OUR VISION
The vision of LNB Bancorp, Inc. is to become recognized as the most
progressive and dynamic, independent provider of financial services in
our market.
OUR MISSION
The mission of LNB Bancorp, Inc. is to be a profitable, responsible,
independent business that provides extraordinary service to our
customers and community, while maximizing shareholder value and creating
a high-quality and challenging work environment for our employees.
PRIVACY POLICY
The Privacy Policy of LNB Bancorp, Inc. and subsidiary companies describes
how we safeguard customers' financial privacy. For more information, visit
our website at www.4LNB.com or by calling (440) 244-7126.
LNB BANCORP, INC. - INVESTMENT FACTS
With a heritage dating from 1905 and a strong tradition of continuous
growth, LNB Bancorp, Inc. has a long history of quality asset growth,
increased revenues and increased earnings and dividends per share.
Here are just a few highlights. In 2002, LNB Bancorp, Inc.:
*Offered shareholders the opportunity to realize more than a 38 percent
total return on their investment, assuming reinvestment of dividends
*Declared a two percent stock dividend on July 2.
*Posted its 21st consecutive year of record EPS and revenue.
*Increased cash dividends for the 19th consecutive year.
*Recorded net interest margin of 4.52.
*Reported a return on average assets (ROAA) and equity (ROAE) of 1.33
percent and 14.24 percent, respectively.
*Common stock traded with a dividend yield of 3.76.
TABLE OF CONTENTS
Corporate and Investor Information. . . . . . . . . . . .IFC
LNB Bancorp, Inc. Common Stock
and Dividend Information . . . . . . . . . . . . . . . IFC
Consolidated Financial Highlights. . . . . . . . . . . . . 1
Message to Our Shareholders. . . . . . . . . . . . . . . . 2
Directors of LNB Bancorp, Inc. and Lorain National Bank. . 8
Officers of LNB Bancorp, Inc.. . . . . . . . . . . . . . . 8
Directors Emeriti of Lorain National Bank. . . . . . . . . 9
Directors and Officers of Charleston Insurance Agency, Inc.9
Directors and Officers of North Coast Community
Development Corporation. . . . . . . . . . . . . . . . . 9
Management of Lorain National Bank . . . . . . . . . . . .10
LNB Bancorp, Inc. and Subsidiary Locations . . . . . . . .12
Banking Centers, ATMs, LNB Investment and Trust Services
and LNB Investment Center. . . . . . . . . . . . . . . .13
Consolidated Balance Sheets. . . . . . . . . . . . . . . .14
Consolidated Statements of Income. . . . . . . . . . . . .15
Consolidated Statements of Shareholders' Equity. . . . . .16
Consolidated Statements of Cash Flows. . . . . . . . . . .17
Notes to Consolidated Financial Statements . . . . . . . .18
Report of Management . . . . . . . . . . . . . . . . . . .34
Report of Independent Auditors . . . . . . . . . . . . . .34
Selected Unaudited Quarterly Financial Data . . . . . . .35
Five Year Consolidated Financial Summary . . . . . . . . .36
Management's Discussion and Analysis . . . . . . . . . . .37
Condensed Consolidated Average Balance Sheets. . . . . . .39
Rate/Volume Analysis of Net Interest Income. . . . . . . .39
Annual Earnings, Dividends and Book Value
Per Share Performance . . . . . . . . . . . . . . . . . IBC
Logos or symbols of NASDAQ Listing, Federal Deposit Insurance Corporation,
Federal Home Loan Bank System and Equal Housing Lender
LNB BANCORP, INC. 2002 ANNUAL REPORT
Inside Front Cover Flap
CORPORATE AND INVESTOR INFORMATION
CORPORATE HEADQUARTERS
If you need to contact the corporate headquarters of LNB Bancorp, Inc.,
call, write or visit:
LNB Bancorp, Inc.
457 Broadway
Lorain, Ohio 44052-1739
Telephone: (440) 244-6000
Toll Free:(800) 860-1007
CORPORATE WEBSITE
www.4LNB.com
For up-to-date corporate, financial and product information.
CORPORATE E-MAIL ADDRESS
InvestorRelations.4LNB.com
ANNUAL MEETING
The 2003 Annual Meeting of Shareholders of LNB Bancorp, Inc. will be
held at 10:00 a.m., Eastern Daylight Savings Time, on Tuesday, April 15,
2003 at Lorain National Bank, 521 Broadway, Lorain, Ohio 44052.
CORPORATE FINANCIAL INFORMATION
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission. Copies of form 10-K and other filings are available at
www.4LNB.com or by contacting Investor Relations. Analysts, shareholders and
investors seeking additional corporate and financial information about LNB
Bancorp, Inc. should contact Investor Relations at:
LNB Bancorp, Inc.
Investor Relations
457 Broadway
Lorain, Ohio 44052-1739
Telephone: (440) 244-7317
Telefax: (440) 244-4815
QUARTERLY EARNINGS REPORTING
For 2003, LNB Bancorp, Inc.'s quarterly earnings are anticipated to be
announced on or about the fourth Tuesday of April, July, October 2003 and
January 2004. Any investor desiring a copy of an earnings release can obtain
one at www.4LNB.com or by calling (440) 244-7317.
INDEPENDENT AUDITORS
KPMG LLP
One Cleveland Center
1375 East 9th Street, Suite 2600
Cleveland, Ohio 44114-1796
STOCK TRANSFER AGENT AND REGISTRAR
Shareholders who hold their shares in physical certification form and
have requests for information about their share balances, a change in
name or address, lost certificates, or other shareholder account
matters should call or write:
Registrar and Transfer Company
Investor Relations Department
10 Commerce Drive
Cranford, New Jersey 07016-9982
Toll Free: (800) 368-5948
STOCK LISTING
Symbol for NASDAQ Listing
LNB Bancorp, Inc. common stock is traded on the Nasdaq Stock Market@ under
the ticker symbol LNBB.
LNBB DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
You may buy LNB Bancorp, Inc. common stock directly from LNB Bancorp, Inc.
through optional cash payments or automatic monthly deductions from your bank
account. You also may have you dividends reinvested automatically. This is
not an offer of LNB Bancorp, Inc. stock. To obtain a prospectus or more
information about the LNBB Direct Stock Purchase and Dividend Reinvestment
Plan, call (800) 368-5948 or complete the postage paid card titled "LNBB
Direct Stock Purchase & Dividend Reinvestment Plan" located at the end of
this Annual Report.
LORAIN NATIONAL BANK
Lorain National Bank operates 21 banking centers and 27 ATMs in nine
communities offering:
*Personal, mortgage and commercial banking products and services
*Investment Management and Trust Services
*24-hour telephone banking
*Internet banking at www.4LNB.com
Individuals seeking additional information on banking products and services
should contact:
Lorain National Bank
457 Broadway
Lorain, Ohio 44052-1739
Telephone: (440) 989-3348
LNB INVESTMENT CENTER AND CHARLESTON INSURANCE AGENCY, INC.
In addition to traditional banking services, customer's can access a wide
range of insurance, investment products and services, including:
*Life, Accident and Health Insurance and Fixed-Annuity Products offered
through Charleston Insurance Agency, Inc. and
*Brokerage Services including stock, mutual funds and variable annuity
products offered through Raymond James Financial Services Inc., member
NASD/SIPC at the LNB Investment Center.
Individuals seeking additional information on investment products and
services should contact:
LNB Investment Center
457 Broadway
Lorain, Ohio 44052-1739
Toll Free: (800) 845-2152
CHARLESTON TITLE AGENCY, LLC
LNB Bancorp, Inc.'s 49-percent-owned subsidiary, Charleston Title Agency,
LLC, offers traditional title services. Individuals seeking additional
information on title services should contact:
Charleston Title Agency, LLC
424 Middle Avenue
Elyria, Ohio 44035
Telephone: (440) 244-5212
LNB Bancorp, Inc. Logo
LNB BANCORP, INC. 2002 ANNUAL REPORT
Inside front cover
LNB BANCORP, INC. COMMON STOCK AND DIVIDEND INFORMATION
COMMON STOCK TRADING RANGES AND CASH DIVIDENDS DECLARED
2002 2001
- ---------------------------------------------
CLOSING PRICE* Closing Price*
HIGH LOW High Low
- ---------------------------------------------
First Quarter $21.57 $20.08 $22.23 $19.23
Second Quarter 26.25 19.98 21.10 19.23
Third Quarter 26.49 23.02 21.57 19.31
Fourth Quarter 27.15 24.30 22.06 18.43
- ---------------------------------------------
2002 2001
- -------------------------------------------------------------
CASH Cash
DIVIDEND Dividend
AMOUNT* Amount*
- -------------------------------------------------------------
First Quarter - regular . . . . .$ .25 $ .24
Second Quarter - regular. . . . . .25 .24
Third Quarter - regular . . . . . .25 .25
Fourth Quarter - regular. . . . . .25 .25
Fourth Quarter - EXTRA. . . . . . .02 .02
----- -----
Total Dividends . . . . . . . . .$1.02 $1.00
- -------------------------------------------------------------
*All closing prices and cash dividend amounts have been adjusted to
reflect the two percent stock dividend in 2002 and 2001.
The shares of LNB Bancorp, Inc., common stock, fixed par value $1.00 per
share, are traded on The Nasdaq National Stock Market@ under the ticker
symbol LNBB. The above prices represent the high and low closing prices
reported on The Nasdaq Stock Market@. All prices reflect inter-dealer prices
without markup, markdown or commission and may not necessarily represent
actual transactions.
LNB Bancorp, Inc. common stock is usually listed in publications as "LNB
Bancorp." LNB Bancorp's common stock CUSIP is 502100100. As of December 31,
2002, LNB Bancorp had 2,210 shareholders of record. Prospective shareholders
may contact our Investor Relations Department at (440) 244-7317 for more
information.
NASDAQ Symbol
LNB BANCORP, INC. AND LORAIN NATIONAL BANK 19-YEAR CASH DIVIDEND DECLARED PER
SHARE HISTORY Dollars*
(A 19-year Cash Dividend Declared Per Share History graph with Dividends
Declared on the y-axis and years 1984 through 2002 on the x-axis. The
graph is a vertical bar graph. The co-ordinates, by year, which are
presented in the table below are plotted on the previously described
grid.)
Year Dividends
2002 $1.02
2001 $1.00
2000 $ .96
1999 $ .86
1998 $ .81
1997 $ .67
1996 $ .58
1995 $ .49
1994 $ .43
1993 $ .39
1992 $ .36
1991 $ .32
1990 $ .29
1989 $ .27
1988 $ .24
1987 $ .21
1986 $ .20
1985 $ .19
1984 $ .19
*Adjusted for stock dividends and splits
DIVIDEND INFORMATION
LNB Bancorp, Inc. has increased the cash dividend paid to shareholders
each year since becoming a Holding Company in 1984. In addition to the
regular quarterly cash dividends, the Board of Directors meets in the fourth
quarter of each year to determine whether to approve an EXTRA cash dividend.
The EXTRA cash dividend is discretionary and varies based upon the
Corporation's current year and near-term profitability outlook.
DIVIDEND CALENDAR
Cash dividends on common stock, if approved by the Board of Directors,
are customarily paid to shareholders as follows:
RECORD DATES:
March 17, June 16, September 15, and December 15, 2003
DIVIDEND PAYABLE DATES:
April 1, July 1, October 1, 2003 and January 2, 2004
LNB BANCORP, INC. COMMON STOCK MARKET MAKERS
Friedman, Billings, Ramsey and Co., Inc.
Goldman, Sachs & Co.
Hill, Thompson, Magid & Company, Inc.
Howe Barnes Investments, Inc.
Merril Lynch, Pierce, Fenner & Smith Inc.
McDonald Investments Inc./Trident Securities, Inc.
Sandler, O'Neill & Partners, L.P.
Susquehanna Capital Group
Sweney Cartwright and Company, Inc.
LNB BANCORP, INC. FIVE YEAR HISTORIC DIVIDEND YIELDS
(Yield*)
(A LNB Bancorp, Inc. Five Year Historic Dividend Yield graph with Dividend
Yields on the y-axis and years 1998 through 2002 on the x-axis. The
graph is a vertical bar graph. The co-ordinates, by year, which are
presented in the table below are plotted on the previously described
grid.)
Year Yield
2002 3.76%
2001 4.80%
2000 4.59%
1999 4.18%
1998 3.16%
*The dividend yield is based upon closing price at year-end and dividends
declared during that year
CONSOLIDATED FINANCIAL HIGHLIGHTS
All dollar amounts presented in thousands, except per share data and
corporate data
2001 to 2002
December 31, 2002 2001 % Change 1992
- ----------------------------------------------------------------------
FINANCIAL POSITION
Assets . . . . . . . . .$715,399 $664,526 7.7% $371,065
Investments. . . . . . . 152,295 138,401 10.0 96,631
Net loans. . . . . . . . 502,897 471,598 6.6 230,364
Deposits . . . . . . . . 566,127 518,267 9.2 317,730
Other borrowings . . . . 75,791 78,515 (3.5) 18,861
Shareholders' equity . . 66,613 62,138 7.2 32,552
-------------------------------------------
FINANCIAL RESULTS FOR THE YEAR
Interest income. . . . .$ 41,364 $ 45,101 (8.3)% $ 27,465
Interest expense . . . . 12,095 16,998 (28.8) 10,223
Net interest income. . . 29,269 28,103 4.1 17,242
Provision for loan losses 2,200 2,200 0.0 700
Noninterest income . . . 10,579 9,448 12.0 3,619
Noninterest expense. . . 24,283 22,738 6.8 14,785
Income taxes . . . . . . 4,200 4,048 3.8 1,550
Net income . . . . . . . 9,165 8,565 7.0 3,826
Revenue. . . . . . . . . 39,848 37,551 6.1 20,861
-------------------------------------------
PER SHARE DATA*
Basic earnings . . . . .$ 2.08 $ 1.95 6.7% $ 0.88
Diluted earnings . . . . 2.08 1.95 6.7 0.88
Cash dividends . . . . . 1.02 1.00 2.0 0.36
Book value (year-end). . 15.14 14.12 7.2 7.47
Market value (year-end). 27.15 20.83 30.3 15.34
-------------------------------------------
FINANCIAL PERFORMANCE RATIOS
Return on average assets
(ROAA). . . . . . . . . . 1.33% 1.35% (1.5)% 1.07%
Return on average share-
holders' equity(ROAE) . . 14.24 14.36 (0.8) 12.17
Net interest margin. . . . 4.52 4.72 (4.4) 5.28
Efficiency ratio . . . . . 62.08 60.96 (1.8) 70.87
Loans/deposits . . . . . . 90.01 92.13 (2.3) 73.58
Dividend payout. . . . . . 48.75 50.96 (4.3) 40.64
------------------------------------------
CAPITAL RATIOS
Core capital (Tier I)/
Risk-adjusted assets. . . 11.64% 11.95% (2.6)% 15.75%
Total capital (Tier I
plus Tier II)/Risk-
adjusted assets . . . . . 12.89 13.17 (2.1) 16.95
Leverage ratio (Tier I/
Average assets) . . . . . 9.04 9.08 (0.4) 9.09
Equity/assets. . . . . . . 9.31 9.35 (0.4) 8.78
------------------------------------------
MARKET RATIOS
Price/earnings (X) . . . . 13.04 10.71 21.8% 17.47
Price/book (%) . . . . . . 179.38% 147.65% 21.5% 205.39%
Dividend yield (%) . . . . 3.76 4.80 (21.7) 2.35
------------------------------------------
CORPORATE DATA
Bank offices . . . . . . . 21 20 5.0% 16
Bank officers and staff. . 305 298 2.3 294
Number of shareholders . . 2,210 2,180 1.4 1,649
-------------------------------------------
*All per share data has been adjusted for five-for-four stock splits in
1995 and 1993 and stock dividends.
LNB Bancorp, Inc.
MARKET VALUE PER SHARE (Dollars*)
(A Market Value Per Share graph follows in printed version with market value
on the y-axis and years 1998 through 2002 on the x-axis. The graph is a
vertical bar graph. The co-ordinates, by year, which are presented in the
table below are plotted on the previously described grid.)
BOOK VALUE PER SHARE (Dollars*)
(A Book Value Per Share graph follows in printed version with book value
on the y-axis and years 1998 through 2002 on the x-axis. The graph is a
vertical bar graph. The co-ordinates, by year, which are presented in
the table below are plotted on the previously described grid.)
DIVIDEND PAYOUT RATES
(A Dividend Payout Rate graph follows in printed version with dividend payout
rates on the y-axis and years 1998 through 2002 on the x-axis. The graph is a
vertical bar graph. The co-ordinates, by year, which are presented in the
table below are plotted on the previously described grid.)
BOOK VALUE DIVIDEND
MARKET VALUE PER SHAR PER SHARE PAYOUT
Year (Dollars) (Dollars) (RATES)
2002 $27.15 $15.14 48.75%
2001 $20.83 $14.12 50.96%
2000 $20.96 $12.90 49.72%
1999 $20.73 $11.66 49.65%
1998 $25.68 $11.13 51.99%
*Adjusted for stock dividends and splits
LNB BANCORP, INC. 2002 ANNUAL REPORT 1
END PUBLISHED PAGE 1
MESSAGE TO OUR SHAREHOLDERS
IT IS A PLEASURE TO ADDRESS YOU ONCE AGAIN AFTER THE COMPLETION OF ANOTHER
SUCCESSFUL YEAR OF OPERATIONS, DESPITE THE BELEAGUERED ECONOMY OF 2002.
Undoubtedly, the past year will be remembered as one of continued market
correction and slow economic growth. However, after years of striving to
demonstrate that LNB Bancorp's financial performance was deserving of wider
recognition by the investment community, we received numerous accolades over
the course of 2002. Our focus on long-term strategies, to which we have
alluded in prior messages, directly benefited our shareholders, who, assuming
all dividends were reinvested, had the opportunity to realize a more than 38
percent total return during the year. That performance ranked LNB Bancorp,
Inc., as the fourth (4th) leading publicly traded Northeastern Ohio
Corporation for the year according to a recent Plain Dealer survey. No other
financial institution in Northeastern Ohio matched LNB Bancorp's total-return
performance during 2002. Thanks to your support and the efforts of our
employees, LNB Bancorp, Inc., continues as a healthy, growing, and viable
financial holding company. As shown by the following highlights of our 2002
financial performance, we made solid progress toward our goal of becoming a
$1 billion-plus financial holding company.
21 CONSECUTIVE YEARS OF REVENUE AND EARNINGS GROWTH
We are proud to say that we achieved our 21st consecutive year of record
growth in revenue, net income, and earnings per share in 2002, an achievement
matched by only a small group of other financial holding companies in the
United States. Net income for 2002 advanced seven percent to $9,165,000 from
2001's $8,565,000. Earnings per basic and diluted share for 2002 surpassed
the $2.00 mark for the first time in the history of LNB Bancorp, Inc.,
reaching $2.08. Adjusted to reflect the two-percent stock dividend paid on
July 2, 2002, this represents an increase of $0.13, or 6.7 percent, from
2001's $1.95. Return on average assets was 1.33 percent and return on average
shareholders' equity was 14.24 percent, both at strong levels compared with
peers.
Contributing to the record 2002 earnings performance were higher net interest
income and noninterest income, partially offset by higher operating expenses.
Fueled by growth in commercial and home equity loans, net interest income
rose 4.15 percent to $29,269,000.
Bottom left hand column, color photograph of GARY C. SMITH, President and
Chief Executive Officer (left) and STANLEY G. PIJOR, Chairman of the Board
(right).
Revenues for 2002 rose $2.3 million, or 6.1 percent, to $39.8 million
compared with 2001. Net interest margin fell 20 basis points to 4.52 from
2001's 4.72 percent. This decrease is the result of earning assets repricing
faster than the rates on funding. Throughout 2002, we worked hard toward
achieving our basic goals of reducing our cost of funds while expanding our
deposit franchise to support and grow a high-quality earning asset portfolio.
Excluding gains on sales of securities, noninterest income grew by 7.1
percent for the year driven primarily by a 15.7 percent increase in service
charges on deposit accounts, which was partially offset by a decrease in
Investment and Trust Division income of 12.6 percent-a direct result of
2002's declining equity markets. Noninterest expenses grew 6.8 percent during
2002 reflecting increases in salaries and benefit expenses, furniture and
equipment expenses, outside services, and marketing and public relations-
related expenses, partially offset by a reduction in Ohio Franchise tax and
goodwill amortization. The increase in salaries and benefits was offset in
part by increases in the cash surrender value of bank owned life insurance
policies. The graphs on the inside back cover depict our consolidated annual
earnings, cumulative cash dividends, and book value per share for the past 10
years.
Cash dividends declared per share in 2002 increased $0.02, or 2.0 percent, to
$1.02 per share, up from $1.00 per share last year. In each of the last 19
years, the Board of Directors has approved an increase in the cash dividend
per share. Total cash dividends declared in 2002, including the $0.02 EXTRA
dividend declared by the Board of Directors in November, rose to $4,468,000.
Total 2002 cash dividends declared represents a 187.3 percent increase, or
almost triple that of 1992 when $1,555,000 in cash dividends were declared.
LNB Bancorp's dividend yield was 3.76 and 4.80 percent, respectively, at
year-end 2002 and 2001.
LNB Bancorp, Inc., as of 2002 year-end, realized significant growth in
assets, loans, deposits, borrowings, and shareholders' equity relative to a
year ago. Total assets surpassed the $700-million mark during the year,
climbing 7.7 percent to $715.4 million from $664.5 million, for an increase
of $50.9 million from one year ago. At 2002 year-end, earning assets
increased 7.4 percent to $665.1 million-up $45.7 million from the year-
earlier period.
During 2002, net loans eclipsed the $500-million mark for the first time,
rising 6.6 percent to $502.9 million from $471.6 million.
2 LNB BANCORP, INC. ANNUAL REPORT
END PUBLISHED PAGE 2
Loan growth was led by an 18.4 percent increase in the commercial loan
portfolio and a 31.8 percent increase in home equity lines of credit
outstanding, while LNB Bancorp, Inc.'s total loan growth was partially offset
by reductions in consumer direct and indirect loans and decreases in the
mortgage loan portfolio due to refinancing.
Commercial loans demonstrated robust growth in 2002 despite the downturn in
both the national and local economies for the manufacturing industry and the
downturn in the regional economy for the steel industry. The commercial loan
portfolio climbed to $260.0 million at December 31, 2002, for an increase of
$40.5 million from one year ago. The number of new loans booked in 2002 was
533, amounting to $106.5 million in new gross loans. This loan growth
resulted from Lorain National Bank's strong reputation and the commitment of
our commercial lenders to our markets.
During the year, mortgage lending continued to be affected by the drop in
mortgage interest rates, which reached their lowest levels in 40 years. This
stimulated refinance activity and made the purchase of homes more affordable.
Mortgage loans ended 2002 at $141.4 million, down $16.8 million from the 2001
year-end. Due to mortgage refinancing, our mortgage loan portfolio balance
decreased from one year ago. The refinancing of mortgage portfolios resulted
in the origination of new fixed-rate mortgages, which were subsequently sold
on the secondary market. New mortgage loans originated in 2002 increased 4.6
percent to $43.7 million for an increase of $1.9 million from last year. The
number of new mortgage loans originated in 2002 totaled 347 versus 340 during
2001. Lorain National Bank was in the secondary mortgage market for the
second full year, with sales of mortgage loans totaling $17.8 million for
2002 compared with $6.1 million for 2001. Gains on sales of mortgages were
$94,000 in 2002 and $76,000 in 2001.
Total consumer loans increased to $108.2 million at December 31, 2002, up
$8.1 million or 8.6 percent from one year ago. The number of new direct and
indirect installment loans booked during 2002 was 2,039 totaling $26.6
million. The increase in consumer loans was attributable to a strong home
equity line performance with credit lines increasing $17.2 million and
outstanding credit line balances increasing $11.8 million. The growth in home
equity balances offset a decrease of $3.7 million in installment loans.
Credit card loans at December 31, 2002, increased 5.2 percent from one year
ago to $5.1 million.
Top right hand column, color photographs of from left, Executive Officers,
GREGORY D. FRIEDMAN, GARY C. SMITH, TERRY M. WHITE, and KEVIN W. NELSON.
We are optimistic that 2003 will bring growth in our commercial and mortgage
portfolios from existing and new customers. Consumer loan growth is expected
to continue in 2003 with continued emphasis on home equity lending, further
balancing the mix between home equity and installment loans in the consumer
loan portfolio.
Deposits climbed 9.2 percent to $566.1 million at December 31, 2002, from
$518.3 million, for an increase of $47.9 million versus the level a year
earlier. Growth in retail deposits was attributable to increases in savings,
certificates of deposits, Market Access,
LNB Bancorp, Inc. and Lorain National Bank 21-Year Basic Earnings Per Share
History (Dollars*)
(A 21-Year Basic Earnings Per Share History graph follows in printed
version with earnings on the y-axis and years 1982 through 2002 on the
x-axis. The graph is a vertical bar graph. The co-ordinates, by year,
which are presented in the table below are plotted on the previously
described grid.)
Basic Earnings
Year Per Share
2002 $2.08
2001 $1.95
2000 $1.92
1999 $1.74
1998 $1.55
1997 $1.48
1996 $1.31
1995 $1.12
1994 $1.00
1993 $ .92
1992 $ .88
1991 $ .81
1990 $ .78
1989 $ .76
1988 $ .69
1987 $ .62
1986 $ .59
1985 $ .55
1984 $ .51
1983 $ .50
1982 $ .37
*Adjusted for stock dividends and splits
LNB BANCORP, INC. 2002 ANNUAL REPORT 3
END OF PUBLISHED PAGE 3
MESSAGE TO OUR SHAREHOLDERS
CheckInvest, and money market deposits slightly offset by decreases in demand
deposits. Savings deposits increased $5.1 million, or 5.6 percent, to $97.1
million at December 31, 2002. Market Access accounts rose $10.2 million, or
11.9 percent, to $95.2 million at year-end 2002. Certificates of deposit
climbed $27.4 million, or 15.4 percent, to $204.6 million at year-end 2002.
CheckInvest deposits increased $10.9 million, or 18.2 percent, and money
market deposits increased $0.9 million, or 5.2 percent from one year ago. The
growth in Market Access and certificates of deposit resulted from several
successful deposit promotion campaigns during 2002.
Other borrowings declined during 2002 as a result of the growth in our retail
deposit base, and were $75.8 million at December 31, 2002-a decrease of $2.7
million, or 3.5 percent, versus one year ago. This decline in other
borrowings was attributable to decreases in repurchase agreements and Federal
Home Loan Bank advances of $2.3 million and $0.4 million, respectively.
Shareholders' equity reached an all-time high of $66.6 million at December
31, 2002, an increase of $4.5 million, or 7.2 percent, from one year ago.
Book value per share climbed $1.03 to $15.14 at December 31, 2002, compared
with $14.12 per share at the end of last year. The 2002 and 2001 year-end
ratio of shareholders' equity-to-assets remained strong at 9.3 percent and
9.4 percent, respectively.
LNB Bancorp, Inc.'s 2002 year-end risk-based Tier 1 and total capital ratios
were 11.64 percent and 12.89 percent, respectively. LNB Bancorp, Inc., and
The Lorain National Bank exceed all applicable regulatory capital
requirements. Under Federal Deposit Insurance Corporation (FDIC) guidelines,
Lorain National Bank is categorized as "well capitalized" - the highest
rating category available.
LOOKING AHEAD TO 2003
With the prospect of war and continued weakness in capital spending, we
anticipate the sluggish economy of 2002 to continue into 2003, although we
are cautiously optimistic about economic growth in the year's second half.
In spite of this economic environment, we anticipate that a number of revenue
enhancement initiatives will sustain revenue growth throughout 2003. New
products and the success of our calling efforts should provide reasonable
earning asset growth. Loan growth is one of the keys to our success, and
despite overall economic conditions, we believe that our calling efforts will
continue to find good-quality loan prospects in our local market.
In order to support our earning asset growth, we continue to develop
strategies to increase our deposit market share by acquiring new customers
with products that fit their changing needs. Despite interest rates at 40-
year lows, we anticipate that deposits will grow at a rate slightly above the
overall rate of growth in the market. We continue to take advantage of other
funding sources when these markets provide profitable opportunities. Sources
such as the Federal Home Loan Bank are particularly useful in properly
funding fixed-rate commercial and consumer loans. Net interest margins will
continue to be under pressure in 2003. Our balance sheet continues to be
structured to benefit from rising rates, and we are cautiously optimistic
that, with better economic growth in the second half of 2003, we will benefit
from Federal Reserve action to raise rates in reaction to such growth. As in
2002, with interest margins under pressure, we strive to enhance our
noninterest income opportunities and more aggressively manage our noninterest
expenses.
