##### Table of Contents



Form 10-Q SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934  OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934  Commission file number: 0-13203 LNB Bancorp, Inc.
  Ohio
(State of Incorporation)
    
    34-1406303
(I.R.S. Employer Identification No.)
 457 Broadway, Lorain, Ohio
(Address of principal executive offices)
    
    44052 - 1769
(Zip Code)
 (440) 244-6000
Registrants telephone number, including area code Not Applicable
(Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such requirements for the past 90 days. YES þ NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2) YES þ NO o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. Outstanding at April 30, 2005: 6,641,173 shares
Class of Common Stock: $1.00 par value




---



LNB Bancorp, Inc.
Table of Contents  
 Part I Financial InformationItem 1. Financial Statements.Consolidated Balance Sheets (unaudited) March 31, 2005 and December 31, 2004Consolidated Statements of Income (unaudited)Three months ended March 31, 2005 and March 31, 2004Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, 2005 and March 31, 2004Consolidated Statements of Changes in Shareholders Equity (unaudited) Three months ended March 31, 2005 and March 31, 2004Notes to the Consolidated Financial Statements (unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.Item 3. Quantitative and Qualitative Disclosures about Market Risk.Item 4. Controls and Procedures.Part II Other InformationItem 1. Legal Proceedings.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Item 3. Defaults Upon Senior Securities.Item 4. Submission of Matters to a Vote of Security Holders.Item 5. Other Information.Item 6. Exhibits.SignaturesEX-31(I)(A) 302 CEO CertificationEX-31(I)(B) 302 CFO CertificationEX-32(A) 906 CEO CertificationEX-32(B) 906 CFO Certification
  2




---



##### Table of Contents



Consolidated Balance Sheets (unaudited) (Dollars in thousands except share amounts)
    
    March 31, 2005
    
    
    December 31, 2004AssetsCash and due from banks
    
    $
    25,495
    
    
    $
    23,123Federal funds sold and short-term investments
    
    
    3,715
    
    
    
    3,695Securities:Available for sale, at fair value
    
    
    138,243
    
    
    
    145,588Federal Home Loan Bank and Federal Reserve stock
    
    
    4,075
    
    
    
    4,033Total securities
    
    
    142,318
    
    
    
    149,621Loans:Loans held for sale
    
    
    5,166
    
    
    
    3,067Portfolio loans
    
    
    574,100
    
    
    
    572,157Allowance for loan losses
    
    
    (7,545
    )
    
    
    (7,386
    )Net loans
    
    
    571,721
    
    
    
    567,838Bank premises and equipment, net
    
    
    11,386
    
    
    
    11,493Other real estate owned
    
    
    476
    
    
    
    420Bank owned life insurance
    
    
    13,527
    
    
    
    13,335Intangible assets
    
    
    3,757
    
    
    
    3,801Accrued interest receivable
    
    
    2,770
    
    
    
    2,594Other assets
    
    
    5,927
    
    
    
    5,729Total Assets
    
    $
    781,092
    
    
    $
    781,649LiabilitiesDepositsDemand and other noninterest-bearing
    
    $
    93,759
    
    
    $
    96,280Savings, money market, and interest bearing
    
    
    273,526
    
    
    
    280,169Certificates of deposit
    
    
    241,813
    
    
    
    229,094Total deposits
    
    
    609,098
    
    
    
    605,543Securities sold under repurchase agreements
and other short-term borrowings
    
    
    22,344
    
    
    
    31,619Federal Home Loan Bank advances
    
    
    75,464
    
    
    
    69,296Accrued interest payable
    
    
    1,310
    
    
    
    1,172Accrued taxes, expenses and other liabilities
    
    
    4,520
    
    
    
    3,445Total Liabilities
    
    
    712,736
    
    
    
    711,075Shareholders EquityCommon stock, par value $1 per share, authorized
15,000,000 shares,
issued 6,766,867
    
    
    6,767
    
    
    
    6,766Additional paid-in capital
    
    
    26,243
    
    
    
    26,243Retained earnings
    
    
    41,668
    
    
    
    41,292Accumulated other comprehensive loss
    
    
    (3,892
    )
    
    
    (1,297
    )Treasury stock at cost, 125,686 shares at March
31, 2005 and December 31, 2004
    
    
    (2,430
    )
    
    
    (2,430
    )Total Shareholders Equity
    
    
    68,356
    
    
    
    70,574Total Liabilities and Shareholders Equity
    
    $
    781,092
    
    
    $
    781,649
 See Notes Consolidated Financial Statements 3




---



##### Table of Contents



Consolidated Statements of Income (unaudited) Three Months EndedMarch 31,(Dollars in thousands except share and per share amounts)
    
    2005
    
    
    2004Interest IncomeInterest and fees on loans
    
    $
    8,833
    
    
    $
    7,774Interest and dividends on investment securities:Taxable
    
    
    1,069
    
    
    
    1,024Tax-exempt
    
    
    114
    
    
    
    145Federal funds sold and short-term investments
    
    
    36
    
    
    
    9Total interest income
    
    
    10,052
    
    
    
    8,952Interest ExpenseDeposits:Certificates of deposit, $100 and over
    
    
    683
    
    
    
    334Other deposits
    
    
    1,447
    
    
    
    1,280Federal Home Loan Bank advances
    
    
    501
    
    
    
    451Federal funds borrowed and security repurchase agreements
    
    
    89
    
    
    
    41Total interest expense
    
    
    2,720
    
    
    
    2,106Net Interest Income
    
    
    7,332
    
    
    
    6,846Provision for Loan Losses
    
    
    399
    
    
    
    525Net interest income after provision for loan losses
    
    
    6,933
    
    
    
    6,321Noninterest IncomeInvestment and trust services
    
    
    517
    
    
    
    586Deposit service charges
    
    
    908
    
    
    
    991Other service charges and fees
    
    
    461
    
    
    
    787Income from investment in life insurance
    
    
    193
    
    
    
    159Mortgage banking revenue
    
    
    370
    
    
    
    Other noninterest income
    
    
    161
    
    
    
    64Total fees and other income
    
    
    2,610
    
    
    
    2,587Securities gains, net
    
    
    180
    
    
    
    227Gain on sale of loans
    
    
    132
    
    
    
    37Gain on sale of other assets, net
    
    
    5
    
    
    
    28Total noninterest income
    
    
    2,927
    
    
    
    2,879Noninterest ExpenseSalaries and employee benefits
    
    
    3,978
    
    
    
    3,038Net occupancy
    
    
    517
    
    
    
    374Furniture and equipment
    
    
    733
    
    
    
    670Electronic banking expenses
    
    
    123
    
    
    
    332Supplies and postage
    
    
    371
    
    
    
    272Outside services
    
    
    309
    
    
    
    234Marketing and public relations
    
    
    307
    
    
    
    179Ohio Franchise tax
    
    
    182
    
    
    
    188Other noninterest expense
    
    
    1,151
    
    
    
    688Total noninterest expense
    
    
    7,671
    
    
    
    5,975Income before income tax expense
    
    
    2,189
    
    
    
    3,225Income tax expense
    
    
    618
    
    
    
    969Net Income
    
    $
    1,571
    
    
    $
    2,256Net Income Per Common ShareBasic
    
    $
    0.24
    
    
    $
    0.34Diluted
    
    
    0.24
    
    
    
    0.34Dividends declared
    
    
    0.18
    
    
    
    0.18Average Common Shares OutstandingBasic
    
    
    6,641,173
    
    
    
    6,617,715Diluted
    
    
    6,641,173
    
    
    
    6,627,891
 See Notes to Consolidated Financial Statements 4




---



##### Table of Contents



Consolidated Statements of Shareholders Equity (unaudited) AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury(Dollars in thousands except share and per share amounts)
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Stock
    
    
    TotalBalance, January 1, 2004
    
    $
    6,766
    
    
    $
    26,243
    
    
    $
    38,715
    
    
    $
    (704
    )
    
    $
    (2,885
    )
    
    $
    68,135Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    2,256
    
    
    
    
    
    
    
    
    
    
    
    2,256Other comprehensive income, net of tax:Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (381
    )
    
    
    
    
    
