##### 



LNB Bancorp, Inc. Exhibit to Form 10 - K (for the fiscal year ended December 31, 2003) S - K Reference Number (13) LNB Bancorp, Inc. 2003 Annual Report
to Shareholders.




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Exhibit 13 (PHOTO)




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(LNB BANCORP, INC. LOGO) CORPORATE INFORMATION Corporate Profile LNB Bancorp, Inc.(the Bancorp), is a $741
million financial holding company
headquartered in Lorain,Ohio. The Bancorp
is a public company whose stock is traded
on The Nasdaq Stock Market® under the
ticker symbol LNBB. Its predecessor, The
Lorain National Bank, was formed as a
result of the merger of The Lorain
Banking Company and The National Bank of
Lorain on January 1, 1961. The Lorain
Banking Company was a state chartered
bank founded in 1905. The National Bank of
Lorain was a national bank receiving its
national charter in 1934. On March
30,1984, The Lorain National Bank became
the wholly-owned subsidiary of LNB
Bancorp,Inc. The Bancorp received its
financial holding company status on March
13,2000. The Bancorps primary subsidiary,The
Lorain National Bank, specializes in
personal,mortgage,and commercial banking
products and services along with
investment management and trust
services. Lorain National Bank operates
20 banking centers and 23 ATMs in the
nine communities of Lorain,Elyria,
Amherst, Avon
Lake, LaGrange, Oberlin, Olmsted
Township,Vermilion and Westlake located
in Ohios Lorain,eastern Erie, and
western Cuyahoga counties. Lorain National Bank offers products and
services by telephone through its 24-hour
TeleBanker and Telepay
systems, (800)610-9033 and provides
Internet banking at www.4LNB.com.Lorain
National Bank also provides services to
state and local governments, schools and
colleges,foundations,and not-for-profit
associations. Lorain National Bank is a
member of the Federal Reserve Bank of
Cleveland; a voluntary member of the
Federal Home Loan Bank of Cincinnati, with
its deposits insured by the Federal
Deposit Insurance Corporation; and an
Equal Employment Opportunity, Affirmative
Action Employer and Equal Housing Lender. LNB Bancorp,Inc. offers life, accident and
health insurance, and fixed annuity
products through its wholly-owned
insurance subsidiary Charleston Insurance
Agency,Inc.; and traditional title
services through its 49 percent owned
subsidiary Charleston Title Agency, LLC. In
addition, pursuant to an agreement between
Lorain National Bank and Raymond James
Financial Services, Inc., member
NASD/SIPC, Raymond James offers brokerage
services including stocks, bonds, mutual
funds and variable annuity products to
Lorain National Bank customers through
the LNB Investment Center. On July 15, 2002, Lorain National Bank
established a wholly-owned
subsidiary, North Coast Community
Development Corporation,which received
its Community Development Entity (CDE)
status from the United States Department
of Treasury on December 10,2002. North
Coast Community Development Corporations
mission is to provide commercial
investment in low- and moderate-income
communities. North Coast Community
Development Corporation was awarded $9
million in New Markets Tax Credit
Allocation in 2002 and will start making
investments during 2004 in low- and
moderate-income census tracts in Lorain
County. Our Vision The vision of LNB Bancorp, Inc. is to be
recognized as the most progressive and
dynamic, independent provider of
financial services in our market. Our Mission The mission of LNB Bancorp, Inc. is to be
a profitable, responsible, independent
business that provides extraordinary
service to our customers and
community, while maximizing shareholder
value and creating a high-quality and
challenging work environment for our
employees. LNB Bancorp, Inc.  Investment Facts With a heritage dating from 1905 and a
strong tradition of growth, LNB
Bancorp, Inc. has a long history of
quality asset growth and increased
dividends per share. Here are just a few
highlights. In 2003, LNB Bancorp, Inc.:  
    
    Experienced stock price appreciation of 12%.
    
    Declared a three-for-two stock split on March 14.
    
    Increased cash dividends for the 20th consecutive year.
    
    Experienced a common stock dividend yield of 3.45%. ContentsCorporate Information
    
    IFCCorporate and Investor Information
    
    IFCCorporate Organization Structure
    
    IFCLNB Bancorp, Inc. Common Stock and Dividend Information
    
    
    
    1Consolidated Financial Highlights
    
    
    
    2Message to Our Shareholders
    
    
    
    3Directors of LNB Bancorp,Inc. and Lorain National Bank
    
    
    
    6Directors Emeriti of Lorain National Bank
    
    
    
    6Officers of
LNB Bancorp, Inc.
    
    
    
    6Directors
and Officers of Charleston Insurance Agency, Inc.
    
    
    
    7Directors and Officers of North Coast Community Development Corporation
    
    
    
    7Management of Lorain National Bank
    
    
    
    8LNB Bancorp, Inc. and Subsidiary Locations
    
    
    
    10LNB Banking Centers, ATMs, LNB Investment and Trust Services and LNB Investment Center
    
    
    
    11Financial Information
    
    
    
    12
 (LOGOS) LNB BANCORP, INC.  2003 ANNUAL REPORT




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CORPORATE AND INVESTOR INFORMATION Corporate Headquarters If you need to contact the corporate
headquarters of LNB
Bancorp, Inc., call, write or visit: LNB
Bancorp, Inc.
      457 Broadway
      Lorain, Ohio
      44052-1739
      Telephone: (440) 244-6000
      Toll Free: (800) 860-1007 Corporate Website and E-mail Address For up-to-date corporate, financial and product information. www.4LNB.com
      InvestorRelations@4LNB.com Annual Meeting The Annual Meeting of Shareholders of
LNB Bancorp, Inc. will be held at 10:00
a.m., Eastern Daylight Savings Time, on
Tuesday, April 20, 2004, at Lorain
National Bank, 521 Broadway, Lorain, Ohio
44052. Corporate Financial Information The Annual Report on Form 10-K is filed
with the Securities and Exchange
Commission. Copies of form 10-K and
other filings are available at
www.4LNB.comor by contacting Investor
Relations. Analysts, shareholders and
investors seeking additional corporate
and financial information about LNB
Bancorp, Inc. should contact Investor
Relations at: LNB
Bancorp, Inc. 
      Investor Relations 
      457 Broadway
      Lorain, Ohio 44052-1739
      Telephone: (440) 244-7317
      Telefax: (440) 244-4815 Web Site Access to United States Securities and Exchange Commission Filings All reports filled electronically by LNB
Bancorp, Inc. with the United States
Securities and Exchange Commission
(SEC), including the annual report on
Form 10-K, quarterly reports on Form
10-Q, and current event reports on Form
8-K, as well as any amendments to those
reports, are accessible at no cost on the
Corporations Web site at
www.4LNB.com.These filings are also
accessible on the SECs Web site at
www.sec.gov. Quarterly Earnings Reporting For 2004, LNB Bancorp, Inc.s quarterly
earnings are anticipated to be
announced on or about the fourth
Tuesday of April, July, October 2004 and
January 2005. Any investor desiring a
copy of an earnings release can obtain
one at www.4LNB.comor by calling (440)
244-7317. Independent Auditors KPMG LLP
      One Cleveland Center
      1375 East 9th Street, Suite 2600
      Cleveland, Ohio 44114-1796 Privacy Policy The Privacy Policy of LNB
Bancorp, Inc. and subsidiary companies describes how we safeguard customersfinancial privacy. For
more information, visit our website at www.4LNB.comor call
(440) 244-7126. Stock Transfer Agent and Registrar Shareholders who hold their shares in physical certification form
and have requests for information about their share balances, a
change in name or address, lost certificates, or other shareholder
account matters should call or write: Registrar and Transfer Company
      Investor Relations Department
      10 Commerce Drive
      Cranford, New Jersey 07016-9982
      Toll Free: (800) 368-5948 Stock Listing (LNBB LOGO)
    
    LNB Bancorp, Inc. common stock is traded on the Nasdaq Stock Market® under the ticker symbol LNBB.
 LNBB Direct Stock Purchase and Dividend Reinvestment Plan You may buy LNB Bancorp, Inc. common stock
directly from LNB Bancorp, Inc. through
optional cash payments or automatic
monthly deductions from your bank
account. You also may have your dividends
reinvested automatically. This is not an
offer of LNB Bancorp, Inc. stock. To obtain
a prospectus or more information about
the LNBB Direct Stock Purchase and
Dividend Reinvestment Plan, call (800)
368-5948 or complete the postage paid
card titled LNBB Direct Stock Purchase &
Dividend Reinvestment Plan located at
the end of this Annual Report. Russell 2000 Index Member Included in the Russell 2000 Index LNB Bancorp, Inc., a financial holding company, was added as a member
of the Russell 2000 Index on June 30, 2003. Russell indexes are
widely used by investment managers for index funds and as benchmarks
for both passive and active strategies. Membership in Russell 2000 is determined by objective rules such as
market capitalization rankings. Annual reconstitution of the Russell
indexes captures the 3,000 largest U.S. stocks as of the end of
May, ranking them by total market capitalization to create the Russell
3000. The largest 1,000 companies in the ranking comprise the Russell
1000 while the remaining 2,000 companies become the widely used
Russell 2000. On June 30, 2003. LNB
Bancorp, Inc., had a
market capitalization of $141
million. This compares with a range of
$116.6 million to $1.2 billion for the
Russell 2000. The Russell 2000 market
capitalization of the median company was
$351.8 million with an average
capitalization of $443.5 million. (LNB BANCORP, INC. LOGO) LNB BANCORP, INC.  2003 ANNUAL REPORT




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CORPORATE ORGANIZATION STRUCTURE LNB Bancorp, Inc. LNB Bancorp, Inc. was established as a holding
company on March 30, 1984 and became the
parent company of The Lorain National Bank, a
national chartered bank with roots back to
1905. LNB Bancorp, Inc. received its financial holding status in
2000 and created a wholly-owned
subsidiary, Charleston Insurance
Agency, Inc. and a 49-percent owned
subsidiary, Charleston Title Agency, LLC. (CORPORATE ORGANIZATION STRUCTURE CHART) Charleston Title Agency, LLC LNB Bancorp, Inc.s 49-percent-owned
subsidiary, Charleston Title
Agency, LLC, offers traditional title
services. Individuals
seeking additional information on title
services should contact: Charleston
Title Agency, LLC
      424 Middle Avenue
      Elyria, Ohio 44035
      Telephone:(440) 244-5212 Lorain National Bank Lorain National Bank operates 20 banking
centers and 23 ATMs in nine communities
offering:  
    
    Personal, mortgage and commercial banking products and services
    
    Investment Management and Trust Services
    
    24-hour telephone banking
    
    Internet banking at www.4LNB.com Individuals seeking additional
information on banking products and
services should contact: Lorain National Bank
      457 Broadway
      Lorain, Ohio 44052-1739
      Telephone:(440) 989-3348 Charleston Insurance Agency, Inc. and LNB Investment Center In addition to traditional banking
services, customers can access a wide range
of insurance, investment products and
services, including:  
    
    Life, Long-term Care Insurance and
Fixed-Annuity products offered through
Charleston Insurance Agency, Inc. and
    
    Brokerage Services including
stocks, bonds, mutual funds, variable
annuity and variable-life insurance
products offered through Raymond
James Financial Services Inc. member
NASD/SIPC at the LNB Investment
Center. Individuals seeking additional information
on investment products and services should
contact: Charleston Insurance Agency, Inc. and LNB Investment Center
      457 Broadway
      Lorain, Ohio 44052-1739
      Telephone: (800) 845-2152 North Coast Community Development Corporation North Coast Community Development Corporation
was created on July 15, 2002 as a wholly-owned
subsidiary of The Lorain National Bank. It
received its Community Development Entity
(CDE) status from the United States
Department of the Treasury on December
10, 2002. North Coast Community Development
Corporations mission is to provide to low
and moderate communities in Lorain
County, Ohio:  
    
    Commercial Loans and
    
    Financial Services Individuals seeking additional information
on investment products and financial
services should contact: North Coast Community Development Corporation
       457 Broadway
       Lorain, Ohio 44052-1739
       Telephone: (440) 244-7212 LNB Financial Services, Inc. LNB Financial Services, Inc., a wholly-owned
subsidiary of The Lorain National Bank is a
dormant Ohio Corporation. LNB Financial Services, Inc.
      457 Broadway
       Lorain, Ohio 44052-1739




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LNB BANCORP, INC. COMMON STOCK AND DIVIDEND INFORMATION Common Stock Trading Ranges and Cash Dividends Declared 2003
    
    2002Sales Price*
    
    Sales Price*High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    21.28
    
    
    $
    18.17
    
    
    $
    14.38
    
    
    $
    13.43Second Quarter
    
    
    23.95
    
    
    
    20.50
    
    
    
    17.50
    
    
    
    12.93Third Quarter
    
    
    21.67
    
    
    
    20.15
    
    
    
    17.66
    
    
    
    15.35Fourth Quarter
    
    
    21.00
    
    
    
    20.17
    
    
    
    18.10
    
    
    
    16.20
 2003
    
    2002Cash
    
    CashDividends
    
    DividendsDeclared*
    
    Declared*First Quarter  regular
    
    $
    .17
    
    
    $
    .17Second Quarter  regular
    
    
    .17
    
    
    
    .17Third Quarter  regular
    
    
    .17
    
    
    
    .17Fourth Quarter  regular
    
    
    .17
    
    
    
    .17Fourth Quarter  extra
    
    
    .02
    
    
    
    .00Total Dividends
    
    $
    .70
    
    
    $
    .68
  *
    
    All sales prices and cash dividends declared have been adjusted to reflect
the three-for-two stock split in 2003 and the two percent stock
dividend in 2002. The shares of LNB Bancorp, Inc. common
stock, fixed par value $1.00 per
share, are traded on The Nasdaq Stock
Market® under the ticker symbol LNBB. The
above prices represent the high and low
sales prices reported on The Nasdaq
Stock Market®. All prices reflect
inter-dealer prices without
markup, markdown or commission and may
not necessarily represent actual
transactions. LNB Bancorp, Inc. common stock, is usually
listed in publications as
LNB Bancorp. LNB Bancorps common stock
CUSIP is 502100100. As of December
31, 2003. LNB Bancorp had 2,257
shareholders of record. Prospective
shareholders may contact our Investor
Relations Department at (440) 244-7317
for more information. (LNBB LOGO) LNB Bancorp, Inc. 20-Year Cash Dividend Declared Per Share History
(Dollars*) (20 YEAR CASH DIVIDEND DECLARED PER SHARE HISTORY BAR CHART) * Adjusted for stock dividends and splits Dividend Information LNB Bancorp, Inc. has increased the cash
dividend paid to shareholders each year
since becoming a Holding Company in
1984. The extra cash dividend is
discretionary and varies based upon the
Corporations current year and near-term
profitability outlook. Dividend Calendar Cash dividends on common stock, if
approved by the Board of Directors, are
customarily paid to shareholders as
follows: Record Dates:
       March 15, June 14, September 13, and December 13, 2004 Dividend Payable Dates:
      April 1, July 1, October 1, 2004 and January 3, 2005 LNB Bancorp, Inc. Common Stock Market Makers Friedman, Billings, Ramsey and Co., Inc.
Howe Barnes Investments, Inc.
McDonald Investments Inc./Trident Securities, Inc.
Sweney Cartwright and Company, Inc. LNB Bancorp, Inc. Five Year Historic Yields
(Yields*) (FIVE YEAR HISTORIC DIVIDEND YIELDS CHART)  *
    
    The dividend yield is
based upon sales price at
year-end and dividends
declared during that year. LNB BANCORP, INC.  2003 ANNUAL REPORT    1




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CONSOLIDATED FINANCIAL HIGHLIGHTS December 31,
    
    
    
    
    
    
    
    
    
    2002 to 2003(Dollars in thousands, except per share data and corporate data)
    
    2003
    
    2002
    
    % Change
    
    1993Financial PositionAssets
    
    $
    741,221
    
    
    $
    715,399
    
    
    
    3.6
    %
    
    $
    379,616Investments
    
    
    152,127
    
    
    
    152,295
    
    
    
    (0.1
    )
    
    
    103,086Net loans
    
    
    526,581
    
    
    
    502,897
    
    
    
    4.7
    
    
    
    242,043Deposits
    
    
    581,344
    
    
    
    566,127
    
    
    
    2.7
    
    
    
    321,012Other borrowings
    
    
    86,563
    
    
    
    75,791
    
    
    
    14.2
    
    
    
    20,500Shareholders equity
    
    
    68,135
    
    
    
    66,613
    
    
    
    2.3
    
    
    
    35,060Financial Results for the YearInterest income
    
    $
    37,945
    
    
    $
    41,364
    
    
    
    (8.3
    )%
    
    $
    25,892Interest expense
    
    
    9,196
    
    
    
    12,095
    
    
    
    (24.0
    )
    
    
    8,540Net interest income
    
    
    28,749
    
    
    
    29,269
    
    
    
    (1.8
    )
    
    
    17,352Provision for loan losses
    
    
    2,695
    
    
    
    2,200
    
    
    
    22.5
    
    
    
    500Noninterest income
    
    
    11,541
    
    
    
    11,068
    
    
    
    4.3
    
    
    
    4,009Noninterest expense
    
    
    26,449
    
    
    
    24,772
    
    
    
    6.8
    
    
    
    15,017Income taxes
    
    
    3,411
    
    
    
    4,200
    
    
    
    (18.8
    )
    
    
    1,815Net income
    
    
    7,715
    
    
    
    9,165
    
    
    
    (15.8
    )
    
    
    4,029Revenue
    
    
    40,290
    
    
    
    40,337
    
    
    
    (0.1
    )
    
    
    21,361Per Share Data*Basic earnings
    
    $
    1.17
    
    
    $
    1.39
    
    
    
    (15.8
    )%
    
    $
    .61Diluted earnings
    
    
    1.17
    
    
    
    1.39
    
    
    
    (15.8
    )
    
    
    .61Cash dividends
    
    
    .70
    
    
    
    .68
    
    
    
    2.9
    
    
    
    .26Book value (year-end)
    
    
    10.30
    
    
    
    10.09
    
    
    
    2.1
    
    
    
    5.30Market value (year-end)
    
    
    20.30
    
    
    
    18.10
    
    
    
    12.2
    
    
    
    12.31Financial Performance RatiosReturn on average assets (ROAA)
    
    
    1.05
    %
    
    
    1.33
    %
    
    
    (21.1
    )%
    
    
    1.08
    %Return on average shareholders equity (ROAE)
    
    
    11.33
    
    
    
    14.24
    
    
    
    (20.4
    )
    
    
    11.90Net interest margin
    
    
    4.18
    
    
    
    4.52
    
    
    
    (7.5
    )
    
    
    5.10Efficiency ratio
    
    
    63.01
    
    
    
    61.41
    
    
    
    2.6
    
    
    
    70.93Loans/deposits
    
    
    91.91
    
    
    
    90.01
    
    
    
    2.1
    
    
    
    76.55Dividend payout
    
    
    59.83
    
    
    
    48.75
    
    
    
    22.7
    
    
    
    42.81Capital RatiosCore capital (Tier I)/Risk-adjusted assets
    
    
    11.32
    %
    
    
    11.64
    %
    
    
    (2.7
    )%
    
    
    16.38
    %Total capital (Tier I Plus Tier II)/Risk-adjusted assets
    
    
    12.57
    
    
    
    12.89
    
    
    
    (2.5
    )
    
    
    17.57Leverage ratio (Tier 1/Average assets)
    
    
    8.92
    
    
    
    9.04
    
    
    
    (1.3
    )
    
    
    9.44Equity/assets
    
    
    9.19
    
    
    
    9.31
    
    
    
    (0.1
    )
    
    
    9.23Market RatiosPrice/earnings (X)
    
    
    17.41
    
    
    
    13.04
    
    
    
    33.5
    %
    
    
    20.18Price/book (%)
    
    
    197.16
    %
    
    
    179.38
    %
    
    
    9.9
    
    
    
    231.89
    %Dividend yield (%)
    
    
    3.45
    
    
    
    3.76
    
    
    
    (8.2
    )
    
    
    2.13Corporate DataBank offices
    
    
    20
    
    
    
    21
    
    
    
    (4.8
    )%
    
    
    17Bank officers and staff
    
    
    277
    
    
    
    305
    
    
    
    (9.2
    )
    
    
    299Number of shareholders
    
    
    2,257
    
    
    
    2,210
    
    
    
    2.1
    
    
    
    1,740
  *
    
    All per share data has been adjusted for the three-for-two stock split in 2003, the five-for-four stock splits in 1995 and 1993 and stock dividends. LNB BANCORP, INC.  2003 ANNUAL REPORT    2




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MESSAGE TO OUR SHAREHOLDERS (PHOTO OF STANLEY G. PIJOR)
    
    Stanley G. Pijor
Chairman of the Board
    
    (PHOTO OF JAMES F. KIDD)
    
    James F. Kidd
President and
Chief Executive Officer
 It is a pleasure to address you once again after a successful year of
operations. All things considered, including a fluctuating economy,
shrinking interest margins and increasing competitive pressures;
we are very pleased with the direction in which our organization
is headed. And while not all of our expectations were met in 2003, weve
strengthened our franchise in many ways. Internal restructuring,
which took place throughout the year, will pay future dividends in
the form of higher quality customer service, improved shareholder
value, and increased operating efficiencies. Though the changes weve undergone have, in some cases, been
difficult, they remain necessary for us to remain competitive and to
improve our organization. As we change, we will not lose sight of
how weve become the largest independent community bank in
our market area. What we havent changed is our focus on our
core constituents, or four publics  our customers, shareholders,
employees and communities we serve. Our Customers While we agree that each of these publics is highly important to
our success, our entire organization recognizes we must perform
in a customer-oriented manner for the other publics to mutually
benefit. Our customers are very important to us, and as such, will
remain the central focus of our operations. Due to their importance, in 2004 we will concentrate much energy in the areas of
customer satisfaction measurement, relationship building and
consultative selling. Our banking subsidiary serves approximately 45,000 households in
Lorain County and portions of Cuyahoga and Erie counties. It is
our goal to provide the members of those households with service that meets or exceeds their expectations, utilizing the most competitive
 products available. Our High Performance Checking accounts,
Market Access deposit account and Preferred Line home equity line
of credit products provide our customers with excellent choices.
New bank branch openings in 2004 will add more convenient
banking locations for existing and new customers alike. Our Shareholders Though LNB Bancorp, Inc. did not reach its earnings goals in 2003,
and reported lower earnings than in 2002, we believe strategies are
in place to produce improved earnings in 2004 and beyond. While
the severance costs in 2003 contributed substantially to the 2003
earnings result, we do not underestimate the need to address other
fundamental earnings issues like net interest margin compression,
sustainable asset growth in Lorain County and expense control. On the bright side, the Corporations earnings were still respectable
and contributed to a healthy capital position. This capital position
provided the opportunity to declare not only the four quarterly cash
dividends, but also an extra cash dividend in the fourth quarter. In
addition, shareholders enjoyed a three-for-two stock split during the
first quarter. As mentioned earlier, several changes occurred in 2003, including
the consolidation of branch banking facilities, outsourcing of
selected back office functions, and a reduction in force of 20 staff
positions. These separations and the retirement of Gary Smith at
year-end, with their accompanying severance and retirement obligations, negatively impacted our fourth quarter and year-end earnings. Our shareholder outlook is bright. With many of our changes
behind us, we believe LNBB shares remain an excellent investment
opportunity. (BAR CHARTS) LNB BANCORP,
INC.    2003 ANNUAL REPORT   3