LNB Bancorp, Inc. and Lorain National Bank 21-Year Revenue History (Millions
of Dollars)
(A 21-Year Revenue History graph follows in printed version with revenue on
the y-axis and years 1982 through 2002 on the x-axis. The graph is a
vertical bar graph. The co-ordinates, by year, which are presented in the
table below are plotted on the previously described grid.)
Year Revenue
2002 $39.8
2001 $37.6
2000 $35.8
1999 $34.1
1998 $31.4
1997 $28.0
1996 $25.9
1995 $23.8
1994 $22.4
1993 $21.4
1992 $20.9
1991 $19.5
1990 $18.7
1989 $17.5
1988 $16.1
1987 $15.5
1986 $14.3
1985 $13.5
1984 $12.0
1983 $10.9
1982 $ 9.3
4 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 4
2002 IN REVIEW
The uncertainties created by the wavering national economy and global
political environments gave way to optimism for LNB Bancorp, Inc. and its
subsidiaries as the year passed. As mentioned earlier, we experienced another
year of record earnings and growth on many other fronts despite concerns on
Wall Street and elsewhere.
We credit our success in 2002 to several factors. As a stable, independent
Midwestern financial holding company with 97 years of service to our market,
our organization operates from a position of strength. Because LNBB is a
well-managed, well-capitalized and stable institution, many of our
shareholders have found comfort with their investment in us.
The graphic below illustrates how some financial analysts and media rank our
performance compared to our peers. At the very least, it is clear that others
from outside of our market are recognizing our accomplishments and how they
translate to shareholder value.
We've reached our present position by prudently managing fundamentals - asset
and liability mix, expenses and noninterest income. Our knowledge of the
marketplace, combined with a strong product menu and motivated staff, helps
us maintain a solid position among our region's community banks.
HIGH PERFORMANCE CHECKING TAKES OFF
Our banking subsidiary kicked off the new year with a completely new line-up
of personal checking accounts with the goal of
Recent Independent Recognition of LNBB Achievements
- ----------------------------------------------------------------------------
U.S. BANKER
Top 100 Performing Community Banks
Ranked number-one Ohio-based community bank according to ROAE for the 1999-
2001 period. 20th overall nationally.
- ----------------------------------------------------------------------------
Howe Barnes Investments
Regional Community Bank Survey
27-bank universe: Second in ROAA, ROAE, net interest margin, and ratio of
noninterest income to average assets. No other bank held the number-one
position in more than one of these categories.
- ----------------------------------------------------------------------------
Friedman Billings Ramsey & Co., Inc.
Regional Performance Summary
41-bank universe: Sixth highest current dividend yield (4.2%) and fifth
lowest P/E ratio (12.7x) at June 7, 2002.
- ----------------------------------------------------------------------------
Keefe, Bruyette & Woods, Inc.
Regional Performance Summary
Yop-10 ranking in 40-bank universe for net interest margin, return on average
equity (ROAE), and return on average assets (ROAA).
- -----------------------------------------------------------------------------
AMERICAN BANKER
Best-Performing Banks Nationally
Ranked 168 of 300 best-performing publicly traded banking companies in
America based on ROAA.
- -----------------------------------------------------------------------------
THE PLAIN DEALER
"The Plain Dealer 100"
Ranked 75 on annual listing of publicly traded Ohio based companies across
all industries based on seven key financial measures.
- -----------------------------------------------------------------------------
Color photographs - FROM LEFT: JAMES W. MANNING, DIRECTOR OF AUDIT, JAMES H.
WEBER, SENIOR MARKETING AND INVESTOR RELATIONS OFFICER, CAROL A. MESKO,
DIRECTOR OF HUMAN RESOURCES, SANDRA L. DUBELL, SENIOR LENDING OFFICER, DAVID
E. NOCJAR, SENIOR INVESTMENT AND TRUST OFFICER
LNB BANCORP, INC. 2002 ANNUAL REPORT 5
END PUBLISHED PAGE 5
MESSAGE TO OUR SHAREHOLDERS
building our core deposit portfolio. Our High Performance Checking program
offers seven accounts including a Totally Free Checking account and six
others that pay interest. This new spectrum of checking choices enables our
sales staff to tailor a checking plan to virtually every customer type.
The new checking program, which features a free gift to those opening a new
account, was introduced to our market in January using a targeted direct mail
approach. This permanent marketing program is backed by attention-getting
outdoor banners and colorful point of purchase advertising materials.
Account premiums are tried and true excitement generators that have been used
by banks periodically for decades. LNB enhanced the free gift offer by giving
customers an opportunity to earn additional free gifts by encouraging others
to open new checking accounts, creating a perpetual flow of new account
openings. Gift selections change with each mailing cycle, about six weeks
apart.
The primary benefits associated with increased checking volume are fee income
and sales and service opportunities. Expanding customer relationships remains
a key component to our long-term success.
HELOC PROGRAM REMAINS STRONG
Home equity line of credit activity remained strong in 2002, thanks in part
to a low-rate environment and untapped capacity. The convenience and
revolving nature of home equity lines of credit continues to enable many
consumers to affordably consolidate debt, make home improvements and tackle
other significant expenses.
In the spring of 2002, home equity line customers availed themselves of a
$100 cash-back offer for new home equity lines of credit. The rebate was paid
to home equity borrowers drawing $10,000 or more on their lines of credit
within 60 days of closing. Again in the fall, home equity loan and line
activity was brisk, as LNB offered rates at Wall Street Prime. LNB
refinancing activity also remained strong.
MANAGEMENT TEAM STRENGTHENED
We added expertise and experience to our officer ranks in 2002 with the
addition of Terry M. White as our new chief investment officer. Mr. White
brings with him several years of investment experience from the private
sector. Paul Campagna, a senior commercial lender, joined Lorain National
Bank with knowledge of and several years of experience in our Elyria market.
With the retirement of senior trust officer Emma N. Mason, our investment
management and trust services function was restructured under the direction
of LNB trust officer David Nocjar. We'd like to acknowledge Mrs. Mason's 24
years of dedicated service to our organization and its clients and wish her a
long and rewarding retirement.
ENHANCED DELIVERY CHANNELS
In 2002 we set in motion a plan for growth and enhancement of our banking
delivery channels. Electronic banking and physical delivery channels are
being expanded in an effort to better serve our existing market and to make
inroads to new markets.
Internet banking became a reality last year with the introduction of Personal
Choice, PC home banking, accessible from the bank's web site at www.4LNB.com.
Online banking provides customers the convenience of conducting many banking
transactions from home, an office or any personal computer with Internet
access.
Color photographs - FROM LEFT: MITCHELL J. FALLIS, CHIEF ACCOUNTING OFFICER,
ROBERT L. COX, DIRECTOR OF RETAIL BANKING, JOHN A. FUNDERBURG, DIRECTOR OF
LENDING OPERATIONS, DEBRA R. BROWN, BRANCH ADMINISTRATION
6 LNB BANCORP, INC. 2002 ANNUAL REPORT
END OF PUBLISHED PAGE 6
Drawing of new Avon Banking Center
LORAIN NATIONAL BANK AVON BANKING CENTER TO OPEN IN 2003 (LEFT END OF
ILLUSTRATION)
Personal Choice users may review statements, transfer funds, pay bills,
verify cleared checks, see check images, order new checks, export account
information for budgeting purposes and more. Since Internet banking was
introduced in May 2002, monthly log-ons to the system exceeded 12,000 at year
end.
In addition to consumers, small business owners and corporate cash managers
are also taking advantage of standard and sophisticated Internet banking
services, respectively.
Clearly, consumers are finding all forms of electronic banking a more
convenient manner to conduct common banking transactions. TeleBanker, our 24-
hour telephone banking service, has increased in usage by more than 15
percent in 2002 compared to 2001. Automated teller machine (ATM) and debit
card usage is also at an all-time high, thanks in part to easy access and
regular national advertising exposure.
Despite the growing popularity of electronic banking, brick and mortar
banking centers still play a significant role in the delivery of service to
bank customers. It is our aim to enhance our branch office presence in areas
of retail and residential growth.
We have determined that there are still many customer acquisition
opportunities within the boundaries of our existing market - we simply need
to provide more convenient ways to serve them. To that end, we will over time
reposition bank offices to more closely shadow the shift of population
centers and areas of commercial growth within our primary market.
Such is the case in the city of Avon Lake. In 2002 we purchased real estate
adjacent to the Avon Lake Towne Center shopping complex on Walker Road for
future development. Eventually we plan to relocate our Miller and Walker Road
banking center to that location.
At year-end 2002, we identified the city of Avon as a market we can better
serve. By the close of 2003, Lorain National will open a banking center in
this fast-growing community. Our newest banking center will be located in a
moderately-sized shopping center located on State Route 83, just south of
Detroit Road, in the vicinity of the Avon Commons.
We believe there are other untapped areas of opportunity for us within our
primary market, as well as beyond. We will continue to examine future
expansion wherever it will provide better customer service and add to
shareholder value.
LNBB DIRECTORS AND SENIOR MANAGEMENT TEAM
On these pages you will see images of the LNB Bancorp, Inc. board of
directors. Though we customarily list their names and titles, we thought this
year it would be appropriate to recognize and thank them for their many years
of service to our organization. You will also find the likenesses of our
senior management team which plays an instrumental role in executing the
daily operations of our organization.
We wish to thank our shareholders for their continuing support and our
customers for their confidence and business, as well as our talented
employees and our Board for making 2002 another successful year. We look
forward to reviewing our progress with you as 2003 unfolds.
/s/Stanley G. Pijor
Stanley G. Pijor,
Chairman of the Board of Directors
/s/ Gary C. Smith
Gary C. Smith,
President and
Chief Executive Officer
LNB BANCORP, INC. 2002 ANNUAL REPORT 7
END PUBLISHED PAGE 7
DIRECTORS AND OFFICERS
DIRECTORS OF LNB BANCORP, INC. AND LORAIN NATIONAL BANK
Stanley G. Pijor
Chairman of the Board
LNB Bancorp, Inc. and
Lorain National Bank
James F. Kidd
Vice Chairman of the Board
LNB Bancorp, Inc. and
Lorain National Bank
Daniel P. Batista
Chairman of the Board
Wickens, Herzer, Panza,
Cook & Batista L.P.A.
Robert M. Campana
Managing Director
P.C. Campana, Inc.
Terry D. Goode
Vice President
LandAmerica Financial
Group, Inc, and
Lorain County Title Company
Wellsley O. Gray
Retired
James R. Herrick
President
Liberty Auto Group, Inc.
Lee C. Howley
President
Howley Bread Group Ltd.
David M. Koethe
Retired
Benjamin G. Norton
Human Resource Consultant
LTI Power Systems
Jeffrey F. Riddell
President and
Chief Executive Officer,
Consumeracq, Inc. and
Consumers Builders Supply Co.
Thomas P. Ryan
Retired
John W. Schaeffer, M.D.
President
North Ohio Heart Center, Inc.
Gary C. Smith
President and
Chief Executive Officer
LNB Bancorp, Inc. and
Lorain National Bank
Eugene M. Sofranko
Chairman of the Board
Lorain Glass Company, Inc.
Leo Weingarten
Retired
OFFICERS OF LNB BANCORP, INC.
Stanley G. Pijor
Chairman of the Board
James F. Kidd
Vice Chairman of the Board
Gary C. Smith
President and
Chief Executive Officer
Gregory D. Friedman, CPA
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
Kevin W. Nelson
Executive Vice President and
Chief Operating Officer
Terry M. White
Executive Vice President and
Chief Investment Officer
Debra R. Brown
Senior Vice President
Robert L. Cox
Senior Vice President
Sandra L. Dubell
Senior Vice President
Michael D. Ireland
Senior Vice President
David E. Nocjar
Senior Trust and
Investment Officer
James H. Weber
Senior Vice President
Mitchell J. Fallis, CPA
Vice President and
Chief Accounting Officer
John A. Funderburg
Vice President
James W. Manning
Director of Audit
Carol A. Mesko
Vice President
Color photographs of LNB Bancorp, Inc. Directors
FROM LEFT: DIRECTORS STANLEY G. PIJOR, DAVID M. KOETHE, THOMAS P. RYAN, JAMES
F. KIDD, WELLSLEY O. GRAY, BENJAMIN G. NORTON, LEE C. HOWLEY AND JEFFREY F.
RIDDELL
8 LNB BANCORP, INC 2002 ANNUAL REPORT
END PUBLISHED PAGE 8
DIRECTORS EMERITI OF LORAIN NATIONAL BANK
James L. Bardoner
Retired, Former President
Dorn Industries, Inc.
T.L. Smith, M.D.
Retired Physician
DIRECTORS AND OFFICERS OF CHARLESTON INSURANCE AGENCY, INC.
DIRECTORS
Gary C. Smith
Chairman of the Board,
President and
Chief Executive Officer
Charleston Insurance
Agency, Inc.
Thomas P. Ryan
Retired
Stanley G. Pijor
Chairman of the Board
LNB Bancorp, Inc. and
Lorain National Bank
James R. Herrick
President
Liberty Auto Group, Inc.
Jeffrey F. Riddell
President and
Chief Executive Officer
Consumeracq, Inc. and
Consumers Builders Supply Co.
OFFICERS
Gary C. Smith
Chairman of the Board,
President and
Chief Executive Officer
Gregory D. Friedman, CPA
Vice President and Treasurer
Kevin W. Nelson
Corporate Secretary
DIRECTORS AND OFFICERS OF NORTH COAST COMMUNITY DEVELOPMENT CORPORATION
DIRECOTRS
Gary C. Smith
President and
Chief Executive Officer
North Coast Community
Development Corporation
Benjamin G. Norton
Human Resource Consultant
LTI Power Systems
Daniel Martinez
President
South Lorain Community
Development Corporation
Joel A. Krueck
Corporate Secretary
North Coast Community
Development Corporation
Evelyn C. France
Director
Women's Development Center
Mitchell J. Fallis, CPA
Treasurer
North Coast Community
Development Corporation
Emma N. Mason
Retired
OFFICERS
Gary C. Smith
President and
Chief Executive Officer
Joel A. Krueck
Corporate Secretary
Mitchell J. Fallis, CPA
Treasurer
Color photographs of LNB Bancorp, Inc. Directors
FROM LEFT: DIRECTORS JAMES R. HERRICK, ROBERT M. CAMPANA, GARY C. SMITH, JOHN
W. SCHAEFFER, M.D., TERRY D. GOODE, LEO WEINGARTEN, DANIEL P. BATISTA AND
EUGENE M. SOFRANKO
LNB BANCORP, INC 2002 ANNUAL REPORT 9
END PUBLISHED PAGE 9
MANAGEMENT OF LORAIN NATIONAL BANK
EXECUTIVE AND SENIOR OFFICERS
Gary C. Smith
President and
Chief Executive Officer
Gregory D. Friedman, CPA
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
Kevin W. Nelson
Executive Vice President and
Chief Operating Officer
Terry M. White
Executive Vive President and
Chief Investment Officer
Debra R. Brown
Senior Vice President
Banking Center Administration
Robert L. Cox
Senior Vice President
Retail Lending
Sandra L. Dubell
Senior Vice President and
Senior Lending Officer
Michael D. Ireland
Senior Vice President and
Senior Operations Officer
David E. Nocjar
Senior Trust and
Investment Officer
James H. Weber
Senior Vice President and
Senior Marketing Officer
Mitchell J. Fallis, CPA
Vice President and
Chief Accounting Officer
James W. Manning
Director of Audit
BANKING CENTER OFFICERS
Teresa E. George
Vice President
Banking Center Administration
MAIN & SIXTH STREET DRIVE-IN
Charles A. DeAngelis
Vice President
Patti A. Klinar
Assistant Branch Manager
AMHERST
G. Dale Rosenkranz
Vice President
Jennifer M. Nickolls
Senior Customer Service
Representative and Lender
AVON LAKE
Diana L. Schmittgen
Assistant Vice President
CLEVELAND STREET
Timothy J. Gallagher
Vice President
ELY SQUARE & ELYRIA
UNTED METHODIST VILLAGE
James E. Schmittgen
Vice President
KANSAS AVENUE
Linda Buehner
Assistant Vice President
VILLAGE OF LAGRANGE
Vanessa R. Walter
Senior Customer Service
Representative and Branch
Team Leader
LAKE AVENUE
Carrie Hartman
Assistant Vice President
MIDWAY MALL
Susan M. Neiding
Vice President
OBERLIN AVENUE &
WEST PARK DRIVE-IN
Christine M. Weber
Assistant Vice President
OBERLIN & KENDAL
AT OBERLIN
Marilyn R. Krasienko
Assistant Vice President
OLMSTED TOWNSHIP
& THE RENAISSANCE
Carol Snyder
Assistant Cashier
PEARL AVENUE
Patricia A. Wolanczyk
Assistant Cashier
VERMILION
Robert B. White
Vice President
Barbara M. Beres-Clark
Assistant Branch Manager
THE CROSSINGS OF WESTLAKE
& WESTLAKE VILLAGE
Lora M. Graves
Senior Customer Service
Representative and
Branch Team Leader
10 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 10
LOAN OFFICERS
COMMERCIAL LOANS
John A. Funderburg
Vice President
Paul A. Campagna
Vice President
Kevin S. Miller
Vice President
Lee C. Myers
Vice President
Ellen M. Walsh
Vice President
Kenneth P. Wayton
Vice President
RETAIL LENDING
Bruce Diso
Vice President
Kimberly S. Plzak
Assistant Vice President
Senior Business Analyst
Jeanne C. Maschari
Vice President
MORTGAGE LOANS
Edwin F. Klenz
Vice President
Joel A. Krueck
Vice President and
CRA Officer
CREDIT ANALYSIS
Denise M. Kosakowski
Vice President
COLLECTIONS
Kelly A. Dunfee
Assistant Cashier
LOAN REVIEW
Richard P. Vieritz
Vice President
LOAN SERVICES
Laura Campbell
Mortgage Loan
Servicing Officer
Joan M. Raymond
Assistant Vice President
Joyce L. Wasela
Assistant Cashier
ADMINISTRATION AND OPERATIONS OFFICERS
ACCOUNTING
Mary L. Scaff
Fiscal Operations Officer
AUDITING
Randy E. Lottman
Network and Information
Security Officer
COMPLIANCE
Donna Jean Phillips
Vice President,
Compliance, BSA
And OFAC Officer
VISA/ELECTRONIC BANKING &
DEPOSIT OPERATIONS
Patricia L. Cole
Assistant Vice President
E.D.P. SERVICES
Larry R. Johnson
Vice President
Larry A. Hill
Assistant Vice President
Rita M. Hoyt
Assistant Cashier
HUMAN RESOURCES
Carol A. Mesko
Vice President
Teresa E. Kreger
Assistant Vice President
MAINTENANCE
Robert J. Witkowski
Maintenance Officer
MARKETING
Steven F. Cooper
Vice President
Debra L. Temerario
Marketing Operations Officer
PROFESSIONAL DEVELOPMENT
Marianne Kocak
Assistant Vice President
PURCHASING
Susan I. Tuttle
Assistant Vice President
SECURITY
James E. Long
Assistant Vice President
LNB INVESTMENTS AND TRUST SERVICES OFFICERS
Neal A. Conger
Vice President
Gerald S. Falcon
Vice President
Patrick E. Sheridan
Vice President
Georgia Bour
Assistant Vice President
Carol A. Cavanaugh
Assistant Vice President
Thomas H. Eschke
Assistant Vice President
Trust Operations Officer
Mario Ruano
Assistant Vice President
LNB INVESTMENT CENTER OFFICERS
Robert A. Carino
Senior Financial Advisor
Keith H. Kapanke
Financial Advisor
Berry A. Taylor
Financial Advisor
LNB BANCORP, INC. 2002 ANNUAL REPORT 11
END PUBLISHED PAGE 11
LNB BANCORP, INC. AND SUBSIDIARY LOCATIONS
LORAIN NATIONAL BANK
457 Broadway
Lorain, Ohio 44052
(440)244-6000
(800)860-1007
CHARLESTON INSURANCE
AGENCY, INC.
457 Broadway
Lorain, Ohio 44052
(440)244-7158
(800)845-2152
CHARLESTON TITLE
AGENCY, LLC
424 Middle Avenue
Elyria, Ohio 44035
(440)244-5212
(440)284-5165
NORTH COAST COMMUNITY
DEVELOPMENT CORPORATION
457 Broadway
Lorain, Ohio 44052
(440)244-7145
(800)860-1007
Map of Lorain, eastern Cuyahoga and western Erie Counties.
Banking Centers and ATM locations identified on map using symbols and a
legend.
12 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 12
Banking Centers, ATMs, LNB Investment and Trust Services and LNB Investment
Center
LORAIN NATIONAL BANK
LORAIN BANKING CENTERS
^^Main
457 Broadway
Lorain, Ohio 44052
(440)244-7185
^^Sixth Street Drive-In
200 Sixth Street
Lorain, Ohio 44052
(440)244-7242
^^Kansas Avenue
1604 Kansas Avenue
Lorain, Ohio 44052
(440)288-9151
^^Oberlin Avenue
3660 Oberlin Avenue
Lorain, Ohio 44053
(440)282-9196
^^Pearl Avenue
2850 Pearl Avenue
Lorain, Ohio 44055
(440)277-1103
^^West Park Drive**
2130 West Park Drive
Lorain, Ohio 44053
(440))989-3131
AMHERST BANKING CENTER
^^Amherst
1175 Cleveland Avenue
Amherst, Ohio 44001
(440)988-4423
AVON LAKE BANKING CENTER
^^Avon Lake
240 Miller Road
Avon Lake, Ohio 44012
(440)933-2186
ELYRIA BANKING CENTERS
^^Ely Square
124 Middle Avenue
Elyria, Ohio 44035
(440)323-4621
^^Cleveland Street
801 Cleveland Street
Elyria, Ohio 44035
(440)365-8397
^^Lake Avenue
42935 North Ridge Road
Elyria Township,
Ohio 44035
(440)233-7196
^^Midway Mall
6395 Midway Mall Blvd.
Elyria, Ohio 44035
(440)324-6530
^^Elyria United
Methodist Village*
807 West Avenue
Elyria, Ohio 44035
(440) 323-6488
VILLAGE OF LAGRANGE
BANKING CENTER
^^Village of LaGrange
546 North Center Street
Village of LaGrange,
Ohio 44050
(440)355-6734
OBERLIN BANKING CENTERS
^^Kendal at Oberlin*
600 Kendal Drive
Oberlin, Ohio 44074
(440)774-5400
^^Oberlin
40 East College Street
Oberlin, Ohio 44074
(440)775-1361
OLMSTED TOWNSHIP
BANKING CENTERS
^^Olmsted Township
27095 Bagley Road
Olmsted Township,
Ohio 44138
(440)235-4600
The Renaissance*
26376 John Road
Olmsted Township,
Ohio 44138
(440)427-0041
VERMILION BANKING CENTER
^^Vermilion
4455 East Liberty Avenue
Vermilion, Ohio 44089
(440)967-3124
WESTLAKE BANKING OFFICES
^^Crossings of Westlake
30210 Detroit Road
Westlake, Ohio 44145
(440)892-9696
Westlake Village*
28550 Westlake
Village Drive
Westlake, Ohio 44145
(440)808-0229
ATMS
^^Captain Larry's Shell
1317 State Route 60
Vermilion, Ohio 44089
^^City Center Building
300 Broadway
Lorain, Ohio 44052
^^Cooper-Foster Park Road
1920 Cooper-Foster
Park Road
Lorain, Ohio 44053
^^Dad's Sunoco
7580 Leavitt Road
State Route 58
Amherst, Ohio 44001
^^Gateway Plaza
3451 Colorado Avenue
Lorain, Ohio 44052
^^Lakeland Medical Center
3700 Kolbe Road
Lorain, Ohio 44053
^^Lorain County Community
College
1005 North Abbe Road
Elyria, Ohio 44035
^^Lowe's Home
Improvement Warehouse
620 Midway Boulevard
Elyria, Ohio 44035
OTHER OFFICES
Executive
457 Broadway
Lorain, Ohio 44052
(440)244-7123
Banking Center
Administration
457 Broadway
Lorain, Ohio 44052
(440)244-7253
Commercial, Consumer
and Mortgage Loans
457 Broadway
Lorain, Ohio 44052
(440)244-7219
(440)998973348
(440)244-7216
Customer Service
2130 West Park Drive
Lorain, Ohio 44053
(440)989-3348
(800)860-1007
Human Resources
2130 West Park Drive
Lorain, Ohio 44053
(440)989-3139
Purchasing
2150 West Park Drive
Lorain, Ohio 44053
(440)989-3327
Technology Center
2130 West Park Drive
Lorain, Ohio 44053
(440)989-3315
VISA/Electronic Banking
2130 West Park Drive
Lorain, Ohio 44053
(440)989-3348
LNB INVESTMENT AND
TRUST SERVICES
457 Broadway
Lorain, Ohio 44052
(440)244-7148
LNB INVESTMENT CENTER
457 Broadway
Lorain, Ohio 44052
(440)244-7158
(800)845-2152
ALL OTHER OFFICES NOT LISTED
Toll Free (800)860-1007
Lorain (440)244-6000
TELEBANKER
Telebanker (440)245-4562
Telebanker (800)610-9033
Internet:www.4LNB.com
(440)989-3348
ATM service available wherever you see this symbol^^
*Restricted to residents, their visitors and employees
**Drive-In service only
LNB BANCORP, INC. 2002 ANNUAL REPORT 13
END PUBLISHED PAGE 13
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001
- ----------------------------------------------------------------------
ASSETS:
Cash and due from banks (note 3). . . . . .$ 23,608,000 $ 28,017,000
Federal funds sold and short-term
investments . . . . . . . . . . . . . . . 3,224,000 3,488,000
Securities (note 5):
Available for sale, at fair value . . . . 137,909,000 117,628,000
Held to maturity, at cost (fair value
$10,903,000 and $17,485,000,
respectively). . . . . . . . . . . . . . 10,648,000 17,191,000
Federal Home Loan Bank and Federal
Reserve Bank stock, at cost (note 1) . . 3,738,000 3,582,000
---------------------------
Total securities. . . . . . . . . . . . . . 152,295,000 138,401,000
---------------------------
Loans (notes 6,7, 10 and 11):
Loans available for sale. . . . . . . . . 8 999,000 12,459,000
Portfolio Loans . . . . . . . . . . . . . 500,551,000 465,029,000
Reserve for loan losses . . . . . . . . . (6,653,000) (5,890,000)
---------------------------
Net loans . . . . . . . . . . . . . . . . . 502,897,000 471,598,000
---------------------------
Bank premises and equipment, net (note 8) . 10,748,000 10,520,000
Bank owned life insurance . . . . . . . . . 11,930,000 1,026,000
Intangible assets (note 4). . . . . . . . . 3,358,000 3,470,000
Accrued interest receivable . . . . . . . . 3,045,000 3,796,000
Other assets (note 12). . . . . . . . . . . 4,272,000 4,087,000
Foreclosed assets . . . . . . . . . . . . . 22,000 123,000
---------------------------
TOTAL ASSETS. . . . . . . . . . . . . . . .$715,399,000 $664,526,000
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Deposits (note 9):
Demand and other noninterest-bearing
deposits. . . . . . . . . . . . . . . .$ 80,879,000 $ 87,488,000
Savings, Market Access
and passbook accounts . . . . . . . . . 280,616,000 253,506,000
Certificates of deposit . . . . . . . . 204,632,000 177,273,000
---------------------------
Total deposits. . . . . . . . . . . . . . 566,127,000 518,267,000
---------------------------
Securities sold under repurchase
agreements and other short-term
borrowings (note 10) . . . . . . . . . . 26,866,000 29,170,000
Federal Home Loan Bank advances,(note 11) 48,925,000 49,345,000
Accrued interest payable. . . . . . . . . 983,000 1,131,000
Accrued taxes, expenses and other
liabilities (notes 12 and 16). . . . . . 5,885,000 4,475,000
---------------------------
TOTAL LIABILITIES . . . . . . . . . . . . . 648,786,000 602,388,000
---------------------------
SHAREHOLDERS' EQUITY: (notes 13 and 14)
Preferred stock, no par value: Shares
authorized 1,000,000, and shares
outstanding, none (note 13)
Common stock, $1.00 par: Shares
authorized 15,000,000
Shares issued 4,501,232 and 4,417,558,
respectively and
Shares outstanding 4,401,232 and
4,317,558, respectively (notes 13,
17, 18 and 19). . . . . . . . . . . . 4,501,000 4,418,000
Additional capital. . . . . . . . . . . . 28,319,000 26,238,000
Retained earnings (note 15) . . . . . . . 35,639,000 33,125,000
Accumulated other comprehensive
income . . . . . . . . . . . . . . . . . 1,054,000 1,257,000
Treasury stock at cost, 100,000
and 100,000 shares, respectively . . . . (2,900,000) (2,900,000)
---------------------------
TOTAL SHAREHOLDERS' EQUITY 66,613,000 62,138,000
---------------------------
Commitments and contingencies
(notes 7, 8 and 20)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $715,399,000 $ 664,526,000
---------------------------
See accompanying notes to consolidated financial statements
14 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 14
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans:
Taxable . . . . . . . . .$ 34,314,000 $ 37,557,000 $ 39,010,000
Tax exempt . . . . . . . . -0- 5,000 18,000
Interest and dividends on
securities:
U.S. Treasury securities . 6,000 91,000 379,000
U.S. Government agencies
and corporations. . . . . 5,944,000 6,451,000 6,518,000
States and political
subdivisions. . . . . . . 538,000 446,000 249,000
Other debt and equity
securities. . . . . . . . 423,000 405,000 249,000
Interest on Federal funds
sold and other short-term
investments. . . . . . . . 94,000 146,000 222,000
------------------------------------------
TOTAL INTEREST INCOME. . . . . 41,364,000 45,101,000 46,645,000
INTEREST EXPENSE:
Interest on deposits:
Certificates of deposit,
$100,000 and over . . . . 1,394,000 2,393,000 3,058,000
Other deposits . . . . . . 8,504,000 12,225,000 12,941,000
Interest on securities sold
under repurchase agreements
and other short-term
borrowings . . . . . . . . 407,000 852,000 1,695,000
Interest on Federal Home Loan
Bank advances. . . . . . . 1,790,000 1,528,000 1,515,000
------------------------------------------
TOTAL INTEREST EXPENSE . . . . 12,095,000 16,998,000 19,209,000
------------------------------------------
NET INTEREST INCOME. . . . . . 29,269,000 28,103,000 27,436,000
Provision for loan
losses (note 7). . . . . . 2,200,000 2,200,000 1,700,000
------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. . 27,069,000 25,903,000 25,736,000
------------------------------------------
NONINTEREST INCOME:
Investment and Trust Services
Division income. . . . . . 2,080,000 2,379,000 2,355,000
Service charges on deposit
accounts . . . . . . . . . 4,083,000 3,529,000 3,150,000
Other service charges,
exchanges and fees . . . . 3,162,000 3,056,000 2,804,000
Gains on sales of
securities (note 5). . . . 732,000 250,000 -0-
Gains on sales of loans. . . 94,000 76,000 7,000
Gains on sales of bank
premises and equipment . . -0- -0- 1,000
Other income . . . . . . . . 428,000 158,000 53,000
------------------------------------------
TOTAL NONINTEREST INCOME . . . 10,579,000 9,448,000 8,370,000
NONINTEREST EXPENSES:
Salaries and employee benefits
(notes 16, 17, 18 and 19) . 11,740,000 11,205,000 10,304,000
Net occupancy expense of
premises (note 8) . . . . . 1,476,000 1,471,000 1,576,000
Furniture and equipment
expenses (note 8) . . . . . 2,193,000 2,090,000 2,163,000
Card-related expenses. . . . 1,325,000 1,283,000 1,133,000
Supplies and postage . . . . 1,018,000 1,008,000 909,000
Outside services . . . . . . 1,306,000 899,000 673,000
Marketing and public
relations . . . . . . . . . 1,032,000 564,000 567,000
Ohio Franchise Tax . . . . . 502,000 622,000 563,000
Other expenses . . . . . . . 3,691,000 3,596,000 3,398,000
------------------------------------------
TOTAL NONINTEREST EXPENSES . . 24,283,000 22,738,000 21,276,000
------------------------------------------
INCOME BEFORE INCOME TAXES . . 13,365,000 12,613,000 12,830,000
------------------------------------------
INCOME TAXES (note 12) . . . . 4,200,000 4,048,000 4,400,000
------------------------------------------
NET INCOME . . . . . . . . . . $ 9,165,000 $ 8,565,000 $ 8,430,000
------------------------------------------
BASIC EARNINGS PER SHARE
(note 2)(*). . . . . . . . . $ 2.08 $ 1.95 $ 1.92
------------------------------------------
DILUTED EARNINGS PER SHARE
(note 2)(*). . . . . . . . . $ 2.08 $ 1.95 $ 1.92
------------------------------------------
DIVIDENDS DECLARED PER SHARE(*) $ 1.02 $ 1.00 $ .96
------------------------------------------
See accompanying notes to consolidated financial statements.