    
    (381
    )Change in unrealized gains and losses
on securities, net of reclassification adjustment of $150 for gains
on sale of securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    721
    
    
    
    
    
    
    
    721Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,977Common dividends declared, $.18 per share
    
    
    
    
    
    
    
    
    
    
    (1,192
    )
    
    
    
    
    
    
    
    
    
    
    (1,192
    )Issuance of 230 common shares under
stock option plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Balance, March 31, 2004
    
    $
    6,766
    
    
    $
    26,243
    
    
    $
    39,779
    
    
    $
    (364
    )
    
    $
    (2,881
    )
    
    $
    69,543Balance, January 1, 2005
    
    $
    6,767
    
    
    $
    26,243
    
    
    $
    41,292
    
    
    $
    (1,297
    )
    
    $
    (2,430
    )
    
    $
    70,575Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,571
    
    
    
    
    
    
    
    
    
    
    
    1,571Other comprehensive loss, net of tax:Change in unrealized gains and losses
on securities, net of reclassification adjustment of $119 for gains
on sale of securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,595
    )
    
    
    
    
    
    
    (2,595
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,024
    )Common dividends declared, $.18 per share
    
    
    
    
    
    
    
    
    
    
    (1,195
    )
    
    
    
    
    
    
    
    
    
    
    (1,195
    )Balance, March 31, 2005
    
    $
    6,767
    
    
    $
    26,243
    
    
    $
    41,668
    
    
    $
    (3,892
    )
    
    $
    (2,430
    )
    
    $
    68,356
 See Notes to Consolidated Financial Statements 5




---



##### Table of Contents



Consolidated Statements of Cash Flows (unaudited) Three Months EndedMarch 31(Dollars in thousands)
    
    2005
    
    
    2004Operating ActivitiesNet income
    
    $
    1,571
    
    
    $
    2,256Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Provision for loan losses
    
    

    399
    
    
    
    525Depreciation and amortization
    
    
    696
    
    
    
    710Securities gains, net
    
    
    (180
    )
    
    
    (227
    )Loans originated for sale
    
    
    (3,206
    )
    
    
    Proceeds from loan sales
    
    
    4,549
    
    
    
    1,596Net gain from loan sales
    
    
    (132
    )
    
    
    (37
    )Net gain on sale of other assets
    
    
    (5
    )
    
    
    (28
    )Net increase in other assets
    
    
    579
    
    
    
    540Net increase in other liabilities
    
    
    (1,219
    )
    
    
    (1,730
    )Other operating activities
    
    
    2,673
    
    
    
    (158
    )Net cash provided by operating activities
    
    
    5,725
    
    
    
    3,447Investing ActivitiesProceeds from maturities of held-to-maturity securities
    
    
    
    
    
    
    338Proceeds from sales of available-for-sale securities
    
    
    4,448
    
    
    
    12,275Proceeds from maturities of available-for-sale securities
    
    
    6,273
    
    
    
    20,880Purchase of held-to-maturity securities
    
    
    
    
    
    
    (16,442
    )Purchase of available-for-sale securities
    
    
    (5,582
    )
    
    
    (16,675
    )Purchase of Federal Home Loan Bank Stock
    
    
    42
    
    
    
    Net increase in loans made to customers
    
    
    (2,908
    )
    
    
    (3,671
    )Purchases of Bank premises and equipment
    
    
    (366
    )
    
    
    (933
    )Proceeds from sale of bank premises and equipment
    
    
    5
    
    
    
    252Net cash provided by (used in) investing activities
    
    
    1,912
    
    
    
    (3,976
    )Financing ActivitiesNet decrease in demand and other noninterest bearing deposits
    
    
    (2,521
    )
    
    
    (2,443
    )Net decrease in savings, money access, and passbook deposits
    
    
    (6,643
    )
    
    
    (7,097
    )Net increase (decrease) in certificates of deposit
    
    
    12,719
    
    
    
    (7,991
    )Net increase (decrease) in securities sold under repurchase agreements
    
    
    (9,275
    )
    
    
    7,940Proceeds from Federal Home Loan Bank advances
    
    
    7,500
    
    
    
    101,762Prepayment of Federal Home Loan Bank advances
    
    
    (5,830
    )
    
    
    (87,737
    )Issuance of treasury stock
    
    
    
    
    
    
    4Dividends paid
    
    
    (1,195
    )
    
    
    (1,192
    )Net cash provided by (used in) financing activities
    
    
    (5,245
    )
    
    
    3,246Net increase in cash and cash equivalents
    
    
    2,392
    
    
    
    2,717Cash and cash equivalents, January 1
    
    
    26,818
    
    
    
    24,646Cash and cash equivalents, March 31
    
    $
    29,210
    
    
    $
    27,363Supplemental cash flow informationInterest paid
    
    $
    2,787
    
    
    $
    2,041Transfer of loans to other real estate owned
    
    
    131
    
    
    
    270
 See Notes to Consolidated Financial Statements 6




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant
Accounting PoliciesConsolidation  Use of Estimates   Segment Information   Statement of Cash Flows   7




---



##### Table of Contents



Securities   Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) Stock   Loans   Held for sale 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 by charges to income. Gains and losses on loan sales (sales proceeds minus carrying
value) are recorded in noninterest income. Loans are generally placed on nonaccrual status (1) when they are 90 days past due for
interest or principal, (2) when the full and timely collection of interest or principal becomes
uncertain or (3) when part of the principal balance has been charged off. When a loan has been
placed on nonaccrual status, the accrued and unpaid interest receivable is reversed to interest
income. Generally, a loan is returned to accrual status (a) when all delinquent interest and
principal becomes current under the terms of the loan agreement or (b) when the loan is both
well-secured and in the process of collection and collectibility is no longer doubtful. A loan is considered impaired, based on current information and events, if it is probable that the
Bank will not be able to collect the amounts due according to the loan contract, including
scheduled interest payments. The measurement of impaired loans is generally based on the present
value of the expected future cash flows discounted at 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
allowance is established for the difference. 8




---



##### Table of Contents



Allowance for Loan Losses   The provision for loan losses is determined based on Managements evaluation of the loan
portfolio and the adequacy of the allowance for loan losses under current economic conditions and
such other factors which, in Managements judgment, deserve current recognition. In addition,
various regulatory agencies, as an integral part of their examination process, periodically review
the Corporations allowance for loan losses. Such agencies may require the Corporation to recognize
additions to the allowance for loan losses based on their judgments about information available to
them at the time of their examinations. Bank Premises and Equipment   Goodwill and Core Deposit Intangibles   Core deposit intangible assets which have finite lives continue to be amortized using an
accelerated method over ten years and are subject to annual impairment testing. Income Taxes   Comprehensive Income   9




---



##### Table of Contents



Stock-Based Compensation   Reclassifications   2. New Accounting Pronouncements SFAS No. 123(revised) Share Based Payment   AICPA Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired
in a Transfer   EITF No 03-01 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments   10




---



##### Table of Contents



Investments (EITF 03-01). EITF 03-01 provides guidance for determining when an investment
is considered impaired, whether impairment is other-than-temporary, and measurement of an
impairment loss. An investment is considered impaired if the fair value of the investment is less
than its cost. Generally, an impairment is considered other-than-temporary unless the investor has
the ability and intent to hold the investment for a reasonable period of time sufficient for the
forecasted recovery of fair value up to (or beyond) the cost of the investment, and evidence
indicating that the cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an
impairment loss should be recognized through earnings equal to the difference between the
investments cost and its fair value. In September 2004, the FASB delayed the accounting
requirements of EITF 03-01 until additional implementation guidance is issued and goes into effect.
The Corporation does not expect the requirements of EITF 03-01 to have a material impact on the
Corporations results of operations, financial position or liquidity. 3. Earnings Per Share Three Months Ended March31,(Dollars in thousands except share and per share amounts)
    
    2005
    
    
    2004Weighted average shares outstanding used inBasicNet income
    
    $
    1,571
    
    
    $
    2,256Average common shares outstanding
    
    
    6,641,173
    
    
    
    6,617,715Net income per common share  basic
    
    
    0.24
    
    
    $
    0.34DilutedNet income
    
    $
    1,571
    
    
    $
    2,256Average common shares outstanding
    
    
    6,641,173
    
    
    
