LNB Bancorp, Inc.
Exhibit to Form 11 - K
(for the fiscal year ended December 31, 2003)
S - K Reference Number (99)
Annual report of The Lorain National Bank 401(k) Plan for
the plan year ended December 31, 2003
LNB Bancorp, Inc.
Exhibit to Form 11 - K
(for the fiscal year ended December 31, 2003)
S - K Reference Number (99.1)
Annual report on Form 11-K of The Lorain National Bank 401(k)
Plan (registration number 333-53210)
for the plan year ended December 31, 2003.
(COVER EMBOSSED WITH LOGO)
KPMG LLP
One Cleveland Center
1375 East Ninth Street, Suite 2600
Cleveland, OH 44114-1796
The Lorain National Bank
401(k) Plan
Financial Statements and Schedules
December 31, 2003 and 2002
(With Report of Independent Registered Public Accounting Firm Thereon)
The Lorain National Bank 401(k) Plan
Table of Contents
Page
Report of Independent Registered Public 1
Accounting Firm
Statements of Assets Available for Plan Benefits,
- December 31, 2003 and 2002 2
Statement of Changes in Assets Available for
Plan Benefits, - Years ended
December 31, 2003 3
Notes to Financial Statements 4
Schedules
1 Schedule H, line 4i - Schedule of Assets
(Held at End of Year) - December 31, 2003 9
2 Schedule H, line 4j - Schedule of Reportable
Transactions - Year ended December 31, 2003 10
All other schedules required to be filed in accordance with the Employee
Retirement Income Security Act of 1974 are not applicable and,
accordingly, have been omitted.
(LETTERHEAD)
(LOGO)
KPMG LLP
One Cleveland Center
1375 East Ninth Street, Suite 2600
Cleveland, OH 44114-1796
Report of Independent Registered Public Accounting Firm
The Plan Administrator
The Lorain National Bank
Sponsor of The Lorain National Bank
401(k) Plan:
We have audited the accompanying statements of assets available for plan
benefits of The Lorain National Bank 401(k) Plan (Plan) as of December 31, 2003
and 2002, and the related statement of changes in assets
available for plan benefits for the year ended December 31, 2003. These
financial statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).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 financial statements referred to above present fairly, in
all material respects, the assets available for plan benefits of the Plan as of
December 31, 2003 and 2002, and the changes in those assets for the year ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule H, line 4i-
Schedule of Assets (Held at End of Year) as of December 31, 2003 and Schedule H,
line 4j - Schedule of Reportable Transactions for the year ended December 31,
2003, are presented for the purpose of additional analysis and are not a
required part of the basic financial statements but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. These supplemental schedules are the responsibility of
the Plan's management. The supplemental schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ KPMG LLP
Cleveland, Ohio
June 11, 2004
(LOGO)
Member Firm of
KPMG International
THE LORAIN NATIONAL BANK 401(K) PLAN
Statements of Assets Available for Plan Benefits
December 31, 2003 and 2002
Assets 2003 2002
---------- ----------
Assets:
Short-term cash investments $ 291,538 229,633
Investments, at fair value (notes 3 and 6)
Common stock - LNB Bancorp, Inc. 3,943,317 3,869,193
Mutual Funds 1,160,202 593,754
Participant loans, at cost 6,726 -0-
Dividends and interest receivable 37,992 38,741
Contribution receivable 184,435 19,497
Receivable from employer (note 8) -- 11,871
---------- ----------
Total assets available for plan benefits $ 5,624,210 4,762,689
========== ==========
See accompanying notes to financial statements.
2
THE LORAIN NATIONAL BANK 401(K) PLAN
Statement of Changes in Assets Available for
Plan Benefits
Year ended December 31, 2003
2003
---------
Additions:
Investment income:
Dividends $ 151,852
Interest 7,676
Net appreciation in fair
value of investment (note 3) 635,962
---------
Total investment income 795,490
---------
Contributions:
Employer 388,002
Employer - other (note 8) -
Participants 522,505
Participant rollovers 22,376
---------
Total contributions 932,883
---------
Total additions 1,728,373
Deductions:
Distributions to participants (866,852)
---------
Increase in assets available for plan benefits 861,521
Assets available for plan benefits:
Beginning of year 4,762,689
---------
End of year $ 5,624,210
=========
See accompanying notes to financial statements.