(*) All share and per share data has been adjusted to reflect the 2
percent stock dividends in 2002, 2001 and 2000.
LNB BANCORP, INC. 2002 ANNUAL REPORT 15
END PUBLISHED PAGE 15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Years Ended Other
December 31, 2002 Common Additional Retained Comprehensive
2001 and 2000 Stock Capital Earnings Income(Loss)
- ------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1999 $4,227,000 $22,685,000 $28,057,000 $(1,016,000)
-------------------------------------------------
Comprehensive income:
Net income. . . . . . . -0- -0- 8,430,000 -0-
Change in unrealized
gain on securities
available for
sale, net of tax . . . -0- -0- -0- 1,208,000
Total comprehensive income
Cash dividends declared,
$.96 per share . . . . -0- -0- (4,191,000) -0-
Issuance of 1,324 shares
of common stock under
stock option plans . . 2,000 23,000 -0- -0-
Market value of stock
issued in payment of
2% stock dividend,
84,562 shares . . . . . 84,000 1,628,000 (1,712,000) -0-
BALANCE AT -------------------------------------------------
DECEMBER 31, 2000 $4,313,000 $24,336,000 $30,584,000 $ 192,000
-------------------------------------------------
Years Ended Total
December 31, 2002 Treasury Shareholders'
2001 and 2000 Stock Equity
- -------------------------------------------------
BALANCE AT
DECEMBER 31, 1999 (2,900,000) $51,053,000
----------------------------------
Comprehensive income:
Net income. . . . . . . -0- 8,430,000
Change in unrealized
gain on securities
available for
sale, net of tax . . . -0- 1,208,000
-----------
Total comprehensive income 9,638,000
Cash dividends declared,
$.96 per share . . . . -0- (4,191,000)
Issuance of 1,324 shares
of common stock under
stock option plans . . -0- 25,000
Market value of stock
issued in payment of
2% stock dividend,
84,562 shares. . . . . -0- -0-
BALANCE AT ----------------------------------
DECEMBER 31, 2000 $ (2,900,000) $56,525,000
----------------------------------
Accumulated
Years Ended Other
December 31, 2002 Common Additional Retained Comprehensive
2001 and 2000 Stock Capital Earnings Income(Loss)
- -------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2000 $4,313,000 $24,336,000 $30,584,000 $ 192,000
--------------------------------------------------
Comprehensive income:
Net income. . . . . . . -0- -0- 8,565,000 -0-
Change in unrealized
gain on securities
available for
sale, net of tax . . . -0- -0- -0- 1,065,000
Total comprehensive income
Cash dividends declared,
$1.00 per share. . . . -0- -0- (4,365,000) -0-
Issuance of 9,431 shares
of common stock under
stock option plans . . 10,000 123,000 -0- -0-
Issuance of 10,835 shares
of common stock under
LNBB Direct Stock
Purchase and Dividend
Reinvestment Plan. . . 11,000 204,000 -0- -0-
Market value of stock
issued in payment of
2% stock dividend,
84,225 shares . . . . . 84,000 1,575,000 (1,659,000) -0-
BALANCE AT -------------------------------------------------
DECEMBER 31, 2001 $4,418,000 $26,238,000 $33,125,000 $ 1,257,000
-------------------------------------------------
Years Ended Total
December 31, 2002 Treasury Shareholders'
2001 and 2000 Stock Equity
- -------------------------------------------------
BALANCE AT
DECEMBER 31, 2000 (2,900,000) $56,525,000
----------------------------------
Comprehensive income:
Net income. . . . . . . -0- 8,565,000
Change in unrealized
gain on securities
available for
sale, net of tax . . . -0- 1,065,000
-----------
Total comprehensive income 9,630,000
Cash dividends declared,
$1.00 per share. . . . -0- (4,365,000)
Issuance of 9,431 shares
of common stock under
stock option plans . . -0- 133,000
Issuance of 10,835 shares
of common stock under
LNBB Direct Stock
Purchase and Dividend
Reinvestment Plan. . . -0- 215,000
Market value of stock
issued in payment of
2% stock dividend,
84,225 shares. . . . . -0- -0-
BALANCE AT ----------------------------------
DECEMBER 31, 2001 $ (2,900,000) $62,138,000
----------------------------------
Accumulated
Years Ended Other
December 31, 2002 Common Additional Retained Comprehensive
2001 and 2000 Stock Capital Earnings Income(Loss)
- ------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2001 $4,418,000 $26,238,000 $33,125,000 $ 1,257,000
-------------------------------------------------
Comprehensive income:
Net income. . . . . . . -0- -0- 9,165,000 -0-
Change in unrealized
(loss) on securities
available for
sale, net of tax . . . -0- -0- -0- (203,000)
Total comprehensive income
Cash dividends declared,
$1.02 per share. . . . -0- -0- (4,468,000) -0-
Issuance of 200 shares
of common stock under
stock option plans . . -0- 3,000 -0- -0-
Payment of cash in lieu of
fractional shares issued
pursuant to 2% stock
dividend . . . . . . . -0- -0- (22,000) -0-
Market value of stock
issued in payment of
2% stock dividend,
85,474 shares . . . . . 83,000 2,078,000 (2,161,000) -0-
BALANCE AT -------------------------------------------------
DECEMBER 31, 2002 $4,501,000 $28,319,000 $35,639,000 $ 1,054,000
-------------------------------------------------
Years Ended Total
December 31, 2002 Treasury Shareholders'
2001 and 2000 Stock Equity
- -------------------------------------------------
BALANCE AT
DECEMBER 31, 2001 (2,900,000) $62,138,000
----------------------------------
Comprehensive income:
Net income. . . . . . . -0- 9,165,000
Change in unrealized
(loss) on securities
available for
sale, net of tax . . . -0- (203,000)
-----------
Total comprehensive income 8,962,000
Cash dividends declared,
$1.02 per share. . . . -0- (4,468,000)
Issuance of 200 shares
of common stock under
stock option plans . . -0- 3,000
Payment of cash in lieu
of fractional shares
issued pursuant to 2%
stock dividend . . . . -0- (22,000)
Market value of stock
issued in payment of
2% stock dividend,
85,474 shares. . . . . -0- -0-
BALANCE AT ----------------------------------
DECEMBER 31, 2002 $ (2,900,000) $66,613,000
See accompanying notes to consolidated financial statements.
All share and per share data has been adjusted to reflect the 2
percent stock dividend in 2002.
DISCLOSURE OF RECLASSIFICATION AMOUNT:
The following discloses the reclassification adjustments for Accumulated
Other Comprehensive Income:
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
Unrealized holding gains(losses)
arising during the year, net of tax. $(686,000) $1,230,000 $1,208,000
Reclassification adjustment for gains
included in net income, net
of tax of $249,000, $85,000, and $0
for 2001, 2000 and 1999, respectively 483,000 (165,000) -0-
---------------------------------
Change in unrealized gain(loss) on
securities available for sale, net
of tax . . . . . . . . . . . . . . . .$(203,000) $1,065,000 $1,208,000
---------------------------------
16 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Interest received . . . . . . $42,280,000 $45,744,000 $45,978,000
Other income received . . . . 9,483,000 9,008,000 8,504,000
Interest paid . . . . . . . . (12,243,000) (17,768,000) (18,818,000)
Cash paid for salaries
and employee benefits. . . . (11,684,000) (11,517,000) (10,264,000)
Net occupancy expense of
premises paid. . . . . . . . (1,165,000) (1,159,000) (1,258,000)
Furniture and equipment
expenses paid. . . . . . . . (942,000) (777,000) (814,000)
Cash paid for supplies and
postage. . . . . . . . . . . (1,018,000) (1,008,000) (909,000)
Cash paid for other
operating expenses . . . . . (4,971,000) (5,654,000) (4,970,000)
Federal income taxes paid . . (4,522,000) (4,237,000) (4,499,000)
------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES. . . . . 15,218,000 12,632,000 12,950,000
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from maturities of
securities held to maturity. 6,045,000 29,559,000 730,000
Proceeds from maturities of
securities available for sale 49,515,000 18,146,000 13,001,000
Proceeds from sales of
securities available for sale 51,719,000 28,064,000 -0-
Proceeds from sales of loans. 17,787,000 6,136,000 609,000
Purchases of securities
held to maturity . . . . . . (699,000) (983,000) (1,022,000)
Purchases of securities
available for sale . . . . .(121,894,000) (85,102,000) (15,650,000)
Increase in loans available
for sale . . . . . . . . . . (16,549,000) (9,341,000) (913,000)
Net (increase) in loans made
to customers . . . . . . . . (34,460,000) (24,775,000) (32,749,000)
Purchases of bank premises,
equipment and intangible
assets . . . . . . . . . . . (1,790,000) (894,000) (1,703,000)
Proceeds from sales of
bank premises and equipment. 75,000 35,000 23,000
Purchase of bank owned life
insurance. . . . . . . . . . (10,413,000) -0- -0-
Additions to other foreclosed
assets . . . . . . . . . . . (86,000) (370,000) (247,000)
Net proceeds from liquidations
of other foreclosed assets 187,000 296,000 296,000
------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES. . . . . . . . . . (60,563,000) (39,229,000) (37,625,000)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase (decrease) in
demand and other non-
interest-bearing deposits. . (6,609,000) 4,395,000 2,439,000
Net increase in savings,
Market Access and passbook
deposits . . . . . . . . . . 27,110,000 33,888,000 27,690,000
Net increase (decrease) in
certificates of deposit. . . 27,359,000 (16,107,000) 9,131,000
Net increase (decrease) in
securities sold under
repurchase agreements and
other short-term borrowings. (2,304,000) 8,779,000 (21,731,000)
Proceeds from Federal Home
Loan Bank advances . . . . . 43,830,000 46,735,000 9,000,000
Cash paid on Federal Home
Loan Bank advances . . . . . (44,250,000) (40,735,000) (10,000,000)
Cash paid in lieu of frac-
tional shares related to
2% stock dividend. . . . . . (22,000) -0- -0-
Proceeds from exercise of
stock options and shares
issued under LNBB Direct
Stock Purchase and Dividend
Reinvestment Plan . . . . . 3,000 348,000 25,000
Dividends paid. . . . . . . . (4,445,000) (4,337,000) (4,086,000)
------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES . . . . . . . . . 40,672,000 32,966,000 12,468,000
------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS. . (4,673,000) 6,369,000 (12,207,000)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR. . . . . 31,505,000 25,136,000 37,343,000
------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR. . . . . . . . $26,832,000 $31,505,000 $25,136,000
------------------------------------------
RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
NET INCOME . . . . . . . . . . $ 9,165,000 $ 8,565,000 $ 8,430,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,562,000 1,625,000 1,667,000
Amortization of intangible
assets. . . . . . . . . . . 112,000 377,000 398,000
Amortization (accretion) of
deferred loan fees and
costs, net. . . . . . . . . (277,000) 72,000 312,000
Provision for loan losses. . 2,200,000 2,200,000 1,700,000
Gains on sales of securities (732,000) (250,000) -0-
Decrease (increase) in accrued
interest receivable . . . . 751,000 898,000 (637,000)
Others, net. . . . . . . . . 2,437,000 (855,000) 1,080,000
------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES. . . . . $15,218,000 $12,632,000 $12,950,000
------------------------------------------
See accompanying notes to consolidated financial statements.
LNB BANCORP, INC. 2002 ANNUAL REPORT 17
END PUBLISHED PAGE 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of LNB Bancorp,
Inc. (the Parent Company) and its wholly owned subsidiaries, The Lorain
National Bank (the Bank) and Charleston Insurance Agency, Inc. Charleston
Title Agency, LLC., a 49% owned subsidiary, is accounted for under the equity
method. The term "the Corporation" refers to LNB Bancorp, Inc. and its wholly
owned subsidiaries, The Lorain National Bank and Charleston Insurance Agency,
Inc., and a 49% interest in Charleston Title Agency, LLC. All material
intercompany transactions and balances have been eliminated in consolidation.
(b) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
Management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates. Areas
involving the use of Management's estimates and assumptions include the
reserve for loan losses, the realization of deferred tax assets, fair values
of certain securities, the determination and carrying value of impaired
loans, the carrying value of loans available for sale, the carrying value of
other real estate, depreciation of premises and equipment, the projected
benefit obligation, the actuarial present value of pension benefit
obligations, net periodic pension expense and accrued pension costs
recognized in the Corporation's financial statements. Estimates that are more
susceptible to change in the near term include the reserve for loan losses
and the fair value of certain securities.
(c) INDUSTRY SEGMENT INFORMATION:
The Corporation's activities are considered to be a single industry segment
for financial reporting purposes. LNB Bancorp, Inc. is a financial holding
company engaged in the business of commercial and retail banking, investment
management and trust services, title insurance, and insurance with operations
conducted through its main office and banking centers located throughout
Lorain, eastern Erie and western Cuyahoga Counties of Ohio. This market
provides the source for substantially all of the Bank's deposit, loan and
trust activities and title insurance and insurance activities. The majority
of the Bank's income is derived from a diverse base of commercial, mortgage
and retail lending activities and investments.
(d) CASH AND CASH EQUIVALENTS:
For purposes of reporting in the Consolidated Statements of Cash Flows, cash
and cash equivalents include currency on hand, amounts due from banks,
Federal funds sold, and securities purchased under resale agreements.
Generally, Federal funds sold and securities purchased under resale
agreements are for one day periods.
(e) SECURITIES:
Debt securities are classified as held to maturity, trading, or available for
sale. Securities which are classified as being held to maturity are stated at
amortized cost based on the Corporation's intent and ability to hold until
maturity. Securities are adjusted for amortization of premiums and accretion
of discounts using the interest method. Securities available for sale are
carried at fair value with unrealized gains and losses, net of tax, included
as a component of accumulated other comprehensive income, net of tax.
Securities classified as trading are carried at fair value with unrealized
gains and losses included in earnings. Gains or losses on dispositions are
based on net proceeds and the carrying value of securities sold, using the
specific identification method. A decline in fair value of any available for
sale or held to maturity security below cost that is deemed other than
temporary is charged to earnings resulting in establishment of a new cost
basis for the security.
(f) LOANS AVAILABLE FOR SALE:
The Bank has identified certain mortgage and commercial loans which may be
sold prior to maturity. These loans are carried at the lower of amortized
cost or estimated fair value, determined on an aggregate basis for each type
of loan available for sale. Net unrealized losses are recognized in a
valuation allowance and by charges to income.
(g) FEDERAL RESERVE (FRB) AND FEDERAL HOME LOAN (FHLB) BANK STOCK:
These stocks are required investments for institutions that are members of
the Federal Reserve and Federal Home Loan Bank systems. The required
investment in the common stock is based on a predetermined formula.
(h) RESERVE FOR LOAN LOSSES:
Because some loans may not be repaid in full, a reserve for loan losses is
recorded. This reserve is increased by provisions charged to earnings and is
reduced by loan charge-offs, net of recoveries. Estimating the risk of loss
on any loan is necessarily subjective. Accordingly, the reserve is maintained
by Management at a level considered adequate to cover probable loan losses
inherent in the loan portfolio that are currently anticipated based on
Management's evaluation of several key factors including information about
specific borrower situations, their financial position and collateral values,
current economic conditions, changes in the mix and levels of the various
types of loans, past charge-off experience and other pertinent information.
The reserve for loan losses is based on estimates using currently available
information, and ultimate losses may vary from current estimates due to
changes in circumstances. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the periods in
which they become known. While Management may periodically allocate portions
of the reserve for specific problem situations, the entire reserve is
available for any charge-offs that may occur. Charge-offs are made against
the reserve for loan losses when Management concludes that it is probable
that all or a portion of a loan is uncollectible. After a loan is charged-
off, collection efforts continue and future recoveries may occur.
A loan is considered impaired, based on current information and events, if it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the
present value of the expected future cash flows discounted at the loans
initial effective interest rate, except that all collateral-dependent loans
are measured for impairment based on the fair value of the collateral. If the
loan valuation is less than the recorded investment in the loan, an
impairment reserve is established for the difference. The impairment reserve
is established by either an allocation of the reserve for loan losses or by a
provision for loan losses, depending upon the adequacy of the reserve for
loan losses. The provision for loan losses is determined based on
Management's evaluation of the loan portfolio and the adequacy of the reserve
or loan losses under current economic conditions and such other factors
which, in Management's judgment, deserve current recognition.
(i) MORTGAGE SERVICING ASSETS:
The Corporation recognizes as separate assets rights to service fixed rate
single-family mortgage loans that it has sold without recourse but services
for others for a fee. Mortgage servicing assets are initially recorded at
cost, based upon pricing multiples as determined by the purchaser, when the
loans are sold. Mortgage servicing assets are carried at the lower of the
initial carrying
18 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value, adjusted for amortization, or estimated fair value. Amortization is
(i) MORTGAGE SERVICING ASSETS (CONTINUED)
determined in proportion to and over the period of estimated net servicing
income using the level yield method. For purposes of determining impairment,
the mortgage servicing assets are stratified by interest rate.
The expected and actual rates of mortgage loan prepayments are the most
significant factors driving the potential for the impairment of the value of
mortgage servicing assets. Increases in mortgage loan prepayments reduce
estimated future net servicing cash flows because the life of the underlying
loan is reduced. For the years presented, mortgage servicing assets and
related amortization were not material.
(j) 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. Upon the
sale or other disposition of assets, the cost and related accumulated
depreciation are retired and the resulting gain or loss is recognized.
Maintenance and repairs are charged to expense as incurred, while renewals
and improvements are capitalized. Software costs related to externally
developed systems are capitalized at cost less accumulated amortization.
Amortization is computed on the straight-line method over the estimated
useful life.
(k) GOODWILL AND CORE DEPOSIT INTANGIBLES:
Intangible assets arise from branch acquisitions and include Goodwill and
Core Deposit Intangibles. Goodwill is the excess of purchase price over
identified net assets in branch acquisitions. Core Deposit Intangibles
represent the value of depositor relationships purchased. In the fourth
quarter of 2002, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" and SFAS No.
147 "Accounting for Certain Financial Institutions" retroactive to January 1,
2002. Under the provisions of SFAS No. 142 and SFAS No. 147, Goodwill is no
longer rateably amortized into the income statement over an estimated life,
but rather is tested at least annually for impairment. Core Deposit
Intangible assets which have finite lives continue to be amortized using an
accelerated method over ten years and also continue to be subject to annual
impairment testing. Prior to the adoption of SFAS No. 142 and SFAS No. 147,
the Corporation's goodwill was amortized on a straight-line basis over a
period of fifteen years and Core Deposit Intangibles were amortized using an
accelerated method over a period of ten years. Prior to 2002, Goodwill and
Core Deposit Intangibles were reviewed for possible impairment, for events or
changes in circumstances that indicate the carrying amount of the asset may
not be recoverable, and written down if necessary. Note 4 includes a summary
of the Corporation's Goodwill and Core Deposit Intangible assets as well as
further detail about the impact of the adoption of SFAS No. 142.
(l) FORECLOSED ASSETS:
Foreclosed assets represents properties acquired through customer loan
default. The real estate and other tangible assets acquired through
foreclosure are carried as Foreclosed assets on the Balance Sheet at fair
value, net of estimated costs to sell, not to exceed the cost of property
acquired through foreclosure.
(m) 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.
(n) INTEREST AND FEES ON LOANS:
Interest income on loans is accrued on the principal balances of loans
outstanding on a "simple interest" basis. The Bank's policy is to cease
accruing interest on any loans where the principal and/or interest is past
due for 90 days or more, unless the loan is both well secured and in the
process of collection. Loan origination fees and certain direct origination
costs are deferred and amortized over the contractual lives of the related
loans using the interest method.
(o) INVESTMENT AND TRUST SERVICES DIVISION'S 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 Investment and Trust
Services Division is reported on an accrual basis.
(p) INTEREST ON DEPOSIT ACCOUNTS:
Interest on deposit accounts is accrued and charged to expense monthly and is
paid or credited in accordance with the terms of the respective accounts.
(q) INCOME TAXES:
The Corporation and its wholly owned subsidiaries file a consolidated Federal
income tax return. The provision for income taxes is based upon income in the
financial statements, rather than amounts reported on the Corporation's
income tax return.
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.
(r) RECLASSIFICATIONS:
Certain 2000 and 2001 amounts have been reclassified to conform to the 2002
presentation.
(s) EMPLOYEE STOCK OWNERSHIP PLAN AND 401(K) PROFIT SHARING PLAN AND TRUST:
These two qualified defined contribution plans are accounted for under the
provisions of SFAS No. 87, "Employers' Accounting for Pensions" and under the
provisions of Statement of Position 93-6 "Employers Accounting for Employee
Stock Ownership Plans," as applicable.
(t) RETIREMENT PENSION PLAN:
The qualified defined benefit pension plan is accounted for under the
provisions of SFAStandards No. 87 "Employers Accounting for Pensions."
(u) REPORTING COMPREHENSIVE INCOME:
The Corporation adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." This Statement requires companies to report all items
that are recognized as components of comprehensive income under accounting
standards. As required, the Corporation displays the accumulated balance of
other comprehensive income as a separate component of shareholders' equity.
(v) STOCK-BASED COMPENSATION
The Corporation applies SFAS No.148, "Accounting for Stock-based
Compensation." SFAS No.148 was adopted in 2002. "Stock-Based Compensation,"
allows a company to recognize stock-based compensation using a fair-value
based method of accounting if it so elects. The Corporation has elected to
adopt the recognition provisions of SFAS No. 123 during 2002.
LNB BANCORP, INC. 2002 ANNUAL REPORT 19
END PUBLISHED PAGE 19
Notes to Consolidated Financial Statements
(2) EARNINGS PER SHARE:
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding during the
year. Diluted earnings per share is computed based on the weighted average
number of shares outstanding plus the effects of dilutive stock options
outstanding during the year. The weighted average number of shares
outstanding and the earnings per share during each year presented has been
adjusted to reflect a two percent stock dividends in 2002 and 2001. Basic and
diluted earnings per share is calculated as follows:
For the Years ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------
Weighted average shares outstanding used in
Basic Earnings Per Share calculation . .4,401,079 4,383,731 4,375,540
Dilutive effect of incentive stock options. 4,216 1,338 4,251
------------------------------------
Weighted average shares outstanding used in
Diluted Earnings Per Share calculation .4,405,295 4,385,069 4,379,791
------------------------------------
NET INCOME. . . . . . . . . . . . . . . . $9,165,000 $8,565,000 $8,430,000
------------------------------------
BASIC EARNINGS PER SHARE. . . . . . . . . $ 2.08 $ 1.95 $ 1.92
------------------------------------
DILUTED EARNINGS PER SHARE. . . . . . . . $ 2.08 $ 1.95 $ 1.92
------------------------------------
(3) CASH AND DUE FROM BANKS:
In order to meet deposit reserve requirements, the Bank is required to
maintain cash on hand and reserve balances at the Federal Reserve Bank. Cash
and due from banks included approximately $10,919,000 and $10,076,000 at
December 31, 2002 and 2001, respectively, to meet these deposit reserve
requirements.
The average balances maintained in cash on hand and in reserve balances at
the Federal Reserve Bank to meet deposit reserve requirements approximated
$10,916,000 and $10,078,000, during 2002 and 2001, respectively.
(4) GOODWILL AND CORE DEPOSIT INTANGIBLES:
In the fourth quarter of 2002, the corporation adopted SFAS No. 142
retroactive to January 1, 2002. Upon the adoption of SFAS No. 142 the
Corporation ceased amortizing its goodwill, which decreased noninterest
expense and increased net income in 2002 as compared to 2001 and 2000. The
following pro forma effects of applying SFAS No. 142 to the 2001 and 2000
years.
(In thousands except For the Calendar Year
per share amount) 2002 2001 2000
- ---------------------------------------------------------------------
Goodwill amortization:
Pretax. . . . . . . . . . . . . .$ -0- $ 264 $ 264
After tax . . . . . . . . . . . . -0- 174 174
Net Income:
Reported. . . . . . . . . . . . . 9,165 8,565 8,430
Add back after-tax
goodwill per share. . . . . . . -0- 174 174
----------------------------------
Adjusted. . . . . . . . . . . . . .$9,165 $8,739 $8,604
----------------------------------
Basic net income per common share:
Reported. . . . . . . . . . . . .$ 2.08 $ 1.95 $ 1.92
Add back goodwill
amortization per share. . . . . -0- .04 .04
----------------------------------
Adjusted. . . . . . . . . . . . . .$ 2.08 $ 1.99 $ 1.96
----------------------------------
Diluted net income per common share:
Reported. . . . . . . . . . . . .$ 2.08 $ 1.95 $ 1.92
Add back goodwill
amortization per share. . . . . -0- .04 .04
----------------------------------
Adjusted. . . . . . . . . . . . . .$ 2.08 $ 1.99 $ 1.96
----------------------------------
The Corporation has finite-lived intangible assets capitalized on its balance
sheet in the form of core deposit intangibles. Core deposit intangibles
continue to be amortized over their estimated useful life of 10 years in
accordance with SFAS No. 142.