    6,627,891Stock award adjustment
    
    
    
    
    
    
    Average common shares outstanding  diluted
    
    
    6,641,173
    
    
    
    6,627,891Net income per common share  diluted
    
    $
    0.24
    
    
    $
    0.34
 Basic earnings per share is computed by dividing income 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. All outstanding options
were anti-dilutive at March 31, 2005. 11




---



##### Table of Contents



4. Securities The amortized cost, gross unrealized gains and losses and fair values of securities at March
31, 2005 and December 31, 2004 were as follows: March 31, 2005Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U.S. Government agencies
and corporations
    
    $
    130,353
    
    
    $
    32
    
    
    $
    (3,641
    )
    
    $
    126,744State and political subdivisions
    
    
    11,188
    
    
    
    221
    
    
    
    (59
    )
    
    
    11,350Equity securities
    
    
    65
    
    
    
    84
    
    
    
    
    
    
    
    149Federal Home Loan Bank and
Federal Reserve Bank stock
    
    
    4,075
    
    

    
    
    
    
    
    
    
    
    
    4,075Total securities
    
    $
    145,681
    
    
    $
    337
    
    
    $
    (3,700
    )
    
    $
    142,318
 December 31, 2004Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueSecurities available for sale:U.S. Government agencies
and corporations
    
    $
    131,789
    
    
    $
    168
    
    
    $
    (2,080
    )
    
    $
    129,877State and political subdivisions
    
    
    11,148
    
    
    
    349
    
    
    
    (8
    )
    
    
    11,489Equity securities
    
    
    3,938
    
    
    
    284
    
    
    
    
    
    
    
    4,222Federal Home Loan Bank and
Federal Reserve Bank stock
    
    
    4,033
    
    
    
    
    
    
    
    
    
    
    
    4,033Total securities
    
    $
    150,908
    
    
    $
    801
    
    
    $
    (2,088
    )
    
    $
    149,621
 5. Loans Loan balances at March 31, 2005 and December 31, 2004 are summarized as follows: (Dollars in thousands)
    
    March 31, 2005
    
    
    December 31, 2004Commercial
    
    $
    355,473
    
    
    $
    339,439Real Estate Mortgage
    
    
    92,094
    
    
    
    112,787Installment
    
    
    68,620
    
    
    
    60,855Home Equity Lines
    
    
    63,079
    
    
    
    62,143Total loans
    
    
    579,266
    
    
    
    575,224Allowance for loan losses
    
    
    (7,545
    )
    
    
    (7,386
    )Net loans
    
    $
    571,721
    
    
    $
    567,838
 6. Retirement Pension Plan   The net periodic pension costs charged to expense amounted to $25 in the period ending March 31,
2005 and $19 in the period ending March 31, 2004. The following table sets forth the net periodic
pension and total pension expense for the periods ended
March 31, 2005 and 2004. Effective December 31, 2002, the benefits under the Plan were frozen and no additional benefits are accrued under the
Plan after December 31, 2002. 12




---



##### Table of Contents



Three Months EndedMarch 31,(Dollars in thousands)
    
    2005
    
    
    2004Interest cost on projected benefit obligation
    
    
    100
    
    
    
    113Expected return on plan assets
    
    
    (125
    )
    
    
    (94
    )Recognized actuarial (gain) or loss
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    25
    
    
    $
    19Loss recognized due to curtailment
    
    
    
    
    
    
    Loss recognized due to settlement
    
    
    
    
    
    
    26Total pension cost
    
    $
    25
    
    
    $
    45
 Weighted-Average Assumptions
    
    2005
    
    
    2004Discount rate
    
    
    5.75
    %
    
    
    5.75
    %Expected long-term return on plan assets
    
    
    7.50
    %
    
    
    5.00
    %Rate of compensation increase
    
    
    0.00
    %
    
    
    0.00
    %
 7. Stock Option Plans At December 31, 2004 all options issued under qualified incentive stock option plans had been
issued or had expired. At March 31, 2005, the Corporation had nonqualified stock option agreements with two executives,
granted in 2004 and 2000. Exercise prices for these nonqualified
options outstanding as of March 31, 2005, ranged from $19.21 to $19.60. The weighted average remaining contractual life of the
nonqualified incentive stock option agreements is 6.2 years. Stock option activity follows: Options
    
    
    Weighted AverageOutstanding
    
    
    Exercise PriceJanuary 1, 2004
    
    
    50,960
    
    
    $
    16.69Granted
    
    
    Cancelled
    
    
    Exercised
    
    
    Expired
    
    
    March 31, 2004
    
    
    50,960
    
    
    $
    16.69January 1, 2005
    
    
    21,939
    
    
    $
    19.39Granted
    
    
    Cancelled
    
    
    Exercised
    
    
    Expired
    
    
    March 31, 2005
    
    
    21,939
    
    
    $
    19.39
 Had compensation cost for the Corporations stock-based compensation agreements been
determined consistent with SFAS No. 123, net income and net income per share would have been as
summarized below. No stock based compensation, as defined by the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based Compensation was generated
under any of the Corporations stock-based benefit agreements during the first quarter of 2005. The fair value of the options granted in 2004 and 2000 is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: Risk Free
    
    
    
    
    
    
    
    
    
    
    RemainingGrant
    
    Interest
    
    
    Dividend
    
    
    
    
    
    
    ExpectedYear
    
    Rate
    
    
    Yield
    
    
    Volatility
    
    
    Life2004
    
    
    4.29
    %
    
    
    3.67
    %
    
    
    30.99
    %
    
    
    92000
    
    
    6.69
    %
    
    
    4.57
    %
    
    
    34.68
    %
    
    
    5
 13




---



##### Table of Contents



The table below shows the proforma net income effect, if the fair value of these stock
options were expensed. Three Months EndedMarch 31,(Dollars in thousands, except per share amounts)
    
    2005
    
    
    2004Net Income, as reported
    
    $
    1,571
    
    
    $
    2,256Add: option expense included in reported
net income, net of related tax effects
    
    
    
    
    
    
    Less: total option expense determined
under fair value method per SFAS 123,
net of related tax effects
    
    
    
    
    
    
    Pro forma net income
    
    $
    1,571
    
    
    $
    2,256Pro forma net income per share:Basic  as reported
    
    $
    0.24
    
    
    $
    0.34Basic  pro forma
    
    
    0.24
    
    
    
    0.34Diluted  as reported
    
    
    0.24
    
    
    
    0.34Diluted  pro forma
    
    
    0.24
    
    
    
    0.34
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION RESULTS OF OPERATIONS FINANCIAL REVIEW The financial review section discusses the financial condition and results of operations of
the Corporation for the three months ended March 31, 2005 and serves to update the 2004 Annual
Report on Form 10-K. The financial review should be read in conjunction with the financial
information contained on Form 10-K and in the accompanying consolidated financial statements and
notes on this Form 10-Q. Introduction For the three months ended March 31, 2005, net income was $1.6 million compared to $2.3
million in the three months ended March 31, 2004. Net interest income and noninterest income both
increased in the quarter as compared to the same period in 2004. These improving revenue trends,
however, were more than offset by substantial increases in many components of noninterest expense.
These components included salaries and benefits, marketing and public relations, and net occupancy
expenses. Portfolio loans increased 8.3% between March 31, 2005 and March 31, 2004. Nonperforming loans
at March 31, 2005 increased by 33% from December 31, 2004 and by 22% from March 31, 2004. Total deposits increased 8.1% for the period ended March 31, 2005 as compared to March 31,
2004. There was growth in demand, interest bearing and time deposits. Growth continued in the first
quarter of 2005 as compared to December 31, 2004, with total deposits increasing $3.6 million.
Historically the first quarter of the year is a period of weak deposit growth for the Corporation. 14