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MESSAGE TO OUR SHAREHOLDERS continued Our Employees Our employees continue to provide our customers and
shareholders with service that favorably sets us apart from the competition.
Through diligent introduction of new products and services, such
as High Performance Checking, our employees have more opportunities than ever before to meet our customersneeds. Their consultative selling approach allows front line employees to
get to know customers and their financial needs in greater depth.
With that knowledge, our staff can provide appropriate solutions to
our customersneeds. Back office employees, while not directly serving customers,
understand that their dedication to their work ultimately impacts
our customers. As we say, If you are not serving a customer
directly, you are serving someone who is.  In 2004 we will implement a performance-based incentive program that will enable employees throughout the organization to
benefit from successful sales consulting efforts, whether or not they
serve on the front line. Our Community Our organization has historically served as one of our areas leading
community partners, providing financial support, volunteers and
expertise to dozens of not-for-profit agencies in our market. That
trend continued in 2003, led by our community reinvestment
director, Evelyn France. For example, Evelyn and her teams of bank volunteers worked in
concert with Lorain Countys Second Harvest Food Bank, the
Womens Development Center and area housing authorities to
distribute several thousand pounds of donated food on multiple
occasions to low- to moderate-income housing residents. Additionally, LNBB joined in partnership with the State of Ohio
to help facilitate the Lorain County summer lunch program,
which provided meals for thousands of area children last year. We take our social responsibility in the communities we serve very
seriously and look forward to helping improve the quality of more
of our neighborslives in 2004. 2003 In Review We are pleased to reflect on
several positive events and achievements from 2003; many of which bode well for our future. In March, shareholders enjoyed a three-for-two split of LNB
Bancorp, Inc. common stock. As a result of the split, the number
of common shares outstanding total approximately 6.6 million.
Shareholders received one additional share of common stock for
every two shares owned. Lorain National Bank was recognized by the U.S. Department
of Labor with a nomination for the Exemplary Voluntary Efforts
(EVE) Award for demonstrating through programs and activities,
exemplary and innovative efforts to create an inclusive American
workforce. The Department of Labor recognized the bank for its
efforts in increasing the employment opportunities of women,
disabled individuals and veterans. LNBBs subsidiary, North Coast Community Development
Corporation (NCCDC), in March was awarded $9 million in
tax credit allocations to be used to provide qualified community
businesses with debt financing, including commercial mortgage,
construction, commercial equipment and working capital loans
aimed at stimulating growth and job creation in low- and moderate-income
census tracts in Lorain County. NCCDC was one of
66 organizations nationally and one of nine in the state of Ohio
selected to receive the inaugural tax credit allocations. In July, LNB Bancorp, Inc. was added to the Russell 2000 Index
by the Frank Russell Company. Russell indexes are widely used by
investment managers for index funds and as benchmarks for both
passive and active strategies. About $220 billion is invested in index
funds based on Russells indexes and an additional $850 billion is
benchmarked to them. (BAR CHARTS) LNB BANCORP,
INC.    2003 ANNUAL REPORT   4






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##### 



In the fourth quarter we announced the installation of a new
drive-up ATM and night depository in the village of Grafton,
adjacent to a new multi-purpose convenience center called
Grafton Station. Also completed during the fourth quarter was
the expansion of business offices at our banks Ely Square office to
accommodate business banking, trust and community reinvestment
department needs. Construction of two new bank branch offices in the cities of
Avon and Avon Lake, respectively, began during the fourth quarter
as well. The Avon branch, which will open March 1, 2004, is
situated in one of northern Ohios fastest growing communities.
Simultaneously we will close our Westlake office and transfer
accounts from that office to Avon, a distance of approximately
three miles. The Westlake property will be maintained and transformed into a commercial loan production office during the
second quarter of 2004. The Avon Lake office will be an improved location over our
existing office to the west. Since the opening of our original
facility in the 1960s, retail development and traffic patterns have
emerged near the Towne Center development where LNBs new
office will open in May 2004. At that time, our former Avon Lake
office will close. Also as part of our delivery system restructuring, we closed our
Midway Mall banking office due to redundancy of Lorain National
Bank service in the area. The accounts and lease of that property
were originally acquired by LNB from KeyBank in the 1990s. In November, as part of our restructuring, the bank eliminated
20 salaried positions from the organization. At that time, Terry M.
White was named executive vice president and chief financial
officer of the Bancorp and bank. White formerly served as a chief
financial officer of a $1.2 billion multi-banking holding company
in Indiana. Prior to the promotion, White served our organization
as chief investment officer. Upon the request of our board of directors, James F. Kidd returned
to LNBB as president and chief executive officer upon the retirement announcement of Gary C. Smith in December. Kidd served
as the Bancorps president and CEO for five years and took a hiatus from full-time duty in 1999. Looking Forward We are very optimistic about our prospects for 2004, and we are
particularly looking forward to the opening of our new branch
locations in Avon and Avon Lake. While our neighbors in these
communities are familiar to us, until this point, we have not been
branched appropriately to meet their financial services needs. There are signs that the economy is picking up momentum, which
usually translates to greater loan demand. At year-end 2003, loan
demand was steady and we anticipate that will carry into the first
quarter of 2004. It is our hope that interest rates will begin a gradual climb, relieving some of the margin compression we have
endured for the past couple of years. As always, we appreciate your support of our activities. We look
forward to addressing you at the close of the first quarter of 2004
and in person at this years annual meeting of shareholders in April. -s- Stanley G. Pijor
    
    -s- James E KiddStanley G. Pijor
    
    James F. KiddChairman of the Board
    
    President andChief Executive Officer
 (20-YEAR REVENUE HISTORY BAR CHART) LNB BANCORP,
INC.    2003 ANNUAL REPORT   5






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##### 



DIRECTORS AND OFFICERS Directors of LNB Bancorp,
Inc. and Lorain National Bank
Stanley G. PijorChairman of the BoardLNB Bancorp, Inc. andLorain National Bank James F. KiddVice Chairman of the BoardPresident andChief Executive OfficerLNB Bancorp, Inc. andLorain National Bank Daniel P. BatistaChairman of the BoardWickens, Herzer, Panza,Cook & Batista L.P.A. Robert M. CampanaPresidentCampana Development Terry D. GoodeVice PresidentLandAmerica FinancialGroup, Inc. andLorain County Title Company Wellsley O. GrayRetired James R. HerrickPresidentLiberty Auto Group, Inc. Lee C. HowleyPresidentHowley Bread Group Ltd. David M. KoetheRetiredFormer Chairman of the BoardThe Lorain Printing Company Benjamin G. NortonConsultantLTI Power Systems Jeffrey F. RiddellPresident andChief Executive Officer,Consumeracq, Inc. and ConsumersBuilders Supply Co. John W. Schaeffer, M. D.PresidentNorth Ohio Heart Center, Inc. Eugene M. SofrankoChairman of the BoardLorain Glass Company, Inc. Directors Emeriti of
Lorain National Bank James L. BardonerRetired, Former PresidentDorn Industries, Inc. T. L. Smith, M. D.Retired Physician Leo WeingartenRetired Officers of LNB Bancorp, Inc.
Stanley G. PijorChairman of the Board James F. KiddVice Chairman of the BoardPresident andChief Executive Officer Kevin W. NelsonExecutive Vice President andChief Operating Officer Terry M. WhiteExecutive Vice President,Chief Financial Officer andCorporate Secretary Debra R. BrownSenior Vice President Robert L. CoxSenior Vice President Paul A. CampagnaSenior Vice President Mitchell J. Fallis, CPAVice President andChief Accounting Officer John D. FunderburgVice PresidentLoan Administrator James W. ManningDirector of Audit Carol M. MeskoVice PresidentHuman Resources David E. NocjarSenior Trust andInvestment Officer Gerry L. ReynoldsSenior Operations Officer James H. WeberSenior Vice President LNB BANCORP, INC.    2003
ANNUAL REPORT   6






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##### 



Directors and Officers of Charleston Insurance Agency, Inc. Directors
James F. KiddChairman of the Board,President andChief Executive OfficerCharleston InsuranceAgency, Inc. Stanley G. PijorChairman of the BoardLNB Bancorp, Inc. andLorain National Bank James R. HerrickPresidentLiberty Auto Group, Inc. Jeffrey F. RiddellPresident andChief Executive Officer,Consumeracq, Inc. andConsumers Builders Supply Co. Officers
James F. KiddChairman of the Board,President andChief Executive Officer Terry M. WhiteVice President,Corporate Secretaryand Treasurer Kevin W. NelsonVice President Directors and Officers of North Coast Community Development Corporation Directors
James F. KiddChairman of the Board,President andChief Executive OfficerNorth Coast CommunityDevelopment Corporation Jose Candelario, Sr.PresidentCandelario Accounting Mitchell J. Fallis, CPAVice President,Corporate Secretary and TreasurerNorth Coast CommunityDevelopment Corporation Joel A. KrueckVice PresidentNorth Coast CommunityDevelopment Corporation Evelyn C. FranceDirectorWomens Development Center Sydney L. LancasterManager Human ResourcesDevelopment andAffirmative Action OfficerLorain CountyCommunity Collage Daniel MartinezChairman of the Board andPresidentSouth Lorain CommunityDevelopment Corporation Benjamin G. NortonConsultantLTI Power Systems Homer A. VirdonDirectorLorain MetropolitanHousing Authority Officers
James F. KiddChairman of the Board,President andChief Executive Officer Joel A. KrueckVice President Mitchell J.  Fallis, CPAVice President,Corporate Secretaryand Treasurer LNB BANCORP, INC.    2003
ANNUAL REPORT   7






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##### 



MANAGEMENT OF LORAIN NATIONAL BANK Executive and Senior Officers
James F. KiddPresident andChief Executive Officer Terry M. WhiteExecutive Vice President,Chief Financial Officer andCorporate Secretary Kevin W. NelsonExecutive Vice President andChief Operating Officer Debra R. BrownSenior Vice PresidentBanking Center Administration Robert L. CoxSenior Vice PresidentRetail Lending Paul A. CampagnaSenior Vice President andSenior Lending Officer Mitchell J. Fallis, CPAVice President andChief Accounting Officer John D. FunderburgVice PresidentLoan Administrator James W. ManningDirector of Audit Jeanne C. MaschariVice President andSenior Business Analyst Carol M. MeskoVice PresidentHuman Resources David E. NocjarSenior Trust andInvestment Officer Gerry L. ReynoldsSenior Operations Officer James H. WeberSenior Vice President andSenior Marketing Officer Banking Center Officers
Teresa E. GeorgeVice PresidentBanking Center Administration Main & Sixth Street Drive-In
Charles A. DeAngelisVice President Patti A. KlinarAssistant Branch Manager Amherst
G. Dale RosenkranzVice President Jennifer M. NickollsSenior Customer ServiceRepresentative and Lender Avon Lake
Diana L. SchmittgenAssistant Vice President Cleveland Street
Timothy J. GallagherVice President Ely Square & Elyria
United Methodist Village
James E. SchmittgenVice President Kansas Avenue
Linda A. BuehnerAssistant Vice President Village of LaGrange
Vanessa R. WalterSenior Customer ServiceRepresentative and BranchTeam Leader Lake Avenue
Kara OdomBranch Service Managerand Team Leader Oberlin Avenue &
West Park Drive-In
Christine M. WeberAssistant Vice President Oberlin & Kendal
at Oberlin
Marilyn R. KrasienkoAssistant Vice President Olmsted Township
& The Renaissance
Carol SnyderAssistant Cashier Pearl Avenue
Cindy WatersSenior CSR andBranch Team Leader Vermilion
Barbara M. Beres-ClarkAssistant Branch Manager The Crossings of Westlake
& Westlake Village
Lora T. GravesSenior Customer ServiceRepresentative andBranch Team Leader Loan Officers
Commercial Loans
Kevin S. MillerVice President Lee C. MyersVice President Ellen M. WalshVice President Kenneth P. WaytonVice President Retail Lending
Janice HardwickAssistant Administrator Mortgage Loans
Keith H. KapankeMortgage Loan Originator Joel A. KrueckVice President Credit Analysis
Denise M. KosakowskiVice President Collections
Kelly A. DunfeeAssistant Cashier Loan Center
Kimberly S. PlzakAssistant Vice President Loan Review
Richard P. VieritzVice President Loan Services
Laura J. CampbellMortgage LoanServicing Officer Joyce L. WaselaAssistant Cashier LNB BANCORP, INC.    2003
ANNUAL REPORT   8






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##### 



Administration and Operations Officers Accounting
Mary L.  ScaffFiscal Operations Officer Auditing
Robert HeinrichAuditor Randy E. LottmanNetwork andInformation Security Officer Community Reinvestment
Evelyn FranceDirector of CRA Cash Management
Diane DePouldSenior Product Manager Compliance
Donna Jean PhillipsVice President,Compliance, BSAand OFAC Officer Customer Service
Janet HatcherCustomer Service Manager Electronic Banking &
Deposit Operations
Barb BalogOperations Manager Michael LanzarottaOperations Manager E.D.P. Services
Larry R. JohnsonVice President Human Resources
Teresa E. KregerAssistant Vice President Marketing
Steven F. CooperVice President Debra L. TemerarioMarketing Operations Officer Professional Development
Marianne KocakAssistant Vice President Purchasing
Susan I. TuttleAssistant Vice President Security
James E. LongAssistant Vice President Technical Support
Michael O. CarmodyNetwork and Systems Engineer LNB Investment and Trust Services Officers Neal A. CongerVice President Gerald S. FalconVice President Patrick E. SheridanVice President Georgia L. BourVice President Carol A. CavanaughAssistant Vice President Thomas H. EschkeAssistant Vice PresidentTrust Operations Officer LNB Investment Center Officer Senior Financial Advisor
 LNB BANCORP,
INC.    2003 ANNUAL REPORT   9






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##### 



LNB BANCORP, INC. AND SUBSIDIARY LOCATIONS Lorain National Bank
457 Broadway
Lorain, Ohio 44052
(440) 244-6000
(800) 860-1007 Charleston Insurance
Agency, Inc.
457 Broadway
Lorain, Ohio 44052
(440) 244-7158
(800) 845-2152 Charleston Title
Agency, LLC
424 Middle Avenue
Elyria, Ohio 44035
(440) 284-5165
(800) 860-1007 North Coast Community
Development Corporation
457 Broadway
Lorain, Ohio 44052
(440) 244-7145
(440) 244-7212 (DEPOSIT MARKET SHARE MAP) LNB BANCORP, INC.    2003 ANNUAL
REPORT   10






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##### 



LNB BANKING CENTERS, ATMs, INVESTMENT AND TRUST SERVICES AND INVESTMENT CENTER Lorain Banking CentersMain457 BroadwayLorain, Ohio 44052(440) 244-7185(LOGO)
    
    Sixth Street Drive-In**
200 Sixth StreetLorain, Ohio 44052(440) 244-7242(LOGO)
    
    Kansas Avenue
1604 Kansas AvenueLorain, Ohio 44052(440) 288-9151(LOGO)
    
    Oberlin Avenue
3660 Oberlin AvenueLorain, Ohio 44053(440) 282-9196(LOGO)
    
    Pearl Avenue
2850 Pearl AvenueLorain, Ohio 44055(440) 277-1103(LOGO)
    
    West Park Drive-In**
2130 West Park DriveLorain, Ohio 44053(440) 989-3131Amherst Banking Center(LOGO)
    
    Amherst
1175 Cleveland AvenueAmherst, Ohio 44001(440) 988-4423Avon Banking Center(LOGO)
    
    Avon
2100 Center RoadAvon, Ohio 44011(440) 934-7922Avon Lake Banking Center(LOGO)
    
    Avon Lake
240 Miller RoadAvon Lake, Ohio 44012(440) 933-2186Elyria Banking Centers(LOGO)
    
    Ely Square
124 Middle AvenueElyria, Ohio 44035(440) 323-4621(LOGO)
    
    Cleveland Street
801 Cleveland StreetElyria, Ohio 44035(440) 365-8397(LOGO)
    
    Lake Avenue
42935 North Ridge RoadElyria Township,Ohio 44035(440) 233-7196Elyria UnitedMethodist Village807 West AvenueElyria, Ohio 44035(440) 323-6488Village of LaGrange
Banking Center(LOGO)
    
    Village of LaGrange
546 North Center StreetVillage of LaGrange,Ohio 44050(440) 355-6734Oberlin Banking Centers(LOGO)
    
    Kendal at Oberlin*
600 Kendal DriveOberlin, Ohio 44074(440) 774-5400(LOGO)
    
    Oberlin
40 East College StreetOberlin, Ohio 44074(440) 775-1361Olmsted Township Banking Centers(LOGO)
    
    Olmsted Township
27095 Bagley RoadOlmsted Township,Ohio 44138(440) 235-4600The Renaissance*26376 John RoadOlmsted Township,Ohio 44138(440) 427-0041Vermilion Banking Center(LOGO)
    
    Vermilion
4455 East Liberty AvenueVermilion, Ohio 44089(440) 967-3124Westlake Banking CenterWestlakeVillage*
28550 WestlakeVillage DriveWestlake, Ohio 44145(440) 808-0229ATMs(LOGO)
    
    Captain Larrys Shell
1317 State Route 60Vermilion, Ohio 44089(LOGO)
    
    Dads Sunoco
7580 Leavitt RoadState Route 58Amherst, Ohio 44001(LOGO)
    
    Gateway Plaza
3451 Colorado AvenueLorain, Ohio 44052(LOGO)
    
    Grafton Station
537 Main StreetGrafton, Ohio 44044(LOGO)
    
    Lakeland Medical Center
3700 Kolbe RoadLorain, Ohio 44053(LOGO)
    
    Lorain County
Community College1005 North Abbe RoadElyria, Ohio 44035(LOGO)
    
    Lowes Home
Improvement Warehouse620 Midway BoulevardElyria, Ohio 44035Other OfficesExecutive
457 BroadwayLorain, Ohio 44052(440) 244-7123Accounting457 BroadwayLorain, Ohio 44052(440) 244-7145Banking CenterAdministration457 BroadwayLorain, Ohio 44052(440) 244-7253Commercial, Consumerand Mortgage Loans457 BroadwayLorain, Ohio 44052(440) 244-7219(440) 989-3348(440) 244-7216Customer Service2130 West Park DriveLorain, Ohio 44053(440) 989-3348(800) 860-1007Human Resources2130 West Park DriveLorain, Ohio 44053(440) 989-3139Purchasing2150 West Park DriveLorain, Ohio 44053(440) 989-3327Technology Center2130 West Park DriveLorain, Ohio 44053(440) 989-3301Electronic Banking2130 West Park DriveLorain, Ohio 44053(440) 989-3348LNB Investment and
Trust Services457 BroadwayLorain, Ohio 44052(440) 244-7148LNB Investment Center457 BroadwayLorain, Ohio 44052(440) 244-7241(800) 845-2152All Other Offices Not ListedToll Free (800) 860-1007Lorain (440) 244-6000TeleBankerTeleBanker (440) 245-4562TeleBanker (800) 610-9033Internet: www.4LNB.com(440) 989-3348
 (LOGO)
    
    ATM service available wherever you see this symbol* Restricted to residents, their visitors and employees** Drive-In service only
 LNB BANCORP,
INC.    2003 ANNUAL REPORT   11






---



##### 



CONSOLIDATED BALANCE SHEETS December 31,(Dollars in thousands)
    
    2003
    
    
    
    
    
    2002Assets:Cash and due from banks (note 3)
    
    $
    24,646
    
    
    
    
    
    
    $
    23,608Federal funds sold and short-term investments
    
    
    3,103
    
    
    
    
    
    
    
    3,224Securities (note 5):Available for sale, at fair value
    
    
    143,459
    
    
    
    
    
    
    
    137,909Held to maturity, at cost (fair value $4,952 and $10,904, respectively)
    
    
    4,789
    
    
    
    
    
    
    
    10,648Federal Home Loan Bank and Federal Reserve Bank stock, at cost (note 1)
    
    
    3,879
    
    
    
    
    
    
    
    3,738Total securities
    
    
    152,127
    
    
    
    
    
    
    
    152,295Loans (notes 6, 7, 10 and 11):Loans available for sale
    
    
    6,215
    
    
    
    
    
    
    
    8,999Portfolio loans
    
    
    528,096
    
    
    
    
    
    
    
    500,551Reserve for loan losses
    
    
    (7,730
    )
    
    
    
    
    
    
    (6,653
    )Net loans
    
    
    526,581
    
    
    
    
    
    
    
    502,897Bank premises and equipment, net (note 8)
    
    
    11,009
    
    
    
    
    
    
    
    10,748Bank owned life insurance
    
    
    12,702
    
    
    
    
    
    
    
    11,930Intangible assets (note 4)
    
    
    3,245
    
    
    
    
    
    
    
    3,358Accrued interest receivable
    
    
    2,818
    
    
    
    
    
    
    
    3,045Other assets (note 12)
    
    
    4,401
    
    
    
    
    
    
    
    4,272Foreclosed assets
    
    
    589
    
    
    
    
    
    
    
    22Total Assets
    
    $
    741,221
    
    
    
    
    
    
    $
    715,399Liabilities and Shareholders Equity:Liabilities:Deposits (note 9)Demand and other noninterest-bearing deposits
    
    $
    86,693
    
    
    
    
    
    
    $
    80,879Savings, Market Access and passbook accounts
    
    
    277,197
    
    
    
    
    
    
    
    280,616Certificates of deposit
    
    
    217,454
    
    
    
    
    
    
    
    204,632Total deposits
    
    
    581,344
    
    
    
    
    
    
    
    566,127Securities sold under repurchase agreements
and other short-term borrowings (note 10)
    
    
    15,023
    
    
    
    
    
    
    
    26,866Federal Home Loan Bank advances, (note 11)
    
    
    71,540
    
    
    
    
    
    
    
    48,925Accrued interest payable
    
    
    875
    
    
    
    
    
    
    
    983Accrued taxes, expenses and other liabilities (notes 12 and 16)
    
    
    4,304
    
    
    
    
    
    
    
    5,885Total Liabilities
    
    
    673,086
    
    
    
    
    
    
    
    648,786Shareholders Equity: (notes 13 and 14)Preferred stock, no par value: Shares authorized 1,000,000, and shares outstanding, none (note 13)
Common stock, $1.00 par: Shares authorized 15,000,000
Shares issued 6,766,867 and 4,501,232, respectively and
Shares outstanding 6,617,618 and 4,401,232, respectively (notes 13, 17, 18 and 19)
    
    
    6,766
    
    
    
    
    
    
    
    4,501Additional capital
    
    
    26,243
    
    
    
    
    
    
    
    28,319Retained earnings (note 15)
    
    
    38,715
    
    
    
    
    
    
    
    35,639Accumulated other comprehensive income (loss)
    
    
    (704
    )
    
    
    
    
    
    
    1,054Treasury stock at cost, 149,249 and 100,000 shares, respectively
    
    
    (2,885
    )
    
    
    
    
    
    
    (2,900
    )Total Shareholders Equity
    
    
    68,135
    
    
    
    
    
    
    
    66,613Commitments and contingencies (notes 7, 8 and 20)Total Liabilities and Shareholders Equity
    
    $
    741,221
    
    
    
    
    
    
    $
    715,399
 See accompanying notes to consolidated financial statements. LNB BANCORP,
INC.    2003 ANNUAL REPORT   12






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##### 



CONSOLIDATED STATEMENTS OF INCOME For the Calendar Year(Dollars in thousands except per share amounts)
    
    2003
    
    2002
    
    2001Interest Income:Interest and fees on loans:Taxable
    
    $
    32,844
    
    
    $
    34,314
    
    
    $
    37,557Tax exempt
    
    
    -0
    -
    
    
    -0
    -
    
    
    5Interest and dividends on securities:U.S. Government agencies and corporations
    
    
    4,155
    
    
    
    5,944
    
    
    
    6,451States and political subdivisions
    
    
    610
    
    
    
    583
    
    
    
    446Other debt and equity securities
    
    
    296
    
    
    
    423
    
    
    
    405U.S. Treasury securities
    
    
    -0
    -
    
    
    6
    
    
    
    91Interest on Federal funds sold and short-term investments
    
    
    40
    
    
    
    94
    
    
    
    146Total Interest Income
    
    
    37,945
    
    
    
    41,364
    
    
    
    45,101Interest Expense:Interest on deposits:Certificates of deposit, $100 and over
    
    
    1,447
    
    
    
    1,394
    
    
    
    2,393Other deposits
    
    
    5,814
    
    
    
    8,504
    
    
    
    12,225Interest on Federal Home Loan Bank advances
    
    
    1,737
    
    
    
    1,790
    
    
    
    1,528Interest on securities sold under repurchase agreements
and other short-term borrowings
    
    
    198
    
    
    
    407
    
    
    
    852Total Interest Expense
    
    
    9,196
    
    
    
    12,095
    
    
    
    16,998Net Interest Income
    
    
    28,749
    
    
    
    29,269
    
    
    
    28,103Provision for loan losses (note 7)
    
    
    2,695
    
    
    
    2,200
    
    
    
    2,200Net Interest Income After Provision for Loan Losses
    
    
    26,054
    
    
    
    27,069
    
    
    
    25,903Noninterest Income:Investment and Trust Services Division income
    
    
    1,762
    
    
    
    2,080
    
    
    
    2,379Service charges on deposit accounts
    
    
    4,260
    
    
    
    4,083
    
    
    
    3,529Other service charges, exchanges and fees
    
    
    3,019
    
    
    
    3,162
    
    
    
    3,056Gains on sale of credit card portfolio
    
    
    832
    
    
    
    -0
    -
    
    
    -0
    -Gains on sales of securities, (note 5)
    
    
    449
    
    
    
    732
    
    
    
    250Gains on sales of loans
    
    
    236
    
    
    
    94
    
    
    
    76Other income
    
    
    983
    
    
    
    917
    
    
    
    381Total Noninterest Income
    
    
    11,541
    
    
    
    11,068
    
    
    
    9,671Noninterest Expenses:Salaries and employee benefits (notes 16, 17, 18 and 19)
    
    
    13,814
    
    
    
    12,229
    
    
    
    11,428Net occupancy expense of premises (note 8)
    
    
    1,585
    
    
    
    1,476
    
    
    
    1,471Furniture and equipment expenses (note 8)
    
    
    2,517
    
    
    
    2,193
    
    
    
    2,090Card-related expenses
    
    
    1,395
    
    
    
    1,325
    
    
    
    1,283Supplies and postage
    
    
    1,137
    
    
    
    1,018
    
    
    
    1,008Outside services
    
    
    1,441
    
    
    
    1,306
    
    
    
    899Marketing and public relations
    
    
    762
    
    
    
    1,032
    
    
    
    564Ohio Franchise Tax
    
    
    673
    
    
    
    502
    
    
    
    622Other expenses
    
    
    3,145
    
    
    
    3,691
    
    
    
    3,596Total Noninterest Expenses
    
    
    26,469
    
    
    
    24,772
    
    
    
    22,961Income Before Income Taxes
    
    
    11,126
    
    
    
    13,365
    
    
    
    12,613Income Taxes (note 12)
    
    
    3,411
    
    
    
    4,200
    
    
    
    4,048Net Income
    
    $
    7,715
    
    
    $
    9,165
    
    
    $
    8,565Basic Earnings Per Share (note 2) (*)
    
    $
    1.17
    
    
    $
    1.39
    
    
    $
    1.30Diluted Earnings Per Share (note 2) (*)
    
    $
    1.17
    
    
    $
    1.39
    
    
    $
    1.30Dividends Declared Per Share (*)
    
    $
    .70
    
    
    $
    .68
    
    
    $
    .66
 See accompanying notes to consolidated financial statements. (*) All share and per share data has been adjusted to reflect the three-for-two stock split in 2003 and the 2 percent stock dividends in 2002 and 2001. LNB BANCORP,
INC.    2003 ANNUAL REPORT   13






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##### 



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AccumulatedOther
    
    
    
    
    
    TotalCommon
    
    Additional
    
    Retained
    
    Comprehensive
    
    Treasury
    
    Shareholders(Dollars in thousands except per share amounts)
    
    Stock
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    Stock
    
    EquityBalance at December 31, 2000.
    