A summary of core deposit intangible assets follows:
December 31, 2002 2001
- ----------------------------------------------------------------------
Core deposit intangible . . . . . . $ 1,288,000 $ 1,288,000
Less accumulated amortization . . . 757,000 645,000
-----------------------------------
Net core deposit intangibles. . . . $ 531,000 $ 643,000
-----------------------------------
The following intangible assets and related amortization arising from a 1997
branch acquisition and included in the accompanying consolidated financial
statements are summarized as follows at December 31, net of accumulated
amortization:
December 31, 2002 2001
- ------------------------------------------------------------------------
Goodwill. . . . . . . . . . . . . . $ 2,827,000 $ 2,827,000
Core deposit intangibles. . . . . . 531,000 643,000
-------------------------------------
Total intangible assets . . . . . . $ 3,358,000 $ 3,470,000
-------------------------------------
Amortization expense for intangible assets totaled $112,000, $377,000 and
$398,000 in 2002, 2001 and 2000, respectively. Amortization expense on
finite-lived assets is expected in the future as follows:
Year Ending Amortization
December 31, Expense
- --------------------------------------------------------------
2003. . . . . . . . . . . . . . . . . . . . . . .$ 113,000
2004. . . . . . . . . . . . . . . . . . . . . . .$ 113,000
2005. . . . . . . . . . . . . . . . . . . . . . .$ 113,000
2006. . . . . . . . . . . . . . . . . . . . . . .$ 113,000
2007. . . . . . . . . . . . . . . . . . . . . . .$ 79,000
-------------
TOTAL . . . . . . . . . . . . . . . . . . . . . .$ 531,000
-------------
20 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 20
Notes to Consolidated Financial Statements
(5) SECURITIES:
The amortized cost, gross unrealized gains and losses and fair values of
securities at December 31, 2002 and 2001 follow:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2002 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury
securities. . . . . . $ -0- $ -0- $ -0- $ -0-
U.S. Government agencies
and corporations. . . 120,599,000 1,659,000 (26,000) 122,232,000
States and political
subdivisions 10,515,000 373,000 (5,000) 10,883,000
Equity securities. . . 5,198,000 51,000 (455,000) 4,794,000
------------------------------------------------
Total securities
available for sale. . . 136,312,000 2,083,000 (486,000) 137,909,000
------------------------------------------------
Securities held to maturity:
U.S.Government agencies
and corporations. . . 7,335,000 169,000 -0- 7,504,000
States and political
subdivisions. . . . . 3,313,000 98,000 (11,000) 3,400,000
------------------------------------------------
Total securities held
to maturity . . . . . . 10,648,000 267,000 (11,000) 10,904,000
------------------------------------------------
Federal Home Loan Bank and
Federal Reserve Bank stock 3,738,000 -0- -0- 3,738,000
------------------------------------------------
Total securities . . . . $150,698,000 $2,350,000 $(497,000) $152,551,000
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2001 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury
securities. . . . . . $ 1,080,000 $ 5,000 $ -0- $ 1,085,000
U.S. Government agencies
and corporations. . . 103,308,000 1,907,000 (130,000) 105,085,000
States and political
subdivisions 7,245,000 51,000 (36,000) 7,260,000
Equity securities. . . 4,096,000 102,000 -0- 4,198,000
------------------------------------------------
Total securities
available for sale. . . 115,729,000 2,065,000 (166,000) 117,628,000
------------------------------------------------
Securities held to maturity:
U.S.Government agencies
and corporations. . . 13,386,000 265,000 -0- 13,651,000
States and political
subdivisions. . . . . 3,805,000 92,000 (63,000) 3,834,000
------------------------------------------------
Total securities held
to maturity . . . . . . 17,191,000 357,000 (63,000) 17,485,000
------------------------------------------------
Federal Home Loan Bank
and Federal Reserve Bank
stock . . . . . . . . . 3,582,000 -0- -0- 3,582,000
------------------------------------------------
Total securities . . . . $136,502,000 $2,422,000 $(229,000) $138,695,000
------------------------------------------------
The amortized cost, fair values and yields of debt securities by
contractual maturity date at December 31, 2002 follow:
FULLY-TAX
AMORTIZED FAIR EQUIVALENT
DECEMBER 31, 2002 COST VALUE YIELD
- ------------------------------------------------------------------------
Securities available for sale:
Due within 1 year. . . . . . .$ 10,130,000 $ 10,397,000 5.60%
After 1 but within 5 years . . 62,069,000 62,727,000 4.45
After 5 but within 10 years. . 37,748,000 38,358,000 5.21
After 10 years . . . . . . . . 21,167,000 21,633,000 5.53
----------------------------------------
Total securities available . . . 131,114,000 133,115,000 4.93
for sale ----------------------------------------
Securities held to maturity:
Due within 1 year. . . . . . . 456,000 463,000 4.35
After 1 but within 5 years . . 2,338,000 2,485,000 6.12
After 5 but within 10 years. . 5,333,000 5,373,000 6.21
After 10 years . . . . . . . . 2,521,000 2,583,000 5.17
----------------------------------------
Total securities held to
maturity. . . . . . . . . . . . 10,648,000 10,904,000 5.86
----------------------------------------
Total securities . . . . . . . .$141,762,000 $144,049,000 5.00%
----------------------------------------
During 2002 and 2001, proceeds from the sale of securities available for sale
were $51,719,000 and $28,064,000, respectively, resulting in realized gains
of $732,000 and $250,000, respectively. During 2000, there were no sales of
securities. All other redemptions during these three years were in the form
of proceeds at maturity or calls by the issuers of debt. The carrying value
of securities pledged to secure trust, public deposits, securities sold under
repurchase agreements, line of credit, and for other purposes required by law
amounted to $129,567,000 and $112,937,000 at December 31, 2002 and 2001,
respectively. The fair value of securities is based on quoted market prices,
where available. If quoted market prices are not available, fair value is
estimated using the quoted market prices of comparable instruments. The
securities portfolio contained approximately $2,206,000 and $3,017,000 in
non-rated securities of states and political subdivisions at December 31,
2002 and 2001, respectively. Based upon yield, term to maturity and market
risk, the valuation service estimated the fair value of these securities to
be $2,254,000 and $3,035,000 at December 31, 2002 and 2001, respectively. The
majority of these non-rated securities are short-term debt issues of local
political subdivisions. Management has reviewed these non-rated securities
and has determined that there is no impairment to their value as of December
31, 2002 and 2001.
LNB BANCORP, INC. 2002 ANNUAL REPORT 21
END PUBLISHED PAGE 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) TRANSACTIONS WITH RELATED PARTIES:
The Corporation, through its subsidiary Bank, makes loans to its officers,
directors and their affiliates. These loans are made with substantially the
same terms and conditions as transactions with non-related parties. An
analysis of loans outstanding to related parties follows:
Years ended December 31, 2002 2001
- -------------------------------------------------------------------------
Aggregate amount beginning of year $ 16,423,000 $ 14,160,000
Additions (deductions):
New loans 5,735,000 3,899,000
Repayments (1,223,000) (1,705,000)
Changes in directors and officers
and/or their affiliations, net 3,673,000 69,000
---------------------------------
Aggregate amount end of year $ 24,608,000 $ 16,423,000
---------------------------------
(7) LOANS AND RESERVE FOR LOAN LOSSES:
Loan balances at December 31, 2002 and 2001 are summarized as follows:
December 31, 2002 2001
- ------------------------------------------------------------------------
Real estate loans (includes loans secured primarily by real estate
only):
Construction and land development. . . . . $ 56,442,000 $ 38,045,000
One to four family residential . . . . . . 202,847,000 201,080,000
Multi-family residential . . . . . . . . . 3,803,000 3,930,000
Non-farm non-residential properties. . . . 150,936,000 142,248,000
Commercial and industrial loans. . . . . . . 47,399,000 43,220,000
Personal loans to individuals:
Auto, single payment and installment . . . 42,569,000 43,705,000
Credit card and related plans. . . . . . . 5,117,000 4,862,000
All other loans. . . . . . . . . . . . . . . 437,000 398,000
---------------------------
TOTAL LOANS. . . . . . . . . . . . . . . . . 509,550,000 477,488,000
Reserve for loan losses . . . . . . . . . . (6,653,000) (5,890,000)
---------------------------
NET LOANS. . . . . . . . . . . . . . . . . . $502,897,000 $471,598,000
---------------------------
Activity in the reserve for loan losses for 2002, 2001 and 2000 is
summarized as follows:
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
Balance at beginning of year. . $5,890,000 $5,250,000 $4,667,000
Provision for loan losses . . . 2,200,000 2,200,000 1,700,000
Loans charged-off . . . . . . . (1,783,000) (1,739,000) (1,333,000)
Recoveries on loans previously
charged-off. . . . . . . . . . 346,000 179,000 216,000
-----------------------------------------
BALANCE AT END OF YEAR. . . . . $6,653,000 $5,890,000 $5,250,000
-----------------------------------------
At December 31, 2002 and 2001, $7,257,000 and $8,868,000 respectively, of
commercial loans were available for sale in the secondary market. At December
31, 2002 and 2001 the market value of commercial loans available for sale
equaled or exceeded its carrying value. At December 31, 2002 and 2001,
$1,742,000 and $3,591,000, respectively of mortgage loans were available for
sale in the secondary market. At December 31, 2001, the market value of
mortgage loans available for sale was less than its carrying value and was
written down by $32,000. At December 31, 2002, the market value of mortgage
loans available for sale equaled or exceeded their carrying value. At
December 31, 2002, the Bank had firm commitments for the sale of mortgage
Loans of $1,742,000.
Information regarding impaired loans is as follows:
Years ended December 31 2002 2001 2000
- ------------------------------------------------------------------------
Year-end impaired loans
with no allowance for
loan losses specifically
allocated. . . . . . . . . . $ 8,094,000 $ 2,977,000 $ 1,599,000
Year-end impaired loans
with allowance for loan
losses specifically
allocated. . . . . . . . . . 10,881,000 8,664,000 6,228,000
Amount of the allowance
specifically allocated to
impaired loans . . . . . . . 1,711,000 1,957,000 862,000
Average of impaired loans
during the year. . . . . . . 16,454,000 978,000 1,230,000
Interest income recognized
during impairment. . . . . . 95,000 60,000 72,000
Cash-basis interest income
recognized . . . . . . . . . -0- -0- -0-
- ------------------------------------------------------------------------
22 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8)BANK PREMISES, EQUIPMENT AND LEASES:
Bank premises and equipment are summarized as follows:
December 31, 2002 2001
- ------------------------------------------------------------------------
Land . . . . . . . . . . . . . . . . . . . . .$ 2,347,000 $ 1,896,000
Buildings. . . . . . . . . . . . . . . . . . . 9,765,000 9,338,000
Equipment. . . . . . . . . . . . . . . . . . . 16,571,000 15,769,000
Leasehold improvements . . . . . . . . . . . . 688,000 688,000
--------------------------
Total Costs. . . . . . . . . . . . . . . . . . 29,371,000 27,691,000
--------------------------
Less accumulated depreciation
and amortization. . . . . . . . . . . . . . . 18,623,000 17,171,000
--------------------------
TOTAL. . . . . . . . . . . . . . . . . . . . .$10,748,000 $10,520,000
--------------------------
Depreciation and amortization of Bank premises and equipment charged to
noninterest expenses amounted to $1,286,000 in 2002, $1,368,000 in 2001 and
$1,440,000 in 2000. Amortization of purchased software charged to
noninterest expenses amounted to $276,000 in 2002, $257,000 in 2001 and
$227,000 in 2000.
At December 31, 2002, the Bank was obligated to pay rental commitments
under noncancelable operating leases on banking centers and certain
equipment as follows:
Year Ending Banking
December 31, Centers Equipment
-----------------------------------------------------------
2003. . . . . . . . . . . . .$234,000 $37,000
2004. . . . . . . . . . . . . 100,000 33,000
2005. . . . . . . . . . . . . 76,000 22,000
2006. . . . . . . . . . . . . 66,000 -0-
2007. . . . . . . . . . . . . 41,000 -0-
2008 and thereafter . . . . . 17,000 -0-
---------------------------
Total. . . . . . . . . . . . .$534,000 $92,000
---------------------------
Rentals paid under leases on banking centers and equipment, respectively,
amounted to $256,000 and $15,000 in 2002, $241,000 and $5,000 in 2001 and
$265,000 and $4,000 in 2000.
(9) DEPOSITS:
Deposit balances at December 31, 2002 and 2001 are summarized as
follows:
December 31, 2002 2001
- ------------------------------------------------------------------------
Demand and other noninterest-bearing deposits:
Individuals, partnerships
and corporations. . . . . . . . . . . . . .$ 73,727,000 $ 77,991,000
U.S. Government. . . . . . . . . . . . . . . 136,000 133,000
States and political subdivisions. . . . . . 2,399,000 4,318,000
Certified, official, travelers
checks and other. . . . . . . . . . . . . . 4,617,000 5,046,000
--------------------------
Total demand and other noninterest-
bearing deposits. . . . . . . . . . . . . . . 80,879,000 87,488,000
--------------------------
Savings, checkinvest, market access,
money market and passbook accounts:
Individuals and non-profit organizations . . 215,772,000 209,265,000
Corporations and profit organizations. . . . 53,392,000 44,241,000
States and political subdivisions. . . . . . 11,452,000 -0-
--------------------------
Total savings, checkinvest, market access,
money market and passbook accounts. . . . . . 280,616,000 253,506,000
--------------------------
Certificates of deposit:
Individuals, partnerships and
corporations . . . . . . . . . . . . . . . 165,434,000 154,679,000
States and political subdivisions. . . . . . 39,198,000 22,594,000
--------------------------
Total certificates of deposit. . . . . . . . . 204,632,000 177,273,000
--------------------------
TOTAL DEPOSITS . . . . . . . . . . . . . . . .$566,127,000 $518,267,000
--------------------------
The aggregate amount of certificates of deposit in denominations of
$100,000 or more amounted to $61,554,000 and $40,690,000 at December 31,
2002 and 2001, respectively.
The maturity distribution of certificates of deposit as of December
31, 2002 and 2001 follows:
After 3 After 6
Months Months
Within 3 But Within But Within
Months 6 Months 1 Year
- ------------------------------------------------------------------------
December 31, 2002. . $60,748,000 $33,021,000 $36,702,000
---------------------------------------------------
December 31, 2001. . $51,135,000 $33,740,000 $36,387,000
---------------------------------------------------
After 1 After 2
Year But Years But
Within Within
2 Years 5 Years Total
- ------------------------------------------------------------------------
December 31, 2001. . $50,351,000 $23,810,000 $204,632,000
---------------------------------------------------
December 31, 2001. . $37,084,000 $18,927,000 $177,273,000
---------------------------------------------------
LNB BANCORP, INC. 2002 ANNUAL REPORT 23
END PUBLISHED PAGE 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM
BORROWINGS:
Information relating to securities sold under repurchase agreements and other
short-term borrowings for the years ended December 31, 2002, 2001 and 2000
follows:
December 31, 2002 2001 2000
- ------------------------------------------------------------------------
Securities sold under repurchase agreements and other short-term
borrowings
At December 31:
Outstanding. . . . . . . . .$26,866,000 $29,170,000 $30,391,000
Interest rate. . . . . . . . 1.36% 1.96% 5.37%
Average for the year:
Outstanding. . . . . . . . .$22,604,000 $26,916,000 $30,756,000
Interest rate. . . . . . . . 1.74% 3.22% 5.47%
Maximum month-end outstanding.$29,633,000 $38,361,000 $33,801,000
The Bank maintains a line of credit for advances and discounts with the
Federal Reserve Bank of Cleveland. The amount of the line of credit varies on
a monthly basis. The level of the line is equal to 85% of the balances of
qualified home equity loans that are pledged as collateral for the line. At
December 31, 2002 the Bank had pledged approximately $47,721,000 in home
equity loans, resulting in an available line of credit of approximately
$36,313,000. The Bank has not made a draw against this line of credit since
December of 1999.
(11) FEDERAL HOME LOAN BANK ADVANCES,
SHORT-TERM ADVANCES:
Information relating to Federal Home Loan Bank (FHLB) cash management, short-
term and long-term advances as of and for the years ended December 31, 2002,
2001 and 2000 follows:
December 31, 2002 2001 2000
- -----------------------------------------------------------------------
Cash management advances average and maximums
Average for the year:
Outstanding. . . . . . . . . . .$ 3,743,000 $ 6,726,000 $ 2,978,000
Interest rate. . . . . . . . . . 1.88% 3.98% 6.52%
Maximum month-end outstanding . . .$13,000,000 $21,500,000 $19,000,000
------------------------------------
December 31, 2002 2001 2000
- -----------------------------------------------------------------------
Cash management advances
Outstanding. . . . . . . . . . . .$ 5,500,000 $19,000,000 $ 9,000,000
Interest rate. . . . . . . . . . . 1.40% 1.90% 6.75%
Short-term advances outstanding . .$24,595,000 $10,750,000 $16,095,000
Interest rate. . . . . . . . . . . 1.50-4.95% 4.27-6.31% 4388-6.85%
LONG-TERM ADVANCES:
Year
Maturing 2002 2001 2000
--------
Amount. . . . . . 2002 8,250,000
Interest rate . . 4.27-6.31%
Amount. . . . . . 2003 19,569,000
Interest rate . . 3.16-4.95%
Amount. . . . . . 2004 6,000,000
Interest rate . . 3.57-3.73%
Amount. . . . . . 2005 11,830,000
Interest rate . . 2.87-4.61%
Amount. . . . . . 2006 1,000,000
Interest rate . . 4.92%
At December 31, 2002, collateral pledged for FHLB advances consisted
of all shares of FHLB stock owned by the Bank and qualified mortgage
loans totaling $223,284,000. The total borrowing capacity of the Bank, at
December 31, 2992, was $109,242,000 with unused collateral borrowing capacity
of $60,317,000. The Bank maintains a $40,000,000 cash management line of
credit with the FHLB which matures on August 1, 2003. At December 31, 2002,
the Bank had $5,500,000 in borrowing outstanding under this cash management
line of credit with $34,550,000 of available credit remaining under this
line.
24 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) INCOME TAXES:
The annual provision for income taxes consists of the following:
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
INCOME TAXES
Federal current expense. . . $4,119,000 $4,361,000 $4,743,000
Federal deferred expense
(benefit). . . . . . . . . 81,000 (313,000) (348,000)
State current expense. . . . -0- -0- 5,000
------------------------------------------
TOTAL INCOME TAXES . . . . . . $4,200,000 $4,048,000 $4,400,000
------------------------------------------
The following presents a reconciliation of the total income taxes as
shown on the Consolidated Statements of Income with that which would be
computed by applying the statutory Federal tax rate of 35 percent to
income before income taxes.
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
Computed "expected" tax
expense . . . . . . . . . . . $4,678,000 $4,414,000 $4,491,000
Increase (reduction) in income
taxes resulting from:
Tax exempt interest on
obligations of states
and political subdivisions (188,000) (139,000) (82,000)
State income taxes net of
Federal benefit. . . . . . -0- -0- 3,000
Other, net. . . . . . . . . (290,000) (227,000) (15,000)
------------------------------------------
TOTAL INCOME TAXES . . . . . . $4,200,000 $4,048,000 $4,400,000
------------------------------------------
Net deferred Federal tax assets are included in Other Assets on the
Consolidated Balance Sheets. Management believes that it is more likely
than not that the deferred Federal tax assets will be realized. The tax
effects of temporary differences that give rise to significant portions
of the deferred Federal tax assets and deferred Federal tax liabilities
are presented below.
December 31, 2002 2001
- -----------------------------------------------------------------------
Deferred Federal tax assets:
Reserve for loan losses . . . . . . . . . . . $2,262,000 $2,003,000
Deferred compensation . . . . . . . . . . . . 370,000 352,000
Accrued vacation payable. . . . . . . . . . . 181,000 167,000
Intangible asset amortization . . . . . . . . 9,000 89,000
Accrued pension payable . . . . . . . . . . . -0- 34,000
Other, net. . . . . . . . . . . . . . . . . . 30,000 39,000
------------------------
Total deferred Federal tax assets . . . . . . . 2,852,000 2,684,000
Deferred Federal tax liabilities:
Bank premises and equipment depreciation. . . (397,000) (344,000)
FHLB stock dividends. . . . . . . . . . . . . (350,000) (297,000)
Unrealized gain on securities available for sale(543,000) (646,000)
Accrued loan fees and costs . . . . . . . . . (267,000) (141,000)
Deferred charges. . . . . . . . . . . . . . . (67,000) (89,000)
Prepaid pension . . . . . . . . . . . . . . . (39,000) -0-
------------------------
Total deferred Federal tax liabilities. . . . . (1,663,000) (1,517,000)
------------------------
NET DEFERRED FEDERAL TAX ASSETS . . . . . . . . $1,189,000 $1,167,000
------------------------
LNB BANCORP, INC. 2002 ANNUAL REPORT 25
END PUBLISHED PAGE 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13)SHAREHOLDERS' EQUITY:
PREFERRED STOCK:
The Corporation is authorized to issue up to 1,000,000 shares of Voting
Preferred Stock, no par value. As of December 31, 2002, no such stock had
been issued. The Board of Directors of the Corporation is authorized to
provide for the issuance of one or more series of Voting Preferred Stock and
establish the dividend rate, dividend dates, whether dividends are
cumulative, liquidation prices, redemption rights and prices, sinking fund
requirements, conversion rights, and restrictions on the issuance of any
series of Voting Preferred Stock. The Voting Preferred Stock may be issued
with conversion rights to common stock and may rank prior to the common stock
in dividends, liquidation preferences, or both. The Corporation has
authorized 750,000 Series A Voting Preferred Shares none of which have been
issued.
COMMON STOCK:
The Corporation is authorized to issue up to 15,000,000 shares of common
stock. Common shares outstanding were 4,401,232 and 4,317,558 at December 31,
2002, and December 31, 2001, respectively.
The Board of Directors of LNB Bancorp, Inc. declared a two percent stock
dividend, paid on July 2, 2002, to shareholders of record on June 17, 2002.
The two percent stock dividend increased LNB Bancorp, Inc.'s common stock
outstanding by 85,474 shares. Cash was issued in lieu of fractional shares.
The Board of Directors of LNB Bancorp, Inc. declared a two percent stock
dividend, paid on July 1, 2001, to shareholders of record on June 12, 2001.
The two percent stock dividend increased LNB Bancorp, Inc.'s common stock
outstanding by 84,225 shares.
COMMON STOCK REPURCHASE PLAN AND TREASURY STOCK:
On May 20, 1997, the Board of Directors authorized the repurchase of up to
100,000 shares of common stock. The repurchased shares will be used primarily
for qualified employee benefit plans, incentive stock option plans, stock
dividends and other Corporate purposes. At December 31, 2002 and at December
31, 2001, LNB Bancorp, Inc. held 100,000 shares of common stock as Treasury
Stock under this plan for a total cost of $2,900,000. During 2002, 2001 and
2000, no shares were issued out of Treasury Stock.
SHAREHOLDER RIGHTS PLAN:
On October 24, 2000, the Board of Directors of LNB Bancorp, Inc. adopted a
Shareholder Rights Plan. The rights plan is designed to prevent a potential
acquirer from exceeding a prescribed ownership level in LNB Bancorp, Inc.,
other than in the context of a negotiated acquisition involving the Board of
Directors. If the prescribed level is exceeded, the rights become exercisable
and, following a limited period for the Board of Directors to redeem the
rights, allow shareholders, other than the potential acquirer that triggered
the exercise of the rights, to purchase Preferred Share Units of the
Corporation having characteristics comparable to the Corporation's Common
Shares, at 50% of market value. This would likely dramatically dilute the
potential acquirer's ownership level and voting power, making an acquisition
of the Corporation without prior Board approval prohibitively expensive.
The Shareholder Rights Plan provided for the distribution of one Preferred
Share Purchase Right as a dividend on each outstanding LNB Bancorp, Inc.
Common Share held as of the close of business on November 6, 2000. One
Preferred Share Purchase Right will also be distributed for each Common Share
issued after November 6, 2000. Each right entitles the registered holder to
purchase from LNB Bancorp, Inc. Units of a new series of Voting Preferred
Shares, no par value, at 50 percent of market value, if a person or group
acquires 15 percent or more of LNB Bancorp, Inc.'s Common Shares. Each Unit
of the new Preferred Shares has terms designed to make it the economic
equivalent of one Common Share. A complete description of the distribution,
exercise, and the terms of the rights are set forth in a Shareholder Rights
Agreement dated October 24, 2000 between LNB Bancorp, Inc. and Registrar and
Transfer Company as Rights Agent. The Shareholder Rights Agreement was filed
with the Securities and Exchange Commission in a Form 8-A Filing on November
6, 2000.
DIVIDENDS:
Total cash dividends declared per share for 2002 increased $.02 or two
percent, to $1.02 per share, up from $1.00 per share in 2001. Total cash
dividends declared in 2002, including the $.02 EXTRA dividend declared by the
Board of Directors in November, rose to $4,468,000. In each of the last 15
years, the Board of Directors has approved an increase in the regular cash
dividend, with the 2002 dividend representing a 187% increase from 1992 when
$1,555,000 in total cash dividends were declared.
LNBB DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN:
The Board of Directors adopted the LNBB Direct Stock Purchase and Dividend
Reinvestment Plan (the Plan) effective June 2001, replacing the former LNB
Bancorp, Inc. Dividend Reinvestment Plan. The Plan authorized the sale of
500,000 shares of the Corporation's common shares to shareholders who choose
to invest all or a portion of their cash dividends plus additional cash
payments for LNB Bancorp, Inc. common stock. The Corporation did not issue
shares pursuant to the Plan in 2002 while 45,830 shares were purchased in the
open market at the current market price. The Corporation issued 10,835 shares
pursuant to the Plan in 2001 while 37,667 shares were purchased in the open
market at the current market price. During 2000, stock for the former Plan
was purchased in the open market at the current market price.
DIVIDEND RESTRICTIONS:
Dividends paid by the Bank are the primary source of funds available to the
Corporation for payment of dividends to shareholders and for other working
capital needs. The payment of dividends by the Bank to the Corporation is
subject to restrictions by the Office of the Comptroller of Currency. These
restrictions generally limit dividends to the current and prior two years'
retained earnings. At December 31, 2002, approximately $13,186,000 of the
Bank's retained earnings were available for dividends to the Corporation. In
addition to these restrictions, as a practical matter, dividend payments
cannot reduce regulatory capital levels below the Corporation's regulatory
capital requirements and minimum regulatory guidelines. These restrictions do
not presently limit the Corporation from paying normal dividends.
26 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) REGULATORY CAPITAL:
The Corporation and the Bank are subject to risk-based capital guidelines
issued by the Board of Governors of the Federal Reserve Board and the Office
of Comptroller of Currency. These guidelines are used to evaluate capital
adequacy and include required minimums as discussed below. The Corporation
and the Bank are subject to an array of banking, Federal Deposit Insurance
Corporation, U.S. Federal, and State of Ohio laws and regulations, including
the FDIC Improvement Act. The FDIC Improvement Act established five capital
categories ranging from "well capitalized" to "critically undercapitalized."
These five capital categories are used by the Federal Deposit Insurance
Corporation to determine prompt corrective action and an institution's semi-
annual FDIC deposit insurance premium assessments.
Capital adequacy guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators about
components, risk weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action that could have a direct material
effect on the consolidated financial statements.
The prompt corrective action regulations provide for five categories which in
declining order are: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To be considered "well capitalized," an institution must
generally have a leverage capital ratio of at least 5 percent, a Tier I risk-
based capital ratio of at least 6 percent, and a total risk-based capital
ratio of at least 10 percent.
Total capital (Tier 1 and Tier 2) amounted to $68.9 million at December 31,
2002, representing 12.89% of net risk-adjusted assets compared with $63.3
million and 13.17%, respectively, at December 31, 2001. Tier 1 capital of
$62.2 million at year-end 2002 represented 11.64% of risk weighted assets,
compared with $57.4 million and 11.95% at year-end 2001.
At December 31, 2002 and 2001, the capital ratios for the Corporation and its
wholly owned subsidiary, Lorain National Bank, exceeded the above ratios
required to be "well capitalized." The "well capitalized" status affords the
Bank the ability to operate with the greatest flexibility under current laws
and regulations. The Comptroller of the Currency's most recent notification,
with an examination date of November 18, 2002, categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that Management
believes have changed the Bank's category.