---



##### Table of Contents



Results of Operations(Dollars in thousands except per share data) Net Interest Income Net interest income is the difference between interest income earned on interest-earning
assets and the interest expense paid on interest-bearing liabilities. 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 of 35%. Net interest income is the most significant component of the Corporations
revenue, accounting for 77% in the three months ended March 31, 2005. Net interest income is
affected by changes in the volumes, rates and composition of interest-earning assets and
interest-bearing liabilities. The net interest margin is net interest income as a percentage of
average earning assets. Table 1 reflects the detailed components of the Corporations net interest income for the
three months ended March 31, 2005 and 2004. The rates are computed on a tax equivalent basis and
non-accrual loans are included in the average loan balances. Table 2 presents, for the periods
indicated, a summary of the changes in interest earned and interest paid resulting from changes in
volume and rates for the major components of interest-earning assets and interest-bearing
liabilities on a fully taxable equivalent basis. The impact of changes in the mix of
interest-earning assets and interest-bearing liabilities is reflected in net interest income. Interest Income Total interest income (FTE) was $10,106 for the three months ended March 31, 2005. This is an
increase of $1,081, or 12.0%, as compared to the three months ended March 31, 2004. Earning asset
growth was responsible for $422 of this increase. Growth in average commercial loans of $43.3
million and average growth of $10.6 million in installment and home equity loans were the primary
drivers of earning asset growth. Offsetting a portion of this growth
was the continued runoff of real
estate mortgage loans and a decline of $5 million in average securities. Interest income also was
positively impacted by the current rate environment. The yield on average earning assets was 5.64%
in the first three months of 2005 as compared to 5.23% in the same period in 2004. The
Corporations commercial and home equity loan portfolios are primarily variable rate. Most of these
loans are tied to the prime rate; consequently with the increases in the prime rate over the last
two quarters, the yield on these portfolios improved 71 and 60 basis points respectively in the
first quarter of 2005 as compared to the same period in 2004. With the exception of real estate
mortgages and tax exempt municipal securities, all other earning asset portfolios experienced
improved yields as compared to the first quarter of 2004. Interest Expense Total interest expense was $2,720 for the three months ended March 31, 2005. This is an
increase of $614, or 29.2%, as compared to the three month period ended March 31, 2004. Average
interestbearing liabilities were $606.6 million in the first three months of 2005 as compared to
$584.0 for the same period in 2004. This growth in average interest-bearing liabilities is
responsible for $97 of the $614 increase in total interest expense. The growth in interest-bearing
deposits was primarily certificates of deposit and money market accounts. Some of this growth was
offset by lower borrowings which declined $8.7 million. Interest expense was also impacted by the
current rate environment. The average cost of interest-bearing liabilities in the first quarter of
2005 was 1.82% as compared to 1.47% in the same period last year. Of the total interest expense
increase of $614 between periods, $517 was due to increased rates. All components of interest
bearing liabilities contributed to this result. Net Interest Income Net interest income (FTE) was $7,386 in the first quarter of 2005, an increase of $467, or
6.7%, over the same period last year. The net interest margin (FTE) was 4.12% in the first quarter
of 2005 as 15




---



##### Table of Contents



compared to 4.01% in the first quarter of last year. The trend in both net interest income and the
net interest margin are expected to continue into the second quarter of 2005. Table 1: Condensed Consolidated Average Balance Sheets  Interest, Rate, and Rate/ Volume
differentials are stated on a Fully-Tax Equivalent (FTE) Basis. Three Months Ended March 31,2005
    
    
    
    
    
    
    
    
    
    
    2004(Dollars in thousands)
    
    Average Balance
    
    
    Interest
    
    
    Rate
    
    
    Average Balance
    
    
    Interest
    
    
    RateAssets:Securities-tax equivalent
    
    $
    136,924
    
    
    $
    1,069
    
    
    
    3.17
    %
    
    $
    141,965
    
    
    $
    1,024
    
    
    
    2.90
    %Securities-tax exempt
    
    
    11,632
    
    
    
    168
    
    
    
    5.86
    %
    
    
    13,453
    
    
    
    218
    
    
    
    6.52
    %Federal funds sold and
short-term investments
    
    
    5,411
    
    
    
    36
    
    
    
    2.68
    %
    
    
    3,227
    
    
    
    9
    
    
    
    1.12
    %Commercial loans
    
    
    348,379
    
    
    
    5,487
    
    
    
    6.39
    %
    
    
    305,104
    
    
    
    4,310
    
    
    
    5.68
    %Real estate mortgage loans
    
    
    94,421
    
    
    
    1,457
    
    
    
    6.26
    %
    
    
    110,980
    
    
    
    1,891
    
    
    
    6.85
    %Installment and home equity loans
    
    
    129,664
    
    
    
    1,890
    
    
    
    5.91
    %
    
    
    119,080
    
    
    
    1,573
    
    
    
    5.31
    %Total Earning Assets
    
    $
    726,431
    
    
    $
    10,106
    
    
    
    5.64
    %
    
    $
    693,809
    
    
    $
    9,025
    
    
    
    5.23
    %Allowance for loan loss
    
    
    (7,517
    )
    
    
    
    
    
    
    
    
    
    
    (7,905
    )Cash and due from banks
    
    
    25,258
    
    
    
    
    
    
    
    
    
    
    
    24,197Bank owned life insurance
    
    
    13,451
    
    
    
    
    
    
    
    
    
    
    
    12,793Other assets
    
    
    23,340
    
    
    
    
    
    
    
    
    
    
    
    22,486Total Assets
    
    $
    780,963
    
    
    
    
    
    
    
    
    
    

    $
    745,380Liabilities and Stockholders
Equity:Certificates of deposit
    
    $
    240,262
    
    
    
    1,682
    
    
    
    2.84
    %
    
    $
    216,490
    
    
    $
    1,312
    
    
    
    2.44
    %Savings deposit
    
    
    104,218
    
    
    
    78
    
    
    
    0.30
    %
    
    
    104,030
    
    
    
    77
    
    
    
    0.30
    %Interest-bearing demand
    
    
    177,034
    
    
    
    370
    
    
    
    0.85
    %
    
    
    169,811
    
    
    
    225
    
    
    
    0.53
    %Short-term borrowings
    
    
    15,039
    
    
    
    89
    
    
    
    2.40
    %
    
    
    17,958
    
    
    
    41
    
    
    
    0.92
    %FHLB advances
    
    
    70,001
    
    
    
    501
    
    
    
    2.90
    %
    
    
    75,753
    
    
    
    451
    
    
    
    2.42
    %Total Interest -
Bearing Liabilities
    
    $
    606,554
    
    
    $
    2,720
    
    
    
    1.82
    %
    
    $
    584,042
    
    
    $
    2,106
    
    
    
    1.47
    %Noninterest-bearing deposits
    
    
    98,062
    
    
    
    
    
    
    
    
    
    
    
    87,533Other liabilities
    
    
    5,640
    
    
    
    
    
    
    
    
    
    
    
    4,983Stockholders Equity
    
    
    70,707
    
    
    
    
    
    
    
    
    
    
    
    68,822Total Liabilities and
Stockholders equity
    
    $
    780,963
    
    
    
    
    
    
    
    
    
    
    $
    745,380Net Interest Income (FTE)
    
    
    
    
    
    $
    7,386
    
    
    
    4.12
    %
    
    
    
    
    
    $
    6,919
    
    
    
    4.01
    %Taxable equivalent adjustment
    
    
    
    
    
    
    (54
    )
    
    
    -0.03
    %
    
    
    
    
    
    
    (73
    )
    
    
    -0.04
    %Net Interest Income Per
Financial Statements
    
    
    
    
    
    $
    7,332
    
    
    
    
    
    
    
    
    
    
    $
    6,846Net Yield on
Earning Assets
    
    
    
    
    
    
    
    
    
    
    4.09
    %
    
    
    
    
    
    
    
    
    
    
    3.97
    %
 16




---



##### Table of Contents



Table 2: Rate/Volume Analysis of Net Interest Income (FTE) Three Months Ended March 31,Increase (Decrease) in Interest(Dollars in thousands)
    
    Income/Expense 2005 and 2004Volume
    
    
    Rate
    
    
    TotalTaxable securities
    
    $
    (41
    )
    
    $
    86
    
    
    $
    45Tax-exempt securities
    
    
    (28
    )
    
    
    (23
    )
    
    
    (51
    )Federal funds sold and
short-term investments
    
    
    11
    
    
    
    16
    
    
    
    27Commercial loans
    
    
    621
    
    
    
    556
    
    
    
    1,177Real estate mortgage loans
    
    
    (282
    )
    