3
THE LORAIN NATIONAL BANK 401(k) PLAN
Notes to Financial Statements
December 31, 2003 and 2002
(1) Description of the Plan
The following is a general description of The Lorain National Bank 401(k)
Plan (Plan). Participants should refer to the Plan agreement for a more
complete description of the Plan's provisions.
(a) General
The Plan is a defined contribution plan sponsored by The Lorain
National Bank (Bank), a wholly owned subsidiary of LNB Bancorp, Inc.,
covering substantially all employees of the Bank and related Bancorp
affiliates for which the Bank acts as common paymaster. An employee
is eligible to participate in the Plan after the attainment of age 19
and completion of 90 days of service, as defined in the Plan. The
Plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974
(ERISA).
Under the terms of the Plan, the Investment and Trust Services
Division of the Bank acts as trustee for the Plan and, as such,
manages a trust fund which includes all of the Plan's assets. The
Plan stipulates that employer matching contributions will be invested
in LNB Bancorp, Inc. common stock and short-term cash investments.
The board of directors of Lorain National Bank, the Corporation's
wholly owned subsidiary, authorized the Bank as employer and trustee
to execute an Adoption Agreement for a 401(k) Plan and Trust (the
Plan), effective January 1, 2001. The Plan amended and restated the
Lorain National Bank Stock Purchase Plan. The Plan is established in
accordance with the requirements under Section 401(a) and Section
401(k) of the Internal Revenue Code. The Plan was submitted to the
IRS for determination by the IRS that the Plan is qualified under
Section 401(a) of the Internal Revenue Code and that its trust
qualified under Section 501(a) of the Internal Revenue Code. LNB
Bancorp, Inc. believes that the Plan complies with the requirements
under Section 401(a) and Section 401(k) of the Internal Revenue Code.
The Plan offers the investment choices of Money Market Mutual Funds,
U. S. Treasury Index Funds, Equity Mutual Funds, International Mutual
Funds and LNB Bancorp, Inc. common stock.
4
THE LORAIN NATIONAL BANK 401(k) PLAN
Notes to Financial Statements
December 31, 2003 and 2002
(b) Contributions
Employee contributions are limited to the maximum dollar limits set
by the IRS which is $12,000 for 2003, plus a $2,000 catch-up
contribution for employees over the age of 50. Based on number of
hours worked or paid, certain participants in the plan are eligible
to receive Company contributions. The amount of Company contributions
was $388,002 for 2003. The Company makes a contribution to the
employee's plan account bi weekly.
Employee contributions are invested according to participant
investment elections for pretax contributions. If an employee has not
made investment elections, the employee contributions will be
invested in the Federated Money Market fund. Employer contributions
are not participant-directed and are invested in LNB Bancorp, Inc.
common stock.
5
THE LORAIN NATIONAL BANK 401(k) PLAN
Notes to Financial Statements
December 31, 2003 and 2002
To receive a Company contribution, a participant must be employed on
the last day of the Plan year. A participant's account also receives
the Company contribution for the year in which they retire, become
disabled, or die.
(c) Participant Accounts
Each participant's account is credited with the participant's
Contribution and the Company's contribution, and an allocation of
Plan earnings. The benefit to which a participant is entitled is the
benefit that can be provided from the participant's vested account.
(d) Forfeitures
At December 31, 2003, forfeited nonvested had a zero balance.
Forfeitures are to be used to reduce future employer contributions.
(e) Investments
The fair value of investments and changes therein are determined
through the use of current quoted market values. Purchases and sales
are recorded on a trade-date basis. Interest income is recorded on
the accrual method of accounting.
(f) Vesting
Participants are immediately vested in their voluntary contribution
plus any earnings accrued thereon. Beginning January 1, 2002,
participants immediately vest in the Company's contribution.
(g) Payment of Benefits
Upon termination of service, the vested amount of the Company's
contributions and earnings thereon is paid at the election of the
participant in cash. Participants can elect to receive their
voluntary contributions and earnings thereon in a single lump-sum
cash payment or in substantially equal installments over a period of
not more than the assumed life expectancy of the participant and the
participant's beneficiary.
THE LORAIN NATIONAL BANK 401(k) PLAN
Notes to Financial Statements
December 31, 2003 and 2002
(h) Withdrawals
Aside from normal retirement distributions, pretax savings may be
withdrawn only upon attainment of age 65. In accordance with plan
provisions, pretax savings may also be withdrawn for reasons of
extreme financial hardship as defined under federal law. An employee
can make only one withdrawal in any twelve-month period, relative to
the Stock Purchase Plan provision, of pre-2000 after tax dollars and
Company match.