Analysis of Lorain National Bank and LNB Bancorp, Inc.'s Regulatory
Capital and Regulatory Capital Requirements
Minimum Required Minimum Required
December 31 Actual To Be Well Capitalized Capital
- ------------------------------------------------------------------------
(amounts in thousands)
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------
2002 Total capital (to risk weighted assets)
Consolidated. .$68,878 12.89% $53,420 10.00% $42,736 8.00%
Bank. . . . . . 65,359 12.25 53,353 10.00 42,682 8.00
2001 Tier 1 capital (to risk weighted assets)
Consolidated. . 62,201 11.64 32,052 6.00 21,368 4.00
Bank. . . . . . 54,706 10.25 32,012 6.00 21,341 4.00
2001 Tier 1 capital (to average assets)
Consolidated. . 62,201 9.04 34,406 5.00 27,525 4.00
Bank. . . . . . 54,706 8.00 34,202 5.00 27,362 4.00
2001 Total capital (to risk weighted assets)
Consolidated. . 63,252 13.17 48,018 10.00 38,414 8.00
Bank. . . . . . 59,571 12.42 47,935 10.00 38,348 8.00
2001 Tier 1 capital (to risk weighted assets)
Consolidated. . 57,362 11.95 28,811 6.00 19,207 4.00
Bank. . . . . . 49,681 10.36 28,761 6.00 19,174 4.00
2001 Tier 1 capital (to average assets)
Consolidated. . 57,362 9.08 31,575 5.00 25,260 4.00
Bank. . . . . . 49,681 7.88 31,541 5.00 25,232 4.00
LNB BANCORP, INC. 2002 ANNUAL REPORT 27
END PUBLISHED PAGE 27
Notes to Consolidated Financial Statements
(15)FINANCIAL HOLDING COMPANY:
Substantially all of the retained earnings of the Corporation represent
undistributed net income of its subsidiary. Condensed financial
information of LNB Bancorp, Inc. (Financial Holding Company only) is as
follows:
CONDENSED BALANCE SHEETS
December 31, 2002 2001
- ------------------------------------------------------------------------
ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . .$ 1,241,000 $ 1,245,000
Short-term investments. . . . . . . . . . . . 3,224,000 3,488,000
Investment in subsidiary bank . . . . . . . . 59,084,000 54,408,000
Investment in subsidiary nonbanks . . . . . . 96,000 56,000
Securities available for sale . . . . . . . . 59,000 152,000
Note receivable - subsidiary
(6.80% due 1/1/2007) . . . . . . . . . . . . 4,000,000 4,000,000
Other assets. . . . . . . . . . . . . . . . . 170,000 15,000
---------------------------
Totals assets . . . . . . . . . . . . . . . .$67,874,000 $63,364,000
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities . . . . . . . . . . . . . . . . .$ 1,261,000 $ 1,226,000
Shareholders' equity. . . . . . . . . . . . . 66,613,000 62,138,000
---------------------------
Total liabilities and shareholders' equity. .$67,874,000 $63,364,000
---------------------------
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
INCOME:
Cash dividends from subsidiary $ 4,468,000 $ 4,365,000 $ 4,191,000
Interest and other income. . . 581,000 466,000 445,000
------------------------------------------
5,049,000 4,831,000 4,636,000
EXPENSES:
Other expenses . . . . . . . . 838,000 376,000 334,000
------------------------------------------
Income before income taxes and
equity in undistributed
net income of subsidiary. . . 4,211,000 4,455,000 4,302,000
Income tax (benefit) expense . (87,000) 26,000 55,000
Equity in undistributed net
income of subsidiary. . . . . 4,867,000 4,136,000 4,183,000
------------------------------------------
NET INCOME . . . . . . . . . . $ 9,165,000 $ 8,565,000 $ 8,430,000
------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Dividends from subsidiary. . . $ 4,468,000 $ 4,365,000 $ 4,191,000
Other, net . . . . . . . . . . (313,000) 119,000 55,000
------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES. . . . . 4,155,000 4,484,000 4,246,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of
securities available for sale 80,000 -0- -0-
Purchases of securities
available for sale. . . . . . (39,000) (64,000) -0-
------------------------------------------
NET CASH (USED) IN INVESTING
ACTIVITIES. . . . . . . . . . 41,000 (64,000) -0-
CASH FLOWS FROM FINANCING
ACTIVITIES:
Cash paid in lieu of fractional
shares related to a 2% stock
dividend. . . . . . . . . . . (22,000) -0- -0-
Proceeds from exercise of
stock options and shares
issued under LNBB Direct
Stock Purchase and Dividend
Reinvestment Plan . . . . . . 3,000 348,000 25,000
Dividends paid to shareholders (4,445,000) (4,337,000) (4,086,000)
------------------------------------------
NET CASH (USED) IN FINANCING
ACTIVITIES. . . . . . . . . . (4,464,000) (3,989,000) (4,061,000)
------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS . . (268,000) 431,000 185,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR . . . . . . 4,733,000 4,302,000 4,117,000
------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR . . . . . . . . . $ 4,465,000 $ 4,733,000 $ 4,302,000
------------------------------------------
28 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16)RETIREMENT PENSION PLAN:
The Bank's non-contributory defined benefit pension plan (the Plan) covers
substantially all of its employees. In general, benefits are based on years
of service and the employee's level of compensation. The Bank's funding
policy is to contribute annually an actuarially determined amount to cover
current service cost plus amortization of prior service costs. At December
31, 2002, approximately 59% of plan assets were invested in corporate
equities and 38% in U.S. Treasury securities, with the remaining in cash
equivalents.
The net periodic pension costs charged to other expenses amounted to $574,000
in 2002, $313,000 in 2001 and $95,000 in 2000. At December 31, 2002 there
were 245 participants in the plan. The following table sets forth the defined
benefit pension plan's Change in Projected Benefit Obligation and Change in
Plan Assets and Funded Status including Prepaid (Accrued) Liability for the
years ended December 31, 2002, 2001, and 2000. The Plan was amended and
restated for GUST effective January 1, 2001 and amended for EGTRRA effective
January 1 2002. Effective December 31, 2002, the benefits under the Plan were
frozen and no additional benefits will be accrued under the Plan after
December 31, 2002. As a result of the Plan being frozen, the Corporation
recorded, as a component of its net periodic pension cost, a loss due to the
curtailment in the amount of $137,000 in 2002. Also as a result of the plan
being frozen, the Corporation recorded a curtailment gain, as a component of
the change in the projected benefit obligation, in the amount of $2,670,000
during 2002.
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
Change in projected benefit obligation:
Projected benefit obligation
at beginning of year. . . .$(10,850,000) $(10,100,000) $ (9,672,000)
Service cost . . . . . . . . (556,000) (531,000) (474,000)
Interest cost. . . . . . . . (643,000) (636,000) (571,000)
Actuarial gain(loss) . . . . (83,000) 22,000 (399,000)
Curtailment gain . . . . . . 2,670,000 -0- -0-
Benefits paid. . . . . . . . 1,047,000 395,000 1,016,000
-------------------------------------------
Projected benefit obligation
at end of year. . . . . . .$ (8,415,000) $(10,850,000) $(10,100,000)
-------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year . . . . .$ 9,665,000 $ 10,101,000 $ 11,704,000
Actual (loss)
on plan assets. . . . . . . (877,000) (512,000) (587,000)
Employer contributions . . . -0- 471,000 -0-
Benefits paid. . . . . . . . (1,047,000) (395,000) (1,016,000)
-------------------------------------------
Fair value of plan assets
at end of year. . . . . . .$ 7,741,000 $ 9,665,000 $ 10,101,000
-------------------------------------------
Funded status . . . . . . . .$ (674,000) $ (1,185,000) $ 1,000
Unrecognized net (gain)
subsequent to transition. . -0- (1,207,000) (103,000)
Unamortized prior service cost -0- (122,000) (156,000)
-------------------------------------------
Accrued Liability . . . . . .$ (674,000) $ (100,000) $ (258,000)
-------------------------------------------
Net Periodic Pension Cost consisted of the following:
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
Service cost. . . . . . . . . $ 556,000 $ 531,000 $ 474,000
Interest cost on projected
benefit obligation . . . . . 643,000 636,000 571,000
Expected return on plan assets (743,000) (819,000) (873,000)
Amortization of transition
net asset. . . . . . . . . . -0- -0- -0-
Amortization of unrecognized
prior service liability. . . (35,000) (35,000) (35,000)
Recognized actuarial
(gain) or loss . . . . . . . 16,000 -0- (42,000)
-------------------------------------------
Net periodic pension cost . . 437,000 313,000 95,000
-------------------------------------------
Loss recognized due to
Curtailment. . . . . . . . . 137,000 -0- -0-
-------------------------------------------
Total pension cost. . . . . . $ 574,000 $ 313,000 $ 95,000
-------------------------------------------
The principal actuarial assumptions used follow:
Weighted average discount rate 6.00% 6.00% 5.95%
-------------------------------------------
Expected long-term rate of
return on plan assets. . . . 7.88% 7.88% 8.00%
-------------------------------------------
Assumed rate of future
compensation increases . . . 5.00% 5.00% 5.25%
-------------------------------------------
LNB BANCORP, INC. 2002 ANNUAL REPORT 29
END PUBLISHED PAGE 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) STOCK OPTION PLANS:
The Corporation sponsors four nonqualified incentive stock option agreements
and one qualified stock option plan. In 2002, the Corporation did not enter
into an incentive stock option agreement.
The Corporation's shareholders approved qualified 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 were granted at fair market value at
the date of the grant and, accordingly, no charges are reflected in salaries
and employee benefits expense due to the granting of stock options. The
excess of the option price over the par value of the shares purchased through
the exercise of stock options is credited to additional capital. Options
granted under the plans may not be outstanding for periods exceeding 10 years
from date of grant.
There were no new options granted or forfeitures under the qualified stock
option plans during the three year period ended December 31, 2002. All stock
option shares granted are vested. Stock options exercised under qualified
plans were 200, 9,431 and 1,324 shares in 2002, 2001 and 2000, respectively.
An analysis of the qualified incentive stock option plans as of December 31,
2002 follows:
Incentive Stock Option Plan Year 1985 1982
----------------------------------------------------------------
Options outstanding:
Total. . . . . . . . . . . . . . . . . .12,345 -0-
Vested . . . . . . . . . . . . . . . . .12,345 -0-
Options available
for granting . . . . . . . . . . . . . . -0- -0-
Exercise price . . . . . . . . . . . . . .$18.47 $ 0.00
---------------------
There were no stock options granted or available for granting under any of
the Corporation's qualified incentive stock option plans during 2002, 2001
and 2000.
QUALIFIED AND NONQUALIFIED INCENTIVE STOCK OPTION PLANS
2002 2001 2000
--------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------------------------------------
Outstanding at
beginning of
year. . . . . . 45,606 $23.73 44,158 $22.63 32,207 $21.37
Granted. . . . . -0- N/A 10,000 21.55 12,500 26.80
Exercised. . . . (200) 18.47 (9,431) 14.07 (1,324) 18.01
Stock Dividend . 912 23.26 879 19.33 775 22 63
------- ------- -------
Outstanding at end
of year . . . . 46,318 23.29 45,606 23.73 44,158 22.63
--------------------------------------------------------
Exercisable at end
of year . . . . 46,318 23.29 45,606 23.73 44,158 22.63
--------------------------------------------------------
Exercise prices for qualified and nonqualified options outstanding as of
December 31, 2002, ranged from $18.47 to $28.27. The weighted average
remaining contractual life of the nonqualified incentive stock option
agreement's is 6 to 9 years. The weighted average remaining contractual life
of the 1985 incentive stock option plans is 1 year.
The fair value of each option granted in 2001 is estimated on the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2001: risk-free interest rate of
5.03%, dividend yield of 4.80%, volatility factors of the expected market
price of LNB Bancorp, Inc.'s common stock of 38.4%; and a weighted average
expected option life of 10 years. Weighted average fair value of options
granted during 2001 was $6.04.
Had compensation cost for the Corporation's stock-based compensation plans
been determined consistent with SFAS No. 123, net income and net income per
share would have been as summarized below.
Years ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------
Pro forma net income. . . . . . . $9,148,000 $8,525,000 $8,400,000
Pro forma net
income per share: .
Basic . . . . . . . . . . . . . $ 2.08 $ 1.94 $ 1.92
Diluted . . . . . . . . . . . . $ 2.08 $ 1.94 $ 1.92
------------------------------------
30 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) EMPLOYEE STOCK OWNERSHIP PLAN:
The Lorain National Bank Employee Stock Ownership Plan (ESOP) is a non-
contributory plan that covers substantially all employees. Contributions by
the Bank to the ESOP are discretionary and subject to approval by the Board
of Directors. Contributions are expensed in the year in which they are
approved and totaled $263,000, $0 and $450,000 in 2002, 2001, and 2000,
respectively. At December 31, 2002 there were 273 participants in the plan.
Under the terms of the ESOP agreement, the Corporation's common stock is to
be the Plan's primary investment..
Transactions by the ESOP, relating to activity in the Corporation's
common stock, are summarized below:
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
Cash dividend income . . . .$ 184,000 $ 172,000 $ 148,000
Stock dividend shares. . . . 3,577 3,287 2,859
Shares purchased . . . . . . 7,421 22,953 17,337
Shares distributed . . . . . 6,142 2,690 6,298
Year end holdings:
Shares . . . . . . . . . . 181,340 176,484 152,934
Market value . . . . . . .$4,923,000 $3,816,000 $3,336,000
As a percentage of
total plan assets. . . . 98.8% 97.4% 91.7%
--------------------------------------------
(19) 401(K) PROFIT SHARING PLAN AND TRUST:
The Bank adopted the Lorain National Bank 401(k) Profit Sharing Plan and
Trust (the Plan) effective January 1, 2001. The Plan amended and restated the
Lorain National Bank Stock Purchase Plan. The Plan allows for the purchase of
up to 80,000 shares of LNB Bancorp, Inc. treasury shares. During 2001, the
Plan purchased LNB Bancorp, Inc common stock on the open market.
Under provisions of the Plan, a participant can contribute from 1 percent to
6 percent of their compensation to the Plan. The Bank makes a contribution
equal to 50 percent of each employee's contribution. The Plan uses the
contributions of the Corporation to purchase LNB Bancorp, Inc. common stock.
Effective January 1, 2001, the Plan permits the investment of plan assets,
contributed by employees, among different funds.
The Bank's 50% matching contributions are expensed in the year in which the
associated participant contributions are made and totaled $209,000, $202,000
and $137,000 in 2002, 2001 and 2000, respectively. At December 31, 2002,
there were 332 participants in the Plan.
Transactions by the Plan relating to the activity in the Corporation's common
stock are summarized below:
Years ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------
Cash dividend income. . . . $ 136,000 $ 131,000 $ 120,000
Stock dividend shares . . . 2,577 2,509 2,238
Shares purchased. . . . . . 15,979 12,543 19,504
Shares rolled over. . . . . 83 237 -0-
Shares distributed/sold . . 5,805 10,250 23,463
Year end holdings:
Shares. . . . . . . . . . 142,512 129,678 124,639
Market value. . . . . . . $3,869,000 $2,804,000 $2,719,000
As a percentage of
total plan assets . . . 81.9% 84.9% 99.2%
-------------------------------------------
(20) COMMITMENTS, CREDIT RISK, AND CONTINGENCIES:
In the normal course of business, the Bank enters into commitments with off-
balance sheet risk to meet the financing needs of its customers. These
instruments are currently limited to commitments to extend credit and standby
letters of credit. Commitments to extend credit involve elements of credit
risk and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The Bank's exposure to credit loss in the event
of nonperformance by the other party to the commitment is represented by the
contractual amount of the commitment. The Bank uses the same credit policies
in making commitments as it does for on-balance sheet instruments. Interest
rate risk on commitments to extend credit results from the possibility that
interest rates may have moved unfavorably from the position of the Bank since
the time the commitment was made.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of 60 to 120 days or other
termination clauses and may require payment of a fee. Since some of the
commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained by the Bank upon extension of credit is
based on Management's credit evaluation of the applicant. Collateral held is
generally single-family residential real estate and commercial real estate.
Substantially all of the obligations to extend credit are variable rate
commitments.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Standby letters of credit
generally are contingent upon the failure of the customer to perform
according to the terms of the underlying contract with the third party.
A summary of the contractual amount of commitments follows:
December 31, 2002 2001
- ----------------------------------------------------------------------
Commitments to extend credit. . . . $ 75,408,000 $ 72,125,000
Home equity lines . . . . . . . . . 38,502,000 32,989,000
Credit card arrangements. . . . . . 23,169,000 18,718,000
Commitments to sell mortgages . . . 1,742,000 -0-
Standby letters of credit . . . . . 1,864,000 1,353,000
----------------------------------
Total. . . . . . . . . . . . . . $140,685,000 $125,185,000
----------------------------------
Most of the Bank's business activity is with customers located within the
Bank's defined market area. As of December 31, 2002, the Bank had no
significant concentrations of credit risk in its loan portfolio. The Bank
also has no exposure to highly leveraged transactions and no foreign credits
in its loan portfolio.
The nature of the Corporation's business results in litigation. Management,
after reviewing with counsel all actions and proceedings pending against or
involving LNB Bancorp, Inc. and subsidiaries, considers that the aggregate
liability or loss, if any, resulting from them will not be material to the
Corporation's financial position, results of operation or liquidity.
LNB BANCORP, INC 2002 ANNUAL REPORT 31
END PUBLISHED PAGE 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(21) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Corporation discloses 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 SHORT-TERM
INVESTMENTS AND ACCRUED INTEREST, ACCOUNTS RECEIVABLE AND OTHER
FINANCIAL ASSETS:
For these short-term financial instruments, the carrying value is a
reasonable estimate of fair value.
SECURITIES:
The fair value of securities is based on quoted market prices, where
available. If quoted market prices are not available, fair value is
estimated using the quoted market prices of comparable instruments.
PORTFOLIO LOANS, NET AND LOANS AVAILABLE FOR SALE, NET:
For variable rate loans with interest rates that may be adjusted on a
quarterly, or more frequent basis, the carrying amount is a reasonable
estimate of fair market value. The fair value of other types of loans is
estimated by discounting future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
DEPOSITS:
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, money market, checking and
NOW accounts, is equal to the amount payable on demand as of December
31, for each year presented. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered
for deposits of similar remaining maturities. For variable rate
certificates of deposit, the carrying amount is a reasonable estimate of
fair value.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM
BORROWINGS AND ACCRUED INTEREST PAYABLE AND OTHER FINANCIAL LIABILITIES:
For these short term financial instruments, the carrying value is a
reasonable estimate of fair value.
FEDERAL HOME LOAN BANK ADVANCES:
The fair value of these long-term financial instruments is estimated by
discounting future cash flows using current FHLB rates for the remaining
term to maturity.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT:
The fair value of these commitments to extend credit approximates the fees
charged to make these commitments; since rates and fees of the commitment
contracts approximates those currently charged to originate similar
commitments. The carrying amount and fair value of off-balance sheet
instruments is not significant as of December 31, 2002 and 2001.
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 Investment and Trust Services Division that contributes net
fee income annually. The Investment and Trust Services 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, 2002 and 2001 are summarized as follows:
December 31, 2002 2001
- ------------------------------------------------------------------------
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
- ------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and due from
banks and Federal
funds sold and
short-term
investments $ 26,832,000 $ 26,832,000 $ 31,505,000 $ 31,505,000
Securities . . . .$152,295,000 $152,551,000 $138,401,000 $138,695,000
============ ============ ============ ============
Portfolio loans,
net . . . . . . .$493,898,000 $502,205,000 $459,139,000 $460,467,000
============ ============ ============ ============
Loans available
for sale, net . .$ 8,999,000 $ 8,999,000 $ 12,459,000 $ 12,459,000
============ ============ ============ ============
Accrued interest,
accounts receivable
and other financial
assets. . . . . .$ 17,295,000 $ 17,295,000 $ 7,013,000 $ 7,013,000
============ ============ ============ ============
FINANCIAL LIABILITIES:
Deposits:
Demand deposits,
savings accounts
and money market
deposits. . . . .$361,495,000 $361,495,000 $340,994,000 $340,994,000
Certificates of
deposit . . . . . 204,632,000 207,676,000 177,273,000 178,774,000
------------ ------------ ------------ ------------
Total deposits. . .$566,127,000 $569,171,000 $518,267,000 $519,768,000
============ ============ ============ ============
Securities sold
under repurchase
agreements and
other short-term
borrowings . . . .$ 26,866,000 $ 26,866,000 $ 29,170,000 $ 29,170,000
============ ============ ============ ============
Federal Home Loan
Bank advances. . .$ 48,925,000 $ 49,536,000 $ 49,345,000 $ 49,981,000
============ ============ ============ ============
Accrued interest
payable and
other financial
liabilities. . . .$ 5,639,000 $ 5,639,000 $ 4,666,000 $ 4,666,000
============ ============ ============ ============
32 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) Subsequent Event:
On February 25, 2003, the Corporation's board of directors approved a three-
for-two (3-for-2) stock split of the Corporation's common stock. The shares
issued as the result of the split will be distributed on or about March 11,
2003 to shareholders of record at the close of business on March 10, 2003.
Shareholders participating in the Corporation's dividend reinvestment plan
will be issued fraction shares as is necessary. Shareholders not
participating in the plan will be paid cash in lieu of fractional shares as
is necessary.
The retroactive impact of the stock split is not reflected in the
accompanying consolidated financial statements with respect to any references
to the number of shares issued or outstanding, to pershare information, or to
information relating to previous stock dividends and stock option activity.
The proforma impact of the split on the aforementioned items is presented
below in tabular format as if the split was recorded as of December 31, 2002.
The following table presents the pro forma effect on earnings per share as if
the stock split had occurred as of December 31, 2002:
The following table presents the pro forma effects on earnings per share as
if the stock split had occurred as of December 31, 2002:
Basic and diluted earnings per share: 2002 2001 2000
- -------------------------------------------------------------------------
As reported. . . . . . . . . . . . . . . 2.08 1.95 1.92
Pro forma. . . . . . . . . . . . . . . . 1.39 1.30 1.28
---------------------------------
The following table presents the pro forma effect of applying SFAS No. 142 as
if the stock split had occurred as of December 31, 2002:
Basic and diluted earnings per share: 2002 2001 2000
- -------------------------------------------------------------------------
As reported, adjusted for SFAS No. 142 . 2.08 1.99 1.96
Pro forma. . . . . . . . . . . . . . . . 1.39 1.33 1.31
---------------------------------
The following table presents the pro forma effect for the Corporation's
Stock-based compensation plan, if it had been determined consistent with
SFAS No. 123, and as if the stock split had occurred as of December 31,
2002:
Basic and diluted earnings per share: 2002 2001 2000
- -------------------------------------------------------------------------
As reported, pro forma
with SFAS No. 123 . . . . . . . . . . . 2.08 1.94 1.92
Pro forma. . . . . . . . . . . . . . . . 1.39 1.29 1.28
---------------------------------
LNB BANCORP, INC. 2002 ANNUAL REPORT 33
END PUBLISHED PAGE 33
REPORT OF MANAGEMENT
To The Shareholders of LNB Bancorp, Inc.
January 28, 2003
The Management of LNB Bancorp, Inc. is responsible for the preparation,
integrity, and fair presentation of its financial statements presented in
this annual report. The financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and, as such, include amounts, some of which are based on judgments and
estimates of Management.
LNB Bancorp, Inc. maintains a system of internal control over financial
reporting designed to produce reliable financial statements. The system
contains self-monitoring mechanisms, and compliance is tested and evaluated
through a program of internal audits. Actions are taken to correct potential
deficiencies as they are identified. Any internal control system has inherent
limitations, including the possibility that controls can be circumvented or
overridden. Further, because of changes in conditions, internal control
system effectiveness may vary over time.
Management assessed the Corporation's internal control over financial
reporting presented in conformity with accounting principles generally
accepted in the United States of America as of December 31, 2002. Based on
this assessment, Management believes that, as of December 31, 2002, the
Corporation maintained effective internal control over financial reporting
presented in conformity with accounting principles generally accepted in the
United States of America.
The Audit Committee of the Board of Directors is composed entirely of outside
directors who are independent of Management and meets periodically with
Management, internal auditors and independent auditors to review audit plans
and the results and recommendations of their audits. The Audit Committee
selects the independent auditor. KPMG LLP, independent auditors, and the
internal auditors have direct and confidential access to the Audit Committee
at all times to discuss the results of their examinations.
The accounting firm of KPMG LLP has been engaged by LNB Bancorp, Inc. to
audit its financial statements and their report follows.
/s/Gary C. Smith /s/Gregory D. Friedman
Gary C. Smith Gregory D. Friedman, CPA
President and Executive Vice President,
Chief Executive Officer Chief Financial Officer and
Corporate Secretary
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
LNB BANCORP, INC.
We have audited the accompanying consolidated balance sheets of LNB Bancorp,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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 subsidiaries at December 31, 2002 and 2001, and the
results of their operations, shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of
America.
/s/KPMG LLP
Cleveland, Ohio
January 28, 2003, except as to note 22, which is as of February 25, 2003
34 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 34
SELECTED UNAUDITED QUARTERLY FINANCIAL DATA
Consolidated unaudited quarterly financial and per share data for the
years ended December 31, 2002, 2001 and 2000 are summarized as follows:
First Second Third Fourth
Quarter(3) Quarter(3) Quarter(3) Quarter Totals
- ------------------------------------------------------------------------
Total 2002$10,189,000 $10,474,000 $10,415,000 $10,286,000 $41,364,000
interest 2001 11,724,000 11,485,000 11,081,000 10,811,000 45,101,000
income 2000 10,939,000 11,521,000 11,992,000 12,193,000 46,645,000
- ------------------------------------------------------------------------
Total 2002 3,106,000 3,175,000 3,072,000 2,742,000 12,095,000
interest 2001 4,903,000 4,432,000 4,194,000 3,469,000 16,998,000
expense 2000 4,384,000 4,549,000 5,038,000 5,238,000 19,209,000
- ------------------------------------------------------------------------
Net 2002 7,083,000 7,299,000 7,343,000 7,544,000 29,269,000
interest 2001 6,821,000 7,053,000 6,887,000 7,342,000 28,103,000
income 2000 6,555,000 6,972,000 6,954,000 6,955,000 27,436,000
- ------------------------------------------------------------------------
Provision2002 600,000 525,000 600,000 475,000 2,200,000
for loan 2001 450,000 400,000 450,000 850,000 2,200,000
losses 2000 300,000 300,000 650,000 450,000 1,700,000
- ------------------------------------------------------------------------
Net 2002 6,483,000 6,774,000 6,743,000 7,069,000 27,069,000
interest 2001 6,371,000 6,603,000 6,437,000 6,492,000 25,903,000
income 2000 6,255,000 6,672,000 6,304,000 6,505,000 25,736,000
after provision for loan losses
- ------------------------------------------------------------------------
Non- 2002 2,638,000 2,867,000 2,568,000 2,706,000 10,579,000
interest 2001 2,043,000 2,383,000 2,537,000 2,486,000 9,448,000
income 2000 1,933,000 2,112,000 2,124,000 2,201,000 8,370,000
- ------------------------------------------------------------------------
Non- 2002 5,994,000 6,122,000 5,945,000 6,222,000 24,283,000
interest 2001 5,399,000 5,749,000 5,637,000 5,953,000 22,738,000
expenses 2000 5,200,000 5,540,000 5,137,000 5,399,000 21,276,000
- ------------------------------------------------------------------------
Income 2002 1,022,000 1,082,000 1,033,000 1,063,000 4,200,000
taxes 2001 1,009,000 1,082,000 1,145,000 812,000 4,048,000
2000 1,008,000 1,124,000 1,130,000 1,138,000 4,400,000
- ------------------------------------------------------------------------
Net 2002 $2,105,000 $2,237,000 $2,333,000 $2,490,000 $9,165,000
income 2001 2,006,000 2,155,000 2,193,000 2,211,000 8,565,000
2000 1,980,000 2,120,000 2,161,000 2,169,000 8,430,000
- ------------------------------------------------------------------------
Basic 2002 $ .48 $ .51 $ .53 $ .56 $2.08
earnings 2001 .46 .49 .50 .50 1.95
per 2000 .46 .47 .49 .40 1.92
share(1)
- ------------------------------------------------------------------------
Diluted 2002 $ .49 $ .50 $ .53 $ .56 $2.08
earnings 2001 .46 .49 .50 .50 1.95
per 2000 .46 .47 .49 .50 1.92
share(1)
- ------------------------------------------------------------------------
Dividends2002 $ .25 $ .25 $ .25 $ .27 $1.02
declared 2001 .24 .24 .25 .27 1.00
per share2000 .23 .23 .24 .26 .96
(2)
- ------------------------------------------------------------------------
(1) Basic and Diluted earnings per share is computed using the weighted
average number of shares outstanding during each quarter and each year.