    $
    4,313
    
    
    $
    24,336
    
    
    $
    30,584
    
    
    $
    192
    
    
    $
    (2,900
    )
    
    $
    56,525Comprehensive income:Net income
    
    
    -0
    -
    
    
    -0
    -
    
    
    8,565
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    8,565Change in unrealized gain on securities
available for sale, net of tax
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    1,065
    
    
    
    -0
    -
    
    
    1,065Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,630Cash dividends declared, $.64 per share.
    
    
    -0
    -
    
    
    -0
    -
    
    
    (4,365
    )
    
    
    -0
    -
    
    
    -0
    -
    
    
    (4,365
    )Issuance of 9,431 shares of common
stock under stock option plans
    
    
    10
    
    
    
    123
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    133Issuance of 10,835 shares of common stock
under LNBB Direct Stock Purchase
and Dividend Reinvestment Plan
    
    
    11
    
    
    
    204
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    215Market value of stock issued in payment of
2% stock dividend, 84,225 shares
    
    
    84
    
    
    
    1,575
    
    
    
    (1,659
    )
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -Balance at December 31, 2001
    
    $
    4,418
    
    
    $
    26,238
    
    
    $
    33,125
    
    
    $
    1,257
    
    
    $
    (2,900
    )
    
    $
    62,138Comprehensive income:Net income
    
    
    -0
    -
    
    
    -0
    -
    
    
    9,165
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    9,165Change in unrealized (loss) on securities
available for sale, net of tax
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    (203
    )
    
    
    -0
    -
    
    
    (203
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,962Cash dividends declared, $.68 per share.
    
    
    -0
    -
    
    
    -0
    -
    
    
    (4,468
    )
    
    
    -0
    -
    
    
    -0
    -
    
    
    (4,468
    )Issuance of 200 shares of common
stock under stock option plans
    
    
    -0
    -
    
    
    3
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    3Payment of cash in lieu of fractional shares
issued pursuant to 2% stock dividend
    
    
    -0
    -
    
    
    -0
    -
    
    
    (22
    )
    
    
    -0
    -
    
    
    -0
    -
    
    
    (22
    )Market value of stock issued in payment of
2% stock dividend, 85,474 shares
    
    
    83
    
    
    
    2,078
    
    
    
    (2,161
    )
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -Balance at December 31, 2002
    
    $
    4,501
    
    
    $
    28,319
    
    
    $
    35,639
    
    
    $
    1,054
    
    
    $
    (2,900
    )
    
    $
    66,613Comprehensive income:Net income
    
    
    -0
    -
    
    
    -0
    -
    
    
    7,715
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    7,715Minimum pension liability
net of tax of $197
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    (381
    )
    
    
    -0
    -
    
    
    (381
    )Change in unrealized (loss) on securities
available for sale, net of tax
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    (1,377
    )
    
    
    -0
    -
    
    
    (1,377
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,957Cash dividends declared, $.70 per share.
    
    
    -0
    -
    
    
    -0
    -
    
    
    (4,626
    )
    
    
    -0
    -
    
    
    -0
    -
    
    
    (4,626
    )Issuance of 722 shares of Treasury Stock
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    15
    
    
    
    15Issuance of 15,425 shares of common
stock under stock option plans
    
    
    15
    
    
    
    174
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    189Payment of cash in lieu of fractional shares
issued under three-for-two stock split
    
    
    -0
    -
    
    
    -0
    -
    
    
    (13
    )
    
    
    -0
    -
    
    
    -0
    -
    
    
    (13
    )Issuance of 2,250,210 shares of common
stock under three-for-two stock split
    
    
    2,250
    
    
    
    (2,250
    )
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -Balance at December 31, 2003
    
    $
    6,766
    
    
    $
    26,243
    
    
    $
    38,715
    
    
    $
    (704
    )
    
    $
    (2,885
    )
    
    $
    68,135
 See accompanying notes to consolidated financial statements. All share and per share
data has been adjusted to reflect the three-for-two stock split in
2003.
 Disclosure of Reclassification Amount:  For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Unrealized holding gains (losses) arising during the year, net of tax.
    
    $
    (1,673
    )
    
    $
    (686
    )
    
    $
    1,230Reclassification adjustment for gains included in net income, net
of tax of $153, $249 and $85, for 2003, 2002 and 2001, respectively.
    
    
    296
    
    
    
    483
    
    
    
    (165
    )Change in unrealized gain (loss) on securities available for sale, net of tax.
    
    $
    (1,377
    )
    
    $
    (203
    )
    
    $
    1,065
 LNB BANCORP,
INC.    2003 ANNUAL REPORT   14






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##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Cash Flows from Operating Activities:Interest received
    
    $
    39,129
    
    
    $
    42,280
    
    
    $
    45,744Other income received
    
    
    10,416
    
    
    
    9,483
    
    
    
    9,008Interest paid
    
    
    (9,304
    )
    
    
    (12,243
    )
    
    
    (17,768
    )Originations of loans available for sale
    
    
    (24,544
    )
    
    
    (16,549
    )
    
    
    (9,341
    )Proceeds from sales of loans available for sale
    
    
    25,842
    
    
    
    17,787
    
    
    
    6,136Gains on sales of loans available for sale
    
    
    (236
    )
    
    
    (94
    )
    
    
    (76
    )Cash paid for salaries and employee benefits
    
    
    (15,361
    )
    
    
    (11,684
    )
    
    
    (11,517
    )Net occupancy expense of premises paid
    
    
    (1,272
    )
    
    
    (1,165
    )
    
    
    (1,159
    )Furniture and equipment expenses paid
    
    
    (1,233
    )
    
    
    (942
    )
    
    
    (777
    )Cash paid for supplies and postage
    
    
    (1,137
    )
    
    
    (1,018
    )
    
    
    (1,008
    )Cash paid for other operating expenses
    
    
    (8,100
    )
    
    
    (4,971
    )
    
    
    (5,654
    )Federal income taxes paid
    
    
    (4,194
    )
    
    
    (4,522
    )
    
    
    (4,237
    )Net Cash Provided by Operating Activities
    
    
    10,006
    
    
    
    16,362
    
    
    
    9,351Cash Flows from Investing Activities:Proceeds from maturities of securities held to maturity
    
    
    5,859
    
    
    
    6,045
    
    
    
    29,559Proceeds from sales and maturities of securities available for sale
    
    
    134,756
    
    
    
    101,234
    
    
    
    46,210Purchases of securities held to maturity
    
    
    -0
    -
    
    
    (699
    )
    
    
    (983
    )Purchases of securities available for sale
    
    
    (143,250
    )
    
    
    (121,894
    )
    
    
    (85,102
    )Net (increase) in loans made to customers
    
    
    (25,457
    )
    
    
    (34,366
    )
    
    
    (24,699
    )Purchases of bank premises, equipment and intangible assets
    
    
    (2,057
    )
    
    
    (1,790
    )
    
    
    (894
    )Proceeds from sales of bank premises and equipment
    
    
    4
    
    
    
    75
    
    
    
    35Purchase of bank owned life insurance
    
    
    -0
    -
    
    
    (10,413
    )
    
    
    -0
    -Proceeds from liquidations of other foreclosed assets
    
    
    22
    
    
    
    187
    
    
    
    296Purchases of other foreclosed assets
    
    
    (589
    )
    
    
    (86
    )
    
    
    (370
    )Net Cash Used in Investing Activities
    
    
    (30,712
    )
    
    
    (61,707
    )
    
    
    (35,948
    )Cash Flows from Financing Activities:Net increase (decrease) in demand and other
noninterest-bearing deposits
    
    
    5,814
    
    
    
    (6,609
    )
    
    
    4,395Net increase (decrease) in savings, Market Access and passbook deposits
    
    
    (3,419
    )
    
    
    27,110
    
    
    
    33,888Net increase (decrease) in certificates of deposit
    
    
    12,822
    
    
    
    27,359
    
    
    
    (16,107
    )Net increase (decrease) in securities sold under repurchase
agreements and other short-term borrowings
    
    
    (11,843
    )
    
    
    (2,304
    )
    
    
    8,779Proceeds from Federal Home Loan Bank advances
    
    
    247,210
    
    
    
    43,830
    
    
    
    46,735Cash paid on Federal Home Loan Bank advances
    
    
    (224,595
    )
    
    
    (44,250
    )
    
    
    (40,735
    )Cash paid in lieu of fractional shares related to stock dividends and stock splits
    
    
    (13
    )
    
    
    (22
    )
    
    
    -0
    -Proceeds from exercise of stock options and shares issued under
LNBB Direct Stock Purchase and Dividend Reinvestment Plan
    
    
    189
    
    
    
    3
    
    
    
    348Issuance of Treasury Stock
    
    
    15
    
    
    
    -0
    -
    
    
    -0
    -Dividends paid
    
    
    (4,557
    )
    
    
    (4,445
    )
    
    
    (4,337
    )Net Cash Provided by Financing Activities
    
    
    21,623
    
    
    
    40,672
    
    
    
    32,966Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    917
    
    
    
    (4,673
    )
    
    
    6,369Cash and Cash Equivalents at Beginning of Year
    
    
    26,832
    
    
    
    31,505
    
    
    
    25,136Cash and Cash Equivalents at End of Year
    
    $
    27,749
    
    
    $
    26,832
    
    
    $
    31,505Reconciliation of Net Income to Net Cash
Provided by Operating Activities:Net Income
    
    $
    7,715
    
    
    $
    9,165
    
    
    $
    8,565Adjustments to reconcile net income to net cash provided by operating activities:Originations of loans available for sale
    
    
    (24,544
    )
    
    
    (16,549
    )
    
    
    (9,341
    )Proceeds from sales of loans available for sale
    
    
    25,842
    
    
    
    17,787
    
    
    
    6,136Gain on sales of investments and loans
    
    
    (1,517
    )
    
    
    (732
    )
    
    
    (250
    )Depreciation and amortization
    
    
    1,597
    
    
    
    1,562
    
    
    
    1,625Amortization of intangible assets
    
    
    113
    
    
    
    112
    
    
    
    377Amortization (accretion) of deferred loan fees and costs, net
    
    
    (382
    )
    
    
    (277
    )
    
    
    72Provision for loan losses
    
    
    2,695
    
    
    
    2,200
    
    
    
    2,200Decrease (increase) in accrued interest receivable
    
    
    227
    
    
    
    751
    
    
    
    898Others, net
    
    
    (1,740
    )
    
    
    2,343
    
    
    
    (931
    )Net Cash Provided by Operating Activities
    
    $
    10,006
    
    
    $
    16,362
    
    
    $
    9,351
 See accompanying notes to consolidated financial statements. LNB BANCORP, INC.  2003
ANNUAL REPORT   15






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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies: (a) Principles of Consolidation: The consolidated financial statements include the accounts of LNB
Bancorp, Inc. (the Parent Company) and its wholly-owned subsidiaries,
The Lorain National Bank (the Bank) and Charleston Insurance Agency,
Inc. Charleston Title Agency, LLC., a 49%-owned subsidiary, is
accounted for under the equity method. The term the Corporation
refers to LNB Bancorp, Inc. and its wholly-owned subsidiaries, The
Lorain National Bank and Charleston Insurance Agency, Inc., and a 49%
interest in Charleston Title Agency, LLC. All material intercompany
transactions and balances have been eliminated in consolidation. (b) Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
Management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Areas involving the use of Managements estimates and
assumptions include the reserve for loan losses, the realization of deferred
tax assets, fair values of certain securities, the determination and carrying
value of impaired loans, the carrying value of loans available for sale, the
carrying value of other real estate, depreciation of premises and equipment, the projected benefit obligation, the actuarial present value of
pension benefit obligations, net periodic pension expense and accrued
pension costs recognized in the Corporations financial statements.
Estimates that are more susceptible to change in the near term include
the reserve for loan losses and the fair value of certain securities. (c) Industry Segment Information: The Corporations activities are considered to be a single industry segment for financial reporting purposes. LNB Bancorp, Inc. is a financial
holding company engaged in the business of commercial and retail
banking, investment management and trust services, title insurance, and
insurance with operations conducted through its main office and banking centers located throughout Lorain, eastern Erie and western
Cuyahoga counties of Ohio. This market provides the source for substantially all of the Banks deposit, loan and trust activities and title
insurance and insurance activities. The majority of the Banks income is
derived from a diverse base of commercial, mortgage and retail lending
activities and investments. (d) Cash and Cash Equivalents: For purposes of reporting in the Consolidated Statements of Cash
Flows, cash and cash equivalents include currency on hand, amounts due
from banks, Federal funds sold, and securities purchased under resale
agreements. Generally, Federal funds sold and securities purchased under
resale agreements are for one day periods. (e) Securities: Debt securities are classified as held to maturity, trading, or available for
sale. Securities which are classified as being held to maturity are stated at
amortized cost based on the Corporations intent and ability to hold
until maturity. Securities are adjusted for amortization of premiums and
accretion of discounts using the interest method. Securities available for
sale are carried at fair value with unrealized gains and losses, net of tax,
included as a component of accumulated other comprehensive income,
net of tax. Securities classified as trading are carried at fair value with
unrealized gains and losses included in earnings. Gains or losses on dispositions are based on net proceeds and the carrying value of securities
sold, using the specific identification method. A decline in fair value of
any available for sale or held to maturity security below cost that is
deemed other than temporary is charged to earnings resulting in establishment of a new cost basis for the security. (f) Loans Available for Sale: The Bank has identified certain mortgage and commercial loans which
may be sold prior to maturity. These loans are carried at the lower of
amortized cost or estimated fair value, determined on an aggregate basis
for each type of loan available for sale. Net unrealized losses are recognized in a valuation allowance and by charges to income. (g) Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) Stock: These stocks are required investments for institutions that are members of
the Federal Reserve and Federal Home Loan Bank systems. The required
investment in the common stock is based on a predetermined formula. (h) Reserve for Loan Losses: Because some loans may not be repaid in full, a reserve for loan losses is
recorded. This reserve is increased by provisions charged to earnings and
is reduced by loan charge-offs, net of recoveries. Estimating the risk of
loss on any loan is necessarily subjective. Accordingly, the reserve is maintained by Management at a level considered adequate to cover probable
loan losses inherent in the loan portfolio that are currently anticipated
based on Managements evaluation of several key factors including information about specific borrower situations, their financial position and
collateral values, current economic conditions, changes in the mix and
levels of the various types of loans, past chargeoff experience and other
pertinent information. The reserve for loan losses is based on estimates
using currently available information, and ultimate losses may vary from
current estimates due to changes in circumstances. These estimates are
reviewed periodically and,  as adjustments become necessary,  they are
reported in earnings in the periods in which they become known. While
Management may periodically allocate portions of the reserve for specific problem situations, the entire reserve is available for any charge-offs
that may occur. Charge-offs are made against the reserve for loan losses
when Management concludes that it is probable that all or a portion of
a loan is uncollectible. After a loan is charged-off, collection efforts continue and future recoveries may occur. A loan is considered impaired, based on current information and events,
if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual
terms of the loan agreement. The measurement of impaired loans is generally based on the present value of the expected future cash flows
discounted at the loans initial effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair
value of the collateral.  If the loan valuation is less than the recorded
investment in the loan, an impairment reserve is established for the difference. The impairment reserve is established by either an allocation of
the reserve for loan losses or by a provision for loan losses, depending
upon the adequacy of the reserve for loan losses. The provision for loan
losses is determined based on Managements evaluation of the loan portfolio and the adequacy of the reserve or loan losses under current
economic conditions and such other factors which,  in Managements
judgment, deserve current recognition. (i) Mortgage Servicing Assets: The Corporation recognizes as separate assets rights to service fixed rate
single-family mortgage loans that it has sold without recourse but services for others for a fee. Mortgage servicing assets are initially recorded at
cost, based upon pricing multiples as determined by the purchaser, when
the loans are sold. Mortgage servicing assets are carried at the lower of
the initial carrying value,  adjusted for amortization,  or estimated fair
value. Amortization is determined in proportion to and over the period
of estimated net servicing income using the level yield method. For purposes of determining impairment,  the mortgage servicing assets are
stratified by interest rate. LNB BANCORP, INC.  2003
ANNUAL REPORT   16






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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The expected and actual rates of mortgage loan prepayments are the
most significant factors driving the potential for the impairment of the
value of mortgage servicing assets. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life
of the underlying loan is reduced.  For the years presented, mortgage
servicing assets and related amortization were not material. (j) Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed
generally on the straight-line method over the estimated useful lives of
the assets. Upon the sale or other disposition of assets, the cost and related
accumulated depreciation are retired and the resulting gain or loss is recognized. Maintenance and repairs are charged to expense as incurred,
while renewals and improvements are capitalized. Software costs related
to externally developed systems are capitalized at cost less accumulated
amortization. Amortization is computed on the straight-line method
over the estimated useful life. (k) Goodwill and Core Deposit Intangibles: Intangible assets arise from branch acquisitions and include goodwill and
core deposit intangibles. Goodwill is the excess of purchase price over
identified net assets in branch acquisitions. Core deposit intangibles represent the value of depositor relationships purchased. In the fourth
quarter of 2002, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets and SFAS No. 147 Accounting for Certain Financial
Institutions retroactive to January 1, 2002. Under the provisions of
SFAS No. 142 and SFAS No. 147, goodwill is no longer rateably amortized into the income statement over an estimated life, but rather is tested
at least annually for impairment. Core deposit intangible assets which
have finite lives continue to be amortized using an accelerated method
over ten years and also continue to be subject to annual impairment testing. Prior to the adoption of SFAS No. 142 and SFAS No. 147,  the
Corporations goodwill was amortized on a straight-line basis over a
period of fifteen years and core deposit intangibles were amortized using
an accelerated method over a period of ten years. Prior to 2002, goodwill and core deposit intangibles were reviewed for possible impairment,
for events or changes in circumstances that indicate the carrying amount
of the asset may not be recoverable, and written down if necessary. Note
4 includes a summary of the Corporations goodwill and core deposit
intangible assets as well as further detail about the impact of the adoption
of SFAS No. 142. (l) Foreclosed Assets: Foreclosed assets represents properties acquired through customer loan
default. The real estate and other tangible assets acquired through foreclosure are carried as Foreclosed assets on the Balance Sheet at fair value,
net of estimated costs to sell, not to exceed the cost of property acquired
through foreclosure. (m) Additional Capital and Retained Earnings: The additional capital account includes amounts received in excess of
par value of common stock sold and amounts voluntarily transferred
from retained earnings. In the case of stock dividends, the Corporation
transfers the market value of shares issued from retained earnings to the
common stock and additional capital accounts. (n) Interest and Fees on Loans: Interest income on loans is accrued on the principal balances of loans
outstanding on a simple interest basis. The Banks policy is to cease
accruing interest on any loans where the principal and/or interest is past
due for 90 days or more, unless the loan is both well secured and in the
process of collection. Loan origination fees and certain direct origination
costs are deferred and amortized over the contractual lives of the related
loans using the interest method. (o) Investment and Trust Services Divisions Assets and Income: Property held by the Corporation in fiduciary or agency capacity for its
customers is not included in the accompanying financial statements, as
such items are not assets of the Corporation. Income from the
Investment and Trust Services Division is reported on an accrual basis. (p) Interest on Deposit Accounts: Interest on deposit accounts is accrued and charged to expense monthly
and is paid or credited in accordance with the terms of the respective
accounts. (q) Income Taxes: The Corporation and its wholly-owned subsidiaries file a consolidated
Federal income tax return. The provision for income taxes is based upon
income in the financial statements, rather than amounts reported on the
Corporations income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be removed or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. (r) Reclassifications: Certain 2001 and 2002 amounts have been reclassified to conform to
the 2003 presentation. (s) Employee Stock Ownership Plan and 401(k) Plan: These two qualified defined contribution plans are accounted for under
the provisions of SFAS No. 87, EmployersAccounting for Pensions
and under the provisions of Statement of Position 93-6 Employers
Accounting for Employee Stock Ownership Plans, as applicable. (t) Retirement Pension Plan: The qualified defined benefit pension plan is accounted for under the
provisions of SFAS No. 87 Employers Accounting for Pensions.  (u) Reporting Comprehensive Income: The Corporation adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income. This Statement requires companies to report
all items that are recognized as components of comprehensive income
under accounting standards. As required, the Corporation displays the
accumulated balance of other comprehensive income as a separate component of shareholdersequity. (v) Stock-Based Compensation: The Corporation applies SFAS
No.148, Accounting for Stock-Based
Compensation.  SFAS No. 148 was adopted in 2002. Stock-Based
Compensation, allows a company to recognize stock-based
compensation using a fair value based method of accounting if it so elects. The
Corporation has elected to adopt the recognition provisions of SFAS
No. 123 during 2002. LNB BANCORP, INC. 
  2003
ANNUAL REPORT   17






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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) Earnings Per Share: Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of shares out-
standing during the year. Diluted earnings per share is computed based
on the weighted average number of shares outstanding plus the effects of
dilutive stock options outstanding during the year. The weighted average
number of shares outstanding and the earnings per share during each
year presented has been adjusted to reflect the three-for-two stock split
in 2003, and the two percent stock dividends in 2002 and 2001. Basic
and diluted earnings per share is calculated as follows: For the Calendar Year(Dollars in thousands except per share amounts)
    
    2003
    
    2002
    
    2001Weighted average shares outstanding used inBasic Earnings Per Share calculation
    
    
    6,605,560
    
    
    
    6,601,619
    
    
    
    6,575,597Dilutive effect of incentive stock options
    
    
    10,094
    
    
    
    6,324
    
    
    
    2,007Weighted average shares outstanding used inDiluted Earnings Per Share calculation
    
    
    6,615,654
    
    
    
    6,607,943
    
    
    
    6,577,604Net Income
    
    $
    7,715
    
    
    $
    9,165
    
    
    $
    8,565Basic Earnings Per Share
    
    $
    1.17
    
    
    $
    1.39
    
    
    $
    1.30Diluted Earnings Per Share
    
    $
    1.17
    
    
    $
    1.39
    
    
    $
    1.30
 (3) Cash and Due from Banks: In order to meet deposit reserve requirements, the Bank is required to
maintain cash on hand and reserve balances at the Federal Reserve Bank.
Cash and due from banks included approximately $12,390 and $10,919
at December 31, 2003 and 2002, respectively, to meet these deposit
reserve requirements. The average balances maintained in cash on hand and in reserve balances
at the Federal Reserve Bank to meet deposit reserve requirements
approximated $12,387 and $10,916 during 2003 and 2002, respectively. (4) Goodwill and Core Deposit Intangibles: In the fourth quarter of 2002, the Corporation adopted SFAS No. 142
retroactive to January 1,2002. Upon the adoption of SFAS No. 142 the
Corporation ceased amortizing its goodwill, which decreased noninterest expense and increased net income in 2002 as compared to 2001. The
following table shows the pro forma effects of applying SFAS No. 142 to
the 2001 year. For the Calendar Year(Dollars in thousands exceptper share amounts)
    
