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THE LORAIN NATIONAL BANK 401(K) PLAN
Financial Statements and Schedules
December 31, 2004 and 2003
(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 Accounting Firm 1
Statements of Assets Available for Plan Benefits -
December 31, 2004 and 2003 2
Statement of Changes in Assets Available for Plan
Benefits - Year ended December 31, 2004 3
Notes to Financial Statements 4
SCHEDULES
1 Schedule H, line 4i - Schedule of Assets (Held
at End of Year) - December 31, 2004 8
2 Schedule H, line 4j - Schedule of Reportable
Transactions - Year ended December 31, 2004 9
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.
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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, 2004
and 2003, and the related statement of changes in assets available for plan
benefits for the year ended December 31, 2004. 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
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, 2004 and 2003, and the changes in assets available for plan
benefits for the year ended December 31, 2004 in conformity with U.S. generally
accepted accounting principles.
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, 2004, and Schedule
H, line 4j - Schedule of Reportable Transactions for the year ended December 31,
2004 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.
KPMG LLP
Cleveland, Ohio
June 24, 2005
THE LORAIN NATIONAL BANK 401(K) PLAN
Statements of Assets Available for Plan Benefits
December 31, 2004 and 2003
2004 2003
---------- ----------
Assets:
Cash $ 34,826 $ --
Short-term cash investments 374,553 291,538
Investments, at fair value (notes 3 and 6):
Common stock - LNB Bancorp, Inc. 3,309,126 3,943,317
Mutual funds 1,513,387 1,160,202
Participant loans, at cost 16,242 6,726
Dividends and interest receivable 26,263 37,992
Contribution receivable -- 184,435
---------- ----------
Total assets available for plan benefits $5,274,397 $5,624,210
========== ==========
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, 2004
Additions:
Investment income:
Dividends $ 134,612
Interest 6,906
Net appreciation in fair value of investments (note 3) 89,371
-----------
Total investment income 230,889
-----------
Contributions:
Employer 251,174
Participants 550,937
Participant rollovers 39,891
-----------
Total contributions 842,002
-----------
Total additions 1,072,891
Deductions:
Distributions to participants (1,422,704)
-----------
Decrease in assets available for plan benefits (349,813)
Assets available for plan benefits:
Beginning of year 5,624,210
-----------
End of year $ 5,274,397
===========
See accompanying notes to financial statements.
3
THE LORAIN NATIONAL BANK 401(K) PLAN
Notes to Financial Statements
December 31, 2004 and 2003
(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.
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 the 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.
(B) CONTRIBUTIONS
The Plan allows participants to make pretax contributions up to the
maximum dollar limits set by the IRS which is $13,000 for 2004, plus
a $3,000 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 were $251,174 and $388,002, for 2004 and 2003,
respectively. The Company makes a contribution to the employee's
plan account biweekly.
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.
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.
4 (Continued)
THE LORAIN NATIONAL BANK 401(K) PLAN
Notes to Financial Statements
December 31, 2004 and 2003
(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, 2004, forfeited nonvested accounts had a zero
balance. Forfeitures are be used to reduce future employer
contributions.
(E) VESTING
Participants are immediately vested in their voluntary contribution
plus any earnings accrued thereon. Participants are immediately
vested in the employer's match for the current plan year provided
they are employed on the last day of the plan year.
(F) 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.
(G) WITHDRAWALS
Aside from normal retirement distributions, in-service withdrawals
of pretax savings may be withdrawn only upon attainment of age 59
1/2. 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.
(H) 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 biweekly payroll deductions. The amount of participant loans
outstanding were $16,242 and $6,726, respectively for 2004 and 2003.
(I) PLAN EXPENSES
The administrative expenses of the Plan are paid by the Bank.
5 (Continued)
THE LORAIN NATIONAL BANK 401(K) PLAN
Notes to Financial Statements
December 31, 2004 and 2003
(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.
(3) INVESTMENTS
The following table presents the fair value of investments at December 31,
2004 and 2003. Items that represented 5% or more of the Plan's assets are
separately identified.