(2) All share and per share data have been adjusted to reflect the 2
percent stock dividend in 2002, 2001 and 2000.
(3)Certain amounts reported for the year 2002 have been restated as a result
of the adoption of SFAS No. 142 and SFAS No. 147.
LNB Bancorp, Inc. and Lorain National Bank
TOTAL ASSETS (Millions of Dollars)
(A Total Assets graph follows in printed version with assets on the
y-axis and years 1998 through 2002 on the x-axis. The graph is a
vertical bar graph. The co-ordinates, by year, which are presented in
the table below are plotted on the previously described grid.)
TOTAL LOANS (Millions of Dollars)
(A Total Loans graph follows in printed version with loans on the y-axis
and years 1998 through 2002 on the x-axis. The graph is a vertical bar
graph. The co-ordinates, by year, which are presented in the table
below are plotted on the previously described grid.)
NET INCOME (Millions of Dollars)
(A Net Income graph follows in printed version with income on the y-axis
and years 1998 through 2002 on the x-axis. The graph is a vertical bar
graph. The co-ordinates, by year, which are presented in the table
below are plotted on the previously described grid.)
Total Assets Total Loans Net Income
Year (Millions of Dollars) (Millions of Dollars) (Millions Of Dollars
2002 $715.4 $509.6 $9,165
2001 $664.5 $477.5 $8,565
2000 $622.1 $451.1 $8,430
1999 $599.6 $419.5 $7,641
1998 $541.7 $369.9 $6,818
LNB BANCORP, INC. 2002 ANNUAL REPORT 35
END PUBLISHED PAGE 35
FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY
CONDENSED STATEMENTS OF INCOME AND CASH DIVIDENDS DECLARED - YEARS ENDED
DECEMBER 31,
2002 2001 2000
- ------------------------------------------------------------------------
Total interest income. . . . . $41,364,000 $45,101,000 $46,645,000
Total interest expense . . . . 12,095,000 16,998,000 19,209,000
------------------------------------------
Net interest income . . . . . 29,269,000 28,103,000 27,436,000
Provision for loan losses. . . 2,200,000 2,200,000 1,700,000
Other income . . . . . . . . . 9,753,000 9,122,000 8,369,000
Gains on sales of assets . . . 826,000 326,000 1,000
Other expenses . . . . . . . . 24,283,000 22,738,000 21,276,000
------------------------------------------
Income before income taxes . . 13,365,000 12,613,000 12,830,000
Income taxes . . . . . . . . . 4,200,000 4,048,000 4,400,000
------------------------------------------
Net income . . . . . . . . . . $ 9,165,000 $ 8,565,000 $ 8,430,000
------------------------------------------
Cash dividends declared. . . . $ 4,468,000 $ 4,365,000 $ 4,191,000
------------------------------------------
CONDENSED BALANCE SHEETS - DECEMBER 31,
2002 2001 2000
- ------------------------------------------------------------------------
Cash and cash equivalents . .$ 26,832,000 $ 31,505,000 $ 25,136,000
Securities . . . . . . . . . . 152,295,000 138,401,000 127,101,000
Net loans. . . . . . . . . . . 502,897,000 471,598,000 445,890,000
Other assets . . . . . . . . . 33,375,000 23,022,000 23,983,000
------------------------------------------
Total assets . . . . . . . . .$715,399,000 $664,526,000 $622,110,000
------------------------------------------
Total deposits . . . . . . . .$566,127,000 $518,267,000 $496,091,000
Other borrowings . . . . . . . 75,791,000 78,515,000 63,736,000
Other liabilities. . . . . . . 6,868,000 5,606,000 5,758,000
------------------------------------------
Total liabilities. . . . . . . 648,786,000 602,388,000 565,585,000
------------------------------------------
Total shareholders' equity . . 66,613,000 62,138,000 56,525,000
------------------------------------------
Total liabilities
and shareholders' equity. . .$715,399,000 $664,526,000 $622,110,000
------------------------------------------
PER SHARE DATA
2002 2001 2000
- ------------------------------------------------------------------------
Basic earnings(1). . . . . . . $ 2.08 $ 1.95 $ 1.92
Diluted earnings(1). . . . . . $ 2.08 $ 1.95 $ 1.92
Cash dividends declared(2). . $ 1.02 $ 1.00 $ .96
Book value per share(2). . . . $15.14 $14.12 $12.90
173
Shares outstanding at end
of year(2). . . . . . . . . . 4,401,232 4,401,032 4,380,742
------------------------------------------
FINANCIAL RATIOS
2002 2001 2000
- ------------------------------------------------------------------------
Return on average
assets (ROAA)(4) . . . . . . 1.33% 1.35% 1.39%
Return on average
shareholders' equity(ROAE)(4) 14.24 14.36 15.83
Net interest margin(3) . . . . 4.52 4.72 4.84
Efficiency ratio(3). . . . . . 62.08 60.96 59.42
Loans to deposits. . . . . . . 90.01 92.13 90.94
Dividend Payout. . . . . . . . 48.75 50.96 49.72
Shareholders' equity to assets(4) 9.31 9.35 8.77
------------------------------------------
ASSET QUALITY RATIOS
2002 2001 2000
- ------------------------------------------------------------------------
Net charge-offs to
total loans. . . . . . . . . .29% .33% .25%
Reserve for loan losses to
total loans . . . . . . . . . 1.31 1.23 1.16
Non-performing loans to total
loans . . . . . . . . . . . . .37 .30 .51
Reserve for loan losses to
nonperforming loans. . . . . 352.94 409.30 226.60
------------------------------------------
CONDENSED STATEMENTS OF INCOME AND CASH DIVIDEND DECLARED - YEARS ENDED
DECEMBER 31,
1999 1998
- ----------------------------------------------------------
Total interest income . . . . $41,617,000 $38,178,000
Total interest expense . . . . 15,593,000 13,999,000
---------------------------
Net interest income . . . . . 26,024,000 24,179,000
Provision for loan losses. . . 2,000,000 2,275,000
Other income . . . . . . . . . 7,936,000 6,997,000
Gains on sales of assets . . . 162,000 655,000
Other expenses . . . . . . . . 20,639,000 18,861,000
---------------------------
Income before income taxes . . 11,483,000 10,245,000
Income taxes . . . . . . . . . 3,842,000 3,427,000
---------------------------
Net income . . . . . . . . . . $ 7,641,000 $ 6,818,000
---------------------------
Cash dividends declared. . . . $ 3,794,000 $ 3,545,000
---------------------------
CONDENSED BALANCE SHEETS - DECEMBER 31,
1999 1998
- ----------------------------------------------------------
Cash and cash equivalents. . .$ 37,343,000 $ 32,801,000
Securities . . . . . . . . . . 123,319,000 118,519,000
Net loans. . . . . . . . . . . 414,849,000 366,383,000
Other assets . . . . . . . . . 24,100,000 24,043,000
----------------------------
Total assets . . . . . . . . .$599,611,000 $541,746,000
----------------------------
Total deposits . . . . . . . .$456,831,000 $443,848,000
Other borrowings . . . . . . . 86,467,000 45,005,000
Other liabilities. . . . . . . 5,260,000 4,217,000
----------------------------
Total liabilities. . . . . . . 548,558,000 493,070,000
----------------------------
Total shareholders' equity . . 51,053,000 48,676,000
----------------------------
Total liabilities
and shareholders' equity. . .$599,611,000 $541,746,000
----------------------------
PER SHARE DATA
1999 1998
- ----------------------------------------------------------
Basic earnings(1). . . . . . . $ 1.74 $ 1.56
Diluted earnings(1). . . . . . $ 1.74 $ 1.56
Cash dividends declared(2) . . $ .87 $ .81
Book value per share(2). . . . $11.66 $11.13
Shares outstanding at end
of year(2). . . . . . . . . . 4,379,422 4,374,836
- -----------------------------------------------------------
FINANCIAL RATIOS
1999 1998
- -----------------------------------------------------------
Return on average
assets(ROAA)(4). . . . . . . 1.33% 1.34%
Return on average
shareholders' equity(ROAE)(4) 15.29 14.46
Net interest margin(3) . . . . 4.88 5.17
Efficiency ratio(3). . . . . . 60.61 60.33
Loans to deposits. . . . . . . 91.83 83.33
Dividend Payout. . . . . . . . 49.65 51.99
Shareholders' equity to assets(4) 8.67 9.27
- -----------------------------------------------------------
ASSET QUALITY RATIOS
1999 1998
- ----------------------------------------------------------
Net charge-offs to year
end loans . . . . . . . . . . .19% .99%
Reserve for loan losses to
total loans . . . . . . . . . 1.11 .94
Non-performing loans to
total loans . . . . . . . . . .33 .35
Reserve for loan losses to
nonperforming loans . . . . . 348.50 140.10
- -----------------------------------------------------------
(1) Basic and diluted earnings per share is computed using the weighted
average number of shares outstanding during each year.
(2) All share and per share data has been adjusted to reflect the 2
percent stock dividend in 2002, 2001, 2000 and 1998.
(3) Tax Equivalent Basis.
(4) Ratios based on average annual balances.
36 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION:
The following is Management's discussion and analysis of the financial
condition and results of operations of LNB Bancorp, Inc. and its
subsidiaries. It is intended to amplify certain financial information
regarding LNB Bancorp, Inc. (the Corporation) and should be read in
conjunction with the Consolidated Financial Statements, related Notes, and
other financial information and discussions included in the 2002 Annual
Report to Shareholders.
FORWARD-LOOKING STATEMENTS:
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the
Securities Exchange Act of 1934. Forward-looking statements which are based
on various assumptions (some of which are beyond the Corporation's control),
may be identified by reference to a future period or periods, or by the use
of forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of these terms. Actual results could differ materially
from those set forth in forward-looking statements due to a variety of
factors, including, but not limited to, those related to the economic
environment, particularly in the market areas in which the company operates,
competitive products and pricing, fiscal and monetary policies of the U.S.
Government, changes in government regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management, asset/liability management, the financial
and securities markets and the availability of and costs associated with
sources of liquidity.
The Corporation does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
APPLICATION OF CRITICAL ACCOUNTING POLICY:
LNB Bancorp, Inc.'s consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
of America and follow general practices within the industries in which it
operates. Application of these principles requires Management to make
estimates, assumptions, and judgments that affect the amounts reported in the
financial statements and accompanying notes. These estimates, assumptions,
and judgments are based on information available as of the date of the
financial statements; accordingly, as this information changes, the financial
statements could reflect different estimates, assumptions, and judgments.
Certain policies inherently have a greater reliance on the use of estimates,
assumptions, and judgments and as such have a greater possibility of
producing results that could be materially different than originally
reported. Estimates, assumptions, and judgments are necessary when assets and
liabilities are required to be recorded at fair value, when a decline in the
value of an asset not carried on the financial statements at fair value
warrants an impairment write-down or valuation reserve to be established, or
when an asset or liability needs to be recorded contingent upon a future
event. Carrying assets and liabilities at fair value inherently results in
more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available. When third-party information is not available, valuation
adjustments are estimated in good faith by Management primarily through the
use of internal cash flow modeling techniques
The most significant accounting policies followed by the Corporation are
presented in Note 1 to the consolidated financial statements. These policies,
along with the disclosures presented in the Notes to Consolidated Financial
Statements and in this management discussion and analysis, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. Based on the
valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions, and estimates underlying those amounts,
Management has identified the determination of the reserve for loan losses as
the accounting area that requires the most subjective or complex judgments,
and as such could be most subject to revision as new information becomes
available.
Note 1 to the consolidated financial statements discusses new accounting
policies adopted by the Corporation during 2002. The expected impact of
accounting policies recently issued or proposed but not yet required to be
adopted is discussed in the management discussion and analysis section under
"Impacts of Accounting and Regulatory Pronouncements." To the extent the
adoption of new accounting standards materially affects the Corporation's
financial condition, results of operations, or liquidity, the impacts are
discussed in the applicable section(s) of this management discussion and
analysis and notes to the consolidated financial statements.
LNB Bancorp, Inc. and Lorain National Bank
BASIC EARNINGS PER SHARE (Dollars*)
(A Basic Earnings Per Share graph follows in printed version with basic
earnings on the y-axis and years 1998 through 2002 on the x-axis. The
graph is a vertical bar graph. The co-ordinates, by year, which are
presented in the table below are plotted on the previously described
grid.)
RETURN ON AVERAGE ASSETS (Percent)
(A Return On Average Assets graph follows in printed version with return
percent on the y-axis and years 1998 through 2002 on the x-axis. The
graph is a vertical bar graph. The co-ordinates, by year, which are
presented in the table below are plotted on the previously described
grid.)
RETURN ON AVERAGE EQUITY (Percent)
(A Return On Average Equity graph follows in printed version with return
percent on the y-axis and years 1998 through 2002 on the x-axis. The
graph is a vertical bar graph. The co-ordinates, by year, which are
presented in the table below are plotted on the previously described
grid.)
BASIC RETURN ON RETURN ON
EARNINGS PER SHARE AVERAGE ASSETS AVERAGE EQUITY
Year (Dollars*) (Percent) (Percent)
2002 $2.08 1.33% 14.24%
2001 $1.95 1.35% 14.36%
2000 $1.92 1.39% 15.83%
1999 $1.74 1.33% 15.29%
1998 $1.56 1.34% 14.46%
*Adjusted for stock dividends and splits
LNB BANCORP, INC. 2002 ANNUAL REPORT 37
END PUBLISHED PAGE 37
MANAGEMENT'S DISCUSSION AND ANALYSIS
EARNINGS SUMMARY:
LNB Bancorp, Inc. posted its twenty-first consecutive year of increased
earnings. LNB Bancorp, Inc.'s consolidated 2002 net income reached a record
high of $9,165,000, compared to $8,565,000 in 2001 and $8,430,000 in 2000.
Net income for 2002, 2001 and 2000 was favorably affected by an increase in
net interest income and increased noninterest income offset in part by higher
noninterest expenses. Net income for 2002 was favorably affected by ceasing
the amortization of goodwill. Net income for 2001 and 2000 was unfavorably
affected by increased loan loss provisions from the prior year.
Basic earnings per share rose $.13 or seven percent to $2.08 for 2002
compared to $1.95 for 2001 and $1.92 for 2000. Diluted earnings per share
totaled $2.08 for 2002, compared to $1.95 for 2001 and $1.92 for 2000. Prior
period earnings per share data has been restated to reflect the 2% stock
dividend of July 2, 2002 and July 1, 2001. The return on average assets, a
measure of profitability, declined slightly to 1.33% in 2002 from 1.35% in
2001 and 1.39% in 2000. Return on average shareholders' equity measures how
profitable the shareholders' invested capital is employed. Return on average
shareholders' equity decreased to 14.24% for 2002 compared to 14.36% and
15.83% in 2001 and 2000, respectively.
NET INTEREST INCOME:
Net interest income, the difference between interest and loan fee income on
earning assets and the interest paid on deposits and borrowed funds, is the
principal source of earnings for the Corporation. Throughout this discussion
net interest income is presented on a fully taxable equivalent (FTE) basis
which restates interest on tax-exempt securities and loans as if such
interest was subject to federal income tax at the statutory rate.
Net interest income is affected by market interest rates on both earning
assets and interest-bearing liabilities, the level of earning assets being
funded by interest-bearing liabilities, noninterest-bearing liabilities and
shareholders' equity and the growth in earning assets. In addition, net
interest income is affected not only by Management's asset/liability
strategies to alter the volume and mix of earning assets and sources of
funds, but also such external factors as economic conditions and credit
demand.
A summary of the impacts of volume and rate changes on the Corporation's net
interest income is presented on page 39. Changes in net interest income
result from changes in both rate and volume. Volume refers to the impact of
net changes in the balances of earning assets and interest-bearing
liabilities. Rate refers to the impact of net changes in interest rates.
Net interest income (FTE) in 2002 increased by $1,402,000 to $29,684,000 in
2002 from $28,282,000 in 2001. This increase was affected by increases in the
volume of interest-bearing assets and liabilities net of decreases in market
interest rates. The cost of funds decreased to 2.25% in 2002 from 3.48% in
2001, or a total of 123 basis points. During the same period, the yield on
earning assets decreased 114 basis points to 6.46% in 2002, compared to 7.60%
in 2001, resulting in a decrease in the net interest spread by 9 basis points
in 2002. The increase in net interest income during 2002 resulted from
increases in the volume of earning assets, which were greater than the
increases in the volume of interest-bearing liabilities, partially offset by
decreases in market rates on interest-bearing liabilities and decreases in
market rates on interest-bearing assets.
Net interest income (FTE) in 2001 increased by $740,000 to $28,282,000 in
2001 from $27,542,000 in 2000. This increase was affected by increases in the
volume of interest-bearing assets and liabilities net of decreases in market
interest rates. The cost of funds decreased to 3.48% in 2001 from 4.11% in
2000, or a total of 63 basis points. During the same period, the yield on
earning assets decreased 64 basis points to 7.60% in 2001, compared to 8.24%
in 2000, resulting in a decrease in the net interest spread by 1 basis point
in 2001.
The net yield on earning assets in 2002 was 4.52% compared to 4.72% in 2001
and 4.84% in 2000. The decrease in the net yield on earning assets during
2002 results primarily from increases in volume of loans and investment
securities with market rates lower than in previous years partially offset by
increases in volume of interest-bearing demand accounts and long-term
borrowings with interest rates lower than in previous years. The slight
decrease in the net yield on earning assets in 2002, 2001 and 2000 during a
declining interest rate environment indicates the Corporation's portfolio of
earning assets and interest-bearing liabilities are slightly asset sensitive.
Corporate management is responsive to the impacts of competition, changes in
market interest rates and regulation in order to maintain a strong net yield
on earning assets.
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 82.1% and 83.0% in 2002 and 2001 respectively. Interest
and dividends on securities and Federal funds sold, as a percentage of total
interest income, on a fully-tax equivalent basis, was 17.9% and 17.0% in 2002
and 2001, respectively.
The cost of interest-bearing liabilities in 2002 was $12,095,000 compared to
$16,998,000 and $19,209,000 in 2001 and 2000, respectively. The favorable
impact of decreases in deposit rates plus increases in volume caused interest
expense to decrease from 2001 to 2002. The net favorable impact of decreases
in deposit rates plus increases in volume caused interest expense to decrease
from 2000 to 2001. Decreases in the average rates paid on savings accounts,
certificates of deposit, interest-bearing demand, short-term and long-term
borrowings offset in part the 2002 increase in the cost of interest-bearing
liabilities due to volume increases.
NONINTEREST INCOME:
Noninterest income, excluding gains on the sale of securities, grew seven
percent in 2002 driven primarily by a 16 percent increase in service charges
on deposit accounts resulting from Lorain National Bank's successful high-
performance checking account campaign, offset in part by a reduction in
Investment and Trust Services income of 13 percent. Noninterest income in
2002 increased to $10,579,000 compared to $9,448,000 in 2001 for an increase
of $1,131,000. This increase results from increases in service charges on
deposit accounts of $554,000, increases in other service charges, exchanges
and fees of $106,000, increases from gains on sales of securities of
$482,000, increases in gains on the sale of loans of $18,000 and increases in
other income of $263,000, partially offset by decreases in Investment and
Trust Services income of $299,000. The increase in service charges on deposit
accounts is due, in addition to the above, to reevaluating the assessment of
transaction account charges. The increase in other service charges results
from volume and pricing increases in credit card and merchant fees and ATM
fees. Other income grew from increased income from Charleston Insurance
Agency, Inc. of $122,000 and Charleston Title Agency, LLC of $29,000.
Investment and Trust Services income includes both corporate and personal
trust customers. Investment and Trust Services income is based primarily on
the market value of assets under administration. Investment and Trust
Services income declined from 2001 principally as a result of a decline in
the equity markets, which has reduced the value of assets under
administration. To a lesser extent, a shift in mix of administered assets
from equity investment products to money market funds, which generate lower
fees, also served to reduce Investment and Trust Services income. At December
31, 2002, LNB Bancorp, Inc. had total assets under administration of $278.4
million, compared to $335.1 million at
38 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 38
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONDENSED CONSOLIDATED AVERAGE BALANCE SHEETS
Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax
Equivalent (FTE) Basis
December 31, 2002
- ------------------------------------------------------------------------
(Dollars in Thousands) BALANCE INTEREST RATE
ASSETS:
Securities-tax equivalent . . . .$132,140 $ 6,559 4.96%
Securities-tax exempt . . . . . . 13,135 812 6.18
Federal funds sold and
short-term investments . . . . . 5,456 94 1.72
Commercial loans. . . . . . . . . 241,884 15,464 6.39
Commercial loans-tax exempt . . . -0- -0- 0.00
Mortgage loans. . . . . . . . . . 148,489 11,199 7.54
Consumer loans. . . . . . . . . . 106,073 7,651 7.21
---------------------------------------
TOTAL EARNING ASSETS . . . . . . 647,177 41,779 6.46%
---------------------------------------
Reserve for loan losses . . . . . (6,405)
Cash and due from banks . . . . . 22,861
Bank owned life insurance . . . . 6,154
Other assets. . . . . . . . . . . 21,689
---------------------------------------
TOTAL ASSETS . . . . . . . . . .$691,486
---------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Certificates of deposit . . . . .$194,461 $ 6,394 3.29%
Savings deposits. . . . . . . . . 95,893 800 .83
Interest-bearing demand . . . . . 175,101 2,704 1.54
Short-term borrowings . . . . . . 22,604 407 1.80
FHLB advances . . . . . . . . . . 50,609 1,790 3.54
TOTAL INTEREST- ---------------------------------------
BEARING LIABILITIES.. . . . . 538,668 12,095 2.25%
---------------------------------------
Noninterest-bearing deposits. . . 82,665
Other liabilities . . . . . . . . 5,773
Shareholders' equity. . . . . . . 64,380
TOTAL LIABILITIES AND ---------------------------------------
SHAREHOLDERS' EQUITY. . . . . .$691,486
---------------------------------------
NET INTEREST INCOME (FTE) . . . . $29,684 4.59%
Taxable equivalent adjustment (415) (.07)
---------------------------------------
NET INTEREST INCOME PER
FINANCIAL STATEMENTS . . . . . . $29,269
---------------------------------------
NET YIELD ON EARNING ASSETS . . . 4.52%
---------------------------------------
Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax
Equivalent (FTE) Basis
December 31, 2001
- ------------------------------------------------------------------------
(Dollars in Thousands) Balance Interest Rate
ASSETS:
Securities. . . . . . . . . . . .$121,179 $ 7,073 5.84%
Securities-tax exempt . . . . . . 9,691 498 5.14
Federal funds sold and
short-term investments . . . . . 3,811 146 3.83
Commercial loans. . . . . . . . . 202,642 16,487 8.14
Commercial loans-tax exempt . . . 65 6 9.23
Mortgage loans. . . . . . . . . . 156,724 12,298 7.85
Consumer loans. . . . . . . . . . 101,326 8,771 8.66
---------------------------------------
TOTAL EARNING ASSETS . . . . . . 595,438 45,280 7.60%
---------------------------------------
Reserve for loan losses . . . . . (5,437)
Cash and due from banks . . . . . 21,923
Bank owned life insurance . . . . 902
Other assets. . . . . . . . . . . 22,095
---------------------------------------
TOTAL ASSETS . . . . . . . . . .$635,011
---------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Certificates of deposit . . . . .$195,656 $ 9,800 5.01
Savings deposits. . . . . . . . . 93,272 1,260 1.35
Interest-bearing demand . . . . . 141,134 3,558 2.52
Short-term borrowings . . . . . . 26,263 852 3.24
FHLB advances . . . . . . . . . . 32,649 1,528 4.68
TOTAL INTEREST- ---------------------------------------
BEARING LIABILITIES.. . . . . 488,974 16,998 3.48%
---------------------------------------
Noninterest-bearing deposits. . . 81,097
Other liabilities . . . . . . . . 5,311
Shareholders' equity. . . . . . . 59,629
TOTAL LIABILITIES AND ---------------------------------------
SHAREHOLDERS' EQUITY. . . . . .$635,011
---------------------------------------
NET INTEREST INCOME (FTE) . . . . $28,282 4.75%
Taxable equivalent adjustment (179) (.03)
---------------------------------------
NET INTEREST INCOME PER
FINANCIAL STATEMENTS . . . . . . $28,103
---------------------------------------
NET YIELD ON EARNING ASSETS . . . 4.72%
---------------------------------------
Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax
Equivalent (FTE) Basis
December 31, 2000
- ------------------------------------------------------------------------
(Dollars in Thousands) Balance Interest Rate
ASSETS:
Securities. . . . . . . . . . . .$120,532 $ 7,166 5.95%
Securities-tax exempt . . . . . . 5,007 329 6.57
Federal funds sold and
short-term investments . . . . . 3,887 222 5.71
Commercial loans. . . . . . . . . 172,951 16,811 9.72
Commercial loans-tax exempt . . . 267 24 8.99
Mortgage loans. . . . . . . . . . 155,753 11,968 7.68
Consumer loans. . . . . . . . . . 108,622 10,231 9.42
---------------------------------------
TOTAL EARNING ASSETS . . . . . . 567,019 46,731 8.25%
---------------------------------------
Reserve for loan losses . . . . . (4,979)
Cash and due from banks . . . . . 21,589
Bank owned life insurance . . . . 686
Other assets. . . . . . . . . . . 23,190
---------------------------------------
TOTAL ASSETS . . . . . . . . . .$607,505
---------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Certificates of deposit . . . . .$205,877 $11,256 5.47%
Savings deposits. . . . . . . . . 101,276 1,999 1.97
Interest-bearing demand . . . . . 101,180 2,744 2.71
Short-term borrowings . . . . . . 30,756 1,696 5.51
FHLB advances . . . . . . . . . . 28,553 1,514 5.30
TOTAL INTEREST- ---------------------------------------
BEARING LIABILITIES.. . . . . 467,642 19,209 4.11%
---------------------------------------
Noninterest-bearing deposits. . . 81,221
Other liabilities . . . . . . . . 5,379
Shareholders' equity. . . . . . . 53,263
TOTAL LIABILITIES AND ---------------------------------------
SHAREHOLDERS' EQUITY. . . . . .$607,505
---------------------------------------
NET INTEREST INCOME (FTE) . . . . $27,542 4.86%
Taxable equivalent adjustment (106) (.02)
---------------------------------------
NET INTEREST INCOME PER
FINANCIAL STATEMENTS . . . . . . $27,436
---------------------------------------
NET YIELD ON EARNING ASSETS . . . 4.84%
---------------------------------------
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
Years ended December 31, 2002 and 2001
- -----------------------------------------------------------------------
(Dollars in Thousands) INCREASE (DECREASE) IN
INTEREST INCOME/EXPENSE
---------------------------------------------
VOLUME RATE TOTAL
--------------------------------------------
Securities-tax equivalent. $ 640 $(1,154) $ (514)
Securities-tax exempt. . . 177 137 314
Federal funds sold and
short-term investments. . 63 (115) (52)
Commercial loans . . . . . 3,193 (4,216) (1,023)
Commercial loans-tax exempt (6) -0- (6)
Mortgage loans . . . . . . (646) (454) (1,100)
Consumer loans . . . . . . 411 (1,531) (1,120)
---------------------------------------------
TOTAL INTEREST INCOME . . 3,832 (7,333) (3,501)
---------------------------------------------
Certificates of deposit. . (60) (3,346) (3,406)
Savings deposits . . . . . 35 (495) (460)
Interest-bearing demand. . 856 (1,710) (854)
Short-term borrowings. . . (119) (326) (445)
FHLB advances. . . . . . . 841 (579) 262
---------------------------------------------
TOTAL INTEREST EXPENSE. . 1,553 (6,456) (4,903)
---------------------------------------------
NET INTEREST INCOME. . . . $2,279 $ (877) $1,402
---------------------------------------------
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
Years ended December 31, 2001 and 2000
- -----------------------------------------------------------------------
(Dollars in Thousands) INCREASE (DECREASE) IN
INTEREST INCOME/EXPENSE
---------------------------------------------
VOLUME RATE TOTAL
---------------------------------------------
Securities-tax equivalent. $ 38 $ (131) $ (93)
Securities-tax exempt. . . 308 (139) 169
Federal funds sold and
short-term investments. . (5) (71) (76)
Commercial loans . . . . . 2,886 (3,210) (324)
Commercial loans-tax exempt (18) -0- (18)
Mortgage loans . . . . . . 75 256 331
Consumer loans . . . . . . (687) (773) (1,460)
---------------------------------------------
TOTAL INTEREST INCOME . . 2,597 (4,068) (1,471)
---------------------------------------------
Certificates of deposit. . (559) (897) (1,456)
Savings deposits . . . . . (158) (581) (739)
Interest-bearing demand. . 1,084 (270) 814
Short-term borrowings. . . (248) (596) (844)
FHLB advances. . . . . . . 217 (302) 14
---------------------------------------------
TOTAL INTEREST EXPENSE. . 336 (2,547) (2,211)
---------------------------------------------
NET INTEREST INCOME. . . . $2,261 $(1,521) $ 740
---------------------------------------------
LNB BANCORP, INC. 2002 ANNUAL REPORT 39
END PUBLISHED PAGE 39
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 2001, and $361.1 million at December 31, 2000. Assets under
administration included $212.2 million, $270.8 million, and $298.6 million of
assets under management at December 31, 2002, 2001, and 2000, respectively.