    2003
    
    2002
    2001Goodwill amortization:Pretax
    
    $
    -0
    -
    
    $
    -0
    -
    
    $
    264After tax
    
    
    -0
    -
    
    
    -0
    -
    
    
    174Net Income:Reported
    
    
    7,715
    
    
    
    9,165
    
    
    
    8,565Add back after-tax
goodwill per share
    
    
    -0
    -
    
    
    -0
    -
    
    
    174Adjusted
    
    $
    7,715
    
    
    $
    9,165
    
    
    $
    8,739Basic net income per common share:Reported
    
    $
    1.17
    
    
    $
    1.39
    
    
    $
    1.30Add back goodwill
amortization per share
    
    
    -0
    -
    
    
    -0
    -
    
    
    .03Adjusted
    
    $
    1.17
    
    
    $
    1.39
    
    
    $
    1.33Diluted net income per common share:Reported
    
    $
    1.17
    
    
    $
    1.39
    
    
    $
    1.30Add back goodwill
amortization per share
    
    
    -0
    -
    
    
    -0
    -
    
    
    .03Adjusted
    
    $
    1.17
    
    
    $
    1.39
    
    
    $
    1.33
 The Corporation has intangible assets capitalized on
its balance sheet in the form of core deposit
intangibles. Core deposit intangibles continue to be
amortized over their estimated useful life of 10
years in accordance with SFAS No. 142. A summary of core deposit intangible assets follows: December 31,(Dollars in thousands)
    
    2003
    
    2002Core deposit intangibles
    
    $
    1,288
    
    
    $
    1,288Less accumulated amortization
    
    
    870
    
    
    
    757Net core deposit intangibles
    
    $
    418
    
    
    $
    531
 The following intangible assets and related
amortization arising from a 1997 branch acquisition
and included in the accompanying consolidated
financial statements are summarized as follows at
December 31, net of accumulated amortization: December 31,(Dollars in thousands)
    
    2003
    
    2002Goodwill
    
    $
    2,827
    
    
    $
    2,827Core deposit intangible
    
    
    418
    
    
    
    531Total intangible assets
    
    $
    3,245
    
    
    $
    3,358
 Amortization expense for intangible assets totaled
$113, $112 and $377 in 2003, 2002 and 2001,
respectively. Amortization expense on core deposit
intangible assets is expected in the future as
follows: Amortization(Dollars in thousands)
    
    ExpenseCalendar Year 2004
    
    $
    113Calendar Year 2005
    
    
    113Calendar Year 2006
    
    
    113Calendar Year 2007
    
    
    79Total
    
    $
    418
 LNB BANCORP, INC.  2003
ANNUAL REPORT   18




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Securities: The amortized cost, gross unrealized gains and
losses and fair values of securities at December 31,
2003 and 2002 follows: Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairDecember 31, 2003 (Dollars in thousands)
    
    Cost
    
    Gains
    
    Losses
    
    ValueSecurities available for sale:U.S. Government agencies and corporations
    
    $
    127,571
    
    
    $
    238
    
    
    $
    (1,148
    )
    
    $
    126,661States and political subdivisions
    
    
    11,240
    
    
    
    494
    
    
    
    (10
    )
    
    
    11,724Equity securities
    
    
    5,137
    
    
    
    76
    
    
    
    (139
    )
    
    
    5,074Total securities available for sale
    
    
    143,948
    
    
    
    808
    
    
    
    (1,297
    )
    
    
    143,459Securities held to maturity:U.S. Government agencies and corporations
    
    
    2,993
    
    
    
    100
    
    
    
    -0
    -
    
    
    3,093States and political subdivisions
    
    
    1,796
    
    
    
    63
    
    
    
    -0
    -
    
    
    1,859Total securities held to maturity
    
    
    4,789
    
    
    
    163
    
    
    
    -0
    -
    
    
    4,952Federal Home Loan Bank and
Federal Reserve Bank stock
    
    
    3,879
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    3,879Total securities
    
    $
    152,616
    
    
    $
    971
    
    
    $
    (1,297
    )
    
    $
    152,290
 December 31, 2002 (Dollars in thousands)Securities available for sale:U.S. Government agencies and corporations
    
    $
    120,599
    
    
    $
    1,659
    
    
    $
    (26
    )
    
    $
    122,232States and political subdivisions
    
    
    10,515
    
    
    
    373
    
    
    
    (5
    )
    
    
    10,883Equity securities
    
    
    5,198
    
    
    
    51
    
    
    
    (455
    )
    
    
    4,794Total securities available for sale
    
    
    136,312
    
    
    
    2,083
    
    
    
    (486
    )
    
    
    137,909Securities held to maturity:U.S. Government agencies and corporations
    
    
    7,335
    
    
    
    169
    
    
    
    -0
    -
    
    
    7,504States and political subdivisions
    
    
    3,313
    
    
    
    98
    
    
    
    (11
    )
    
    
    3,400Total securities held to maturity
    
    
    10,648
    
    
    
    267
    
    
    
    (11
    )
    
    
    10,904Federal Home Loan Bank and
Federal Reserve Bank stock
    
    
    3,738
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    3,738Total securities
    
    $
    150,698
    
    
    $
    2,350
    
    
    $
    (497
    )
    
    $
    152,551
 The amortized cost, fair values and yields of debt
securities by contractual maturity date at December
31, 2003 follows: Fully-TaxAmortized
    
    Fair
    
    EquivalentDecember 31, 2003 (Dollars in thousands)
    
    Cost
    
    Value
    
    YieldSecurities available for sale:Due within 1 year
    
    $
    1,156
    
    
    $
    1,184
    
    
    
    5.81
    %After 1 but within 5 years
    
    
    65,710
    
    
    
    65,612
    
    
    
    2.89After 5 but within 10 years
    
    
    63,923
    
    
    
    63,266
    
    
    
    4.37After 10 years
    
    
    8,022
    
    
    
    8,323
    
    
    
    5.26Total securities available for sale
    
    
    138,811
    
    
    
    138,385
    
    
    
    3.73Securities held to maturity:Due within 1 year
    
    
    65
    
    
    
    67
    
    
    
    5.84After 1 but within 5 years
    
    
    3,253
    
    
    
    3,367
    
    
    
    4.24After 5 but within 10 years
    
    
    -0-
    
    
    
    -0-
    
    
    
    0.00After 10 years
    
    
    1,471
    
    
    
    1,518
    
    
    
    5.76Total securities held to maturity
    
    
    4,789
    
    
    
    4,952
    
    
    
    4.73Total securities
    
    $
    143,600
    
    
    $
    143,337
    
    
    
    3.76
    %
 LNB BANCORP, INC.  2003
ANNUAL REPORT   19




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The gross realized gains and proceeds from the sales
of securities are as follows: For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Gross realized
gains on sales
    
    $
    449
    
    
    $
    732
    
    
    $
    250Proceeds from
sales of securities
    
    $
    28,488
    
    
    $
    51,719
    
    
    $
    28,064
 All other redemptions during these three years were
in the form of proceeds at maturity or calls by the
issuers of debt. The carrying value of securities
pledged to secure trust, public deposits, securities
sold under repurchase agreements, line of credit, and
for other purposes required by law amounted to
$129,654 and $129,567 at December 31, 2003 and 2002,
respectively. The fair value of securities is based on
quoted market prices, where available. If quoted
market prices are not available, fair value is
estimated using the quoted market prices of
comparable instruments. The securities portfolio
contained approximately $1,223 and $2,206 in
non-rated securities of states and political
subdivisions at December 31, 2003 and 2002, respectively. Based upon
yield, term to maturity and market risk, the fair
value of these securities was estimated to be $1,250
and $2,254 at December 31, 2003 and 2002,
respectively. The majority of these non-rated
securities are short-term debt issues of local
political subdivisions. Management has reviewed these
non-rated securities and has determined that there is
no impairment to their value as of December 31, 2003
and 2002. The following is an analysis of the securities that
had unrealized losses at December 31, 2003. The
information is presented for securities that have
been valued at less than amortized cost for less than
12 months and for more than 12 months. There are
temporary and permanent reasons why securities may be
valued at less than amortized cost. Temporary reasons
would include a deterioration in the credit quality
of a security issuer or a change in the tax law
pertaining to tax free or preferred stock issues. Temporary reasons also include the current level of
interest rates as compared to the coupons on the
securities held by the Corporation. At December
31, 2003, the total unrealized losses of $1,297 were
temporary in nature and due to the current level of
interest rates. Less than 12 months
    
    12 months or longer
    
    TotalDecember 31, 2003
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized(Dollars in thousands)
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesU.S. Government agencies
and corporations
    
    $
    27,958
    
    
    $
    (292
    )
    
    $
    -0-
    
    
    $
    -0-
    
    
    $
    27,958
    
    
    $
    (292
    )U.S. Government agency
mortgage backed securities
    
    
    54,092
    
    
    
    (845
    )
    
    
    2,014
    
    
    
    (11
    )
    
    
    56,106
    
    
    
    (856
    )State and political subdivisions
    
    
    941
    
    
    
    (10
    )
    
    
    -0-
    
    
    
    -0-
    
    
    
    941
    
    
    
    (10
    )Subtotal, debt securities
    
    
    82,991
    
    
    
    (1,147
    )
    
    
    2,014
    
    
    
    (11
    )
    
    
    85,005
    
    
    
    (1,158
    )Equity securities
    
    
    -0-
    
    
    
    -0-
    
    
    
    4,903
    
    
    
    (139
    )
    
    
    4,903
    
    
    
    (139
    )Total temporarily impaired securities
    
    $
    82,991
    
    
    $
    (1,147
    )
    
    $
    6,917
    
    
    $
    (150
    )
    
    $
    89,908
    
    
    $
    (1,297
    )
 (6) Transactions With Related Parties: The Corporation, through its
subsidiary Bank, makes
loans to its officers, directors and their
affiliates. These loans are made with substantially
the same terms and conditions as transactions with
non-related parties. An analysis of loans outstanding
to related parties follows: For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Aggregate amount beginning of year
    
    $
    24,608
    
    
    $
    16,423
    
    
    $
    14,160Additions (deductions):New loans
    
    
    12,145
    
    
    
    5,735
    
    
    
    3,899Repayments
    
    
    (12,915
    )
    
    
    (1,223
    )
    
    
    (1,705
    )Changes in directors and officers and/or their affiliations, net
    
    
    (555
    )
    
    
    3,673
    
    
    
    69Aggregate amount end of year
    
    $
    23,283
    
    
    $
    24,608
    
    
    $
    16,423
 LNB BANCORP, INC.  2003
ANNUAL REPORT   20




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) Loans and Reserve for Loan Losses: Loan balances at December 31, 2003 and 2002 are summarized as follows: December 31,(Dollars in thousands)
    
    2003
    
    2002Real estate loans (includes loans secured primarily by real estate only):Construction and land development
    
    $
    91,759
    
    
    $
    56,442One to four family residential
    
    
    188,033
    
    
    
    202,847Multi-family residential
    
    
    4,125
    
    
    
    3,803Non-farm non-residential properties
    
    
    148,053
    
    
    
    150,936Commercial and industrial loans
    
    
    59,119
    
    
    
    47,399Personal loans to individuals:Auto, single payment and installment
    
    
    43,060
    
    
    
    42,569Credit card and related plans
    
    
    -0
    -
    
    
    5,117All other loans
    
    
    162
    
    
    
    437Total loans
    
    
    534,311
    
    
    
    509,550Reserve for loan losses
    
    
    (7,730
    )
    
    
    (6,653
    )Net loans
    
    $
    526,581
    
    
    $
    502,897
 Activity in the reserve for loan losses for 2003, 2002 and 2001 is summarized
as follows: For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Balance at beginning of year
    
    $
    6,653
    
    
    $
    5,890
    
    
    $
    5,250Provision for loan losses
    
    
    2,695
    
    
    
    2,200
    
    
    
    2,200Loans charged-off
    
    
    (1,958
    )
    
    
    (1,783
    )
    
    
    (1,739
    )Recoveries on loans previously charged-off
    
    
    340
    
    
    
    346
    
    
    
    179Balance at end of year
    
    $
    7,730
    
    
    $
    6,653
    
    
    $
    5,890
  At December 31, 2003 and 2002, $5,771 and $7,257 respectively, of
commercial loans were available for sale in the secondary market. At
December 31, 2003 and 2002 the market value of commercial loans
available for sale equaled or exceeded its carrying value. At December
31, 2003 and 2002, $444 and $1,742, respectively of mortgage loans were
available for sale in the secondary market. At December 31,2001, the
market value of mortgage loans available for sale was less than its
carrying value and was written down by $32. At December 31,2003 and
2002, the market value of mortgage loans available for sale equaled or
exceeded their carrying value. At December 31, 2003, the Bank had firm
commitments for the sale of mortgage loans of $444. Information regarding impaired loans is as follows: For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Year-end impaired loans with no allowance for loan losses specifically allocated
    
    $
    8,901
    
    
    $
    8,094
    
    
    $
    2,977Year-end impaired loans with allowance for loan losses specifically allocated
    
    
    16,329
    
    
    
    10,881
    
    
    
    8,664Amount of the allowance specifically allocated to impaired loans
    
    
    2,272
    
    
    
    1,711
    
    
    
    1,957Average of impaired loans during the year
    
    
    21,742
    
    
    
    16,454
    
    
    
    978Interest income recognized during impairment
    
    
    258
    
    
    
    95
    
    
    
    60Cash-basis interest income recognized
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
 LNB BANCORP, INC.  2003
ANNUAL REPORT   21




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) Bank Premises, Equipment and Leases: Bank premises and equipment are summarized as follows: For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002Land
    
    $
    2,347
    
    
    $
    2,347Buildings
    
    
    9,863
    
    
    
    9,765Equipment
    
    
    17,599
    
    
    
    16,571Leasehold improvements
    
    
    749
    
    
    
    688Total costs
    
    
    30,558
    
    
    
    29,371Less accumulated depreciation
and amortization
    
    
    19,549
    
    
    
    18,623Total
    
    $
    11,009
    
    
    $
    10,748
 Depreciation and amortization of Bank premises and
equipment charged to noninterest expenses amounted to
$1,273 in 2003, $1,286 in 2002 and $1,368 in 2001.
Amortization of purchased software charged to
noninterest expenses amounted to $324 in 2003, $276
in 2002 and $257 in 2001. At December 31, 2003, the Bank was obligated to pay
rental commitments under noncancelable operating
leases on banking centers and certain equipment as
follows: Banking(Dollars in thousands)
    
    Centers
    
    EquipmentCalendar Year 2004
    
    $
    234
    
    
    $
    37Calendar Year 2005
    
    
    100
    
    
    
    33Calendar Year 2006
    
    
    76
    
    
    
    22Calendar Year 2007
    
    
    66
    
    
    
    -0
    -Calendar Year 2008
    
    
    41
    
    
    
    -0
    -Calendar Year 2009 and thereafter
    
    
    17
    
    
    
    -0
    -Total
    
    $
    534
    
    
    $
    92
 Rentals paid under leases on banking centers and
equipment, respectively, amounted to $295 and $43 in
2003, $256 and $15 in 2002, $241 and $5 in 2001. (9) Deposits: Deposit balances at December 31, 2003 and 2002 are summarized as follows: December 31,(Dollars in thousands)
    
    2003
    
    2002Demand and other noninterest-bearing deposits:Individuals, partnerships and corporations
    
    $
    75,606
    
    
    $
    73,727U.S. Government
    
    
    149
    
    
    
    136States and political subdivisions
    
    
    6,451
    
    
    
    2,399Certified, official, travelers checks and other
    
    
    4,487
    
    
    
    4,617Total demand and other noninterest-bearing deposits
    
    
    86,693
    
    
    
    80,879Savings,
check invest, market access, money market and passbook accounts:Individuals and non-profit organizations
    
    
    226,384
    
    
    
    227,224Corporations and profit organizations
    
    
    32,231
    
    
    
    36,394States and political subdivisions
    
    
    18,582
    
    
    
    16,998Total savings, checkinvest, market access, money market and passbook accounts
    
    
    277,197
    
    
    
    280,616Certificates of deposit:Individuals, partnerships and corporations
    
    
    167,780
    
    
    
    165,434States and political subdivisions
    
    
    49,674
    
    
    
    39,198Total certificates of deposit
    
    
    217,454
    
    
    
    204,632Total deposits
    
    $
    581,344
    
    
    $
    566,127
 The aggregate amount of certificates of deposit in
denominations of $100 or more amounted to $76,737 and
$64,817 at December 31, 2003 and
2002, respectively. The maturity distribution of
certificates of deposit as of December 31, 2003 and
2002 follows: After 3
    
    After 6
    
    After 1
    
    After 2Months
    
    Months
    
    Year But
    
    Years ButWithin 3
    
    But Within
    
    But Within
    
    Within
    
    Within(Dollars in thousands)
    
    Months
    
    6 Months
    
    1 Year
    
    2 Years
    
    5 Years
    
    TotalDecember 31, 2003
    
    $
    55,838
    
    
    $
    55,037
    
    
    $
    45,428
    
    
    $
    27,453
    
    
    $
    33,698
    
    
    $
    217,454December 31, 2002
    
    $
    60,748
    
    
    $
    33,021
    
    
    $
    36,702
    
    
    $
    50,351
    
    
    $
    23,810
    
    
    $
    204,632
 LNB BANCORP, INC.  2003
ANNUAL REPORT   22




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10) Securities Sold Under Repurchase
Agreements
and Other Short-Term Borrowings: Information relating to securities sold under
repurchase agreements and other short-term borrowings
for the years ended December 31, 2003, 2002 and 2001
follows: December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001Securities sold under repurchase agreements and other short-term borrowingsAt December 31Outstanding
    
    $
    15,023
    
    
    $
    26,866
    
    
    $
    29,170Interest rate
    
    
    .89
    %
    
    
    1.36
    %
    
    
    1.96
    %Average for the year:Outstanding
    
    $
    18,185
    
    
    $
    22,604
    
    
    $
    26,916Interest rate
    
    
    .99
    %
    
    
    1.74
    %
    
    
    3.22
    %Maximum month-end outstanding
    
    $
    26,309
    
    
    $
    29,633
    
    
    $
    38,361
 The Bank maintains a line of credit for advances and discounts with
the Federal Reserve Bank of Cleveland. The amount of the line of
credit varies on a monthly basis. The level of the line is equal to
85% of the balances of qualified second mortgage loans that are
pledged as collateral for the line. At December 31, 2003,the Bank had
pledged approximately $54,934 in second mortgage loans,resulting in
an available line of credit of approximately $46,694. The Bank has not
made a draw against this line of credit since December of 1999. (11) Federal Home Loan Bank Advances: Short-Term Advances: Information relating to Federal Home Loan Bank (FHLB)
cash management, short-term and long-term advances as
of and for the years ended December 31, 2003, 2002
and 2001 follows: For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Cash management advances average and maximumsAverage for the year:Outstanding
    
    $
    16,600
    
    
    $
    3,743
    
    
    $
    6,726Interest rate
    
    
    1.28
    %
    
    
    1.88
    %
    
    
    3.98
    %Maximum month-end outstanding
    
    $
    30,000
    
    
    $
    13,000
    
    
    $
    21,500
 December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001Cash management advances outstanding
    
    $
    15,000
    
    
    $
    5,500
    
    
    $
    19,000Interest rate
    
    
    1.09
    %
    
    
    1.40
    %
    
    
    1.90
    %Short-term advances outstanding
    
    $
    17,235
    
    
    $
    24,595
    
    
    $
    10,750Interest rate
    
    
    1.15 - 3.73
    %
    
    
    1.50 - 4.95
    %
    
    
    4.27 - 6.31
    %
 Long-term Advances:
    
    Year(Dollars in thousands)
    
    MaturingAmount
    
    
    2003
    
    
    $
    -0
    -
    
    $
    -0
    -
    
    $
    19,595Interest rate
    
    
    
    
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    3.16 - 4.95
    %Amount
    
    
    2004
    
    
    
    -0
    -
    
    
    6,000
    
    
    
    -0
    -Interest rate
    
    
    
    
    
    
    0.00
    %
    
    
    3.57 - 3.73
    %
    
    
    0.00
    %Amount
    
    
    2005
    
    
    
    28,190
    
    
    
    11,830
    
    
    
    -0
    -Interest rate
    
    
    
    
    
    
    2.06 - 4.61
    %
    
    
    2.87 - 4.61
    %
    
    
    0.00
    %Amount
    
    
    2006
    
    
    
    11,000
    
    
    
    1,000
    
    
    
    -0
    -Interest rate
    
    
    
    
    
    
    2.70 - 4.92
    %
    
    
    4.92
    %
    
    
    0.00
    %Amount
    
    
    2014
    
    
    
    115
    
    
    
    -0
    -
    
    
    -0
    -Interest rate
    
    
    
    
    
    
    3.55
    %
    
    
    0.00
    %
    
    
    0.00
    %Total long-term advances outstanding
    
    
    
    
    
    
    39,305
    
    
    
    18,830
    
    
    
    19,595Total FHLB advances outstanding
    
    
    
    
    
    $
    71,540
    
    
    $
    48,925
    
    
    $
    49,345
 At December 31, 2003, collateral pledged for FHLB advances consisted
of all shares of FHLB stock owned by the Bank and qualified mortgage
loans totaling $259,746. The total borrowing capacity of the Bank, at
December 31,2003, was $94,655 with unused collateral borrowing
capacity of $23,115. The Bank maintains a $40,000 cash management line
of credit with the FHLB which matures on August 1, 2004. At December
31,2003, the Bank had $15,000 in borrowings outstanding under this
cash management line with $25,000 of available credit remaining under
this line. LNB BANCORP, INC.  2003
ANNUAL REPORT   23




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) Income Taxes: The annual provision for income taxes consists of the following: For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Income Taxes:Federal current expense
    
    $
    3,661
    
    
    $
    4,119
    
    
    $
    4,361Federal deferred expense (benefit)
    
    
    (254
    )
    
    
    81
    
    
    
    (313
    )State and city current expense
    
    
    4
    
    
    
    -0
    -
    
    
    -0
    -Total Income Taxes
    
    $
    3,411
    
    
    $
    4,200
    
    
    $
    4,048
 The following presents a reconciliation of the total
income taxes as shown on the Consolidated Statements
of Income with that which would be computed by
applying the statutory Federal tax rate of 35 percent
to income before income taxes. December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001Computed expected tax expense
    
    $
    3,896
    
    
    $
    4,678
    
    
    $
    4,414Increase (reduction) in income taxes resulting from:Tax exempt interest on obligations of states and political subdivisions
    
    
    (201
    )
    
    
    (188
    )
    
    
    (139
    )Tax exempt interest on bank owned life insurance
    
    
    (270
    )
    
    
    (171
    )
    
    
    (78
    )State income taxes net of Federal benefit
    
    
    2
    
    
    
    -0
    -
    
    
    -0
    -Other, net
    
    
    (16
    )
    
    
    (119
    )
    
    
    (149
    )Total Income Taxes
    
    $
    3,411
    
    
    $
    4,200
    
    
    $
    4,048
 Net deferred Federal tax assets are included in Other
Assets on the Consolidated Balance Sheets. Management
believes that it is more likely than not that the
deferred Federal tax assets will be realized. The tax
effects of temporary differences that give rise to
significant portions of the deferred Federal tax
assets and deferred Federal tax liabilities are
presented below. December 31,(Dollars in thousands)
    
    2003
    
    2002Deferred Federal tax assets:Reserve for loan losses
    
    $
    2,628
    
    
    $
    2,262Deferred compensation
    
    
    879
    
    
    
    370Minimum pension liability
    
    
    197
    
    
    
    -0
    -Accrued vacation payable
    
    
    0
    
    
    
    181Intangible asset amortization
    
    
    (72
    )
    
    
    9Unrealized loss on securities available for sale
    
    
    166
    
    
    
    -0
    -Other, net
    
    
    27
    
    
    
    30Total deferred Federal tax assets
    
    
    3,825
    
    
    
    2,852Deferred Federal tax liabilities:Bank premises and equipment depreciation
    
    
    (525
    )
    
    
    (397
    )FHLB stock dividends
    
    
    (398
    )
    
    
    (350
    )Unrealized gain on securities available for sale
    
    
    -0
    -
    
    
    (543
    )Accrued loan fees and costs
    
    
    (335
    )
    