6
THE LORAIN NATIONAL BANK 401(k) PLAN
Notes to Financial Statements
December 31, 2003 and 2002
(i) Participant Loans
Participants may borrow from their fund accounts a minimum of $1,000
up to a maximum equal to the lesser of $50,000 or 50% of their
account balance, whichever is less. The loans are secured by the
balance in the participant's account and are charged a rate of
interest commensurate with local prevailing rates as determined by
the plan administrator. Principal and interest is paid ratably
through monthly payroll deductions.
(j) Plan Expenses
The administrative expenses of the Plan are paid by the Bank.
(k) Plan Administrator
The plan administrator is the President and Chief Executive Officer
of the Bank.
(2) Significant Accounting Policies
(a) Basis of Presentation
The financial statements of the Plan are prepared using the accrual
basis of accounting.
(b) Investment Valuation and Income Recognition
The Plan's investments are stated at fair value. Quoted market prices
are used to value investments. Purchases and sales of securities are
recorded on a trade-date basis. Dividends are recorded on the
ex-dividend date. Interest income is recorded on the accrual method
of accounting.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires Plan management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, and changes
therein, and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
7
(3) Investments
The following table presents the fair value of investments at December 31,
2003 and 2002. Items that represented 5% or more of the Plan's assets are
separately identified.
2003 2002
-------------- ---------------
Common stock - LNB Bancorp, Inc.:
194,252 and 142,512 common shares in
2003 and 2002 respectively $ 3,943,317 3,869,193
Mutual funds 1,160,202 593,754
============== ================
8
THE LORAIN NATIONAL BANK 401(K) PLAN
Notes to Financial Statements
December 31, 2003 and 2002
During the years ended December 31, 2003, the Plan's investments (including
investments bought, sold, and held during the year) appreciated
(depreciated) in value as follows:
2003
--------
Common stock - LNB Bancorp, Inc. $ 439,570
Mutual funds 196,392
------------
$ 635,962
==========
(4) Plan Termination
The Company has voluntarily agreed to make contributions to the Plan.
Although the Company has not expressed any intent to terminate the Plan
agreement, it may do so at any time. In the event of such termination, each
participant will receive 100% of the amounts contributed to the Plan and
earnings thereon, and the vested amount of the Company's matching
contribution.
(5) Federal Income Taxes
The Internal Revenue Service (IRS) issued its latest determination letter
on January 27, 2003, which stated that the Plan and underlying Trust, as
designed, qualify under the applicable provisions of the Internal Revenue
Code (Code). In the opinion of the plan administrator, the Plan and its
underlying Trust have operated within the terms of the Plan and remain
qualified under the applicable provisions of the Internal Revenue Code.
9
(6) Party-in-interest Transactions
The following is a summary of transactions in common stock of LNB
Bancorp, Inc., 100% owner of the Bank, during the year ended
December 31, 2003: Number
of Shares Fair Value
--------- ----------
Balance at December 31, 2002 142,512 $ 3,869,193
Stock split 68,079 -
Purchases 18,466 420,257
Distributions (24,357) (555,348)
Sales (10,448) (230,355)
Net appreciation - 439,570
------- -----------
Balance at December 31, 2003 194,252 $ 3,943,317
======= ===========
10
THE LORAIN NATIONAL BANK 401(K) PLAN
Notes to Financial Statements
December 31, 2003 and 2002
(7) Assets Available for Distribution to Participants
2003 2002
------------ ------------
Assets payable to terminated participants $ 737,725 27,101
Assets available for continuing participants 4,886,485 4,735,588
------------ ------------
$ 5,624,210 4,762,689
============ ============
(8) Prohibited Transaction
During portions of 2000 and 2001 the Plan and its predecessor, The Lorain
National Bank Stock Purchase, purchased shares of LNB Bancorp, Inc. common stock
(LNB Stock), consistently near the close of the trading day, through open market
trades using registered brokerage firms. Since it is possible that a purchase of
LNB Stock at the close of the day could cause the price of LNB Stock to be
slightly higher than it might otherwise have been if the trading day had ended
without a sale, LNB has elected to treat such end of day purchases as prohibited
transactions.