Noninterest income, excluding gains on the sale of securities, grew 9.9
percent in 2001 driven primarily by a 12.0 percent increase in service
charges on deposit accounts. Noninterest income in 2001 increased to
$9,448,000 compared to $8,370,000 in 2000 for an increase of $1,078,000. This
increase results from increases from Investment and Trust Services income of
$24,000, increases in service charges on deposit accounts of $379,000,
increases in other service charges, exchanges and fees of $252,000, and
increases in gains on the sale of securities of $250,000. The increase in
service charges on deposit accounts is due, in part, to reevaluating the
assessment of transaction account charges. The increase in other service
charges exchanges and fees is the result of pricing increases in credit card
and merchant fees and ATM fees.
NONINTEREST EXPENSES:
Noninterest expense was $24,283,000 in 2002, compared to $22,738,000 in 2001
and $21,276,000 in 2000.
Noninterest expenses increased 6.8% in 2002 compared to 2001 after a 6.9%
increase for 2001 compared to 2000. In general, the 2002 increase in
noninterest expenses resulted from increases in salaries and benefits,
furniture and equipment expenses, outside services, and marketing and public
relations offset in part by a reduction in Ohio Franchise tax and
amortization of goodwill.
Salaries and benefits increased in 2002 primarily to increased levels of
sales incentives, hospitalization, employee stock ownership expenses and
defined benefit pension costs. Further discussion of the corporation's
retirement plans are discussed in Notes 16, 18, and 19.
Included in other expenses, amortization expense associated with intangible
assets declined in 2002 due to the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
Upon adoption, the Corporation ceased rateably amortizing its goodwill into
the income statement. Further discussion of the adoption of goodwill and
detail of goodwill and other intangible assets is included in Note 4 to the
consolidated financial statements.
In general, the 2001 increase in noninterest expenses resulted from increases
in salaries and benefits, supplies and postage, card-related expenses,
outside services, Ohio Franchise tax, and loan collection expenses.
Salaries and benefits increased in 2001 primarily to increased levels of
salaries, hospitalization, deferred compensation expenses, 401(k) expenses
and defined benefit pension costs. Supplies and postage expenses increased
from increases in postage rates. Card-related expenses increased due to
increases in rates and volume. Loan collection expenses increased due to
increases in the number of loans under the collection process. The increase
in Ohio Franchise tax was due to the increase in the capital of the
Corporation.
The effective tax rate of the Corporation was 31.4%, 32.1%, and 34.3% in
2002, 2001, and 2000, respectively. The decrease in the effective tax rate in
2002 was primarily due to the increase in tax-exempt interest income from
municipal securities, equity and preferred stock and bank owned life
insurance investments. The decrease in the effective tax rate in 2001 was
primarily due to the increase in tax-exempt interest income from municipal
securities, and equity and preferred stock. A detailed analysis of income
taxes is presented in Note 12 in the consolidated financial statements.
The Corporation continuously monitors noninterest expenses for greater
efficiency and profitability. The entire staff is geared to minimizing
increases in expenses and to improve efficiency and productivity at all
levels. The Corporation's efficiency ratio was 59.42% in 2000, 60.96% in 2001
and 62.08% in 2002.
The Corporation's Consolidated Statements of Income reflect the effects of
inflation. During the past three years the general rate of inflation has been
relatively low. 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.
UNAUDITED QUARTERLY FINANCIAL DATA:
Selected unaudited quarterly financial data for 2002, 2001 and 2000 is
presented on page 35. There were intra-quarter fluctuations during the first,
second and fourth quarters of 2002 in noninterest income from increased
levels of gains on sales of securities compared with the third quarter of
2002. The decrease in the provision for loan losses in the fourth quarter of
2002 resulted from changes in the mix and levels of loans and current
economic conditions. There were significant intra-quarter fluctuations during
the fourth quarter of 2001 from increases in the provision for loan losses.
The increase in the provision for loan losses in the fourth quarter of 2001
resulted from anticipated loan charge-offs and to increase the reserve for
loan losses for changes in the mix and level of loans. The 2001 second and
third quarters noninterest income reflects gains on sales of securities.
There were significant intra-quarter fluctuations during the third and fourth
quarters of 2000 from increases in the provision for loan losses. The
increase in the provision for loan losses in the third and fourth quarters of
2000 resulted from anticipated charge-offs of indirect automobile lending.
LNB BANCORP, INC.
NET INTEREST MARGIN (Percent)
(A Net Interest Margin graph follows in printed version with net interest
margin on the y-axis and years 1998 through 2002 on the x-axis. The graph is
a vertical bar graph. The co-ordinates, by year, which are presented in the
table below are plotted on the previously described grid.)
TOTAL DEPOSITS (Millions of Dollars)
(A Total Deposits graph follows in printed version with total deposits on the
y-axis and years 1998 through 2002 on the x-axis. The graph is a vertical
bar graph. The co-ordinates, by year, which are presented in the table below
are plotted on the previously described grid.)
NONINTEREST INCOME (Millions of Dollars)
(A Noninterest Income graph follows in printed version with noninterest
income on the y-axis and years 1998 through 2002 on the x-axis. The graph is
a vertical bar graph. The co-ordinates, by year, which are presented in the
table below are plotted on the previously described grid.)
Net Interest Margin Total Deposits Noninterest Income
Year (Percent) (Millions of Dollars) (Millions of Dollars)
2002 4.52% $566.1 $10.6
2001 4.71% $518.3 $ 9.4
2000 4.84% $496.1 $ 8.4
1999 4.88% $456.8 $ 8.1
1998 5.17% $443.8 $ 7.6
40 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
PROVISION AND RESERVE FOR LOAN LOSSES:
The reserve for loan losses is maintained by Management at a level considered
adequate to cover probable losses. The amount of the provision for loan
losses charged to operating expenses is the amount necessary, in the opinion
of Management, to maintain the reserve for loan losses at an adequate level.
Management determines the adequacy of the reserve based on past experience,
changes in portfolio size and mix, relative quality of the loan portfolio and
the rate of loan growth, assessments of current and future economic
conditions, information about specific borrower situations, including their
financial position and collateral values, and other factors and estimates,
which are subject to change over time. While Management's periodic analysis
of the reserve for loan losses may dictate portions of the reserve be
allocated to specific problem loans, the entire amount is available for any
loan charge-offs that may occur.
The reserve for loan losses on December 31, 2002, was $6,653,000 or 1.31% of
outstanding loans, compared to $5,890,000, or 1.23% at year-end 2001. The
provision for loan losses charged to operating expense was and $2,200,000 in
2002 and 2001, respectively.
Net charge-offs for 2002 were $1,437,000, as compared to $1,560,000 for 2001,
while net charge-offs as a percentage of average loans outstanding for 2002
was .29%, compared to .33% for 2001.
Nonperforming assets at year-end 2002 were $1,885,000 compared to $1,439,000
at year-end 2001. Nonperforming assets consist of loans past due 90 days or
more and loans placed on non-accrual status and other foreclosed assets. As
of December 31, 2002, 8% of nonperforming loans were commercial loans, 10%
were personal loans and 82% were residential mortgage loans. This compares to
4% for commercial loans, 16% for personal loans and 80% for mortgage loans at
year-end 2001. Nonperforming loans did not have a material impact on interest
income during 2002, 2001 or 2000. The overall quality of the loan portfolio
remains good, as the ratio of nonperforming loans to total loans remains at
low levels of .37% at year-end 2002 and .30% at year-end 2001.
The Corporation's credit policies are reviewed and modified on an ongoing
basis in order to remain suitable for management of credit risks within the
loan portfolio as conditions change. At December 31, 2002, there were no
significant concentrations of credit risk in the loan portfolio. More
information about the loan portfolio is presented in Note 7 to the
consolidated financial statements.
RESERVE FOR LOAN LOSSES
December 31, (Dollars in Thousands) 2002 2001 2000
- ------------------------------------------------------------------------
Balance at beginning of year . . . . . .$ 5,890 $ 5,250 $ 4,667
Charge-offs:
Commercial . . . . . . . . . . . . . . (738) (490) (25)
Real estate. . . . . . . . . . . . . . (15) (26) (59)
Consumer . . . . . . . . . . . . . . . (1,030) (1,223) (1,249)
--------------------------------
TOTAL CHARGE-OFFS. . . . . . . . . . . (1,783) (1,739) (1,333)
Recoveries:
Commercial . . . . . . . . . . . . . . 163 64 14
Real estate. . . . . . . . . . . . . . 1 14 9
Consumer . . . . . . . . . . . . . . . 182 101 193
--------------------------------
TOTAL RECOVERIES . . . . . . . . . . . 346 179 216
--------------------------------
Net charge-offs. . . . . . . . . . . . . (1,437) (1,560) (1,117)
--------------------------------
Provision for loan losses. . . . . . . . 2,200 2,200 1,700
--------------------------------
Balance at end of year . . . . . . . . .$ 6,653 $ 5,890 $ 5,250
--------------------------------
Net charge-offs (recoveries) by portfolio type in the following table:
December 31, (Dollars in Thousands) 2002 2001 2000
- ------------------------------------------------------------------------
Commercial . . . . . . . . . . . . . .$ 575 $ 426 $ 11
Real estate. . . . . . . . . . . . . . 14 12 50
Consumer . . . . . . . . . . . . . . . 848 1,122 1,056
--------------------------------
TOTAL CHARGE-OFFS. . . . . . . . . . .$ 1,437 $ 1,560 $ 1,117
--------------------------------
December 31, (Dollars in Thousands) 1999 1998
- ------------------------------------------------------------
Balance at beginning of year . . . . . .$ 3,483 $ 4,168
Charge-offs:
Commercial . . . . . . . . . . . . . . (23) (3,060)
Real estate. . . . . . . . . . . . . . (359) (147)
Consumer . . . . . . . . . . . . . . . (668) (384)
--------------------
TOTAL CHARGE-OFFS. . . . . . . . . . . (1,050) (3,591)
Recoveries:
Commercial . . . . . . . . . . . . . . 23 29
Real estate. . . . . . . . . . . . . . 108 71
Consumer . . . . . . . . . . . . . . . 103 81
--------------------
TOTAL RECOVERIES . . . . . . . . . . . 234 181
--------------------
Net charge-offs. . . . . . . . . . . . . (816) (3,410)
--------------------
Provision for loan losses. . . . . . . . 2,200 2,725
--------------------
Balance at end of year . . . . . . . . .$ 4,667 $ 3,483
--------------------
Net charge-offs (recoveries) by portfolio type in the following table:
December 31, (Dollars in Thousands) 1999 1998
- ------------------------------------------------------------
Commercial . . . . . . . . . . . . . .$ -0- $ 3,031
Real estate. . . . . . . . . . . . . . 251 76
Consumer . . . . . . . . . . . . . . . 454 303
--------------------
TOTAL CHARGE-OFFS. . . . . . . . . . .$ 816 $ 3,410
--------------------
NONPERFORMING ASSETS
Nonperforming assets as of December 31 follows:
Dollars in Thousands 2002 2001 2000
- -----------------------------------------------------------------------
Mortgage loans . . . . . . . . . . . . .$ 1,554 $ 1,152 $ 1,652
Commercial loan. . . . . . . . . . . . . 142 51 378
Consumer loans . . . . . . . . . . . . . 167 113 189
--------------------------------
TOTAL NONPERFORMING LOANS. . . . . . . 1,863 1,316 2,219
Other foreclosed assets. . . . . . . . . 22 123 98
--------------------------------
TOTAL NONPERFORMING ASSETS . . . . . .$ 1,885 $ 1,439 $ 2,317
--------------------------------
Loans 90 days past due accruing
interest . . . . . . . . . . . . . . .$ 45 $ 149 $ 306
--------------------------------
Reserve for loan losses to
nonperforming loans. . . . . . . . . . 352.9% 409.3% 226.6%
--------------------------------
LNB BANCORP, INC. 2002 ANNUAL REPORT 41
END PUBLISHED PAGE 41
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION:
Consolidated assets surpassed the $700-million mark during the year climbing
8 percent to $715,399,000 at December 31, 2002. The asset growth was funded
by increases in deposits and capital. Earning assets increased seven percent
to $665,075,000 at year-end 2002, up $45,698,000 million from 2001's
$619,377,000. The ratio of earning assets to total assets decreased slightly
from 93.2% at December 31, 2001 to 92.97% at December 31, 2002. The loan to
deposit ratio has decreased from 92.1% at 2001 year-end to 90.01% at December
31, 2002. During 2002, Federal funds sold and other short-term investments
decreased by $264,000 to $3,224,000. Securities rose $13,894,000 to
$152,295,000, and gross loans grew by $32,062,000 to $509,550,000.
The maturity distribution of debt securities, which appears on page 21 of
this report, indicates that $74,993,000 or 52.9%, of debt securities mature
within the next five-year period with $10,586,000, or 7.5% maturing during
2003. At the end of 2002, the fair market value of the debt securities
portfolio was greater than the book value due to decreases in short-and mid-
term interest rates from the beginning of 2002 to its close. The fair value
of the debt securities portfolio was greater than its cost by $2,255,000 or
1.6% at the close of 2002. During 2002 the Corporation continued to diversify
its investment portfolio by reinvesting proceeds from bonds into high quality
mortgaged-backed securities. At the close of 2001, there were no significant
differences between the book and fair values of the debt securities
portfolio. The fair value of the debt securities portfolio exceeded its
amortized cost by $2,193,000 or 1.6%, at the close of 2001.
During 2002, loans eclipsed the $500-million mark for the first time, rising
seven percent to $509,550,000 at December 31, 2002 an increase of $32,062,000
from the year-ago level of $477,488,000. Led by an 18 percent increase in its
commercial loan portfolio and a 32 percent increase in home equity lines of
credit outstanding, the Corporation's loan growth was partially offset by
reductions in 2002 year-end consumer direct and indirect loans and decreases
in the mortgage loan portfolio due to refinancing.
Commercial loans demonstrated robust growth in 2002 despite the downturn in
both the national and local economies for the manufacturing industry and the
downturn in the regional economy for the steel industry in 2002. The
commercial loan portfolio climbed to $260.0 million at December 31, 2002, for
an increase of $40.5 million from one year ago. The number of new loans
booked in 2002 was 533, amounting to $106.5 million in new gross loans. This
loan growth resulted from Lorain National Bank's strong reputation and the
commitment of our commercial lenders to our markets.
During the year, mortgage lending continued to be affected by the drop in
mortgage interest rates reaching their lowest levels in 40 years, which
stimulated refinance activity and made the purchase of homes more affordable.
Mortgage loans ended 2002 at $141.4 million, down $16.8 million from the 2001
year-end. Due to mortgage refinancing, our mortgage loan portfolio balance
decreased from one year ago. The refinancing of mortgage portfolios resulted
in the origination of new fixed-rate mortgages, which were subsequently sold
on the secondary market. New mortgage loans originated in 2002 increased 4.6
percent to $43.7 million
Maturities of securities owned by the Corporation as of December 31, 2002
are presented below at amortized cost:
Maturing
----------------------------------------------------
Within From 1 to From 5 to After 10
(Dollars in Thousands) 1 year 5 years 10 years years Total
- ------------------------------------------------------------------------
SECURITIES AVAILABLE
FOR SALE:
U.S. Government
agencies and
corporations 9,999 61,505 34,727 14,368 120,599
States and political
subdivisions 131 564 3,021 6,799 10,515
-------------------------------------------------
Total securities
available for sale 10,130 62,069 37,748 21,167 131,114
-------------------------------------------------
SECURITIES HELD TO
MATURITY:
U.S. Government
agencies and
corporations -0- 2,002 5,333 -0- 7,335
States and political
subdivisions 456 335 -0- 2,522 3,313
-------------------------------------------------
Total securities
held to maturity 456 2,337 5,333 2,522 10,648
-------------------------------------------------
TOTAL SECURITIES $10,586 $64,406 $43,081 $23,689 $141,762
-------------------------------------------------
The weighted-average yield for each range of maturities of investment
securities is shown below as of December 31, 2002:
Maturing
-----------------------------------------------------
Within From 1 to From 5 to After 10
1 year 5 years 10 years years Total
- ------------------------------------------------------------------------
SECURITIES AVAILABLE
FOR SALE:
U.S. Government
agencies and
corporations 5.61 4.45 5.28 5.59 4.92
States and
political
subdivisions (1) 4.63 4.50 4.38 5.40 5.05
--------------------------------------------------
Total securities
available for sale 5.60 4.45 5.21 5.53 4.93
--------------------------------------------------
SECURITIES HELD TO
MATURITY:
U.S. Government
agencies and
corporations 0.00 6.22 6.21 0.00 6.21
States and
political
subdivisions (1) 4.39 5.50 0.00 5.17 5.10
--------------------------------------------------
Total securities
held to maturity 4.39 6.12 6.21 5.17 5.86
--------------------------------------------------
TOTAL SECURITIES 6.14% 5.77% 5.57% 5.09% 5.00%
(1) Yields on tax-exempt obligations are computed on a tax equivalent
basis based upon a 35% statutory Federal income tax rate.
42 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 42
MANAGEMENT'S DISCUSSION AND ANALYSIS
LOAN PORTFOLIO DISTRIBUTION:
December 31, (Dollars in Thousands) 2002 2001 2000
- -----------------------------------------------------------------------
Commercial . . . . . . . . . . . . . .$259,993 $219,511 $186,866
Mortgage . . . . . . . . . . . . . . . 141,405 158,221 157,575
Installment. . . . . . . . . . . . . . 54,219 57,886 69,821
Home equity lines. . . . . . . . . . . 48,816 37,008 31,662
Credit cards . . . . . . . . . . . . . 5,117 4,862 5,216
---------------------------------
TOTAL LOANS. . . . . . . . . . . . . . 509,550 477,488 451,140
Reserve for loan losses. . . . . . . . (6,653) (5,890) (5,250)
---------------------------------
NET LOANS. . . . . . . . . . . . . . .$502,897 $471,598 $445,890
---------------------------------
December 31, (Dollars in Thousands) 1999 1998
- -----------------------------------------------------------------------
Commercial . . . . . . . . . . . . . .$157,897 $124,875
Mortgage . . . . . . . . . . . . . . . 152,825 147,591
Installment. . . . . . . . . . . . . . 74,682 65,793
Home equity lines. . . . . . . . . . . 29,001 26,478
Credit cards . . . . . . . . . . . . . 5,111 5,069
---------------------
TOTAL LOANS. . . . . . . . . . . . . . 419,516 369,866
Reserve for loan losses. . . . . . . . (4,667) (3,483)
---------------------
NET LOANS. . . . . . . . . . . . . . .$414,849 $366,383
---------------------
for an increase of $1.9 million from last year. The number of new mortgage
loans originated in 2002 totaled 347 versus 340 during 2001. Lorain National
Bank was in the secondary mortgage market for the second full year, with
sales of mortgage loans totaling $17.8 million for 2002 compared with $6.1
million for 2001. Gains on sales of mortgages were $94,000 in 2002 and
$76,000 in 2001.
Total consumer loans increased to $108.2 million at December 31, 2002, up
$8.1 million or 8.6 percent from one year ago. The increase in consumer loans
was attributable to a strong home equity line performance with credit lines
increasing $17.2 million and outstanding credit line balances increasing
$11.8 million. The growth in home equity balances offset a decrease of $3.7
million in installment loans. The number of new direct and indirect
installment loans booked during 2002 was 2,039 totaling $26.6 million. Credit
card loans at December 31, 2002, increased 5.2 percent from one year ago to
$5.1 million.
Management is optimistic that 2003 will bring growth in our commercial and
mortgage portfolios from existing and new customers. Consumer loan growth is
expected to continue in 2003 with continued emphasis on home equity lending,
further balancing the mix between home equity and installment loans in the
consumer loan portfolio.
DEPOSITS:
Deposits grew to $566,127,000 at December 31, 2002, up from $518,267,000 from
one year ago or nine percent, for an increase of $47,860,000 during 2002
compared to an increase of $22,176,000 during 2001. Interest-bearing deposits
represented 85.7% and 83.1% of total deposits at December 31, 2002 and 2001,
respectively. Noninterest-bearing deposits decreased by $6,609,000 while
interest-bearing deposits increased by $54,469,000 during 2002. Growth in
deposits from savings, certificates of deposit, Market Access, interest-
bearing checking and money market accounts were offset by declines in demand
deposits. Savings deposits increased by $5.1million or six percent to $97.1
million at December 31, 2002. Market Access deposits rose $10.2 million or 12
percent to $95.2 million at December 31, 2002. Certificates of deposit
climbed $27.4 million or 15 percent to $204.6 million at 2002 year-end.
Interest-bearing checking deposits rose $10.9 million or 18 percent to $70.9
million at December 31, 2002. Money market deposits rose $.9 million or five
percent from one year ago. The significant growth in Market Access and
certificates of deposits resulted from several deposit promotion campaigns
during 2002, while growth in the interest-bearing checking accounts was
attributable to the positive effects of the Corporation's introduction of
high-performance checking and totally free checking accounts during the year
2002.
Deposits grew to $518,267,000 at December 31, 2001, up from $496,091,000 from
December 31, 2000 or four percent, for an increase of $22,176,000 during
2001. Interest-bearing deposits represented 83.1% and 83.3% of total deposits
at December 31, 2001 and 2000, respectively.
Noninterest-bearing deposits increased by $4,395,000 while interest-bearing
deposits increased by $17,781,000 during 2001. Increases in balances of
Market Access accounts, CheckInvest, and public fund certificates of deposit
accounted for the deposit increase. Market Access accounts soared by $30.3
million or 55.2 percent to $85.1 million at December 31, 2001. The
significant growth in Market Access deposits results from a deposit promotion
campaign during 2001. In both 2002 and 2001, as long-term deposits matured
and renewed and new funds were deposited, these funds were primarily placed
in short-term deposits.
OTHER BORROWINGS:
Securities sold under repurchase agreements and other short-term borrowings
include repurchase agreements and Federal funds purchased. These balances
decreased by $2,304,000 during 2002, following a decrease of $1,221,000 in
2001. 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. Federal Home Loan Bank advances decreased by $420,000
during 2002 to $48,925,000 at December 31, 2002. Securities sold under
repurchase agreements and other short-term borrowings and Federal Home Loan
Bank advances decreased as a result of the growth in the deposit base during
2002.
LNB BANCORP, INC. 2002 ANNUAL REPORT 43
END PUBLISHED PAGE 43
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE
SHEET ARRANGEMENTS:
The following table presents, as of December 31, 2002, the Corporation's
significant fixed and determinable contractual obligations by payment date.
The payment amounts represent those amounts contractually due to the
recipient and do not include any unamortized premiums or discounts, hedge
basis adjustments, or other similar carrying value adjustments. Further
discussion of the nature of each obligation is included in the referenced
note to the consolidated financial statements.
A schedule of significant commitments at December 31, 2002 follows:
DECEMBER 31, 2002
- -----------------------------------------------------------
Commitments to extend credit. . . . . . . . .$ 75,408,000
Home equity line. . . . . . . . . . . . . . . 38,502,000
Credit card lines . . . . . . . . . . . . . . 23,169,000
Standby letters of credit . . . . . . . . . . 1,864,000
Commitments to sell mortgage loans. . . . . . 1,742,000
--------------
Total Commitments . . . . . . . . . . . . . .$140,685,000
--------------
Further discussion of these commitments is included in Note 20 to the
consolidated financial statements. In addition, the Corporation has
commitments under a defined benefit pension plan as described in Note 16
to the Consolidated Financial Statements.
One Two Four
Note Year and Three and Five
In Thousands Ref. or less Years Years
- -------------------------------------------------------------------------
Deposits without a stated maturity . 9 $361,495 $ -0- $ -0-
Certificates of deposit. . . . . . . 9 130,471 58,629 15,499
Short-term borrowings. . . . . . . .10 26,866 -0- -0-
FHLB advances. . . . . . . . . . . .11 30,095 17,830 1,000
Operating leases . . . . . . . . . . 8 271 231 107
-------------------------------------
Over
Five
In Thousands Years Total
- ----------------------------------------------------------
Deposits without a stated maturity .$ -0- $361,495
Certificates of deposit. . . . . . . 33 204,632
Short-term borrowings. . . . . . . . -0- 26,866
FHLB advances. . . . . . . . . . . . -0- 48,295
Operating leases . . . . . . . . . . 17 626
----------------------
CAPITAL RESOURCES:
Shareholder's equity reached an all-time high of $66,613,000 at December 31,
2002 compared to $62,138,000 at December 31, 2001, an increase of $4,475,000,
or seven percent. This increase was primarily attributable to net income of
$9,165,000, less dividends declared to shareholders of $4,468,000, less the
change in unrealized gain on securities available for sale in the amount of
$203,000. The book value per share of common stock climbed $1.03 to $15.14 at
year-end 2002 compared with $14.12 per share at year-end 2001, a seven
percent increase. Capital ratios remained strong during 2002, with average
equity to average assets of 9.3% compared with 9.4% from one year ago. The
return on average shareholders equity during 2002 decreased to 14.24%, from
14.36% and 15.83% during 2001 and 2000, respectively. As discussed in Note 13
to the Consolidated Financial Statements, the Corporation's primary source of
funds for the payment of dividends is its Bank subsidiary.
Under regulations issued by the Federal Reserve Board and the Office of the
Comptroller of the Currency, bank holding companies and banks are required to
maintain certain minimum capital ratios in order to be considered "well
capitalized." These guidelines require a minimum total risk-based capital
ratio of 10%, a Tier 1 capital ratio of 6% and leverage ratio of 5%. All of
the Corporation's assets, which include various risk-weighted percentages of
assets on the balance sheet, as well as off-balance sheet exposures of unused
commitments and letters of credit, are expressed as a percentage of risk-
adjusted assets and compared to its capital. Tier 1 capital consists of
shareholders' equity, exclusive of net unrealized gain (loss) on securities
available for sale.
Total risk-based capital consists of shareholders' equity, exclusive of net
gain (loss) on securities available for sale, plus the allowable portion of
the reserve for loan losses and subordinated debt. The allowance included in
total risk-based capital cannot exceed 1.25% of risk-weighted assets. As of
December 31, 2002, LNB Bancorp, Inc. had a total risk-based capital ratio of
12.89%, with a Tier 1 capital ratio of 11.64% compared to 13.17% and 11.95%,
respectively, at December 31, 2001. Both of these risk-based capital ratios
are well above minimum regulatory requirements. In addition to risk-based
capital, a leverage ratio test must also be met. This ratio evaluates capital
adequacy on the basis of Tier 1 capital-to-total average assets (unadjusted
for risk). On December 31, 2002, LNB Bancorp, Inc.'s leverage ratio was
9.04%, which substantially exceeds the Corporation's minimum regulatory
requirement. For additional information on the Corporation and Bank's capital
ratios, refer to Note 14, Regulatory Capital on page 27.
The Corporation continually evaluates acquisition and expansion opportunities
within markets and in areas that might provide profitable new markets.
Corporate management believes that its current capital resources are
sufficient to support any foreseeable acquisition activity. The Corporation
also retains a portion of the net income it earns to accommodate current
operational and regulatory capital requirements and to fund future growth
opportunities. A part of future growth depends upon capital expenditure
programs. Capital expenditures for purchases of land, branch construction,
furniture and fixtures and computer equipment of approximately $2,200,000 are
projected for 2003.
LNB Bancorp, Inc. and Lorain National Bank
TOTAL SHAREHOLDERS' EQUITY (Millions of Dollars*)
(A Total Shareholders' Equity graph follows in printed version with
total equity on the y-axis and years 1998 through 2002 on the x-axis.
The graph is a vertical bar graph. The co-ordinates, by year, which are
presented in the table below are plotted on the previously described
grid.)
AVERAGE EQUITY TO AVERAGE ASSETS (Percent)
(An Average Equity to Average Assets graph follows in printed version
with average equity on the y-axis and years 1998 through 2002 on the
x-axis. The graph is a vertical bar graph. The co-ordinates, by year,
which are presented in the table below are plotted on the previously
described grid.)