    
    (267
    )Deferred charges
    
    
    (95
    )
    
    
    (67
    )Prepaid pension
    
    
    (123
    )
    
    
    (39
    )Total deferred Federal tax liabilities
    
    
    (1,476
    )
    
    
    (1,663
    )Net Deferred Federal Tax Assets
    
    $
    2,349
    
    
    $
    1,189
 LNB BANCORP, INC.  2003
ANNUAL REPORT   24




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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (13) Shareholders Equity: Preferred Stock: The Corporation is authorized to issue up to
1,000,000 shares of Voting Preferred Stock, no par
value. As of December 31, 2003, no such stock had been
issued. The Board of Directors of the Corporation is
authorized to provide for the issuance of one or more
series of Voting Preferred Stock and establish the
dividend rate, dividend dates, whether dividends are
cumulative, liquidation prices, redemption rights and
prices, sinking fund requirements, conversion rights,
and restrictions on the issuance of any series of
Voting Preferred Stock. The Voting Preferred Stock
may be issued with conversion rights to common stock
and may rank prior to the common stock in dividends,
liquidation preferences, or both. The Corporation has
authorized 750,000 Series A Voting Preferred Shares
none of which have been issued. Common Stock: The Corporation is authorized to issue up to
15,000,000 shares of common stock. Common shares
outstanding were 6,617,618 and 4,401,232 at December
31, 2003, and December 31, 2002, respectively. The
Board of Directors of LNB Bancorp, Inc. declared a
three-for-two stock split in 2003, paid on April 1,
2003, to shareholders of record on March 17,
2003. This three-for-two stock split increased LNB
Bancorp, Inc.s common stock outstanding by 2,250,210
shares. The Board of Directors of LNB Bancorp, Inc.
declared a two percent stock dividend, paid on July
2, 2002, to shareholders of record on June 17, 2002. The
two percent stock dividend increased LNB Bancorp, Inc.s common stock outstanding by 85,474 shares.
Cash was issued in lieu of fractional shares. The
Board of Directors of LNB Bancorp, Inc. declared a
two percent stock dividend, paid on July 1, 2001, to
shareholders of record on June 12, 2001. The two
percent stock dividend increased LNB Bancorp, Inc.s
common stock outstanding by 84,225 shares. Common Stock Repurchase Plan and Treasury Stock: On May 20, 1997, the Board of Directors authorized
the repurchase of up to 100,000 shares of common
stock. The repurchased shares will be used primarily
for qualified employee benefit plans, incentive stock
option plans, stock dividends and other Corporate
purposes. Treasury stock shares were adjusted to
reflect the three-for-two stock split of April
1, 2003. At December 31, 2003 and at December 31, 2002, LNB
Bancorp, Inc. held 149,249 shares and 100,000 shares
of common stock as Treasury Stock under this plan for
a total cost of $2,885 and $2,900 respectively.
During 2003 and 2002, 722 and 0 shares were issued
out of Treasury Stock. Shareholder Rights Plan: On October 24, 2000, the Board of Directors of LNB
Bancorp, Inc. adopted a Shareholder Rights Plan. The
rights plan is designed to prevent a potential
acquirer from exceeding a prescribed ownership level
in LNB Bancorp, Inc., other than in the context of a
negotiated acquisition involving the Board of
Directors. If the prescribed level is exceeded, the
rights become exercisable and, following a limited
period for the Board of Directors to redeem the
rights, allow shareholders, other than the potential
acquirer that triggered the exercise of the rights,
to purchase Preferred Share Units of the Corporation
having characteristics comparable to the
Corporations Common Shares, at 50% of market
value. This would likely dramatically dilute the
potential acquirers ownership level and voting
power, making an acquisition of the Corporation
without prior Board approval prohibitively expensive. The Shareholder Rights Plan provided for the
distribution of one Preferred Share Purchase Right as
a dividend on each outstanding LNB Bancorp, Inc.
Common Share held as of the close of business on
November 6,2000. One Preferred Share Purchase Right
will also be distributed for each Common Share issued
after November 6, 2000. Each right entitles the
registered holder to purchase from LNB Bancorp, Inc.
Units of a new series of Voting Preferred Shares, no
par value, at 50 percent of market value, if a person
or group acquires 15 percent or more of LNB Bancorp, Inc.s Common Shares. Each Unit of the new Preferred
Shares has terms designed to make it the economic
equivalent of one Common Share. A complete description
of the distribution, exercise, and the terms of the
rights are set forth in a Shareholder Rights
Agreement dated October 24, 2000 between LNB Bancorp, Inc. and Registrar and Transfer Company as Rights
Agent. The Shareholder Rights Agreement was filed
with the Securities and Exchange Commission in a Form
8-A Filing on November 6, 2000. Dividends: Total cash dividends declared per share for 2003
increased $.02 or two percent, to $.70 per share, up
from $.68 per share in 2002. LNBB Direct Stock Purchase and Dividend Reinvestment Plan: The Board of Directors adopted the LNBB Direct Stock
Purchase and Dividend Reinvestment Plan (the Plan)
effective June 2001, replacing the former LNB
Bancorp, Inc. Dividend Reinvestment Plan. The Plan
authorized the sale of 500,000 shares of the
Corporations common shares to shareholders who
choose to invest all or a portion of their cash
dividends plus additional cash payments for LNB
Bancorp, Inc. common stock. The Corporation did not
issue shares pursuant to the Plan in 2003 while
45,560 shares were purchased in the open market at
the current market price. The Corporation did not
issue shares pursuant to the Plan in 2002 while
45,830 shares were purchased in the open market at
the current market price. The Corporation issued
10,835 shares pursuant to the Plan in 2001 while
37,667 shares were purchased in the open market at
the current market price. Dividend Restrictions: Dividends paid by the Bank are the primary source of
funds available to the Corporation for payment of
dividends to shareholders and for other working
capital needs. The payment of dividends by the Bank
to the Corporation is subject to restrictions by the
Office of the Comptroller of Currency. These
restrictions generally limit dividends to the current
and prior two years retained earnings. At December
31, 2003, approximately $12,145 of the Banks
retained earnings were available for dividends to the
Corporation. In addition to these restrictions, as a
practical matter, dividend payments cannot reduce
regulatory capital levels below the Corporations
regulatory capital requirements and minimum
regulatory guidelines. These restrictions do not
presently limit the Corporation from paying normal
dividends. LNB BANCORP, INC.  2003
ANNUAL REPORT   25




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) Regulatory Capital: The Corporation and the Bank are subject to
risk-based capital guidelines issued by the Board of
Governors of the Federal Reserve Board and the Office
of Comptroller of Currency. These guidelines are used
to evaluate capital adequacy and include required
minimums as discussed below. The Corporation and the
Bank are subject to an array of banking, Federal
Deposit Insurance Corporation, U.S. Federal, and
State of Ohio laws and regulations, including the
FDIC Improvement Act. The FDIC Improvement Act
established five capital categories ranging from
well capitalized to critically undercapitalized.
These five capital categories are used by the Federal
Deposit Insurance Corporation to determine prompt
corrective action and an institutions semi-annual
FDIC deposit insurance premium assessments. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of
assets, liabilities, and certain off-balance sheet
items calculated under regulatory accounting
practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators
about components, risk weightings, and other factors,
and the regulators can lower classifications in
certain cases. Failure to meet various capital
requirements can initiate regulatory action that
could have a direct material effect on the
consolidated financial statements. The prompt corrective action regulations provide for
five categories which in declining order are:well
capitalized, adequately capitalized, 
undercapitalized, significantly undercapitalized, 
and critically under-capitalized. To be considered
well capitalized,  an institution must generally
have a leverage capital ratio of at least 5 percent,
a Tier I risk-based capital ratio of at least 6
percent, and a total risk-based capital ratio of at
least 10 percent. Total capital (Tier 1 and Tier 2) amounted to $72.8
million at December 31, 2003, representing 12.57% of
net risk-adjusted assets compared with $68.9 million
and 12.89%, respectively, at December 31, 2002. Tier 1
capital of $65.6 million at December 31, 2003
represented 11.32% of risk weighted assets, compared
with $62.2 million and 11.64% at December 31, 2002. At December 31, 2003 and 2002, the capital ratios for
the Corporation and its wholly-owned subsidiary,
Lorain National Bank, exceeded the ratios required to
be well capitalized. The well capitalized status
affords the Bank the ability to operate with the
greatest flexibility under current laws and
regulations. The Comptroller of the Currencys most
recent notification, with an examination date of
September 30, 2003, categorized the Bank as well
capitalized under the regulatory framework for
prompt corrective action. There are no conditions or
events since that notification that Management
believes have changed the Banks category. Analysis
of Lorain National Bank and LNB Bancorp, Inc.s
Regulatory Capital and Regulatory Capital
Requirements follows: Minimum RequiredMinimum Required
    
    Actual
    
    To Be Well Capitalized
    
    CapitalDecember 31,(Dollars in thousands)
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio2003 Total capital (to risk weighted assets)Consolidated
    
    $
    72,838
    
    
    
    12.57
    %
    
    $
    57,952
    
    
    
    10.00
    %
    
    $
    46,362
    
    
    
    8.00
    %Bank
    
    
    69,196
    
    
    
    11.97
    
    
    
    57,880
    
    
    
    10.00
    
    
    
    46,304
    
    
    
    8.002003 Tier 1 capital (to risk weighted assets)Consolidated
    
    
    65,594
    
    
    
    11.32
    
    
    
    34,771
    
    
    
    6.00
    
    
    
    23,181
    
    
    
    4.00Bank
    
    
    57,961
    
    
    
    10.02
    
    
    
    34,728
    
    
    
    6.00
    
    
    
    23,152
    
    
    
    4.002003 Tier 1 capital (to average assets)Consolidated
    
    
    65,594
    
    
    
    8.92
    
    
    
    36,749
    
    
    
    5.00
    
    
    
    29,399
    
    
    
    4.00Bank
    
    
    57,961
    
    
    
    7.81
    
    
    
    36,561
    
    
    
    5.00
    
    
    
    29,249
    
    
    
    4.002002 Total capital (to risk weighted assets)Consolidated
    
    $
    68,878
    
    
    
    12.89
    %
    
    $
    53,420
    
    
    
    10.00
    %
    
    $
    42,736
    
    
    
    8.00
    %Bank
    
    
    65,359
    
    
    
    12.25
    
    
    
    53,353
    
    
    
    10.00
    
    
    
    42,682
    
    
    
    8.002002 Tier 1 capital (to risk weighted assets)Consolidated
    
    
    62,201
    
    
    
    11.64
    
    
    
    32,052
    
    
    
    6.00
    
    
    
    21,368
    
    
    
    4.00Bank
    
    
    54,706
    
    
    
    10.25
    
    
    
    32,012
    
    
    
    6.00
    
    
    
    21,341
    
    
    
    4.002002 Tier 1 capital (to average assets)Consolidated
    
    
    62,201
    
    
    
    9.04
    
    
    
    34,406
    
    
    
    5.00
    
    
    
    27,525
    
    
    
    4.00Bank
    
    
    54,706
    
    
    
    8.00
    
    
    
    34,202
    
    
    
    5.00
    
    
    
    27,362
    
    
    
    4.00
 LNB BANCORP, INC.  2003
ANNUAL REPORT   26




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) Financial Holding Company: Substantially all of the retained earnings of the
Corporation represent undistributed net income of its
subsidiaries. Condensed financial information of LNB
Bancorp, Inc. (Financial Holding Company only) is as
follows: Condensed Balance Sheets
    
    December 31,(Dollars in thousands)
    
    2003
    
    2002Assets:Cash
    
    $
    1,679
    
    
    $
    1,241Short-term investments
    
    
    3,103
    
    
    
    3,224Investment in subsidiary bank
    
    
    60,452
    
    
    
    59,084Investment in subsidiary nonbanks
    
    
    77
    
    
    
    96Securities available for sale
    
    
    93
    
    
    
    59Note
receivable - subsidiary bank (6.80% due 1/1/2007)
    
    
    4,000
    
    
    
    4,000Other assets
    
    
    52
    
    
    
    170Total assets
    
    $
    69,456
    
    
    $
    67,874Liabilities and Shareholders Equity:Liabilities
    
    $
    1,321
    
    
    $
    1,261Shareholders equity
    
    
    68,135
    
    
    
    66,613Total liabilities and shareholders equity
    
    $
    69,456
    
    
    $
    67,874
 Condensed Statements of Income
    
    For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Income:Cash dividends from subsidiary
    
    $
    4,626
    
    
    $
    4,468
    
    
    $
    4,365Interest and other income
    
    
    483
    
    
    
    581
    
    
    
    466Total income
    
    
    5,109
    
    
    
    5,049
    
    
    
    4,831Expenses:Other expenses
    
    
    563
    
    
    
    838
    
    
    
    376Income before income taxes and equity in
undistributed net income of subsidiary
    
    
    4,546
    
    
    
    4,211
    

    
    
    4,455Income tax (benefit) expense
    
    
    (27
    )
    
    
    (87
    )
    
    
    26Equity in undistributed net income of subsidiary
    
    
    3,142
    
    
    
    4,867
    
    
    
    4,136Net Income
    
    $
    7,715
    
    
    $
    9,165
    
    
    $
    8,565
 Condensed Statements of Cash Flows
    
    For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Cash Flows from Operating Activities:Dividends from subsidiary
    
    $
    4,626
    
    
    $
    4,468
    
    
    $
    4,365Other, net
    
    
    57
    
    
    
    (313
    )
    
    
    119Net Cash Provided by Operating Activities
    
    
    4,683
    
    
    
    4,155
    
    
    
    4,484Cash Flows from Investing Activities:Proceeds from maturity of securities available for sale
    
    
    -0
    -
    
    
    80
    
    
    
    -0
    -Purchases of securities available for sale
    
    
    -0
    -
    
    
    (39
    )
    
    
    (64
    )Net cash (Used) in investing activities
    
    
    -0
    -
    
    
    41
    
    
    
    (64
    )Cash Flows from Financing Activities:Cash paid in lieu of fractional shares related to stock dividends and stock splits
    
    
    (13
    )
    
    
    (22
    )
    
    
    -0
    -Proceeds from exercise of stock options and shares issued under LNBB
Direct Stock Purchase and Dividend Reinvestment Plan
    
    
    189
    
    
    
    3
    
    
    
    348Issuance of Treasury stock
    
    
    15
    
    
    
    -0
    -
    
    
    -0
    -Dividends paid to shareholders
    
    
    (4,557
    )
    
    
    (4,445
    )
    
    
    (4,337
    )Net Cash (Used) in Financing Activities
    
    
    (4,366
    )
    
    
    (4,464
    )
    
    
    (3,989
    )Net Increase (decrease) in Cash and Cash Equivalents
    
    
    317
    
    
    
    (268
    )
    
    
    431Cash and Cash Equivalents at Beginning of Year
    
    
    4,465
    
    
    
    4,733
    
    
    
    4,302Cash and Cash Equivalents at End of Year
    
    $
    4,782
    
    
    $
    4,465
    
    
    $
    4,733
 LNB BANCORP, INC.  2003
ANNUAL REPORT   27




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (16) Retirement Pension Plan: The Banks non-contributory defined benefit pension
plan (the Plan) covers substantially all of its
employees. In general, benefits are based on years of
service and the employees level of compensation. The
Banks funding policy is to contribute annually an
actuarially determined amount to cover current
service cost plus amortization of prior service
costs. The net periodic pension costs charged to other
expenses amounted to $116 in 2003, $574 in 2002 and
$313 in 2001. At December 31, 2003 there were 245
participants in the plan. The following table sets
forth the defined benefit pension plans Change in
Projected Benefit Obligation, Change in Plan Assets
and Funded Status, including the Accrued Liability for
the years ended December 31, 2003, 2002, and 2001. The
Plan was
amended and restated for GUST effective January 1,
2001 and amended for EGTRRA effective January 1,
2002. Effective December 31, 2002, the benefits under
the Plan were frozen and no additional benefits will
be accrued under the Plan after December 31, 2002. As
a result of the Plan being frozen, the Corporation
recorded, as a component of its net periodic pension
cost, a loss due to the curtailment in the amount of
$137 in 2002. Also as a result of the plan being
frozen, the Corporation recorded a curtailment gain,
as a component of the change in the projected benefit
obligation, in the amount of $2,670 during 2002. The
2003 loss recognized due to settlement in the amount
of $20 results from significant lump sum
distributions paid in 2003, but not actuarially
projected for 2003. For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Change in projected benefit obligation:Projected benefit obligation at beginning of year
    
    $
    (8,415
    )
    
    $
    (10,850
    )
    
    $
    (10,100
    )Service cost
    
    
    -0
    -
    
    
    (556
    )
    
    
    (531
    )Interest cost
    
    
    (477
    )
    
    
    (643
    )
    
    
    (636
    )Actuarial gain (loss)
    
    
    (283
    )
    
    
    (83
    )
    
    
    22Curtailment gain
    
    
    -0
    -
    
    
    2,670
    
    
    
    -0
    -Settlement (loss)
    
    
    (157
    )
    
    
    -0
    -
    
    
    -0
    -Benefits paid
    
    
    1,389
    
    
    
    1,047
    
    
    
    395Projected benefit obligation at end of year
    
    $
    (7,943
    )
    
    $
    (8,415
    )
    
    $
    (10,850
    )Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    7,741
    
    
    $
    9,665
    
    
    $
    10,101Actual gain (loss) on plan assets
    
    
    223
    
    
    
    (877
    )
    
    
    (512
    )Employer contributions
    
    
    652
    
    
    
    -0
    -
    
    
    471Benefits paid
    
    
    (1,389
    )
    
    
    (1,047
    )
    
    
    (395
    )Fair value of plan assets at end of year
    
    $
    7,227
    
    
    $
    7,741
    
    
    $
    9,665Funded status
    
    $
    (716
    )
    
    $
    (674
    )
    
    $
    (1,185
    )Unrecognized net (gain) subsequent to transition
    
    
    -0
    -
    
    
    -0
    -
    
    
    1,207Unrecognized actuarial loss
    
    
    578
    
    
    
    -0
    -
    
    
    -0
    -Unrecognized prior service cost (benefit)
    
    
    -0
    -
    
    
    -0
    -
    
    
    (122
    )Accrued Liability
    
    $
    (138
    )
    
    $
    (674
    )
    
    $
    (100
    )
 For the Calendar YearNet Periodic Pension Cost (Dollars in thousands)
    
    2003
    
    2002
    
    2001Service cost
    
    $
    -0-
    
    
    $
    556
    
    
    $
    531Interest cost on projected benefit obligation
    
    
    477
    
    
    
    643
    
    
    
    636Expected return on plan assets
    
    
    (381
    )
    
    
    (743
    )
    
    
    (819
    )Amortization of unrecognized prior service liability
    
    
    -0
    -
    
    
    (35
    )
    
    
    (35
    )Recognized actuarial (gain) or loss
    
    
    -0
    -
    
    
    16
    
    
    
    -0
    -Net periodic pension cost
    
    
    96
    
    
    
    437
    
    
    
    313Loss recognized due to curtailment
    
    
    -0
    -
    
    
    137
    
    
    
    -0
    -Loss recognized due to settlement
    
    
    20
    
    
    
    -0
    -
    
    
    -0
    -Total pension cost
    
    $
    116
    
    
    $
    574
    
    
    $
    313Weighted-average assumptions used to determine net periodic benefit
cost for years ended December 31, 2003, 2002, and 2001.Weighted average discount rate
    
    
    5.75
    %
    
    
    6.00
    %
    
    
    6.00
    %Expected long-term rate of return on plan assets
    
    
    5.00
    %
    
    
    7.88
    %
    
    
    7.88
    %Assumed rate of future compensation increases
    
    
    0.00
    %
    
    
    5.00
    %
    
    
    5.00
    %
 LNB BANCORP, INC.  2003
ANNUAL REPORT   28




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts recognized in the consolidated balance sheet consist of: For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Accrued benefit cost
    
    $
    (716
    )
    
    $
    (674
    )
    
    $
    (100
    )Minimum pension liability
    
    
    578
    
    
    
    -0
    -
    
    
    -0
    -Net amount recognized
    
    $
    (138
    )
    
    $
    (674
    )
    
    $
    (100
    )
 Pension Benefits(Dollars in thousands)
    
    2003
    
    2002
    
    2001Increase in minimum
liability included in other
comprehensive income
    
    $
    381
    
    
    $
    -0-
    
    
    $
    -0-
 The accumulated benefit obligation for the Lorain
National Bank Retirement Pension Plan was $7,943,
$8,415 and $7,570 at December 31, 2003, 2002 and 2001
respectively. December 31(Dollars in thousands)
    
    2003
    
    2002
    
    2001Projected benefit obligation
    
    $
    (7,943
    )
    
    $
    (8,415
    )
    
    $
    (10,850
    )Accumulated benefit obligation
    
    
    (7,943
    )
    
    
    (8,415
    )
    
    
    (10,850
    )Fair value of plan assets
    
    
    7,227
    
    
    
    7,741
    
    
    
    9,665
 Assumptions: Weighted-average assumptions used to
determine projected and accumulated benefit
obligations at December 31. December 312003
    
    2002
    
    2001Discount rate
    
    
    5.75
    %
    
    
    6.00
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    0.00
    
    
    
    5.00
    
    
    
    5.00
 The plan reviews Moodys Aaa and Aa corporate bond
yields as of each plan year-end to determine the
appropriate discount rate to calculate the year-end
benefit plan obligation and the following years net
periodic pension cost. Plan Assets: Lorain National Banks Retirement Pension Plans
weighted-average assets allocations at December
31, 2003, 2002 and 2001 by asset category are as
follows: Plan Assets at December 31Asset category
    
    2003
    
    2002
    
    2001Equity securities
    
    
    18
    %
    
    
    53
    %
    
    
    59
    %Debt securities
    
    
    82
    
    
    
    42
    
    
    
    37Cash and cash equivalents
    
    
    0
    
    
    
    5
    
    
    
    4Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %LNB Bancorp, Inc. common
stock to total plan assets
    
    
    8.9
    %
    
    
    7.5
    %
    
    
    4.8
    %
 The investment strategy for 2004 is to achieve an
equity security allocation percent of about 60% and a
debt security position of about 40%. This strategy
will be employed in order to position more assets to
benefit from the anticipated increase in the equities
market in 2004. Cash flows of the Lorain National Bank Retirement
Pension Plan Contributions: Lorain National Bank expects to contribute $500 to
the Lorain National Bank Retirement Pension Plan in
2004. Estimated Future Benefit Payments: The following benefit payments, which reflect no
expected future service as the plan is frozen, are
expected to be paid as follows: (Dollars in thousands)
    
    Pension BenefitCalendar year 2004
    
    $
    245Calendar year 2005
    
    
    35Calendar year 2006
    
    
    547Calendar year 2007
    
    
    67Calendar year 2008
    
    
    111Calendar year 2009  2045
    
    
    9,938
 LNB BANCORP, INC.  2003
ANNUAL REPORT   29




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(17) Stock Option Plans:

The Corporation sponsors four nonqualified
incentive stock option agreements and two
qualified incentive stock option plans. In
2003, the Corporation did not enter into an
incentive stock option agreement.

The Corporations shareholders approved
qualified incentive stock option plans on
April 6, 1982 and April 16, 1985 for all
officers at or above the position of Vice
President or equivalent. Under each plan,
50,000 shares of stock were originally
reserved. Options were granted at fair
market value at the date of the grant and,
accordingly, no charges are reflected in
salaries and employee benefits expense due
to the granting of stock options. The excess
of the option price over the par value of
the shares purchased through the exercise of
stock options is credited to additional
capital. Options granted under the plans may
not be outstanding for periods exceeding 10
years from date of grant.

At December 31, 2003 all qualified stock
options issued under these plans had expired
or been exercised.

There were no new options granted or
forfeitures under the qualified stock option
plans during the three year period ended
December 31, 2003. Stock options exercised
under qualified plans
were 15,425, 200 and 9,431 shares in 2003,
2002 and 2001, respectively.

An analysis of the qualified incentive stock
option plans as of December 31, 2003
follows:

|                                 |        |      |      |      |   |   |      |    |  
|-------------------------------- | ------ | ---- | ---- | ---- | - | - | ---- | -- | -
|Incentive Stock Option Plan Year |        | 1985 |      | 1982
|                                 |        |      |      |     
|Options outstanding:             |        |      |      |      |   |   |      |   
|                                 | Total  |      |      | -0   | - |   |      | -0 | -
|                                 | Vested |      |      | -0   | - |   |      | -0 | -
|Options available for granting   |        |      | -0   | -    |   |   | -0   | - 
|                                 |        |      |      |      |   |   |      |    |  
|Exercise price                   |        | $    | 0.00 |      |   | $ | 0.00 |   
|                                 |        |      |      |      |   |   |      |    |  

There were no stock options granted or available for granting under any
of the Corporations qualified incentive stock option plans during 2003,
2002 and 2001.