Pursuant to its decision to treat such end of day purchases by the Plans as
prohibited transactions, LNB has elected to voluntarily correct such
transactions. The impact of this potential overpayment of the purchase price was
calculated in accordance with Department of Labor guidelines and amounted to
$10,176, plus interest of $1,695. The total correction amount, including accrued
interest was paid by LNB to the Plan on June 13, 2003, and is included as a
receivable from employer in the statement of assets available for plan benefits
and as an employer contribution in the statement of changes in assets available
for plan benefits at December 31, 2002.
11
Schedule 1
THE LORAIN NATIONAL BANK 401(k) PLAN
EIN: 34-0869480
PLAN NUMBER: 003
Schedule H, line 4i - Schedule of Assets (Held at End of Year)
December 31, 2003
Column A Column B Column C Column D Column E
- -------- ------------------ ------------------------- --------- --------
Description of investment
Identity of issue, including maturity date,
borrower, lessor rate of interest, collateral, Current
or similar party par or maturity value Cost value
- -------- ----------------- -------------------------- --------- --------
* LNB Bancorp, Inc. 194,252 shares of $1,810,818 3,943,317
LNB Bancorp, Inc. ========== ==========
common stock
* Lorain National Bank Treasury Trust Fund $ 291,538 291,538
========== ==========
Mutual funds
Janus Fund Janus Advisor
International Fund $
Northern Northern Institutional
Institutional Funds Funds Balanced Fund ** 94,640
Northern Northern Institutional
Institutional Focused Growth Portfolio ** 97,701
Portfolio
Northern Northern Institutional
Institutional Funds Funds US Treasury Index A ** 171,325
Vanguard Fund Vanguard Explorer Fund ** 165,396
Vanguard Fund International Value Fund ** 70,183
Vanguard Fund Vanguard 500 Index Fund 229,376
Dodge & Cox Dodge & Cox Stock Fund ** 331,581
Participant Participant Loans at rates
Loans Of interest ranging from
4.5% to 9.5% and various
maturity dates through
2008 *** 6,726
---------- ---------
Total $ 5,401,783
* Party in interest
** Historical cost information is no longer required on the Schedule of Assets
Held for Investments at End of Year for participant-directed Investments.
*** Cost of participant loans is $0 as indicated by the instruction to
Form 5500 See accompanying independent auditors' report.
12
Schedule 2
THE LORAIN NATIONAL BANK 401(k) PLAN
EIN: 34-0869480
PLAN NUMBER: 003
Schedule H, line 4j - Schedule of Reportable Transactions Year
ended December 31, 2003
Series transactions, when aggregated, involving an amount in excess of 5% of the
current value of Plan assets:
Column A Column B Column C Column D Column E
- -------------------- ----------------- ---------- -------- ---------
Total Total
dollar dollar
Identity of Description value of value Lease
party involved of assets purchases of sales rental
- -------------------- ----------------- ---------- --------- ---------
* LNB Bancorp, Inc. LNB Bancorp, Inc.
common stock;
52 purchases $ 362,880 - -
26 sales - 146,760 -
* Lorain National Bank Treasury Trust Fund;
139 purchases $1,129,337 - -
121 sales $ - 1,067,432 -
=========== ========== ==========
Schedule of Reportable Transactions Continued
Column A Column B Column F Column G Column H
- -------------------- ----------------- ------------ --------- ---------
Current
Expenses value of
incurred asset on
Identity of Description with Cost of transaction
party involved of assets transaction asset date
- -------------------- ----------------- ------------ -------- -----------
* LNB Bancorp, Inc. LNB Bancorp, Inc.
common stock;
52 purchases - 362,880 362,880
26 sales - 146,760 230,355
* Lorain National Bank Treasury Trust Fund;
139 purchases - 1,129,337 1,129,337
121 sales - 1,067,432 1,067,432
============ ========= =========
13
Schedule 2
THE LORAIN NATIONAL BANK 401(k) PLAN
EIN: 34-0869480
PLAN NUMBER: 003
Schedule H, line 4j - Schedule of Reportable Transactions
Continued Year ended December 31, 2003
Column A Column B Column I
- -------------------- ----------------- ----------
Identity of Description Net gain
party involved of assets or (loss)
- -------------------- ----------------- ----------
* LNB Bancorp, Inc. LNB Bancorp, Inc.
common stock;
52 purchases -
26 sales 83,595
* Lorain National Bank Treasury Trust Fund;
139 purchases -
121 sales -
==========
* Party in interest
See accompanying report of independent registered public accounting firm.
14