    
    (152
    )
    
    
    (434
    )Installment and home equity loans
    
    
    141
    
    
    
    176
    
    
    
    317Total Interest Income
    
    
    422
    
    
    
    659
    
    
    
    1,081Certificates of deposit
    
    
    153
    
    
    
    217
    
    
    
    370Savings deposits
    
    
    1
    
    
    
    
    
    
    
    1Interest-bearing demand
    
    
    14
    
    
    
    131
    
    
    
    145Short-term borrowings
    
    
    (22
    )
    
    
    70
    
    
    
    48FHLB advances
    
    
    (49
    )
    
    
    99
    
    
    
    50Total Interest Expense
    
    
    97
    
    
    
    517
    
    
    
    614Net Interest Income (FTE)
    
    $
    325
    
    
    $
    142
    
    
    $
    467
 Noninterest Income Table 3: Details on Noninterest Income Three Months EndedMarch 31,Percent(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    ChangeInvestment and trust services
    
    $
    517
    
    
    $
    586
    
    
    
    -11.8
    %Deposit service charges
    
    
    908
    
    
    
    991
    
    
    
    -8.4
    %Other service charges
    
    
    95
    
    
    
    156
    
    
    
    -39.1
    %Electronic banking fees
    
    
    366
    
    
    
    631
    
    
    
    -42.0
    %Gain on sale of loans
    
    
    132
    
    
    
    37
    
    
    
    256.8
    %Gain on sale of securities
    
    
    180
    
    
    
    227
    
    
    
    -20.7
    %Gain on sale of other assets
    
    
    5
    
    
    
    28
    
    
    
    -82.1
    %Income from investment in
life insurance
    
    
    193
    
    
    
    159
    
    
    
    21.4
    %Mortgage banking revenue
    
    
    370
    
    
    
    
    
    
    
    100.0
    %Other noninterest income
    
    
    161
    
    
    
    64
    
    
    
    151.6
    %Total noninterest income
    
    $
    2,927
    
    
    $
    2,879
    
    
    
    1.7
    %
 Noninterest income increased $48, or 1.7%, in the three months ended March 31, 2005
compared to the same period in 2004. Revenue generated by Investment and Trust services was down
11.8% for the first quarter of 2005 as compared to the same period in 2004. This revenue is highly
dependent upon the performance of the stock market which was weak in the first quarter of 2005.
Deposit service charges were down 8.4% for the quarter as compared to the same period in 2004. The
primary reason for this decrease was a lower level of overdraft fees in the current quarter as
compared to the first quarter of 2004. As discussed in prior reports, electronic banking fees
continue to decline due to changes in merchant processing and interchange income earned on debit
card and ATM transactions. Offsetting these areas of weakness were gains on the sale of loans of
$132, and the revenue generated by LNB Mortgage LLC of $370, which was acquired in September 2004.
Gains on the sale of loans increased $95 in the first quarter of 2005 as compared to the same
period in 2004. These gains were generated by the sale of two
commercial loans. Other noninterest income was $161 in the first
quarter of 2005 as compared to $64 in the same period of 2004. Other
noninterest income includes commercial loan placement fees, a new
revenue initiative started in the second half of 2004. Of this $97
increase in noninterest income, $86 was attributable to this activity. 17




---



##### Table of Contents



Noninterest Expense Table 4: Details on Noninterest Expense Three Months EndedMarch 31,Percent(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    ChangeSalaries and employee benefits
    
    $
    3,978
    
    
    $
    3,038
    
    
    
    30.9
    %Net occupancy
    
    
    517
    
    
    
    374
    
    
    
    38.2
    %Furniture and equipment
    
    
    733
    
    
    
    670
    
    
    
    9.4
    %Debit card and ATM
    
    
    123
    
    
    
    332
    
    
    
    -63.0
    %Supplies and postage
    
    
    371
    
    
    
    272
    
    
    
    36.4
    %Outside services
    
    
    309
    
    
    
    234
    
    
    
    32.1
    %Marketing and public relations
    
    
    307
    
    
    
    179
    
    
    
    71.5
    %Ohio Franchise tax
    
    
    182
    
    
    
    188
    
    
    
    -3.2
    %Other noninterest expense
    
    
    1,151
    
    
    
    688
    
    
    
    67.3
    %Total noninterest expense
    
    $
    7,671
    
    
    $
    5,975
    
    
    
    28.4
    %
 Noninterest expense increased $1.7 million, or 28.4%, for the three months ended March
31, 2005 compared to the same period in 2004. The largest increases in noninterest expense related
to salaries and employee benefits, net occupancy, outside services, marketing and public relations
and other noninterest expense. The $940, or 30.9%, increase in salaries and employee benefits is attributable to several
factors. First, LNB Mortgage, LLC added $361 to the salaries in the quarter. This company was
acquired in the third quarter of 2004. Additionally, the Corporation recognized various costs
related to the hiring of the new President and CEO in the first quarter. Net occupancy expense increased by $143, or 38.2%, for the three months ended March 31, 2005
versus the three months ended March 31, 2004. This increase was primarily related to the
maintenance and renovation of the Corporations facilities. Outside services were $309 for the first three months of 2005 as compared to $234 in the same
period last year. This increase was primarily due to higher audit and compliance expenses incurred
to comply with section 404 of the Sarbanes-Oxley Act of 2002. Marketing and public relations increased by $128, or 71.5%, for the three months ended March
31, 2005 versus the three months ended March 31, 2004. In the current quarter, there was more
activity for brand marketing and costs associated with the celebration of the Corporations 100th
anniversary. These activities also impacted supplies and postage expense which increased 36.4% in
the first quarter of 2005 as compared to the same period in 2004. Other expenses increased by $463, or 67.3%, for the three months ended March 31, 2005 versus
the three months ended March 31, 2004. The increase in other expenses relates to increases in
communications expenses of $171, or 121.3%, increases in loan and collection expenses of $152, or
155.1%, and increases in miscellaneous losses of $96, or 192.0%. Increases in communication
expenses relate to the upgrade of the Corporations voice and data telecom system that began in
September 2004 to provide enhanced service and reliability. The project is expected to be completed
in the third quarter of 2005. Increases in loan and collection expense stem from increased
commercial collection activity, and the activities of LNB Mortgage LLC. The increase in
miscellaneous losses was primarily a single charge-off for an ATM loss of $82. 18




---



##### Table of Contents



Income taxes Income taxes decreased $351, or 36.2%, for the three months ended March 31, 2005 versus the
three months ended March 31, 2004. The main reason for the decline is the decline in pretax income.
The effective tax rate in the first three months of 2005 was 28.2% as compared to 30.0% for the
same period in 2004. The change in the effective tax rate is due to the activities of North Coast Community Development, a bank
subsidiary. This subsidiary generates tax credits by making qualified
investments in economic development projects. The first of these
credits was recognized in the second quarter of 2004. Balance Sheet Analysis Securities The maturity distribution of the Corporations securities portfolio for the three months ended
March 31, 2005 is presented in Note 4 to the Consolidated Financial Statements. The Corporation
continues to employ the securities portfolio to mitigate interest rate risk and manage its
liquidity needs. Currently, the portfolio comprises approximately 43% U.S. Government agencies, 46%
U.S. agency mortgage backed securities, 8% municipals, and 3% in other securities. Other securities
are Federal Home Loan Bank stock and Federal Reserve Bank stock. At March 31, 2005 the securities
portfolio had a net temporary $3.4 million unrealized loss, representing 2.4% of total securities.
In the first quarter of 2005, FNMA and FHLMC preferred stock were sold, along with $500 in zero
coupon municipals, and most remaining equity investments. The Corporation purchased $5 million of
agency securities and $500 of municipal securities during the three months ended March 31, 2005. Loans Total portfolio loans for the period ended March 31, 2005 were $574 million, or 8.3%, higher
versus the comparable time period in 2004, and experienced an increase of $2 million, or .35%, from
December 31, 2004. Commercial loans comprise 61.4% of total portfolio loans and have increased by
$56 million, or 18.8%, versus the comparable period in 2004 and $16 million, or 4.7%, versus
December 31, 2004. The growth in the commercial portfolio is a function of new business
developments in emerging markets and an expanded lending effort into the Cuyahoga County market.
Lorain County continues to struggle as the markets recovery is slow and arduous. Consumer loans, consisting of installment loans and home equity loans, comprise 22.7% of total
portfolio loans, an increase of $9 million, or 7.6%, from the period ended March 31, 2004, and an
increase of $8.7 million, or 7.1%, from December 31, 2004. Consumer loans made to borrowers are on
a both secured and unsecured basis dependent on the term and nature of the loan. The Corporation
also purchases consumer loans from another institution in the Cleveland area. During the three months
ended March 31, 2005, the Corporation purchased $4.8 million of these loans. Real estate mortgages comprise 15.9% of total portfolio loans. These loans decreased $16.6
million, or 15.3%, for the period ended March 31, 2005 versus the comparable period in 2004 and
decreased $21 million, or 18.3%, from December 31, 2004. The decrease is primarily the result of
all mortgage business being generated via the Corporations subsidiary LNB Mortgage, LLC. All
production, both fixed and variable rate loans, generated by LNB Mortgage is sold in the secondary
market. Deposits Total deposits at March 31, 2005 were $609 million an increase of $3.5 million, or 1%, from
December 31, 2004 and an increase of $45 million, or 8.0%, from March 31, 2004. Demand deposits and
certificates of deposit represented the largest changes in total deposits. Deposit accounts and the generation of deposit accounts continue to be the primary source of
funds within our market area. The Corporation offers various deposit products to both retail and
business customers. However, this is not the only source of funding for the Corporation, albeit the
primary 19