Qualified and Nonqualified Incentive Stock Option Plans

|                                 |  |         |         |       |  |          |       |       |  |         |        |          |  |   |       |  |  |          |        |   |  |   |       | 
|-------------------------------- |  | ------- | ------- | ----- |  | -------- | ----- | ----- |  | ------- | ------ | -------- |  | - | ----- |  |  | -------- | ------ | - |  | - | ----- | 
|                                 |  | 2003    |         | 2002  |  | 2001    
|                                 |  |         |         |       |  |         
|                                 |  |         |         |       |  | Weighted |       |       |  |         |        | Weighted |  |   |       |  |  | Weighted
|                                 |  |         |         |       |  | Average  |       |       |  |         |        | Average  |  |   |       |  |  | Average 
|                                 |  |         |         |       |  | Exercise |       |       |  |         |        | Exercise |  |   |       |  |  | Exercise
|                                 |  | Options |         | Price |  | Options  |       | Price |  | Options |        | Price   
|                                 |  |         |         |       |  |          |       |       |  |         |        |         
|Outstanding at beginning of year |  |         | 46,318  |       |  | $        | 23.29 |       |  |         | 45,606 |          |  | $ | 23.73 |  |  |          | 44,158 |   |  | $ | 22.63 | 
|Granted                          |  |         | -0      | -     |  |          | N/A   |       |  |         | -0     | -        |  |   | N/A   |  |  |          | 10,000 |   |  |   | 21.55 | 
|Expired                          |  |         | (3,092  | )     |  |          | 12.31 |       |  |         | -0     | -        |  |   | N/A   |  |  |          | -0     | - |  |   | N/A   | 
|Exercised                        |  |         | (15,425 | )     |  |          | 12.31 |       |  |         | (200   | )        |  |   | 18.47 |  |  |          | (9,431 | ) |  |   | 14.07 | 
|Stock Dividend/Split             |  |         | 23,159  |       |  |          | 15.52 |       |  |         | 912    |          |  |   | 23.26 |  |  |          | 879    |   |  |   | 19.33 | 
|                                 |  |         |         |       |  |          |       |       |  |         |        |          |  |   |       |  |  |          |        |   |  |   |       | 
|Outstanding at end of year       |  |         | 50,960  |       |  |          | 16.69 |       |  |         | 46,318 |          |  |   | 23.29 |  |  |          | 45,606 |   |  |   | 23.73 | 
|                                 |  |         |         |       |  |          |       |       |  |         |        |          |  |   |       |  |  |          |        |   |  |   |       | 
|Exercisable at end of year       |  |         | 50,960  |       |  | $        | 16.69 |       |  |         | 46,318 |          |  | $ | 23.29 |  |  |          | 45,606 |   |  | $ | 23.73 | 
|                                 |  |         |         |       |  |          |       |       |  |         |        |          |  |   |       |  |  |          |        |   |  |   |       | 

Exercise prices for nonqualified options
outstanding as of December 31, 2003, ranged
from $14.08 to $18.85. The weighted average
remaining contractual life of the
nonqualified incentive stock option
agreements is 5 to 8 years.

The fair value of each option granted in
2001 is estimated on the date of grant using
a Black-Scholes option pricing model with
the following weighted average assumptions
used for grants in 2001: risk-free interest
rate of 5.03%, dividend yield of 4.80%,
volatility factors of the expected market
price of LNB Bancorp, Inc.s common stock of
38.4%; and a weighted average expected
option life of 10 years. Weighted average
fair value of options granted during 2001
was $6.04.

Had compensation cost for the Corporations
stock-based compensation plans been
determined consistent with SFAS No. 123, net
income and net income per share would have
been as summarized below. Additionally, no
stock-based compensation, as defined by the
provisions of Statement of Financial
Accounting Standards No. 123,Stock-Based
Compensation was generated under any of the
Corporations stock-based benefit plans
during 2003.

|                                |         |      |                       |      |  |      |       |      |  |   |       |      | 
|------------------------------- | ------- | ---- | --------------------- | ---- |  | ---- | ----- | ---- |  | - | ----- | ---- | 
|                                |         |      | For the Calendar Year
|(Dollars in thousands           |         |     
|except per shares amounts)      |         | 2003 |                       | 2002 |  | 2001
|                                |         |      |                       |      |  |     
|Pro forma net income            |         | $    | N/A                   |      |  | $    | 9,148 |      |  | $ | 8,525 |     
|Pro forma net
income per share: |         |      |                       |      |  |      |       |      |  |   |       |     
|                                | Basic   |      | $                     | N/A  |  |      | $     | 1.39 |  |   | $     | 1.30 | 
|                                | Diluted |      |                       | N/A  |  |      |       | 1.39 |  |   |       | 1.30 | 
|                                |         |      |                       |      |  |      |       |      |  |   |       |     

LNB BANCORP, INC.  2003
ANNUAL REPORT    30





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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(18) Employee Stock Ownership Plan:

The Lorain National Bank Employee Stock
Ownership Plan (ESOP) is a non-contributory
plan that covers substantially all
employees. Contributions by the Bank to the
ESOP are discretionary and subject to
approval by the Board of Directors.
Contributions are expensed in the year in
which they are approved and totaled $0, $263
and $0 in 2003, 2002, and 2001,
respectively. At December 31, 2003 there were
292 participants in the plan. Under the
terms of the ESOP agreement, the
Corporations common stock is to be the
Plans primary investment.

Transactions by the ESOP, relating to
activity in the Corporations common stock,
are summarized in the table to the right:

|                            |                                      |      |        |         |   |      |       |         |   |   |        |         |  
|--------------------------- | ------------------------------------ | ---- | ------ | ------- | - | ---- | ----- | ------- | - | - | ------ | ------- | -
|(Dollars in thousands       |                                      |      |        |         |   |      |       |         |   |   |        |        
|except per share amounts)   |                                      | 2003 |        | 2002    |   | 2001
|                            |                                      |      |        |         |   |     
|Cash dividend income        |                                      | $    | 189    |         |   | $    | 184   |         |   | $ | 172    |        
|Stock split/dividend shares |                                      |      | 93,836 |         |   |      | 3,577 |         |   |   | 3,287  |        
|Shares purchased            |                                      |      | 18,110 |         |   |      | 7,421 |         |   |   | 22,953 |        
|Shares distributed/sold     |                                      |      | 29,110 |         |   |      | 6,142 |         |   |   | 2,690  |        
|Year end holdings:          |                                      |      |        |         |   |      |       |         |   |   |        |        
|                            | Shares                               |      |        | 264,175 |   |      |       | 181,340 |   |   |        | 176,484 |  
|                            | Market value                         |      | $      | 5,363   |   |      | $     | 4,923   |   |   | $      | 3,816   |  
|                            | As a percentage of
total plan assets |      |        | 98.8    | % |      |       | 98.8    | % |   |        | 97.4    | %
|                            |                                      |      |        |         |   |      |       |         |   |   |        |        

(19) 401(k) Plan:

The Bank adopted the Lorain National Bank
401(k) Plan (the Plan) effective January 1,
2001. The Plan amended and restated the
Lorain National Bank Stock Purchase Plan. The
Plan allows for the purchase of up to 80,000
shares of LNB Bancorp, Inc. treasury shares.
During 2003, 2002, and 2001 the Plan
purchased LNB Bancorp, Inc common stock on
the open market.

Under provisions of the Plan, a participant
can contribute a certain percentage of their
compensation to the Plan. The Bank makes a
discretionary percentage contribution to
match each employees contribution. The
Banks match is limited to the first six
percent of an employees wage. The Plan uses
the contributions of the Corporation to
purchase LNB Bancorp, Inc. common stock.
Effective January 1, 2001, the Plan permits
the investment of plan assets, contributed
by employees, among different funds.

The Banks matching contributions are
expensed in the year in which the associated
participant contributions are made and
totaled $425,$209,
and $202 in 2003, 2002 and 2001,
respectively. At December 31, 2003, there
were 280 participants in the Plan.

Transactions by the Plan relating to the
activity in the Corporations common stock
are summarized below:

|                            |                                      |      |        |         |   |      |        |         |   |   |        |         |  
|--------------------------- | ------------------------------------ | ---- | ------ | ------- | - | ---- | ------ | ------- | - | - | ------ | ------- | -
|(Dollars in thousands       |                                      |      |        |         |   |      |        |         |   |   |        |        
|except per share amounts)   |                                      | 2003 |        | 2002    |   | 2001
|                            |                                      |      |        |         |   |     
|Cash dividend income        |                                      | $    | 140    |         |   | $    | 136    |         |   | $ | 131    |        
|Stock split/dividend shares |                                      |      | 68,079 |         |   |      | 2,577  |         |   |   | 2,509  |        
|Shares purchased            |                                      |      | 17,821 |         |   |      | 15,979 |         |   |   | 12,543 |        
|Shares rolled over          |                                      |      | 645    |         |   |      | 83     |         |   |   | 237    |        
|Shares distributed/sold     |                                      |      | 34,805 |         |   |      | 5,805  |         |   |   | 10,250 |        
|Year end holdings:          |                                      |      |        |         |   |      |        |         |   |   |        |        
|                            | Shares                               |      |        | 194,252 |   |      |        | 142,512 |   |   |        | 129,678 |  
|                            | Market value                         |      | $      | 3,943   |   |      | $      | 3,869   |   |   | $      | 2,804   |  
|                            | As a percentage of
total plan assets |      |        | 72.6    | % |      |        | 81.9    | % |   |        | 84.9    | %
|                            |                                      |      |        |         |   |      |        |         |   |   |        |        

(20) Commitments, Credit Risk, and Contingencies:

In the normal course of business, the Bank
enters into commitments with off-balance
sheet risk to meet the financing needs of
its customers. These instruments are
currently limited to commitments to extend
credit and standby letters of credit.
Commitments to extend credit involve
elements of credit risk and interest rate
risk in excess of the amount recognized in
the consolidated balance sheets. The Banks
exposure to credit loss in the event of
nonperformance by the other party to the
commitment is represented by the contractual
amount of the commitment. The Bank uses the
same credit policies in making commitments
as it does for on-balance sheet instruments.
Interest rate risk on commitments to extend
credit results from the possibility that
interest rates may have moved unfavorably
from the position of the Bank since the time
the commitment was made.

Commitments to extend credit are agreements
to lend to a customer as long as there is no
violation of any condition established in
the contract. Commitments generally have
fixed expiration dates of 30 to 120 days or
other termination clauses and may require
payment of a fee. Since some of the
commitments may expire without being drawn
upon,the total commitment amounts do not
necessarily represent future cash
requirements.

The Bank evaluates each customers credit
worthiness on a case-by-case basis. The
amount of collateral obtained by the Bank
upon extension of credit is based on
Managements credit evaluation of the
applicant. Collateral held is generally
single-family residential real estate and
commercial real estate. Substantially all of
the obligations to extend credit are
variable rate commitments except for
commitments to sell mortgages which are
fixed rate commitments.

Standby letters of credit are conditional
commitments issued to guarantee the
performance of a customer to a third party.
Standby letters of credit generally are
contingent upon the failure of the customer
to perform according to the terms of the
underlying contract with the third party.

A summary of the contractual amount of commitments follows:

|                              |       |      |              |         |  |   |        |         | 
|----------------------------- | ----- | ---- | ------------ | ------- |  | - | ------ | ------- | 
|                              |       |      | December 31,
|                              |       |      |             
|(Dollars in thousands)        |       | 2003 |              | 2002   
|                              |       |      |              |        
|Commitments to extend credit  |       | $    | 58,434       |         |  | $ | 75,408 |        
|Home equity lines             |       |      | 43,793       |         |  |   | 38,502 |        
|Credit card arrangements      |       |      | -0           | -       |  |   | 23,169 |        
|Commitments to sell mortgages |       |      | 444          |         |  |   | 1,742  |        
|Standby letters of credit     |       |      | 1,774        |         |  |   | 1,864  |        
|                              |       |      |              |         |  |   |        |        
|                              | Total |      | $            | 104,445 |  |   | $      | 140,685 | 
|                              |       |      |              |         |  |   |        |        

Most of the Banks business activity is with
customers located within the Banks defined
market area. As of December 31, 2003, the
Bank had no significant concentrations of
credit risk in its loan portfolio. The Bank
also has no exposure to highly leveraged
transactions and no foreign credits in its
loan portfolio.

The nature of the Corporations business
results in litigation. Management, after
reviewing with counsel all actions and
proceedings pending against or involving LNB
Bancorp, Inc. and subsidiaries, considers
that the aggregate liability or loss, if
any, resulting from them will not be
material to the Corporations financial
position, results of operation or liquidity.

LNB BANCORP, INC.  2003
ANNUAL REPORT    31





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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(21) Estimated Fair Value of Financial Instruments:

The Corporation discloses estimated fair
values for its financial instruments. Fair
value estimates,methods,and assumptions are
set forth below for the Corporations
financial instruments.

The following methods and assumptions were
used to estimate the fair value of each
class of financial instruments for which it
is practicable to estimate that value:

Cash and due from banks and Federal funds
sold and short-term investments and
Accrued interest, accounts receivable and
other financial assets:

For these short-term financial instruments,
the carrying value is a reasonable estimate
of fair value.

Securities:

The fair value of securities is based on
quoted market prices, where available. If
quoted market prices are not available, fair
value is estimated using the quoted market
prices of comparable instruments.

Portfolio loans, net and Loans available for sale, net:

For variable rate loans with interest rates
that may be adjusted on a quarterly,or more
frequent basis,the carrying amount is a
reasonable estimate of fair market value. The
fair value of other types of loans is
estimated by discounting future cash flows
using the current rates at which similar
loans would be made to borrowers with
similar credit ratings and for the same
remaining maturities.

Bank owned life insurance:

The carrying value is the fair market value for bank owned life insurance.

Deposits:
The fair value of deposits with no stated
maturity, such as noninterest-bearing demand
deposits, savings, money market, checking
and NOW accounts,is equal to the amount
payable on demand as of December 31, for
each year presented. The fair value of
fixed-maturity certificates of deposit is
estimated using the rates currently offered
for deposits of similar remaining
maturities. For variable rate certificates
of deposit, the carrying amount is a
reasonable estimate of fair value.

Securities sold under repurchase
agreements and other short-term
borrowings and Accrued interest payable
and other financial liabilities:

For these short-term financial instruments,
the carrying value is a reasonable estimate
of fair value.

Federal Home Loan Bank advances:

The fair value of these long-term financial
instruments is estimated by discounting
future cash flows using current FHLB rates
for the remaining term to maturity.

Commitments to extend credit and standby letters of credit:

The fair value of these commitments to extend
credit approximates the fees charged to make
these commitments; since rates and fees of
the commitment contracts approximates those
currently charged to originate similar
commitments. The carrying amount and fair
value of off-balance sheet instruments is not
significant as of December 31, 2003 and 2002.

Limitations:

Estimates of fair value are made at a
specific point in time, based on relevant
market information and information about the
financial instrument. These estimates are
subjective in nature and involve
uncertainties and matters of significant
judgement and therefore, cannot be determined
with precision. Changes in assumptions could
significantly affect the estimates.

Estimates of fair value are based on existing
on-and-off balance sheet financial
instruments without attempting to estimate
the value of anticipated future business and
the value of assets and liabilities that are
not considered financial instruments. For
example, the Bank has a substantial
Investment and Trust Services Division that
contributes net fee income annually. The
Investment and Trust Services Division is not
considered a financial instrument and its
value has not been incorporated into the fair
value estimates. Other significant assets and
liabilities that are not considered financial
instruments include property, plant, and
equipment and deferred tax liabilities. In
addition, it is not practicable for the
Corporation to estimate the tax ramifications
related to the realization of the unrealized
gains and losses and they have not been
reflected in any of the estimates of fair
value. The impact of these tax ramifications
can have a significant effect on estimates of
fair value. The estimated fair values of the
Corporations financial instruments at
December 31, 2003 and 2002 are summarized as
follows:

|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|---------------------- | --------------------------------------------------------------------------- | -------- | ---- | ---------- | ---- | -------- | - | ---------- |  |  | - | ------- |  |  | - | ------- | 
|                       |                                                                             |          | 2003 |            | 2002
|                       |                                                                             |          |      |            |     
|December 31,           |                                                                             | Carrying |      | Estimated  |      | Carrying |   | Estimated 
|(Dollars in thousands) |                                                                             | Value    |      | Fair Value |      | Value    |   | Fair Value
|                       |                                                                             |          |      |            |      |          |   |           
|Financial assets:      |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |        
|                       | Cash and due from banks and Federal funds sold and
short-term investments   |          | $    | 27,749     |      |          | $ | 27,749     |  |  | $ | 26,832  |  |  | $ | 26,832  | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|                       | Securities                                                                  |          |      | 152,127    |      |          |   | 152,290    |  |  |   | 152,295 |  |  |   | 152,551 | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|                       | Portfolio loans, net                                                        |          |      | 520,366    |      |          |   | 531,857    |  |  |   | 493,898 |  |  |   | 502,205 | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|                       | Loans available for sale, net                                               |          |      | 6,215      |      |          |   | 6,215      |  |  |   | 8,999   |  |  |   | 8,999   | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|                       | Bank owned life insurance                                                   |          |      | 12,702     |      |          |   | 12,702     |  |  |   | 11,930  |  |  |   | 11,930  | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|                       | Accrued interest, accounts receivable and
other financial assets            |          |      | 5,083      |      |          |   | 5,083      |  |  |   | 5,639   |  |  |   | 5,639   | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|Financial liabilities: |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |        
|Deposits:              |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |        
|                       | Demand deposits, savings accounts and
money market deposits                 |          | $    | 363,890    |      |          | $ | 363,890    |  |  | $ | 361,495 |  |  | $ | 361,495 | 
|                       | Certificates of deposit                                                     |          |      | 217,454    |      |          |   | 219,878    |  |  |   | 204,632 |  |  |   | 207,676 | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|                       | Total deposits                                                              |          |      | 581,344    |      |          |   | 583,768    |  |  |   | 566,127 |  |  |   | 569,171 | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|                       | Securities sold under repurchase agreements
and other short-term borrowings |          |      | 15,023     |      |          |   | 15,023     |  |  |   | 26,866  |  |  |   | 26,866  | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|                       | Federal Home Loan Bank advances                                             |          |      | 71,540     |      |          |   | 70,748     |  |  |   | 48,925  |  |  |   | 49,536  | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 
|                       | Accrued interest payable and other financial liabilities                    |          |      | 5,083      |      |          |   | 5,083      |  |  |   | 5,639   |  |  |   | 5,639   | 
|                       |                                                                             |          |      |            |      |          |   |            |  |  |   |         |  |  |   |         | 

LNB BANCORP, INC.  2003
ANNUAL REPORT    32





---



##### 



REPORT OF MANAGEMENT

To The Shareholders of LNB
Bancorp, Inc.

January 30,
2004


The Management of LNB Bancorp, Inc. is
responsible for the preparation, integrity,
and fair presentation of its financial
statements presented in this annual report.
The financial statements have been prepared
in accordance with accounting principles
generally accepted in the United States of
America and,as such,include amounts,some of
which are based on judgments and estimates
of Management.

LNB Bancorp, Inc. maintains a system of
internal control over financial reporting
designed to produce reliable financial
statements. The system contains
self-monitoring mechanisms,and compliance is
tested and evaluated through a program of
internal audits. Actions are taken to correct
potential deficiencies as they are
identified. Any internal control system has
inherent limitations,including the
possibility that controls can be
circumvented or overridden. Further, because
of changes in conditions, internal control
system effectiveness may vary over time.

Management assessed the Corporations
internal control over financial reporting
presented in conformity with accounting
principles generally
accepted in the United States of America as of
December 31, 2003. Based on this
assessment,Management believes that,as of December
31, 2003, the Corporation maintained effective
internal control over financial reporting presented
in conformity with accounting principles generally
accepted in the United States of America.

The Audit Committee of the Board of
Directors is composed entirely of outside
directors who are independent of Management
and meets periodically with Management,
internal auditors and independent auditors
to review audit plans and the results and
recommendations of their audits. The Audit
Committee selects the independent auditor.
KPMG LLP, independent auditors, and the
internal auditors have direct and
confidential access to the Audit Committee
at all times to discuss the results of their
examinations.

The accounting firm of KPMG LLP has been engaged by LNB Bancorp, Inc.
to audit its financial statements and their report follows.

|                        |  |                                                
|----------------------- |  | -----------------------------------------------
|-s- James F. Kidd       |  | -s- Terry M. White                             
|James F. Kidd           |  | Terry M. White                                 
|President and           |  | Executive Vice President,                      
|Chief Executive Officer |  | Chief Financial Officer and
Corporate Secretary

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
LNB Bancorp, Inc.

We have audited the accompanying
consolidated balance sheets of LNB Bancorp,
Inc. and subsidiaries as of December 31,
2003 and 2002, and the related consolidated
statements of income,
shareholders equity and cash flows for each
of the years in the three-year period ended
December 31, 2003. These consolidated
financial statements are the responsibility
of the Corporations management. Our
responsibility is to express an opinion on
these consolidated financial statements
based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the
United States of America. Those standards
require that we plan and perform the audit
to obtain reasonable assurance about whether
the financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence
supporting the
amounts and disclosures in the financial
statements. An audit also includes assessing
the accounting principles used and
significant estimates made by Management, as
well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial
statements referred to above present fairly,
in all material respects, the financial
position of LNB Bancorp, Inc. and
subsidiaries at December 31, 2003 and 2002,
and the results of their
operations,shareholdersequity and cash
flows for each of the years in the
three-year period ended December 31, 2003,
in conformity with accounting principles
generally accepted in the United States of
America.