BOOK VALUE PER SHARE (Dollars*)
(A Book Value Per Share graph follows in printed version with book value
on the y-axis and years 1998 through 2002 on the x-axis. The graph is a
vertical bar graph. The co-ordinates, by year, which are presented in
the table below are plotted on the previously described grid.)
Total Shareholders' Average Equity to Book Value
Equity Average Assets Per Share
Year (Millions of Dollars*) (Percent) (Dollars*)
2002 $66.6 9.37% $15.14
2001 $62.1 9.39% $14.12
2000 $56.5 8.77% $12.90
1999 $51.1 8.67% $11.66
1998 $48.7 9.27% $11.13
*Adjusted for stock dividends and splits
44 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 44
MANAGEMENT'S DISCUSSION AND ANALYSIS
GAP ANALYSIS (DOLLARS IN THOUSANDS)
EXPECTED MATURITY/REPRICING DATE
2003 2004 2005 2006
- ------------------------------------------------------------------------
Commercial loans . . . . . . . . .$255,804 $ 3,839 $ 130 $ 155
Weighted average yield . . . . . . 5.95 6.11% 6.48% 6.93%
Mortgage loans(2). . . . . . . . . 52,596 20,555 9,010 24,573
Weighted average yield . . . . . . 6.83% 6.84% 6.25% 6.86%
Consumer loans . . . . . . . . . . 18,192 11,829 8,810 6,375
Weighted average yield . . . . . . 8.42% 8.25% 7.98% 7.67%
Home equity lines of credit. . . . 48,826 -0- -0- -0-
Weighted average yield . . . . . . 4.44% 0.00% 0.00% 0.00%
Credit Card loans. . . . . . . . . 1,824 1,824 1,469 -0-
Weighted average yield . . . . . . 10.36% 10.36% 10.36% 0.00%
Securities and other(3). . . . . . 100,350 29,516 9,284 106
Weighted average yield . . . . . . 4.06% 5.12% 3.97% 4.16%
--------------------------------------
Total interest-earning assets . . 477,592 67,563 28,703 31,209
--------------------------------------
Certificates of deposit. . . . . . 130,741 50,351 8,153 11,427
Weighted average yield . . . . . . 2.29% 3.61% 4.25% 5.15%
Savings deposits . . . . . . . . . 38,851 38,851 19,426 -0-
Weighted average yield . . . . . . 0.51% 0.51% 0.51% 0.00%
Interest-bearing demand. . . . . . 73,395 73,395 36,698 -0-
Weighted average yield . . . . . . 1.05% 1.05% 1.05% 0.00%
Short-term borrowings. . . . . . . 28,866 -0- -0- -0-
Weighted average yield . . . . . . 1.36% 0.00% 0.00% 0.00%
Federal Home Loan Bank advances. . 30,095 6,000 11,830 1,000
Weighted average yield . . . . . . 3.07% 3.62% 3.79% 4.92%
--------------------------------------
Total interest-bearing liabilities 299,948 168,597 76,107 12,427
--------------------------------------
Interest-earning assets less
Interest-bearing liabilities. . . 177,644 (101,034) (47,404) 18,782
--------------------------------------
Cumulative interest-rate
sensitive gap . . . . . . . . . .$177,644 $ 76,610 $ 29,206 $ 47,988
--------------------------------------
Cumulative interest-rate gap as a
percentage of total earning assets at
December 31, 2002 26.77%
Cumulative interest-rate gap as a
percentage of total earning assets at
December 31, 2001 16.35%
Cumulative interest-rate gap as a
percentage of total earning assets at
December 31, 2000 5.38%
--------------------------------------
GAP ANALYSIS (DOLLARS IN THOUSANDS)
EXPECTED MATURITY/REPRICING DATE FAIR
2007 THEREAFTER TOTAL VALUE(1)
- ------------------------------------------------------------------------
Commercial loans . . . . . . . . .$ 65 $ -0- $259,993 $269,599
Weighted average yield . . . . . . 6.40% 0.00% 5.95%
Mortgage loans(2). . . . . . . . . 28,049 6,622 141,405 138,865
Weighted average yield . . . . . . 6.73% 6.40% 6.76%
Consumer loans . . . . . . . . . . 3,531 5,472 54,209 55,450
Weighted average yield . . . . . . 7.62% 5.93% 7.92%
Home equity lines of credit. . . . -0- -0- 48,826 48,826
Weighted average yield . . . . . . 0.00% 0.00% 4.44%
Credit Card loans. . . . . . . . . -0- -0- 5,117 5,117
Weighted average yield . . . . . . 0.00% 0.00% 10.36%
Securities and other(3). . . . . . 2,825 11,841 153,922 155,775
Weighted average yield . . . . . . 4.64% 4.56% 4.31%
--------------------------------------
Total interest-earning assets . . 34,470 23,935 663,472 673,632
--------------------------------------
Certificates of deposit. . . . . . 3,960 -0- 204,632 207,676
Weighted average yield . . . . . . 4.54% 0.00% 2.90%
Savings deposits . . . . . . . . . -0- -0- 97,128 97,128
Weighted average yield . . . . . . 0.00% 0.00% 0.51%
Interest-bearing demand. . . . . . -0- -0- 183,488 183,488
Weighted average yield . . . . . . 0.00% 0.00% 1.05%
Short-term borrowings. . . . . . . -0- -0- 26,866 26,866
Weighted average yield . . . . . . 0.00% 0.00% 1.36%
Federal Home Loan Bank advances. . -0- -0- 48,925 49,536
Weighted average yield . . . . . . 0.00% 0.00% 3.35%
--------------------------------------
Total interest-bearing liabilities 3,960 -0- 561,039 564,694
--------------------------------------
Interest-earning assets less
Interest-bearing liabilities. . . 30,510 23,935
----------------------------
Cumulative interest-
rate sensitive gap. . . . . . . .$78,498 $102,433
----------------------------
(1)Fair value of loans are gross of deferred fees and costs and
allowance for loan losses.
(2)Mortgage loans include mortgages in which the loan is fixed for the
first three or five years of the loan and its interest rate is
adjustable thereafter.
(3)Securities available for sale are shown at amortized cost.
MARKET RISK MANAGEMENT
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market indices such as interest rates, foreign exchange
rates and equity prices. The Corporation's principal market risk exposure is
interest rate risk, with no material impact on earnings from changes in
foreign exchange rates or equity prices. Interest rate risk is the exposure
to changes in market interest rates. Interest rate sensitivity is the
relationship between market interest rates and net interest income due to the
repricing characteristics of assets and liabilities. The Corporation monitors
the interest rate sensitivity of its on - and - off balance sheet positions
by examining its near-term sensitivity and its longer term gap position.
The mission of the Asset/Liability Management Committee is to effectively
monitor and manage the exposure to interest rate risk, liquidity risk, and
repricing risk and thereby provide the Bank with a stable net interest
margin. Asset/liability management is the measurement and analysis of the
Bank's exposure to changes in the interest rate environment. The Corporation
manages this risk on a continuing basis through the use of a number of
objectives and strategies as an ongoing part of its strategic financial plan.
The Asset/Liability Management Committee, which includes executive and senior
management representatives, meets monthly. Objectives include monitoring and
methods of managing the rate sensitivity and repricing characteristics of the
balance sheet components consistent with maintaining acceptable levels of net
interest income. The asset and liability management program defined by the
Board of Directors is designed to minimize the impact of significant changes
in interest rates on net interest income. Strategies include attempting to
market variable-rate loans, growth in the consumer loan portfolio which tend
to have shorter terms to maturity, match fixed rate commercial loans with
Federal Home Loan Bank advances, and utilizing deposit promotions in an
effort to extend the term to maturity of its liabilities.
LNB BANCORP, INC. 2002 ANNUAL REPORT 45
END PUBLISHED PAGE 45
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management may, at times, place greater emphasis on maximizing net interest
margin rather than merely concentrating on interest rate risk depending on
the relationship between short-and long-term interest rates, market
conditions and consumer preference. Management believes that increased net
income resulting from a moderate contrast between the maturity of its assets
and liabilities can provide high enough returns to justify the increased risk
exposure during periods of stable interest rates. The effectiveness of
Management's administration of the Asset/Liability function is demonstrated
by the Corporation's consistently high net yield on earning assets. Although
the Corporation's net yield on earning assets decreased 20 basis points, the
net yield on earning assets remains at the top third percentile of its peers
at 4.52% and 4.72% for the years ended December 31, 2002 and 2001,
respectively. The Asset/Liability Management Committee has established limits
on the amount of its interest rate risk exposure, however, there can be no
assurance that Management's efforts to limit interest rate risk will be
successful.
One measure of exposure to interest rate risk is interest rate sensitivity
gap analysis. The Corporation uses interest rate sensitivity gap analysis to
monitor the relationship between the maturity and repricing of its interest-
earning assets and interest-bearing liabilities, while maintaining an
acceptable interest rate spread. Interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest-rate-sensitive assets exceeds
the amount of the interest-rate-sensitive liabilities, and is considered
negative when the amount of interest-rate-sensitive liabilities exceeds the
amount of interest-rate-sensitive assets. Generally, during a period of
rising interest rates, with all factors held constant, a negative gap would
adversely affect net interest income, while a positive gap would result in an
increase in net interest income. Conversely, during a period of falling
interest rates, with all factors held constant, a negative gap would result
in an increase in net interest income, while a positive gap would negatively
affect net interest income. Management's goal is to maintain a reasonable
balance between exposure to interest rate fluctuations and earnings.
The Corporation's one-year gap was 26.77% at December 31, 2002, 16.35% at
December 31, 2001 and 5.38% at December 31, 2000. The increase in the
Corporation's one year gap at December 31, 2002 compared to December 31,
2001, was due to an increase in assets maturing or otherwise repricing in one
year or less totaling $82,283,000 (due to increases in loans and in
securities repricing during that period) offset by an increase in liabilities
maturing or otherwise repricing in one year or less totaling $5,919,000 (due
primarily to decreases in certificates of deposit and short-term borrowings
more than offset by increases in savings deposits, interest-bearing demand
deposits and Federal Home Loan Bank advances during that period). The
increase in the Corporation's one year gap at December 31, 2001 compared to
December 31, 2000, was due to an increase in assets maturing or otherwise
repricing in one year or less totaling $68,950,000 (due to increases in loans
and in securities repricing during that period) offset by a decrease in
liabilities maturing or otherwise repricing in one year or less totaling
$1,044,000 (due primarily to decreases in certificates of deposit and savings
deposits partially offset by increases in interest-bearing demand deposits
and short-term borrowings during that period). Corporate management does not
anticipate any significant changes in the Corporation's market risk or
interest rate risk profiles in 2003. The table on page 45 sets forth the
repricing dates of the Corporation's interest-earning assets and interest-
bearing liabilities at December 31, 2002 and the interest rate sensitivity
"gap" percentages at the dates indicated.
LIQUIDITY MANAGEMENT:
Liquidity measures a corporation's ability to generate cash or otherwise
obtain funds at reasonable prices to fund commitments to borrowers as well as
the demands of depositors and debt holders. Principal internal sources of
liquidity for the Corporation and the Bank are cash and cash equivalents,
Federal funds sold, and the maturity structures of securities held to
maturity 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, 2002, cash and cash equivalents equaled $26,832,000 or 3.8%
of total assets. The change in cash and cash equivalents is shown in the
Consolidated Statement of Cash Flows on page 17 and arises from operating,
investing, and financing activities.
The adjustments to reconcile 2002 net income to net cash provided by
operating activities primarily consists of depreciation and amortization of
$1,562,000, amortization of intangible assets of $112,000, accretion of
deferred loan fees and costs of $277,000 and a provision for loan losses of
$2,200,000. These items represent expenses included in net income which do
not represent an expenditure or receipt of cash.
The cash flows from investing activities relate primarily to securities,
loans and purchases of capital assets. Net cash used in investing activities
was $60,563,000. Cash used in investing activities resulted from the
purchases of securities of $122,593,000 offset by proceeds from sales and
maturities of securities of $107,279,000. Cash used in investing activities
included net loan increases of $33,222,000, purchases of capital assets of
$1,790,000 and purchases of Bank owned life insurance of $10,413,000.
Net cash provided by financing activities was $40,672,000. Cash provided by
financing activities included increases in deposits of $47,860,000, decreases
in securities sold under repurchase agreements and other short-term
borrowings of $2,304,000, proceeds from Federal Home Loan Bank advances of
$43,830,000 less cash paid on Federal Home Loan Bank advances of $44,250,000
and proceeds from stock options exercised of $3,000. Cash used by financing
activities includes dividends paid of $4,445,000. These cash flows resulted
in a $4,673,000 decrease in cash and cash equivalents from December 31, 2001
to December 31, 2002.
The Corporation can obtain additional liquidity from off-balance sheet
sources that include the purchase of Federal funds from correspondent banks
and borrowing from the Federal Reserve Bank's discount window. At December
31, 2002 the Bank had pledged as collateral $42,721,000 in second mortgages
with the Federal Reserve Bank of Cleveland to secure advances and discounts
up to $36,313,000. At December 31, 2002, the Bank had available credit at the
Federal Reserve Bank discount window of $36,313,000. At year-end, the Bank
had approved Federal funds facilities of $24,000,000 at three correspondent
banks. At December 31, 2002, the Bank borrowed $10,000,000 under these
arrangements. Additionally, the Bank has a $40,000,000 cash management
advance line of credit with the Federal Home Loan Bank of Cincinnati. At
December 31, 2002 the Bank had borrowed $5,500,000 from the Federal Home Loan
Bank under this line of credit. The internal and external sources of funds
for liquidity, in the opinion of Management, satisfy the liquidity needs of
the Corporation and the Bank.
46 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 46
MANAGEMENT'S DISCUSSION AND ANALYSIS
IMPACTS OF ACCOUNTING AND REGULATORY PRONOUNCEMENTS:
Corporate management is not aware of any proposed regulations or current
recommendations by the Financial Accounting Standards Board or by regulatory
authorities, which, if they were implemented, would have a material effect on
the liquidity, capital resources, or operations of the Corporation. However,
the potential impact of certain accounting and regulatory pronouncements
warrant further discussion.
FINANCIAL ACCOUNTING STANDARDS BOARD:
The Financial Accounting Standards Board (FASB) has issued:
SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets"
On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which addresses the accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion 17,
"Intangible Assets." Notes 1 and 4 provide further detail on the accounting
for goodwill and intangible assets under the standard and the impact of the
adoption on the financial statements. The Standard's adoption had no impact
on liquidity.
SFAS No. 143, "Accounting for Asset Retirement Obligations"
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires an entity to record a
liability for an obligation associated with the retirement of an asset at the
time the liability is incurred by capitalizing the cost as part of the
carrying value of the related asset and depreciating it over the remaining
useful life of that asset. SFAS No. 143 is effective for the Corporation
beginning January 1, 2003, and its adoption is not expected to have a
material impact on our financial position, results of operations, or
liquidity.
SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses how and when to
measure impairment on long-lived assets and how to account for long-lived
assets that an entity plans to dispose of either through sale, abandonment,
exchange, or distribution to owners. The Statement's provisions supersede
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed" of which addressed asset impairment, and
certain provisions of APB Opinion 30 related to reporting the effects of the
disposal of a business segment and requires expected future operating losses
from discontinued operations to be recorded in the period in which the losses
are incurred rather than the measurement date. Under SFAS No. 144, more
dispositions may qualify for discontinued operations treatment in the income
statement. The provisions of SFAS No. 144 became effective for the
Corporation on January 1, 2002, and did not have a material impact on our
financial position, results of operations or liquidity.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections"
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" which updates, clarifies, and simplifies certain existing
accounting pronouncements beginning at various dates in 2002 and 2003. The
Statement rescinds SFAS No. 4 and SFAS No. 64, which required net gains or
losses from the extinguishment of debt to be classified as an extraordinary
item in the income statement. These gains and losses will now be classified
as extraordinary only if they meet the criteria for such classification as
outlined in APB Opinion 30, which allows for extraordinary treatment if the
item is material and both unusual and infrequent in nature. The Statement
also rescinds SFAS No. 44 related to the accounting for intangible assets for
motor carriers and amends SFAS No. 13 to require certain lease modifications
that have economic effects similar to sale-leaseback transactions to be
accounted for as such. SFAS No. 145 is effective for the Corporation
beginning January 1, 2003, and its adoption is not expected to have a
material impact on our financial position, results of operations, or
liquidity.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities"
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires a cost associated
with an exit or disposal activity, such as the sale or termination of a line
of business, the closure of business activities in a particular location, or
a change in management structure, to be recorded as a liability at fair value
when it becomes probable the cost will be incurred and no future economic
benefit will be gained by the company for such cost. Applicable costs include
employee termination benefits, contract termination costs, and costs to
consolidate facilities or relocate employees. SFAS No. 146 supersedes EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity," which in some cases required
certain costs to be recognized before a liability was actually incurred. SFAS
No. 146 is effective for the Corporation beginning January 1, 2003, and its
adoption is not expected to have a material impact on our financial position,
results of operations, or liquidity.
SFAS No. 147, "Acquisitions of Certain Financial Institutions -
an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9"
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and
FASB Interpretation No. 9." FASB No. 72 and 144 and FASB Interpretation No. 9
provided guidance on the application of the purchase method in acquisitions
of financial institutions. SFAS No. 147 removes acquisitions from the scope
of both FASB No. 72 and FASB Interpretation No. 9 and requires that those
transactions be accounted for in accordance with SFAS No. 141 and 142. SFAS
No. 147 also modifies SFAS No. 144 to include in its scope long-term
customer-relationship intangible assets and thus subject those intangible
assets to the same undiscounted cash flow recoverability test and impairment
loss recognition and measurement provisions required for other long-lived
assets.
SFAS No. 147 states that a branch acquisition that meets the definition of a
business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. SFAS No. 147 became effective upon
issuance and requires companies to cease amortization of unidentified
intangible assets associated with certain branch acquisitions and reclassify
these assets to goodwill. The Corporation adopted SFAS No. 147 on October 1,
2002 retroactive to January 1, 2002 and ceased amortizing goodwill associated
with a branch acquisition. The affect of the adoption of SFAS No. 147 is
discussed in Note 4 of the consolidated financial statements.
LNB BANCORP, INC. 2002 ANNUAL REPORT 47
END PUBLISHED PAGE 47
MANAGEMENT'S DISCUSSION AND ANALYSIS
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure"
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides guidance on
how to transition from the intrinsic value method of accounting for stock-
based employee compensation under APB No. 25 to SFAS No. 123's fair value
method of accounting, if a company so elects. In accordance with the
transitional guidance of SFAS No. 148, the fair value method of accounting
for stock options should be applied prospectively to awards granted
subsequent to January 1, 2003. As permitted, options granted prior to January
1, 2003, will continue to be accounted for under APB Opinion 25, and the pro
forma impact of accounting for these options at fair value will continue to
be disclosed in the notes to the consolidated financial statements. SFAS No.
148 is effective fiscal years ending after December 15, 2002. The Corporation
adopted SFAS No. 148 for the year ended December 31, 2002 and its adoption
did not have a material impact on our financial position, results of
operations, or liquidity.
FASB Interpretation No. 45 (FIN No. 45), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others"
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize
a liability for the fair value of an obligation assumed under a guarantee.
FIN No. 45 clarifies the requirements of SFAS No. 5, "Accounting/or
Contingencies," relating to guarantees. In general, FIN No. 45 applies to
contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, liability, or equity security of the
guaranteed party. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this interpretation, including,
among others, guarantees relating to employee compensation, residual value
guarantees under capital lease arrangements, commercial letters of credit,
loan commitments, subordinated interests in an SPE, and guarantees of a
company's own future performance. Other guarantees are subject to the
disclosure requirements of FIN No. 45 but not to the recognition provisions.
The disclosure requirements of FIN No. 45 are effective for the Corporation
as of December 31, 2002. The recognition requirements of FIN No. 45 are to be
applied prospectively to guarantees issued or modified after December 31,
2002. Significant guarantees that have been entered into by the Corporation
are disclosed in Note 20 of the consolidated financial statements. The
Corporation does not expect the requirements of FIN No. 45 to have a material
impact on financial position, results of operations, or liquidity.
FASB Interpretation No. 46 (FIN No. 46), "Consolidation of Variable Interest
Entities"
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities." The objective of this
Interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in a
company's consolidated financial statements. A company that holds variable
interests in an entity will need to consolidate the entity if the company's
interest in the VIE is such that the company will absorb a majority of the
VIE's expected losses and/or receive a majority of the entity's expected
residual returns, if they occur. The provisions of this Interpretation became
effective upon issuance. As of December 31, 2002, the Corporation had no
variable interests entities. The Corporation is currently assessing the
impact, if any, the Interpretation will have on financial position, results
of operations, or liquidity, as it applies to other areas within the
Corporation.
All other applicable Statements of Financial Accounting Standards that have
been issued and have effective dates impacting 2002 and prior years financial
statements were 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 that 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:
Sarbanes-Oxley Act of 2002
On July 30, 2002, the Senate and the House of Representatives of the United
States (Congress) enacted the Sarbanes-Oxley Act of 2002, a law that
addresses, among other issues, corporate governance, auditing and accounting,
executive compensation, and enhanced and timely disclosure of corporate
information. The Nasdaq National Stock Exchange has also proposed corporate
governance rules that were presented to the Securities and Exchange
Commission for review and approval. The proposed changes are intended to
allow stockholders to more easily and efficiently monitor the performance of
companies and directors.
Effective August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley,
LNB Bancorp, Inc.'s chief executive officer and chief financial officer are
each required to certify that LNB Bancorp, Inc.'s Quarterly and Annual
Reports do not contain any untrue statement of a material fact. The rules
have several requirements, including having these officers certify that: they
are responsible for establishing, maintaining and regularly evaluating the
effectiveness of LNB Bancorp, Inc.'s internal controls; they have made
certain disclosures to LNB Bancorp, Inc.'s auditors and the audit committee
of the Board of Directors about LNB Bancorp, Inc.'s internal controls; and
they have included information in LNB Bancorp, Inc.'s Quarterly and Annual
Reports about their evaluation and whether there have been significant
changes in LNB Bancorp, Inc.'s internal controls or in other factors that
could significantly affect internal controls subsequent to the evaluation.
Gramm-Leach-Bliley Act
The enactment of the Gramm-Leach-Bliley Act of 1999 (the GLB Act) represented
a pivotal point in the history of the financial services industry. The GLB
Act removed large parts of a regulatory framework that had its origins in the
Depression Era of the l930s. Effective March 11, 2000, new opportunities
became available for banks, other depository institutions, insurance
companies, and securities firms to enter into combinations that permit a
single financial services organization to offer customers a more complete
array of financial products and services. The GLB Act provides a new
regulatory framework for regulation through the financial holding company,
which has as its umbrella regulator the Federal Reserve Board. Functional
regulation of the financial holding company's separately regulated
subsidiaries is conducted by their primary functional regulator. The GLB Act
requires "satisfactory" or higher Community Reinvestment Act compliance for
insured depository institutions and their financial holding companies in
order for them to engage in new financial activities. The GLB Act provides a
federal right to privacy of non-public personal information of individual
customers. LNB Bancorp, Inc. and its subsidiaries are also subject to certain
state laws that deal with the use and distribution of non-public personal
information.
48 LNB BANCORP, INC. 2002 ANNUAL REPORT
END PUBLISHED PAGE 48
ANNUAL EARNINGS, DIVIDENDS AND BOOK VALUE PER SHARE PERFORMANCE
This graph depicts the earnings history of LNB Bancorp, Inc. from 1993
through 2002. The Corporation's management team is proud of its record of
continuously increasing annual earnings over this ten year period.
10 YEAR ANNUAL EARNINGS 1993 THROUGH 2002
(10 Year Earnings History graph follows in printed version with years
1993 through 2002 on the y-axis and earnings on the x-axis in
$2,500,000.00 increments ranging from $0 to $10,000,000.00. The graph
is a horizontal bar graph. The co-ordinates, by year, which are
presented in the table below are plotted on the previously described
grid along with an accompanying legend for identification purposes.)
For shareholder information, this graph reflects a 10 year chronological
record of dividend performance following a hypothetical purchase of 100
shares of LNB Bancorp, Inc., stock without further reinvestment.
Over the 10 year period, our hypothetical shareholder would have benefited
from the cumulative cash dividends declared on the stock in the amount of
$1,350.00.
CUMULATIVE CASH TOTAL CASH DIVIDENDS DECLARED
DIVIDENDS DECLARED 1993 - 2002: $1,350.00
(Cumulative Cash Dividends Declared graph follows in printed version
with years 1993 through 2002 on the y-axis and Dividends Declared on the
x-axis in $300.00 increments ranging from $0 to $1,200.00. The graph is
horizontal bar graph. The co-ordinates, by year, which are presented in
the table below are plotted on the previously described grid along with
an accompanying legend for identification purposes.)
This graph depicts the book value per share of LNB Bancorp, Inc. from 1993
through 2002. Executive and senior management has worked diligently to cause
the rapid increase in the book value per share over the past ten years.
BOOK VALUE PER SHARE 1993 through 2002
(Book Value Per Share graph follows in printed version with years 1993
through 2002 on the y-axis and book values on the x-axis in $4.00
increments ranging from $0.00 to $16.00. The graph is a horizontal bar
graph. The co-ordinates, by year, which are presented in the table
below are plotted on the previously described grid along with an
accompanying legend for identification purposes.)
The data points used to plot the three (3) graphs previously described
follows:
10 YEAR ANNUAL CUMULATIVE CASH BOOK VALUE
YEAR EARNINGS DIVIDENDS DECLARED PER SHARE
2002 $9,165,000.00 $1,350.00 $15.14
2001 $8,565,000.00 $1,165.00 $14.12
2000 $8,430,000.00 $ 980.00 $12.90
1999 $7,641,000.00 $ 799.00 $11.66
1998 $6,818,000.00 $ 637.00 $11.13
1997 $6,480,000.00 $ 484.00 $10.28
1996 $5,852,000.00 $ 359.00 $ 9.87
1995 $5,003,000.00 $ 249.00 $ 9.15
1994 $4,432,000.00 $ 157.00 $ 8.49
1993 $4,029,000.00 $ 74.00 $ 7.96
END INSIDE BACK COVER
Half page insert front side
Two postage paid postcards
Left side card reads as follows:
Lorain National Bank
Attn: Mitchell J. Fallis
457 Broadway
Lorain, Ohio 44052-9986
Right side card reads as follows:
Lorain National Bank
Attn: Gary C. Smith
457 Broadway
Lorain, Ohio 44052-9986
Half page insert back side
Left side card reads as follows:
2002 ANNUAL REPORT SURVEY
Thank you for reading the 2002 LNB Bancorp, Inc. Annual Report. To help
us improve our ability to serve you, please complete the following
survey.
The following grading scale should be used:
5-Excellent;4-Good;3-Fair;2-Poor;1-Very Poor
- ------------------------------------------------------------------------
1. Please rate the sections of the Annual Report you found most helpful.
When evaluating, consider the overall quality, communication
effectiveness and readability of the section.
_____ Corporate Profile
_____ Corporate and Investor Information
_____ Stock and Dividend Information
_____ Earnings and Dividend History
_____ LNBB Direct Purchase Plan
_____ Financial Highlights
_____ Message to Shareholders
_____ Financial Statements and Notes
_____ Glossary of Key Terms
_____ Management's Discussion and Analysis
_____ LNB Investment & Trust Services
_____ LNB Investment Center
2. Please rate the Annual Report on the following characteristics:
_____ Appearance/design
_____ Organization/ease of locating information
_____ Ease of Reading
_____ Use of Charts/graphs
_____ Use of Photographs
_____ Showing how LNB Bancorp, Inc. is positioned for the future
_____ Helping you understand LNB Bancorp, Inc.
3. Please give a rating for your overall impression of the Annual
Report._____
4. What information would you like to see in future Annual Reports?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
5. Please provide name & address
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Thank you for answering these questions.
Right side card reads as follows:
LNBB DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
Yes, I am interested in learning more about LNBB Direct. Please send me a
Plan prospectus at the following address:
Name___________________________________________________
Street Address_________________________________________
City,State & Zip_______________________________________
Phone________
COVER DESCRIPTION
Outside back cover
White background
(Logo)LNB
Bancorp, Inc.
Blue lettering
Mail: LNB Bancorp, Inc. 457 Broadway . Lorain, Ohio 44052-1739
E-Mail: INVESTORRELATIONS@4LNB.com . Internet: WWW.4LNB.COM
Telephone: (440) 244-6000 . Toll Free: (800) 860-1007
Telefax: (440) 244-4815
END OF PUBLISHED LNB BANCORP, INC. 2002 ANNUAL REPORT