---



##### Table of Contents



source. The Corporation also utilizes its business sweep accounts to generate funds as well
as tapping into the brokered CD market providing term funding rates comparable to other national
market borrowings, which include the Federal Home Loan Bank of Cincinnati and the Federal Reserve
Bank of Cleveland. Noninterest bearing deposits comprise 15.4% of total deposits providing a large concentration
of low cost funding. Coupled with noninterest bearing deposits are savings accounts and interest
bearing checking accounts that additionally contribute to low cost funding. However, the
Corporation is increasingly dependent on brokered CDs and public fund CDs. Borrowings The Corporation utilizes both short-term and long-term borrowings to assist in the growth of
earning assets. For the Corporation, short-term borrowings include federal funds purchased and
repurchase agreements. As of March 31, 2005 the Corporation had $22 million of short-term
borrowings. This was a decrease of $9.3 million, or 29.3%, from December 31, 2004 and a decrease of
$619, or 2.7%, from March 31, 2004. Long-term borrowings for the
Corporation were at $75 million, an
increase of $6 million, or 8.9%, from December 31, 2004 and a decrease of $15 million, or 16.4%,
from March 31, 2004. Throughout the first three months of March 31, 2005, the Corporation realized
$5.8 million of maturities from the Federal Home Loan Bank leading to a repayment of FHLB
borrowings. Regulatory Capital The Corporation continues to maintain a strong capital position. Total shareholders equity
was $68,356, at March 31, 2005, a decrease of $2,218, or 3.1%, from December 31, 2004. This
decrease resulted primarily from $1,571 of net income generated for the three months ended March
31, 2005 less cash dividends payable to shareholders of $1,195. The first quarter change in
intermediate term interest rates caused a decrease in the fair value of available for sale
securities which resulted in a decrease in shareholders equity within accumulated other
comprehensive income of $2,595 for the three months ended March 31, 2005. As of March 31, 2005, the
Corporation held 125,686 shares of common stock as treasury stock at a cost of $2,430. The Corporation and the Bank continue to monitor growth to stay within the constraints
established by applicable regulatory authorities. Under Federal banking regulations, at March 31,
2005 and December 31, 2004, the Corporation and Bank maintained capital ratios consistent with
guidelines to be deemed well-capitalized. These capital positions for
the Corporation and the Bank are presented in
Table 5. Table 5  Capital Ratios Well-March 31, 2005
    
    
    December 31, 2004
    
    
    capitalized RatioLorain
National BankTier 1 Capital (average assets)
    
    
    7.78
    %
    
    
    7.86
    %
    
    
    5.00
    %Tier 1 Capital (risk weighted)
    
    
    9.37
    %
    
    
    9.36
    %
    
    
    6.00
    %Total Capital (risk weighted)
    
    
    11.17
    %
    
    
    11.13
    %
    
    
    10.00
    %LNB Bancorp,
Inc.Tier 1 Capital (average assets)
    
    
    8.84
    %
    
    
    9.05
    %
    
    
    5.00
    %Tier 1 Capital (risk weighted)
    
    
    10.68
    %
    
    
    10.58
    %
    
    
    6.00
    %Total Capital (risk weighted)
    
    
    11.85
    %
    
    
    11.72
    %
    
    
    10.00
    %
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK RISK ELEMENTS Risk management is an essential aspect to operate a financial services company successfully
and effectively. The most prominent risk exposures, for a financial services company, are credit,
residual, operational, interest rate, market, and liquidity risk. Credit risk involves the risk of
uncollectible interest 20




---



##### Table of Contents



and principal balance on a loan when it is due. Residual risk involves the
potential end-of-term value of leased assets or related cash flows on asset securitizations or
other off balance sheet structures. Fraud, legal and compliance issues, processing errors,
technology and the related disaster recovery, and breaches in business continuation and internal
controls are types of operational risks. Changes in interest rates affecting net interest income
are considered interest rate risks. Market risk is the risk that a financial institutions earnings
and capital or its ability to meet its business objectives are adversely affected by movements in
market rates or prices. Such movements include fluctuations in interest rates, foreign exchange
rates, equity prices that affect the changes in value of available-for-sale securities, credit
spreads, and commodity prices. The inability to fund obligations due to investors, borrowers, or
depositors is liquidity risk. For the Corporation, the dominant risks are market risk, specifically
our exposure to changes in interest rates, and credit risk. Credit Risk Management Uniform underwriting criteria, ongoing risk monitoring and review processes, and well-defined,
centralized credit policies dictate the management of credit risk for the Corporation. As such,
credit risk is managed through the Banks loan loss review policy which requires the loan officer,
lending officers, and the loan review committee to manage loan quality. The Corporations credit
policies are reviewed and modified on an ongoing basis in order to remain suitable for the
management of credit risks within the loan portfolio as conditions change. The Corporation uses a
loan rating system to properly classify and assess the credit quality of individual commercial loan
transactions. The loan rating system is used to determine the adequacy of the allowance for loan
losses for regulatory reporting purposes and to assist in the determination of the frequency of
review for credit exposures. Credit quality was stable for the three months ended March 31, 2005 as compared to the same
period in 2004. General economic conditions have contributed to improved credit quality, but a more
stringent and defined credit review policy has been the driving force for the decline. Nonperforming Assets Total nonperforming assets consist of nonperforming loans, loans which have been restructured,
and other foreclosed assets. As such, any loan that is 90 days past due and/or in managements
estimation the collection of interest is doubtful are considered nonperforming. These loans no
longer accrue interest and are accounted for on a cash basis. The classification of restructured
loans involves the deterioration of a borrowers financial ability thus leading to original terms
being favorably modified or either principal or interest has been forgiven. Nonperforming loans at March 31, 2005 were $6.6 million, an increase of $1.7 million, or
32.2%, from December 31, 2004 and an increase of $1.2 million or 16.9%, from March 31, 2004. At
March 31, 2005, commercial, mortgage and consumer loans represented 81.5%, 14.5%, and 4%, of
nonperforming loans, respectively. At December 31, 2004 these ratios were 66.1%, 22.7%, and 11.2%
of commercial, mortgage, and consumer, respectively. The increase in nonperforming loans is
attributable to the classification of two commercial loan customers as nonaccrual. Although
payments are current on these loans, other loans to these customers are nonperforming, and
management felt that it was prudent to put these two commercial loans on nonaccrual. Nonperforming
trends in all other loan portfolios during the quarter were improved. Nonperforming assets at March 31, 2005 compared to December, 31, 2004, and March 31, 2004
increased by $1.7 million, and $1 million, respectively due to an increase in nonaccrual loans of
$1.7 million, and $1.2 million, respectively, and an increase in other foreclosed assets of $56
versus December 31, 2004 and a decrease of $186 versus March 31, 2004. Nonperforming loans at March
31, 2005 are substantially secured by commercial real estate and did not have a material impact on
interest income for the three months ended March 31, 2005. The overall quality of the portfolio
remains good as the ratio of nonperforming loans to total loans is at
1.14% at March 31, 2005 as
compared to .93% at 21