-s- KPMG LLP
Cleveland, Ohio
January 30,2004

LNB BANCORP, INC.  2003
ANNUAL REPORT    33





---



##### 



SELECTED UNAUDITED QUARTERLY FINANCIAL DATA

Unaudited Quarterly Financial Data:

Selected unaudited quarterly financial data
and per share data for 2003, 2002 and 2001
is presented below. There were intra-quarter
fluctuations during the third quarter of
2003 in noninterest income from the gain on
the sale of the credit card portfolio of
$832. The increase in the provision for loan
losses in the third quarter of 2003 resulted
from changes in the mix and levels of loans
and the softening of the local economy. There
were intra-quarter fluctuations during the
fourth quarter of 2003 in noninterest
expense, net income and earnings per share
from one-time severance expenses amounting
to $1,712. There were intra-quarter
fluctuations during the first, second and
fourth quarters of 2002 in
noninterest income from increased levels of
gains on sales of securities compared with
the third quarter of 2002. The decrease in
the provision for loan losses in the fourth
quarter of 2002 resulted from changes in the
mix and levels of loans and current economic
conditions. There were significant
intra-quarter fluctuations during the fourth
quarter of 2001 from increases in the
provision for loan losses. The increase in
the provision for loan losses in the fourth
quarter of 2001 resulted from anticipated
loan charge-offs and to increase the reserve
for loan losses for changes in the mix and
levels of loans. The 2001 second and third
quarters noninterest income reflects gains
on sales of securities.

|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |        | 
|----------------------------------------------- | --------------- |  | ---- | ---- |  | ----------- | ------ | ----------- | ------ | ----------- | ------ | ------- | ------ | ------ | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ------ | 
|                                                |                 |  |      |      |  |             | First  |             | Second |             | Third  |         | Fourth |        |        |       | 
|(Dollars in thousands except per share amounts) |                 |  |      |      |  | Quarter (1) |        | Quarter (1) |        | Quarter (1) |        | Quarter |        | Totals
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |       
|Total interest income                           |                 |  | 2003 |      |  | $           | 9,686  |             |        | $           | 9,626  |         |        | $      | 9,400  |       |  | $ | 9,233  |       |  | $ | 37,945 |       
|                                                |                 |  | 2002 |      |  |             | 10,189 |             |        |             | 10,474 |         |        |        | 10,415 |       |  |   | 10,286 |       |  |   | 41,364 |       
|                                                |                 |  | 2001 |      |  |             | 11,724 |             |        |             | 11,485 |         |        |        | 11,081 |       |  |   | 10,811 |       |  |   | 45,101 |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Total interest expense                          |                 |  | 2003 |      |  |             | 2,526  |             |        |             | 2,352  |         |        |        | 2,186  |       |  |   | 2,132  |       |  |   | 9,196  |       
|                                                |                 |  | 2002 |      |  |             | 3,106  |             |        |             | 3,175  |         |        |        | 3,072  |       |  |   | 2,742  |       |  |   | 12,095 |       
|                                                |                 |  | 2001 |      |  |             | 4,903  |             |        |             | 4,432  |         |        |        | 4,194  |       |  |   | 3,469  |       |  |   | 16,998 |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Net interest income                             |                 |  | 2003 |      |  |             | 7,160  |             |        |             | 7,274  |         |        |        | 7,214  |       |  |   | 7,101  |       |  |   | 28,749 |       
|                                                |                 |  | 2002 |      |  |             | 7,083  |             |        |             | 7,299  |         |        |        | 7,343  |       |  |   | 7,544  |       |  |   | 29,269 |       
|                                                |                 |  | 2001 |      |  |             | 6,821  |             |        |             | 7,053  |         |        |        | 6,887  |       |  |   | 7,342  |       |  |   | 28,103 |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Provision for loan losses                       |                 |  | 2003 |      |  |             | 564    |             |        |             | 570    |         |        |        | 991    |       |  |   | 570    |       |  |   | 2,695  |       
|                                                |                 |  | 2002 |      |  |             | 600    |             |        |             | 525    |         |        |        | 600    |       |  |   | 475    |       |  |   | 2,200  |       
|                                                |                 |  | 2001 |      |  |             | 450    |             |        |             | 450    |         |        |        | 450    |       |  |   | 850    |       |  |   | 2,200  |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Net interest income after provision             |                 |  | 2003 |      |  |             | 6,596  |             |        |             | 6,704  |         |        |        | 6,223  |       |  |   | 6,522  |       |  |   | 26,045 |       
|                                                | for loan losses |  |      | 2002 |  |             |        | 6,483       |        |             |        | 6,774   |        |        |        | 6,743 |  |   |        | 7,069 |  |   |        | 27,069 | 
|                                                |                 |  | 2001 |      |  |             | 6,371  |             |        |             | 6,603  |         |        |        | 6,437  |       |  |   | 6,492  |       |  |   | 25,903 |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Noninterest income                              |                 |  | 2003 |      |  |             | 2,699  |             |        |             | 2,858  |         |        |        | 3,536  |       |  |   | 2,448  |       |  |   | 11,541 |       
|                                                |                 |  | 2002 |      |  |             | 2,694  |             |        |             | 2,723  |         |        |        | 2,624  |       |  |   | 3,027  |       |  |   | 11,068 |       
|                                                |                 |  | 2001 |      |  |             | 2,098  |             |        |             | 2,439  |         |        |        | 2,593  |       |  |   | 2,541  |       |  |   | 9,671  |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Noninterest expenses                            |                 |  | 2003 |      |  |             | 6,139  |             |        |             | 6,082  |         |        |        | 6,419  |       |  |   | 7,829  |       |  |   | 26,469 |       
|                                                |                 |  | 2002 |      |  |             | 6,050  |             |        |             | 6,178  |         |        |        | 6,001  |       |  |   | 6,543  |       |  |   | 24,772 |       
|                                                |                 |  | 2001 |      |  |             | 5,454  |             |        |             | 5,805  |         |        |        | 5,693  |       |  |   | 6,009  |       |  |   | 22,961 |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Income taxes                                    |                 |  | 2003 |      |  |             | 965    |             |        |             | 1,156  |         |        |        | 985    |       |  |   | 305    |       |  |   | 3,411  |       
|                                                |                 |  | 2002 |      |  |             | 1,022  |             |        |             | 1,082  |         |        |        | 1,033  |       |  |   | 1,063  |       |  |   | 4,200  |       
|                                                |                 |  | 2001 |      |  |             | 1,009  |             |        |             | 1,082  |         |        |        | 1,145  |       |  |   | 812    |       |  |   | 4,048  |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Net income                                      |                 |  | 2003 |      |  | $           | 2,191  |             |        | $           | 2,324  |         |        | $      | 2,355  |       |  | $ | 845    |       |  | $ | 7,715  |       
|                                                |                 |  | 2002 |      |  |             | 2,105  |             |        |             | 2,237  |         |        |        | 2,333  |       |  |   | 2,490  |       |  |   | 9,165  |       
|                                                |                 |  | 2001 |      |  |             | 2,006  |             |        |             | 2,155  |         |        |        | 2,193  |       |  |   | 2,211  |       |  |   | 8,565  |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Basic earnings per share (2)                    |                 |  | 2003 |      |  | $           | .33    |             |        | $           | .35    |         |        | $      | .36    |       |  | $ | .13    |       |  | $ | 1.17   |       
|                                                |                 |  | 2002 |      |  |             | .32    |             |        |             | .34    |         |        |        | .35    |       |  |   | .38    |       |  |   | 1.39   |       
|                                                |                 |  | 2001 |      |  |             | .31    |             |        |             | .33    |         |        |        | .33    |       |  |   | .33    |       |  |   | 1.30   |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Diluted earnings per share (2)                  |                 |  | 2003 |      |  | $           | .33    |             |        | $           | .35    |         |        | $      | .36    |       |  | $ | .13    |       |  | $ | 1.17   |       
|                                                |                 |  | 2002 |      |  |             | .32    |             |        |             | .34    |         |        |        | .35    |       |  |   | .38    |       |  |   | 1.39   |       
|                                                |                 |  | 2001 |      |  |             | .31    |             |        |             | .33    |         |        |        | .33    |       |  |   | .33    |       |  |   | 1.30   |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       
|Dividends declared per share (3)                |                 |  | 2003 |      |  | $           | .17    |             |        | $           | .17    |         |        | $      | .17    |       |  | $ | .19    |       |  | $ | .70    |       
|                                                |                 |  | 2002 |      |  |             | .16    |             |        |             | .17    |         |        |        | .17    |       |  |   | .18    |       |  |   | .68    |       
|                                                |                 |  | 2001 |      |  |             | .16    |             |        |             | .16    |         |        |        | .16    |       |  |   | .18    |       |  |   | .66    |       
|                                                |                 |  |      |      |  |             |        |             |        |             |        |         |        |        |        |       |  |   |        |       |  |   |        |       



|(1) |  | Certain amounts reported for
the year 2002 have been restated as a result of the adoption of SFAS
No. 142 and SFAS No. 147.                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Basic and Diluted earnings per share is computed using the weighted average number of shares outstanding during each quarter and each year.         
|   
|(3) |  | All share and per share data have been adjusted to reflect the three-for-two stock split in 2003, and the 2 percent stock dividend in 2002 and 2001.

LNB BANCORP, INC.  2003
ANNUAL REPORT    34





---



##### 



FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY

Condensed Statements of Income and Cash Dividends Declared

|                           |                     |      |                       |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |        | 
|-------------------------- | ------------------- | ---- | --------------------- | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                           |                     |      | For the Calendar Year
|                           |                     |      |                      
|(Dollars in thousands)     |                     | 2003 |                       | 2002   |  | 2001 |        | 2000   |  | 1999
|                           |                     |      |                       |        |  |      |        |        |  |     
|Total interest income      |                     | $    | 37,945                |        |  | $    | 41,364 |        |  | $    | 45,101 |        |  | $ | 46,645 |        |  | $ | 41,617 |       
|Total interest expense     |                     |      | 9,196                 |        |  |      | 12,095 |        |  |      | 16,998 |        |  |   | 19,209 |        |  |   | 15,593 |       
|                           |                     |      |                       |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|                           | Net interest income |      |                       | 28,749 |  |      |        | 29,269 |  |      |        | 28,103 |  |   |        | 27,436 |  |   |        | 26,024 | 
|Provision for loan losses  |                     |      | 2,695                 |        |  |      | 2,200  |        |  |      | 2,200  |        |  |   | 1,700  |        |  |   | 2.000  |       
|Other income               |                     |      | 10,024                |        |  |      | 10,242 |        |  |      | 9,122  |        |  |   | 8,369  |        |  |   | 7,936  |       
|Gains on sales of assets   |                     |      | 1,517                 |        |  |      | 826    |        |  |      | 326    |        |  |   | 1      |        |  |   | 162    |       
|Other expenses             |                     |      | 26,469                |        |  |      | 24,772 |        |  |      | 22,738 |        |  |   | 21,276 |        |  |   | 20,639 |       
|                           |                     |      |                       |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Income before income taxes |                     |      | 11,126                |        |  |      | 13,365 |        |  |      | 12,613 |        |  |   | 12,830 |        |  |   | 11,483 |       
|Income taxes               |                     |      | 3,411                 |        |  |      | 4,200  |        |  |      | 4,048  |        |  |   | 4,400  |        |  |   | 3,842  |       
|                           |                     |      |                       |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Net income                 |                     | $    | 7,715                 |        |  | $    | 9,165  |        |  | $    | 8,565  |        |  | $ | 8,430  |        |  | $ | 7,641  |       
|                           |                     |      |                       |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       
|Cash dividends declared    |                     | $    | 4,626                 |        |  | $    | 4,468  |        |  | $    | 4,365  |        |  | $ | 4,191  |        |  | $ | 3,794  |       
|                           |                     |      |                       |        |  |      |        |        |  |      |        |        |  |   |        |        |  |   |        |       

Condensed Balance Sheets

|                                           |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|------------------------------------------ |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                           |  | December 31,
|                                           |  |             
|(Dollars in thousands)                     |  | 2003         |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                           |  |              |         |      |  |      |         |      |  |     
|Cash and cash equivalents                  |  | $            | 27,749  |      |  | $    | 26,832  |      |  | $    | 31,505  |  |  | $ | 25,136  |  |  | $ | 37,343  | 
|Securities                                 |  |              | 152,127 |      |  |      | 152,295 |      |  |      | 138,401 |  |  |   | 127,101 |  |  |   | 123,319 | 
|Net loans                                  |  |              | 526,581 |      |  |      | 502,897 |      |  |      | 471,598 |  |  |   | 445,890 |  |  |   | 414,849 | 
|Other assets                               |  |              | 34,764  |      |  |      | 33,375  |      |  |      | 23,022  |  |  |   | 23,983  |  |  |   | 24,100  | 
|                                           |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total assets                               |  | $            | 741,221 |      |  | $    | 715,399 |      |  | $    | 664,526 |  |  | $ | 622,110 |  |  | $ | 599,611 | 
|                                           |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total deposits                             |  | $            | 581,344 |      |  | $    | 566,127 |      |  | $    | 518,267 |  |  | $ | 496,091 |  |  | $ | 456,831 | 
|Other borrowings                           |  |              | 86,563  |      |  |      | 75,791  |      |  |      | 78,515  |  |  |   | 63,736  |  |  |   | 86,467  | 
|Other liabilities                          |  |              | 5,179   |      |  |      | 6,868   |      |  |      | 5,606   |  |  |   | 5,758   |  |  |   | 5,260   | 
|                                           |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total liabilities                          |  |              | 673,086 |      |  |      | 648,786 |      |  |      | 602,388 |  |  |   | 565,585 |  |  |   | 548,558 | 
|                                           |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total shareholders equity                 |  |              | 68,135  |      |  |      | 66,613  |      |  |      | 62,138  |  |  |   | 56,525  |  |  |   | 51,053  | 
|                                           |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total liabilities and shareholders equity |  | $            | 741,221 |      |  | $    | 715,399 |      |  | $    | 664,526 |  |  | $ | 622,110 |  |  | $ | 599,611 | 
|                                           |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 

Per Share Data

|                                      |  |      |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                      |  | 2003 |           | 2002 |  | 2001 |           | 2000 |  | 1999
|                                      |  |      |           |      |  |      |           |      |  |     
|Basic earnings (1) (2)                |  | $    | 1.17      |      |  | $    | 1.39      |      |  | $    | 1.30      |  |  | $ | 1.28      |  |  | $ | 1.16      | 
|Diluted earnings (1) (2)              |  |      | 1.17      |      |  |      | 1.39      |      |  |      | 1.30      |  |  |   | 1.28      |  |  |   | 1.16      | 
|Cash dividends declared (2)           |  |      | .70       |      |  |      | .68       |      |  |      | .66       |  |  |   | .64       |  |  |   | .58       | 
|Book value per share (2)              |  |      | 10.30     |      |  |      | 10.09     |      |  |      | 9.41      |  |  |   | 8.60      |  |  |   | 7.77      | 
|Shares outstanding at end of year (2) |  |      | 6,617,618 |      |  |      | 6,601,848 |      |  |      | 6,601,548 |  |  |   | 6,571,119 |  |  |   | 6,569,133 | 
|                                      |  |      |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 

Financial Ratios

|                                                  |  |      |       |      |  |      |       |      |  |      |       |   |  |  |       |   |  |  |       |  
|------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                                  |  | 2003 |       | 2002 |  | 2001 |       | 2000 |  | 1999
|                                                  |  |      |       |      |  |      |       |      |  |     
|Return on average assets (ROAA) (3)               |  |      | 1.05  | %    |  |      | 1.33  | %    |  |      | 1.35  | % |  |  | 1.39  | % |  |  | 1.33  | %
|Return on average shareholders equity (ROAE) (3) |  |      | 11.33 |      |  |      | 14.24 |      |  |      | 14.36 |   |  |  | 15.83 |   |  |  | 15.29 |  
|Net interest margin (4)                           |  |      | 4.24  |      |  |      | 4.59  |      |  |      | 4.75  |   |  |  | 4.85  |   |  |  | 4.88  |  
|Efficiency ratio (4)                              |  |      | 63.01 |      |  |      | 61.41 |      |  |      | 60.96 |   |  |  | 59.42 |   |  |  | 60.61 |  
|Loans to deposits                                 |  |      | 91.91 |      |  |      | 90.01 |      |  |      | 92.13 |   |  |  | 90.94 |   |  |  | 91.83 |  
|Dividend Payout                                   |  |      | 59.98 |      |  |      | 48.75 |      |  |      | 50.96 |   |  |  | 49.72 |   |  |  | 49.65 |  
|Shareholders equity to assets (3)                |  |      | 9.22  |      |  |      | 9.31  |      |  |      | 9.35  |   |  |  | 8.77  |   |  |  | 8.67  |  
|                                                  |  |      |       |      |  |      |       |      |  |      |       |   |  |  |       |   |  |  |       |  

Asset Quality Ratios

|                                                |  |      |        |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  
|----------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                                |  | 2003 |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                |  |      |        |      |  |      |        |      |  |     
|Net charge-offs to total loans                  |  |      | .30    | %    |  |      | .28    | %    |  |      | .33    | % |  |  | .25    | % |  |  | .19    | %
|Reserve for loan losses to total loans          |  |      | 1.46   |      |  |      | 1.31   |      |  |      | 1.23   |   |  |  | 1.16   |   |  |  | 1.11   |  
|Nonperforming loans to total loans              |  |      | .96    |      |  |      | .37    |      |  |      | .30    |   |  |  | .51    |   |  |  | .33    |  
|Reserve for loan losses to nonperforming assets |  |      | 135.00 |      |  |      | 352.94 |      |  |      | 409.30 |   |  |  | 226.60 |   |  |  | 348.50 |  
|                                                |  |      |        |      |  |      |        |      |  |      |        |   |  |  |        |   |  |  |        |  



|(1) |  | Basic and diluted earnings per share is computed using the weighted average number of shares outstanding during each year.                              
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | All share and per share data has been adjusted to reflect the three-for-two stock split in 2003 and the 2 percent stock dividend in 2002, 2001 and 2000.
|   
|(3) |  | Ratios based on average annual balances.                                                                                                                
|   
|(4) |  | Fully-Tax Equivalent (FTE) Basis.                                                                                                                       

LNB BANCORP, INC.  2003
ANNUAL REPORT    35





---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS

The following is managements discussion and
analysis of the financial condition and
results of operations of LNB Bancorp, Inc.
(the Corporation). The purpose of this
analysis is to clearly describe, from
managements perspective, what primary
factors contributed to the
financial performance presented in the
consolidated financial statements and the
notes related to these statements. This
discussion and analysis should be read in
conjunction with the consolidated financial
statements, notes and other materials
contained in this 2003 annual report.

Introduction

This was a year of change for the
Corporation. Prolonged economic weakness in
our market, and the need to make fundamental
changes to position the Corporation for the
future, necessitated many changes. In order
to continue to grow profitably, major
personnel, technology, product line and
branch office decisions were made in 2003. It
was also a year in which the President and
Chief Executive Officer announced his
retirement. The full financial impact of all
of these activities is discussed in detail
in the Results of Operations section of this
discussion.

The Corporation is a financial holding
corporation serving Lorain County, extreme
eastern Erie County and western Cuyahoga
County in northern Ohio. As such the
Corporations performance is impacted by
general trends in the banking industry and
by local economic conditions in the Federal
Reserve Bank of Cleveland  Fourth
District. At year-end, the banking industry
was entering another period of
consolidation, with several bank mergers
announced that may impact the Corporations
market. There has also been increased
branching activity into Lorain County by
super-regional banks and new competitors
from Cuyahoga County. While it appeared that
in late 2003 the national economy was
quickly improving, the Corporations local
economy was only slowly recovering. This is
primarily due to the areas strong
dependence on the manufacturing
sector. Within Lorain County, future
population growth estimates are encouraging,
but such growth will increasingly be in the
eastern part of the county as opposed to
traditional population centers.

The Corporation offers a full line of
financial products and services through its
wholly-owned subsidiary, Lorain National
Bank. The Corporations delivery network
includes 20 branch offices and 23 ATMs. The
Corporation also offers on-line banking
services at its Internet site. The current
business lines that are most critical to the
Corporations continued success are
commercial lending, retail lending, and core
transaction deposit products. The
Corporation continues to derive 71% of its
revenues from net interest income, so the
ability to achieve balance sheet growth and
therefore net interest income growth is
still the Corporations most critical
revenue factor. Combining this dependence on
asset growth with a weak local economy
contributed to a decline in revenue in 2003.

A restructuring of the branch network was
announced in 2003. Customer convenience
plays a critical role in the Corporations
success,
and after completing an analysis of the
current branch network and projected
population trends, changes were announced
involving
three locations. In late 2003 the Midway Mall
office was closed and plans were announced
to close the Avon Lake office in 2004. New
offices in Avon Lake and Avon will replace
these two offices in early 2004. These new
offices will serve two important growth
areas in eastern Lorain County. The
Corporation will also close its full service
Westlake office in early 2004. After
remodeling, this office will reopen as a loan
production office staffed by commercial and
mortgage lenders.

This was also the year that the
Corporations backroom operations were
reviewed and upgraded. An aggressive plan
was completed to update obsolete processes
and equipment. The Corporations computer
network, debit card and ATM network,branch
communications, and teller system were
upgraded or replaced. Major work was
completed to improve disaster planning,
information security, overall process
controls and better network monitoring. This
work will continue in 2004 as the
Corporation prepares for the technical
challenges of geographic expansion.

From a strategic perspective the Corporation
is addressing the issues that will enhance
its ability to profitably grow and to meet
the product demands of the market. With
respect to growth, the changing demographics
of Lorain County, and the prospects for
future local economic growth pose the most
important challenges for the
Corporation. While significant opportunities
exist within our current market area,
geographic expansion outside Lorain County
is critical. From a product standpoint, the
primary challenge is from new
competition. With Lorain Countys proximity
to Cleveland, the Corporation is
experiencing new competitors in our current
market. Super-regional banks pose some
challenges,but many of our pricing and
product challenges are the result of more
competition from non-regional banks.

The Corporation is a relatively large
community bank. As such it has a mission to
meet the demands of the market with unique
customer solutions whether these are free
personal checking accounts or multi-million
dollar commercial loans. The Corporation
strives to compete against the
super-regional banks with superior customer
service and to compete against other
community banks by providing more creative
and sophisticated products. To successfully
implement this business plan many changes
have occurred in the last two years to meet
current and future challenges.

(BAR CHARTS)

LNB BANCORP, INC.  2003
ANNUAL REPORT    36





---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS

Key Indicators and Material Trends

One of the more difficult challenges in the
banking industry is net interest margin
compression. Management can affect balance
sheet changes that can insulate the net
interest margin from dramatic changes in
interest rates. However, in absolute terms,
assuming interest rates do not change, the
Corporation will be dealing with smaller
margins in the future. This is a competitive
reality that has impacted 1-4 family real
estate loans and installment loans in recent
years, and is beginning to be felt in
commercial loan pricing today. Since the
Corporation is dependent on net interest
income for 71% of its revenue, minimizing
this compression is critical. The
Corporations net interest margin has
historically compared favorably with peer
banks and this continued in 2003. This
historical strength is primarily due to the
ability to grow and maintain a strong retail
deposit base and to grow and maintain a
strong commercial lending operation. The
Corporations balance sheet is structured to
benefit when rates rise, so as rates
continued to decline throughout much of
2003, the Corporation continued to
experience net interest margin compression.

With the industry struggling with lower net
interest margins, the generation of
noninterest income has become more critical
to long-term revenue growth. The Corporation
has historically compared quite favorably to
peers in this regard. While this positive
comparison to peers continued in 2003, the
composition of noninterest income is
changing and challenges exist for the
Corporation in 2004. There are components of
noninterest income that are directly related
to economic activity and others that are
more predictable. Service charges on deposit
accounts, electronic banking fees and other
transaction fees are generally noncyclical
types of income. The Corporations Trust
revenues and mortgage banking income are
examples of cyclical types of income. Trust
revenues continue to be depressed after
three years of difficult economic and stock
market conditions. Mortgage banking income
has improved in the last two years, but is
still a challenge for the Corporation. In
2003, plans were developed to improve future
noninterest income performance with
particular emphasis on corporate cash
management, investment and trust services
and mortgage banking.

Asset quality is always a key indicator of
financial strength, and the Corporation
continues to manage credit risk
aggressively. In 2003 the level of
nonperforming assets and the loan loss
reserve to total loans increased over prior
years. The Corporations risk profile is
changing with loan portfolio trends and
current economic conditions. The market for
1-4 family mortgage lending has changed
dramatically in recent years. It is
estimated that 80% of all 1-4 family
mortgages are originated through mortgage
brokers today. This means that the number of
1-4 family loans that the Corporation is
originating is declining. Additionally,
since the Corporation must also manage its
interest rate risk, most of the fixed rate
1-4 family loans it originates are sold in
the secondary market. The result is a higher
concentration of potentially higher risk
commercial loans in the portfolio.

Expense control has been a challenge for the
Corporation. Management has made changes in
operations in 2002 and 2003 to
aggressively address salaries and benefits,
equipment and occupancy expenses and
taxes. The Corporation has also pursued
outsource solutions in some areas and
renegotiated many of its vendor contracts to
gain quality of service commitments and cost
reductions.

One of the key indications of how well the
Corporation competes is market share. This
data is difficult to produce in the banking
industry, but deposit market share data is
readily available. Since the ability to
generate deposits is a key indication of the
Corporations ability to meet its liquidity
needs and fund profitable asset growth, it is
a significant measure of the success of the
business plan. In 2003, as measured by the
FDIC at June 30, 2002 and at June 30, 2003,
the Corporations deposits grew by 6.4% as
compared to 6.2% for the Lorain County
market as a whole. This means that the
Corporations market share of deposits grew
slightly in 2003, and now stands at
17.8%.The Corporation continues to do very
well in its historically strong city markets
of Lorain, Elyria and Amherst. The branch
initiatives that were announced in 2003 are
designed to lower the delivery cost in these
areas and redeploy resources into the
rapidly growing markets in Lorain County.

Results of Operations (Dollars in thousands except for per share data)

Summary of Earnings

Net income was $7,715 or $1.17 per diluted
share, down from $9,165 or $1.39 per diluted
share in 2002, and $8,565 or $1.30 per
diluted share in 2001. In 2003, the
Corporation incurred $1,712 in one-time
severance expenses as part of an overall
restructuring of the Corporation and the
retirement of its President and Chief
Executive Officer. Also included in 2003
earnings was an $832 gain on the sale of the
credit card portfolio. As a percent of
average assets, net income in 2003
represents a return of 1.05%.This compares
to 1.33% and 1.35% in 2002 and 2001
respectively. Return on assets is one
measure of operating efficiency. As a percent
of average shareholders equity this
represents a return of 11.33% as compared to
14.24% and 14.36% in 2002 and 2001
respectively. Return on shareholders equity
is a measure of how well the Corporation
employs leverage to maximize the return on
the capital it employs.

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. This is the most significant component
of the Corporations revenue and earnings.
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
summarizes net interest income and net
interest margin for the three years ended
December 31, 2003.