2004 2003
---------- ----------
Common stock - LNB Bancorp, Inc.:
164,469 and 194,252 common shares in 2004 and 2003,
respectively $3,309,126 $3,943,317
Mutual funds
Vanguard 500 Index Fund 280,250 229,376
Dodge & Cox Stock Fund 473,980 331,581
During the year ended December 31, 2004, the Plan's investments (including
investments bought, sold, and held during the year) appreciated (depreciated) in
value as follows:
Common stock - LNB Bancorp, Inc. $ (55,511)
Mutual funds 144,882
---------
$ 89,371
=========
(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.
6 (Continued)
THE LORAIN NATIONAL BANK 401(K) PLAN
Notes to Financial Statements
December 31, 2004 and 2003
(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.
(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, 2004:
NUMBER
OF SHARES FAIR VALUE
----------- -----------
Balance at December 31, 2003 $ 194,252 $ 3,943,317
Purchases 28,316 578,424
Distributions (58,099) (1,157,104)
Net depreciation -- (55,511)
----------- -----------
Balance at December 31, 2004 $ 164,469 $ 3,309,126
=========== ===========
(7) ASSETS AVAILABLE FOR DISTRIBUTION TO PARTICIPANTS
2004 2003
---------- ----------
Assets payable to terminated participants $ 106,252 $ 737,725
Assets available for continuing participants 5,168,145 4,886,485
---------- ----------
$5,274,397 $5,624,210
========== ==========
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, 2004
(A) (B) (C) (D) (E)
IDENTITY OF ISSUE, DESCRIPTION OF INVESTMENT INCLUDING
BORROWER, LESSOR MATURITY DATE, RATE OF INTEREST, CURRENT
OR SIMILAR PARTY COLLATERAL, PAR OR MATURITY VALUE COST VALUE
- --- ------------------ ------------------------------------ ---------- ----------
* LNB Bancorp, Inc. 164,469 shares of LNB Bancorp, Inc.
common stock $1,835,207 $3,309,126
Federated Investor
Services Federated Money Market Trust 365,372 365,372
* Lorain National Bank Treasury Trust Fund 9,181 9,181
MUTUAL FUNDS
Northern Institutional Northern Institutional Funds Balanced
Funds Fund X 137,466
Northern Institutional Northern Institutional Focused Growth
Portfolio Portfolio X 120,689
Northern Institutional Northern Institutional Funds
Funds US Treasury Index A X 166,948
Vanguard Fund Vanguard Explorer Fund X 225,850
Vanguard Fund Vanguard International Value Fund X 108,204
Vanguard Fund Vanguard 500 Index Fund X 280,250
Dodge & Cox Dodge & Cox Stock Fund X 473,980
----------
Total $5,197,066
==========
* Party in interest
X Historical cost information is no longer required on the Schedule of
Assets Held for Investment at End of Year for participant-directed
investments.
See accompanying report of independent registered public accounting firm.
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, 2004
Series transactions, when aggregated, involving an amount in excess of 5% of the
current value of Plan assets:
(A) (B) (C) (D) (E) (F) (G) (H) (I)
CURRENT
TOTAL TOTAL EXPENSE VALUE OF
DOLLAR DOLLAR INCURRED ASSET ON
IDENTITY OF PARTY DESCRIPTION OF VALUE OF VALUE OF LEASE WITH COST OF TRANSACTION NET GAIN
INVOLVED ASSETS PURCHASES SALES RENTAL TRANSACTION ASSET DATE OR (LOSS)
- ------------------- ----------------- ---------- ---------- ------ ----------- ----------- ----------- ---------
* LNB Bancorp, Inc. LNB Bancorp, Inc.
common stock;
56 purchases $ 578,424 $ -- $ -- $ -- $ 578,424 $ 578,424 $ --
18 sales -- 416,379 -- -- 276,135 416,379 140,244
Federated Investor Federated Money
Services Market Trust;
128 purchases 1,509,354 -- -- -- 1,509,354 1,509,354 --
124 sales -- 1,435,895 -- -- 1,435,895 1,435,895 --
* Party in interest
See accompanying report of independent registered public accounting firm.
9