---



##### Table of Contents



March 31, 2004. Additionally, there were no particular industry or geographic
concentrations in nonperforming or delinquent loans or net charge-offs. The Corporations credit policies are reviewed and modified on an ongoing basis to remain
suitable for the management of credit risks within the loan portfolio as conditions change. At
March 31, 2005 there were no significant concentrations of credit risk in the loan portfolio. Table 6 sets forth nonperforming assets for the periods ended March 31, 2005 and December 31,
2004. Table 6: Nonperforming Assets March 31,
    
    
    December 31,(Dollars in thousands)
    
    2005
    
    
    2004Commercial loans
    
    $
    5,366
    
    
    $
    3,255Real Estate Mortgage
    
    
    957
    
    
    
    1,116Installment loans
    
    
    123
    
    
    
    150Home equity lines
    
    
    140
    
    
    
    400Total nonperforming loans
    
    
    6,586
    
    
    
    4,921Other foreclosed assets
    
    
    476
    
    
    
    420Total nonperforming assets
    
    $
    7,062
    
    
    $
    5,341Nonperforming loans to total loans
    
    
    1.14
    %
    
    
    0.85
    %Nonperforming assets to total assets
    
    
    0.90
    %
    
    
    0.68
    %
 Provision and Allowance for Loan Losses The allowance for loan losses in maintained by the Corporation at a level considered by
management to be adequate to cover probable credit losses inherent in the loan portfolio. The
amount of the provision for loan losses charged to operating expenses is the amount necessary, in
the estimation of management, to maintain the allowance for loan losses at an adequate level.
Management determines the
adequacy of the allowance based upon 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, and information about specific borrower situations, including their financial
position and collateral values, and other factors, which are subject to change over time. While
managements periodic analysis of the allowance for loan losses may dictate portions of the
allowance be allocated to specific problem loans, the entire amount is available for any loan
charge-offs that may occur. Table 7 presents the detailed activity in the allowance for loan losses
and related charge-off activity for the three months ended March 31, 2005 and March 31, 2004,
respectively. 22




---



##### Table of Contents



Table 7: Analysis of Allowance for Loan Losses Three Months
    
    
    Three Months EndedEnded March 31,
    
    
    March 31,(Dollars in thousands)
    
    2005
    
    
    2004Balance at beginning of year
    
    $
    7,386
    
    
    $
    7,730Charge-offs:Commercial
    
    
    (169
    )
    
    
    (185
    )Real estate mortgage
    
    
    
    
    
    
    (197
    )Installment
    
    
    (129
    )
    
    
    (136
    )Home equity lines
    
    
    
    
    
    
    Total charge-offs
    
    
    (298
    )
    
    
    (518
    )Recoveries:Commercial
    
    
    15
    
    
    
    27Real estate mortgage
    
    
    
    
    
    
    Installment
    
    
    41
    
    
    
    42Home equity lines
    
    
    1
    
    
    
    Credit cards
    
    
    1
    
    
    
    13Total recoveries
    
    
    58
    
    
    
    82Net charge-offs
    
    
    (240
    )
    
    
    (436
    )Provision for loan loss
    
    
    399
    
    
    
    525Balance at end of year
    
    $
    7,545
    
    
    $
    7,819Average total loans
    
    $
    572,464
    
    
    $
    535,164Total loans at end of period
    
    
    579,266
    
    
    
    537,008Annualized net-charge-offs to average loans
    
    
    0.17
    %
    
    
    0.32
    %Allowance to total loans at end of period
    
    
    1.30
    %
    
    
    1.46
    %Allowance to nonperforming loans
    
    
    114.56
    %
    
    
    145.39
    %Nonperforming loans to total loans
    
    
    1.14
    %
    
    
    1.00
    %
 The allowance for loan losses on March 31, 2005 was $7.5 million, or 1.30%, of
outstanding loans, compared to $7,819, or 1.46% of outstanding loans at March 31, 2004. The
provision charged to expense was $399 for the three months ended March 31, 2005, and $525 for the
three months ended March 31, 2004. This is a $126, or 24% decrease in the provision for loan
losses in the first quarter of 2005 as compared to the same period in
2004. This decline reflects the stabilizing trends in potential
problems loans that began about mid-year 2004 and continued into the
first quarter of 2005. Net charge-offs for the three months ended March 31, 2005 were
$240, as compared to $436 for the three months ended March 31,
2004. Net charge-offs in the first
quarter of 2005 were down 45% from the same period in 2004. Charge-offs in the first quarter of
2005 were in-line with expectations, and reflect better charge-off experience in all portfolios as
compared to the same period in 2004. The provision for the three months ended March 31, 2005 was,
in the opinion of management, adequate when factoring the improving charge-off trends with the
deterioration of nonperforming loans in the quarter. The Corporation continues to aggressively
address potential problem loans, and underwriting standards continue to been adjusted in response
to trends and asset review findings. Market Risk Management The Corporation manages market risk through its Asset/Liability Management Committee (ALCO)
at the Bank level. This committee assesses interest rate risk exposure through two primary
measures: rate sensitive assets divided by rate sensitive liabilities and earnings-at-risk
simulation of net interest income. The difference between a financial institutions interest rate sensitive assets and interest
rate sensitive liabilities is referred to as the interest rate gap. An institution that has more
interest rate sensitive assets than interest rate sensitive liabilities in a given period is said
to be asset sensitive or has a positive gap. This means that if interest rates rise a corporations
net interest income may rise and if interest rates fall its net interest income may decline. If
interest sensitive liabilities exceed interest sensitive assets then the opposite impact on net
interest income may occur. The usefulness of the gap measure is limited. It is important to know
the gross dollars of assets and liabilities that reprice in 23




---



##### Table of Contents



various time horizons, but without
knowing the frequency and basis of the potential rate changes its predictive power is limited. Two more useful tools in managing market risk are earnings-at-risk simulation and economic
value of equity simulation. An earnings at risk analysis is a modeling approach that combines the
repricing information from gap analysis, with forecasts of balance sheet growth and changes in
future interest rates. The result of this simulation provides management with a range of possible
net interest margin outcomes. Trends that are identified in earnings-at-risk simulation can help
identify product and pricing decisions that can be made currently to assure stable net interest
income performance in the future. At March 31, 2005, a shock treatment of the balance sheet, in
which a parallel shift in the yield curve occurs and all rates increase immediately, indicates that
in a +200 basis point shock, net interest income would increase
9.7% and in a
-200 basis point shock, net interest income would increase 14.0%. The reason for the lack
of symmetry in these results is the implied floors in many of the Corporations core funding which
limits their downward adjustment from current offering rates. This analysis is done to describe a
best or worst case scenario. Factors such as non-parallel yield curve shifts, management pricing
changes, customer preferences and other factors are likely to produce different results. The economic value of equity approach measures the change in the value of the Corporations
equity as the value of assets and liabilities on the balance sheet change with interest rates. At
March 31, 2005, this analysis indicated that a +200 basis point change in rates would
reduce the value of
the Corporations equity by 4.6%, while a -200 basis point
change in rates would increase the value of the Corporations
equity by 9.3%. Critical Accounting Policy and Estimates The Corporations consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. It follows general practices within
the banking industry and application of these principles requires management to make assumptions,
estimates and judgments that affect the financial statements and accompanying notes. These
assumptions, estimates and judgments are based on information available as of the date of the
financial statements. The most significant accounting policies followed by the Corporation are presented in Note 1
of the Consolidated Financial Statement in the December 31, 2004
Form 10-K. These policies are fundamental to the understanding of
results of operation and financial conditions. The accounting policies considered to be critical by
management are as follows: Allowance for loan losses The allowance for loan losses is an amount that management believes will be adequate to absorb
probable credit losses inherent in the loan portfolio, taking into consideration such factors as
past loss experience, changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, and current economic conditions that affect the
borrowers ability to pay. Determination of the allowance is subjective in nature. Loan losses are
charged off against the allowance when management believes that the full collectability of the loan
is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. A loan is considered impaired when it is probable that not all principal and interest amounts
will be collected according to the loan contract. Residential mortgage, installment and other
consumer loans are evaluated collectively for impairment. Individual commercial loans exceeding
size thresholds established by management are evaluated for impairment. Impaired loans are recorded
at the loans fair value by the establishment of a specific allowance where necessary. The fair
value of all loans currently 24




---



##### Table of Contents



evaluated for impairment are collateral-dependent and therefore the
fair value is determined by the fair value of the underlying collateral. The Corporation maintains the allowance for loan losses at a level adequate to absorb
managements estimate of probable credit losses inherent in the loan portfolio. The allowance is
comprised of a general allowance, a specific allowance for identified problem loans and an
unallocated allowance representing estimations done pursuant to either Standard of Financial
Accounting Standards (SFAS) No. 5 Accounting for Contingencies, or SFAS 114, Accounting by
Creditors for Impairment of a Loan. The general allowance is determined by applying estimated loss factors to the credit exposures
from outstanding loans. For commercial and commercial real estate loans, loss factors are applied
based on internal risk grades of these loans. Many factors are considered when these grades are
assigned to individual loans such as current and past delinquency, financial statements of the
borrower, current net realizable value of collateral and the general economic environment and
specific economic trends affecting the portfolio. For residential real estate, consumer and other
loans, loss factors are applied on a portfolio basis. Loss factors are based on the Corporations
historical loss experience and are reviewed for appropriateness on a quarterly basis, along with
other factors affecting the collectibility of the loan portfolio. Specific allowances are established for all classified loans when management has determined
that, due to identified significant conditions, it is probable that a loss has been incurred that
exceeds the general allowance loss factor for those loans. The unallocated allowance recognizes the
estimation risk
associated with the allocated general and specific allowances and incorporates managements
evaluation of existing conditions that are not included in the allocated allowance determinations.
These conditions are reviewed quarterly by management and include general economic conditions,
credit quality trends and internal loan review and regulatory examination findings. Management believes that it uses the best information available to determine the adequacy of
the allowance for loan losses. However, future adjustments to the allowance may be necessary and
the results of operations could be significantly and adversely affected if circumstances differ
substantially from the assumptions used in making the determinations Pension accounting Four key variables are used for calculating the annual pension cost (1) size of employee
population, (2) actuarial assumptions, (3) expected long-term rate of return on plan assets and (4)
discount rate. Described below is the effect of each of the variables on the pension expense: Size of employee population has stayed relatively constant over the last few years, thereby
causing pension cost relating to this variable to remain relatively stable. Actuarial assumptions are required for mortality rate, turnover rate, retirement rate,
disability rate and the rate of compensation increases. These factors
generally do not change over time, so
the range of assumptions and their impact on pension expense is generally narrow. Expected long-term rate of return on plan assets are based on the balance in the pension asset
portfolio at the beginning of the plan year and the expected long-term rate of return on that
portfolio. The expected long-term rate of return is designed to approximate the actual long term
rate of return on plan assets over time. The expected long-term rate of return is generally held
constant so the pattern of income/expense recognition more closely matches the stable pattern of
services provided by the employees over the life of pension obligation. In 2005 the expected long
term rate of return on plan assets is 7.50%. A discount rate is used to determine the present value of the future benefit obligations. It
reflects the rates available on long-term high quality fixed income debt instruments, reset
annually on the measurement date. The discount rate being used in 2005 is 5.75% 25




---



##### Table of Contents



Income Taxes The Corporations income tax expense and related current and deferred tax assets and
liabilities are presented as prescribed in SFAS No. 109 Accounting for Income Taxes. SFAS 109
requires the periodic review and adjustment of tax assets and liabilities based on many
assumptions. These assumptions include predictions as to the Corporations future profitability, as
well as potential changes in tax laws that could impact the deductibility of certain income and
expense items. Since financial results could be significantly different than these estimates,
future adjustments may be necessary to tax expense and related balance sheet accounts. 
 ITEM 4. CONTROLS AND PROCEDURES The Corporations management carried out an evaluation, under the supervision and with the
participation of the chief executive officer and the chief financial officer, of the effectiveness
of the design and operation of the Corporations disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
the Exchange Act) as of March 31, 2005, pursuant to the evaluation of these controls and
procedures required by Rule 13a-15 promulgated under the Exchange Act. Based upon that evaluation,
the chief executive officer along with the chief financial officer concluded that the Corporations
disclosure controls and procedures as of March 31, 2005 are effective in alerting them, on a timely
basis, to material information
required to be included in the Corporations periodic filings with the Securities and Exchange
Commission. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Not Applicable 
 Item 2. Changes in Securities and Use of Proceeds Issuer Purchases of Equity Securities (d) Maximum Number(a) Total
    
    
    
    (b)
    
    
    
    (c) Total Number of
    
    
    
    (or Approximate DollarNumber of
    
    
    
    Average
    
    
    
    Shares (or Units)
    
    
    
    Value) of Shares (orShares (or
    
    
    
    Price Paid
    
    
    
    Purchased as Part of
    
    
    
    Units) that May Yet BeUnits)
    
    
    
    per Share
    
    
    
    Publicly Announced
    
    
    
    Purchased Under thePeriod
    
    
    Purchased
    
    
    
    (or Unit)
    
    
    
    Plans or Programs
    
    
    
    Plans or ProgramsJanuary 1, 2005 
January 31, 2005
    
    
    
    0
    
    
    
    
    N/A
    
    
    
    
    0
    
    
    
    
    N/AFebruary 1, 2005 -
February 28, 2005
    
    
    
    0
    
    
    
    
    N/A
    
    
    
    
    0
    
    
    
    
    N/AMarch 1, 2005 -
March 31, 2005
    
    
    
    0
    
    
    
    
    N/A
    
    
    
    
    0
    
    
    
    
    N/ATotal
    
    
    
    0
    
    
    
    
    N/A
    
    
    
    
    0
    
    
    
    
    N/A
 26




---



##### Table of Contents



The Corporation currently does not have any common share repurchase plans. 
 Item 3. Defaults Upon Senior Securities Not applicable. 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 
 Item 5. Other Information Not applicable. 
 Item 6. Exhibits and Reports on Form 8-K (a) The exhibits required by Item 601 (a) of Regulation S-K are contained in the Exhibit Index
which is found on page 28 of this Form 10-Q.   
 SIGNATURE Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LNB BANCORP, INC.(Registrant)Date: May 10, 2005
    
    /s/ Terry M. WhiteTerry M. WhiteChief Financial Officer(Duly Authorized Officer, PrincipalFinancial Officer, and Chief Accounting Officer)
 27




---



##### Table of Contents



LNB Bancorp, Inc. 
   S-KReferencePageNumber
    
    Exhibit
    
    Number(4.1)
    
    LNB Bancorp, Inc. Second Amended Articles of
Incorporation. Previously filed under Item 6, Exhibit (3)(i)
to Quarterly Report on Form 10-Q (Commission File No.
0-13202) for the quarter ended September 30, 2000, filed
November 14, 2000 and incorporated herein by reference.
    
    N/A(4.2)
    
    LNB Bancorp, Inc. Amended Code of Regulations.
Previously filed under Item 7, Exhibit 3 to Form 8-K
(Commission File No. 0-13203) filed January 4, 2001 and
incorporated herein by reference.
    
    N/A(4.3)
    
    Instruments Defining the Rights of Security Holders. (See
Exhibits 4.1 and 4.2)
    
    N/A(10.2)
    
    Employment Agreement, made as of January 28, 2005, by and
among Daniel E. Klimas, LNB Bancorp, Inc. and The Lorain
National Bank. Previously filed under Item 15, Exhibit 10a
to Form 10-K (Commission File No. 0-13203) filed March 14,
2005 and incorporated herein by reference.(31(i)(a))
    
    Chief Executive Officer Sarbanes-Oxley Act 302 Certification.(31(i)(b))
    
    Chief Financial Officer Sarbanes-Oxley Act 302 Certification.(32(a))
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.(32(b))
    
    Certification pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 28