Table 1:

|                           |  |      |        |      |  |      |        |   |  |   |        |  
|-------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|Net Interest Income        |  | 2003 |        | 2002 |  | 2001
|                           |  |      |        |      |  |     
|Net Interest Income        |  | $    | 28,749 |      |  | $    | 29,269 |   |  | $ | 28,103 |  
|Tax equivalent adjustments |  |      | 383    |      |  |      | 415    |   |  |   | 179    |  
|Net Interest Income (FTE)  |  |      | 29,132 |      |  |      | 29,684 |   |  |   | 28,282 |  
|Net Interest Margin        |  |      | 4.18   | %    |  |      | 4.52   | % |  |   | 4.72   | %
|Tax equivalent adjustments |  |      | .06    | %    |  |      | .07    | % |  |   | .03    | %
|Net Interest Margin (FTE)  |  |      | 4.24   | %    |  |      | 4.59   | % |  |   | 4.75   | %

The Corporations net interest income (FTE)
was $29,132 in 2003, which is a decline of
$552 from 2002. This follows an increase in
net interest income (FTE) of $1,402 in 2002
as compared to 2001. The net interest margin
(FTE) was 4.24% in 2003, which is a decline
of 35 basis points from 2002. This follows a
decrease of 16 basis points in 2002 as
compared to 2001. This decline in net
interest income (FTE) was the result of
three continuing factors,with unique factors
impacting 2003. First, the Federal Reserve
continued to reduce rates in 2003, this time
lowering the Federal Funds Rate by 25 basis
points. In general, a reduction in rates of
25 basis points compresses the Corporations
annual net interest income by about
$250. This has been a factor in the
Corporations margin performance since 2000,
but the impact was more pronounced in 2003
since many of the Corporations deposit
rates reached practical rate floors and
could not be lowered further. Second, the
Corporation experienced only modest balance
sheet growth during the year. In 2001 and



| | LNB BANCORP, INC.  2003 ANNUAL
REPORT | 37
| | -------------------------------------- | --



---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS

Table 2: Condensed Consolidated Average Balance Sheets

Interest, Rate, and Rate/Volume differentials are stated on a Fully-Tax
Equivalent (FTE) Basis.

|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |      |  
|--------------------------------------------- | ------------------------------------------ | ------- | ------- | -------- |  | ---- | ------ | ------- |  | -------- | ---- | ---- | - | ------- | ------- | -------- |  | ---- | ------ | ------ |  |  | ---- | ---- | - | - | ------- | ------- |  | - | ------ | ------ |  |  | ---- | ---- | -
|December 31,                                  |                                            | 2003    |         | 2002     |  | 2001
|                                              |                                            |         |         |          |  |     
|(Dollars in thousands)                        |                                            | Balance |         | Interest |  | Rate |        | Balance |  | Interest |      | Rate |   | Balance |         | Interest |  | Rate
|Assets:                                       |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Securities-tax equivalent                     |                                            | $       | 143,505 |          |  | $    | 4,572  |         |  |          | 3.19 | %    |   | $       | 132,140 |          |  | $    | 6,559  |        |  |  | 4.96 | %    |   | $ | 121,179 |         |  | $ | 7,073  |        |  |  | 5.84 | %   
|Securities-tax exempt                         |                                            |         | 14,268  |          |  |      | 871    |         |  |          | 6.10 |      |   |         | 13,135  |          |  |      | 812    |        |  |  | 6.18 |      |   |   | 9,691   |         |  |   | 498    |        |  |  | 5.14 |     
|Federal funds sold and
short-term investments |                                            |         | 3,261   |          |  |      | 39     |         |  |          | 1.20 |      |   |         | 5,456   |          |  |      | 94     |        |  |  | 1.72 |      |   |   | 3,811   |         |  |   | 146    |        |  |  | 3.83 |     
|Commercial loans                              |                                            |         | 286,244 |          |  |      | 16,788 |         |  |          | 5.86 |      |   |         | 241,884 |          |  |      | 15,464 |        |  |  | 6.39 |      |   |   | 202,642 |         |  |   | 16,487 |        |  |  | 8.14 |     
|Commercial loans-tax exempt                   |                                            |         | -0      | -        |  |      | -0     | -       |  |          | 0.00 |      |   |         | -0      | -        |  |      | -0     | -      |  |  | 0.00 |      |   |   | 65      |         |  |   | 6      |        |  |  | 9.23 |     
|Mortgage loans                                |                                            |         | 127,244 |          |  |      | 9,196  |         |  |          | 7.23 |      |   |         | 148,489 |          |  |      | 11,199 |        |  |  | 7.54 |      |   |   | 156,724 |         |  |   | 12,299 |        |  |  | 7.85 |     
|Consumer loans                                |                                            |         | 112,628 |          |  |      | 6,862  |         |  |          | 6.09 |      |   |         | 106,073 |          |  |      | 7,651  |        |  |  | 7.21 |      |   |   | 101,326 |         |  |   | 8,771  |        |  |  | 8.66 |     
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|                                              | Total Earning Assets                       |         | $       | 687,150  |  |      | $      | 38,328  |  |          |      | 5.58 | % |         | $       | 647,177  |  |      | $      | 41,779 |  |  |      | 6.46 | % |   | $       | 595,438 |  |   | $      | 45,280 |  |  |      | 7.60 | %
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Reserve for loan losses                       |                                            |         | (7,215  | )        |  |      |        |         |  |          |      |      |   |         | (6,405  | )        |  |      |        |        |  |  |      |      |   |   | (5,347  | )       |  |   |        |        |  |  |      |     
|Cash and due from banks                       |                                            |         | 24,276  |          |  |      |        |         |  |          |      |      |   |         | 22,861  |          |  |      |        |        |  |  |      |      |   |   | 21,923  |         |  |   |        |        |  |  |      |     
|Bank owned life insurance                     |                                            |         | 12,313  |          |  |      |        |         |  |          |      |      |   |         | 6,164   |          |  |      |        |        |  |  |      |      |   |   | 902     |         |  |   |        |        |  |  |      |     
|Other assets                                  |                                            |         | 21,696  |          |  |      |        |         |  |          |      |      |   |         | 21,689  |          |  |      |        |        |  |  |      |      |   |   | 22,095  |         |  |   |        |        |  |  |      |     
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|                                              | Total Assets                               |         | $       | 738,220  |  |      |        |         |  |          |      |      |   |         | $       | 691,486  |  |      |        |        |  |  |      |      |   |   | $       | 635,011 |  |   |        |        |  |  |      |      |  
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Liabilities and Shareholders Equity:         |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Certificates of deposit                       |                                            | $       | 213,743 |          |  | $    | 5,627  |         |  |          | 2.63 | %    |   | $       | 194,461 |          |  | $    | 6,394  |        |  |  | 3.29 | %    |   | $ | 195,656 |         |  | $ | 9,800  |        |  |  | 5.01 | %   
|Savings deposits                              |                                            |         | 102,100 |          |  |      | 366    |         |  |          | .36  |      |   |         | 95,893  |          |  |      | 800    |        |  |  | .83  |      |   |   | 93,272  |         |  |   | 1,260  |        |  |  | 1.35 |     
|Interest-bearing demand                       |                                            |         | 176,430 |          |  |      | 1,268  |         |  |          | .72  |      |   |         | 175,101 |          |  |      | 2,704  |        |  |  | 1.54 |      |   |   | 141,134 |         |  |   | 3,558  |        |  |  | 2.52 |     
|Short-term borrowings                         |                                            |         | 18,185  |          |  |      | 198    |         |  |          | 1.09 |      |   |         | 22,604  |          |  |      | 407    |        |  |  | 1.80 |      |   |   | 26,263  |         |  |   | 852    |        |  |  | 3.24 |     
|FHLB advances                                 |                                            |         | 64,880  |          |  |      | 1,737  |         |  |          | 2.68 |      |   |         | 50,609  |          |  |      | 1,790  |        |  |  | 3.54 |      |   |   | 32,649  |         |  |   | 1,528  |        |  |  | 4.68 |     
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|                                              | Total Interest-
Bearing Liabilities        |         | $       | 575,338  |  |      | $      | 9,196   |  |          |      | 1.60 | % |         | $       | 538,668  |  |      | $      | 12,095 |  |  |      | 2.25 | % |   | $       | 488,974 |  |   | $      | 16,998 |  |  |      | 3.48 | %
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Noninterest-bearing deposits                  |                                            |         | 89,928  |          |  |      |        |         |  |          |      |      |   |         | 82,665  |          |  |      |        |        |  |  |      |      |   |   | 81,097  |         |  |   |        |        |  |  |      |     
|Other liabilities                             |                                            |         | 4,865   |          |  |      |        |         |  |          |      |      |   |         | 5,773   |          |  |      |        |        |  |  |      |      |   |   | 5,311   |         |  |   |        |        |  |  |      |     
|Shareholders equity                          |                                            |         | 68,089  |          |  |      |        |         |  |          |      |      |   |         | 64,380  |          |  |      |        |        |  |  |      |      |   |   | 59,629  |         |  |   |        |        |  |  |      |     
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|                                              | Total Liabilities and
Shareholders Equity |         | $       | 738,220  |  |      |        |         |  |          |      |      |   |         | $       | 691,486  |  |      |        |        |  |  |      |      |   |   | $       | 635,011 |  |   |        |        |  |  |      |      |  
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Net Interest Income (FTE)                     |                                            |         |         |          |  | $    | 29,132 |         |  |          | 4.24 | %    |   |         |         |          |  | $    | 29,684 |        |  |  | 4.59 | %    |   |   |         |         |  | $ | 28,282 |        |  |  | 4.75 | %   
|Taxable equivalent adjustment                 |                                            |         |         |          |  |      | (383   | )       |  |          | (.06 | )    |   |         |         |          |  |      | (415   | )      |  |  | (.07 | )    |   |   |         |         |  |   | (179   | )      |  |  | (.03 | )   
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Net Interest Income Per
Financial Statements  |                                            |         |         |          |  | $    | 28,749 |         |  |          |      |      |   |         |         |          |  | $    | 29,269 |        |  |  |      |      |   |   |         |         |  | $ | 28,103 |        |  |  |      |     
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     
|Net Yield on Earning Assets                   |                                            |         |         |          |  |      |        |         |  |          | 4.18 | %    |   |         |         |          |  |      |        |        |  |  | 4.52 | %    |   |   |         |         |  |   |        |        |  |  | 4.72 | %   
|                                              |                                            |         |         |          |  |      |        |         |  |          |      |      |   |         |         |          |  |      |        |        |  |  |      |      |   |   |         |         |  |   |        |        |  |  |      |     

Table 3: Rate/Volume Analysis of Net Interest Income (FTE)

|                                              |                        |                         |                        |                         |                        |       |        |        |   |      |        |        |   |   |       |       |  |   |        |        |   |   |        |        |  
|--------------------------------------------- | ---------------------- | ----------------------- | ---------------------- | ----------------------- | ---------------------- | ----- | ------ | ------ | - | ---- | ------ | ------ | - | - | ----- | ----- |  | - | ------ | ------ | - | - | ------ | ------ | -
|                                              |                        |                         | 2003 and 2002          |                         | 2002 and 2001         
|                                              |                        |                         |                        |                         |                       
|                                              |                        |                         | Increase (Decrease) In |                         | Increase (Decrease) In
|Years ended December 31,                      |                        | Interest Income/Expense |                        | Interest Income/Expense
|                                              |                        |                         |                        |                        
|(Dollars in thousands)                        |                        | Volume                  |                        | Rate                    |                        | Total |        | Volume |   | Rate |        | Total 
|                                              |                        |                         |                        |                         |                        |       |        |        |   |      |        |       
|Securities-tax equivalent                     |                        | $                       | 564                    |                         |                        | $     | (2,551 | )      |   | $    | (1,987 | )      |   | $ | 640   |       |  | $ | (1,154 | )      |   | $ | (514   | )     
|Securities-tax exempt                         |                        |                         | 70                     |                         |                        |       | (11    | )      |   |      | 59     |        |   |   | 177   |       |  |   | 137    |        |   |   | 314    |       
|Federal funds sold and
short-term investments |                        |                         | (38                    | )                       |                        |       | (17    | )      |   |      | (55    | )      |   |   | 63    |       |  |   | (115   | )      |   |   | (52    | )     
|Commercial loans                              |                        |                         | 2,836                  |                         |                        |       | (1,512 | )      |   |      | 1,324  |        |   |   | 3,193 |       |  |   | (4,216 | )      |   |   | (1,023 | )     
|Commercial loans-tax exempt                   |                        |                         | -0                     | -                       |                        |       | -0     | -      |   |      | -0     | -      |   |   | (6    | )     |  |   | -0     | -      |   |   | (6     | )     
|Mortgage loans                                |                        |                         | (1,602                 | )                       |                        |       | (401   | )      |   |      | (2,003 | )      |   |   | (646  | )     |  |   | (454   | )      |   |   | (1,100 | )     
|Consumer loans                                |                        |                         | 473                    |                         |                        |       | (1,262 | )      |   |      | (789   | )      |   |   | 411   |       |  |   | (1,531 | )      |   |   | (1,120 | )     
|                                              |                        |                         |                        |                         |                        |       |        |        |   |      |        |        |   |   |       |       |  |   |        |        |   |   |        |       
|                                              | Total Interest Income  |                         |                        | 2,303                   |                        |       |        | (5,754 | ) |      |        | (3,451 | ) |   |       | 3,832 |  |   |        | (7,333 | ) |   |        | (3,501 | )
|                                              |                        |                         |                        |                         |                        |       |        |        |   |      |        |        |   |   |       |       |  |   |        |        |   |   |        |       
|Certificates of deposit                       |                        |                         | 634                    |                         |                        |       | (1,401 | )      |   |      | (767   | )      |   |   | (60   | )     |  |   | (3,346 | )      |   |   | (3,406 | )     
|Savings deposits                              |                        |                         | 52                     |                         |                        |       | (486   | )      |   |      | (434   | )      |   |   | 35    |       |  |   | (495   | )      |   |   | (460   | )     
|Interest-bearing demand                       |                        |                         | 21                     |                         |                        |       | (1,457 | )      |   |      | (1,436 | )      |   |   | 856   |       |  |   | (1,710 | )      |   |   | (854   | )     
|Short-term borrowings                         |                        |                         | (80                    | )                       |                        |       | (129   | )      |   |      | (209   | )      |   |   | (119  | )     |  |   | (326   | )      |   |   | (445   | )     
|FHLB advances                                 |                        |                         | 505                    |                         |                        |       | (558   | )      |   |      | (53    | )      |   |   | 841   |       |  |   | (579   | )      |   |   | 262    |       
|                                              |                        |                         |                        |                         |                        |       |        |        |   |      |        |        |   |   |       |       |  |   |        |        |   |   |        |       
|                                              | Total Interest Expense |                         |                        | 1,132                   |                        |       |        | (4,031 | ) |      |        | (2,899 | ) |   |       | 1,553 |  |   |        | (6,456 | ) |   |        | (4,903 | )
|                                              |                        |                         |                        |                         |                        |       |        |        |   |      |        |        |   |   |       |       |  |   |        |        |   |   |        |       
|Net Interest Income                           |                        | $                       | 1,171                  |                         |                        | $     | (1,723 | )      |   | $    | (552   | )      |   | $ | 2,279 |       |  | $ | (877   | )      |   | $ | 1,402  |       
|                                              |                        |                         |                        |                         |                        |       |        |        |   |      |        |        |   |   |       |       |  |   |        |        |   |   |        |       

LNB BANCORP, INC.  2003
ANNUAL REPORT    38





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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS

2002 the Corporation offset some of the net
interest margin (FTE) compression caused by
declining rates with balance sheet growth.
However, in 2003 assets grew by only 3.5%,
as compared to 7.6% and 6.8% respectively in
2002 and 2001. This slowing of asset growth
is an indication of the general economic
conditions in the market. Finally, the
Corporation is becoming more dependent on
non-core funding sources. This trend is
highlighted in Table 8. While these funds are
not necessarily more expensive than other
funding of comparable term, the degree to
which our funding mix shifts from such
extremely low cost sources like money market
accounts, to these alternative funding
sources, the potential for further margin
compression increases.

The Corporation endeavored in 2003 to keep
asset maturities relatively short-term to be
positioned for rising rates. At December 31,
2003, 58% of the Corporations assets were
available for repricing in 2004.
Consequently the Corporation is structured
to materially benefit when economic
conditions improve and the Board of
Governors of the Federal Reserve system
begins to increase interest rates.

Table 2 reflects the detailed components of
the Corporations net interest income for
each of the three years ended December 31,
2003. Rates are computed on a tax equivalent
basis and non-accrual loans are included in
the average loan balances. As mentioned
earlier, one of the unique factors in 2003
was many of the Corporations deposit
products reaching practical interest rate
floors. This can be seen in the average rates
that were paid on accounts such as savings
and interest-bearing demand accounts in
2003. Should rates fall further in 2004,
these floors, combined with competitive loan
pricing pressure, will be major factors in
further net interest margin compression.

Net interest income may also be analyzed by
segregating the volume and rate components
of interest income and interest
expense. Table 3 presents an analysis of
increases and decreases in interest income
and expense in terms of changes in volume
and interest rates during the two years
ended December 31, 2003. Changes that are
not due solely to either a change in volume
or a change in rate have been allocated
proportionally to both changes due to volume
and rate. The table is presented on a
tax-equivalent basis.

Noninterest income

Noninterest income increased $473 or 4.3% in
2003 compared with an increase of $1,397 or
14.4% in 2002. Included in the 2003 results
is the sale of the Corporations credit card
portfolio. This sale was completed in the
third quarter after considering the level of
loan losses experienced in this portfolio,
the changing nature of the credit card
business and the limited prospects for
profitable growth in this card base. The
proceeds of this sale were redeployed into
other loan products. In Table 4 the sources
of noninterest income are presented for the
last three years ended December 31, 2003.
Totals are presented including and excluding
the gain on sale of the credit card
portfolio.

Excluding this sale, noninterest income was
$10,709, or a decrease of $359 as compared
to 2002. As can been seen in Table 4, gains
on the sale of securities, weakness in Trust
revenue and a decline in
electronic banking fees occurred in
2003. Trust revenue continues to be depressed
by the general economic and stock market
conditions. This is expected to improve in
2004. Electronic banking fees are being
impacted by changes in the interchange
income earned from VISA and MasterCard on
debit card and ATM transactions. The
Corporation expects that initiatives to
stimulate card usage in 2003 will offset
this factor and enhance future revenue
growth. The change in other income is
primarily earnings on the Corporations
investment in bank owned life insurance
(BOLI) in 2002. Also in 2002, the
Corporation developed a line of High
Performance Checking products, in response
to adverse trends in demand deposits that
management identified. The success of these
products contributed to a $554 increase in
service charges on deposit accounts in 2002
as compared to 2001. In 2003 this trend
continued as service charges on deposit
accounts increased $177 as compared to 2002.
The $236 in gains on the sale of loans was
primarily gains on sale of mortgages in the
secondary market. Although the contribution
of the secondary market mortgage activity
increased substantially in 2003, it was less
than expected with the very strong refinance
activity in the market. The Corporation is
developing strategies to better compete in
the mortgage market through expanded product
offerings and sales efforts.

|                                                   |  |      |        |      |  |      |        |         |  |         |       |   |  |        |       |        |  |  |       |   
|-------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ------- |  | ------- | ----- | - |  | ------ | ----- | ------ |  |  | ----- | --
|                                                   |  |      |        |      |  |      |        |         |  |         |       |   |  | 2003   |       | 2002  
|                                                   |  |      |        |      |  |      |        |         |  |         |       |   |  | versus |       | versus
|Table 4: Noninterest Income (Dollars in thousands) |  | 2003 |        | 2002 |  | 2001 |        | 2002(%) |  | 2001(%)
|                                                   |  |      |        |      |  |      |        |         |  |        
|Trust services income                              |  | $    | 1,762  |      |  | $    | 2,080  |         |  | $       | 2,379 |   |  |        | (15.3 | )%     |  |  | (12.6 | )%
|Services charges on deposit accounts               |  |      | 4,260  |      |  |      | 4,083  |         |  |         | 3,529 |   |  |        | 4.3   |        |  |  | 15.7  |   
|Other services charges                             |  |      | 516    |      |  |      | 585    |         |  |         | 627   |   |  |        | (11.8 | )      |  |  | (6.7  | ) 
|Electronic banking fees                            |  |      | 2,503  |      |  |      | 2,577  |         |  |         | 2,429 |   |  |        | (1.0  | )      |  |  | 6.0   |   
|Gains on the sale of loans                         |  |      | 236    |      |  |      | 94     |         |  |         | 76    |   |  |        | 151.1 |        |  |  | 23.7  |   
|Gains on sale of securities                        |  |      | 449    |      |  |      | 732    |         |  |         | 250   |   |  |        | (38.7 | )      |  |  | 192.8 |   
|Other income                                       |  |      | 983    |      |  |      | 917    |         |  |         | 381   |   |  |        | 7.2   |        |  |  | 140.7 |   
|                                                   |  |      |        |      |  |      |        |         |  |         |       |   |  |        |       |        |  |  |       |   
|Total excluding credit card sale                   |  | $    | 10,709 |      |  | $    | 11,068 |         |  | $       | 9,671 |   |  |        | (3.2  | )%     |  |  | 14.4  | % 
|Gain on sale of credit card portfolio              |  |      | 832    |      |  |      | -0     | -       |  |         | -0    | - |  |        | N/M   |        |  |  | 0.0   |   
|                                                   |  |      |        |      |  |      |        |         |  |         |       |   |  |        |       |        |  |  |       |   
|Total Noninterest Income                           |  | $    | 11,541 |      |  | $    | 11,068 |         |  | $       | 9,671 |   |  |        | 4.3   | %      |  |  | 14.4  | % 
|                                                   |  |      |        |      |  |      |        |         |  |         |       |   |  |        |       |        |  |  |       |   

(BAR CHARTS)

LNB BANCORP, INC.  2003
ANNUAL REPORT    39





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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS

Noninterest expense

Noninterest expense was $26,469 in
2003, an
increase of $1,697 or 6.8% over the prior
year. This result includes $1,712 in
severance expenses. Beginning in 2002 and
continuing into 2003 a series of expense
initiatives were completed that better
position the Corporation to address
long-term strategic issues. In addition to
these initiatives, other events also
occurred which had a material impact on 2003
earnings. The Corporation acknowledged the
desire of its President and CEO to retire
early. The Corporations Chief Financial
Officer also ceased employment with the
Corporation. Under the terms of the CFOs
employment contract, the Corporation
recognized a one-time pretax charge of $166
in 2003. In the course of its discussion
with the president and CEO, the Board of
Directors accepted his retirement and put in
place a salary continuation plan for
him. The recognition of the future expense
for this plan was accounted for under SFAS
146, and the Corporation recognized a pretax
charge of $1,164 in 2003 earnings. In
addition to these two executive level
changes, the Corporation also acceded to the
early retirement requests of two senior vice
presidents. In these cases, the Corporation
provided severance packages totaling
$289. This amount is also included in 2003
earnings.

In 2003 the Corporation made a complete
review of staffing and compensation. Based
on this analysis it was determined that
technology advancements and changing product
offerings had resulted in an overstaffing
situation. Management also considered
industry statistics that compared the number
of Bank employees with that of banks of
similar size and complexity. This comparison
also indicated that the Corporation was
overstaffed. This was an across the board
review and resulted in the elimination of
nineteen clerical and management level
positions. The severance packages included
in 2003 earnings for these nineteen
employees totaled $93. The annual salary and
benefits eliminated by these 19 layoffs were
approximately $760.

In 2002 a similar analysis was completed
with regard to the employee benefit plans of
the Corporation. As a result, the Corporation
froze the defined benefit pension plan,
restructured the life insurance provided to
employees and financed this restructured
benefit with bank owned life insurance
(BOLI). Additionally, the Corporation more
aggressively managed health care benefits.
Excluding severance expenses, these 2003 and
2002 actions resulted in a $127 reduction in
salary and benefit costs in 2003 as compared
to 2002.

Furniture and equipment expenses totaled
$2,517, an increase of $324 as compared to
2002. This increase was primarily due to
increased software maintenance and
amortization related to the upgrade of
obsolete systems and additional licensing of
server software. Marketing and public
relations expense was $762, a decrease of
$270 compared to 2002. This decrease was
primarily due to start-up costs incurred in
2002 related to the Corporations High
Performance Checking products that did not
reoccur in 2003. The Corporation expects
marketing expenses will increase from the
2003 level in support of the new branch
offices planned in the first half of
2004. The Ohio Franchise Tax increased $171
in 2003. The 2003 expense was a more normal
expense level, as in 2002 the Corporation
received refunds on Franchise taxes paid in
2000, 1999
and 1998. The Corporation also experienced a
$135 increase in outside services over
2002. This followed a $407 increase in 2002
over 2001. The Corporation has incurred
increased outside services as it addresses
legal, audit and compliance issues related
to the implementation of the provisions of
The Sarbanes Oxley Act of 2002 and The
Gramm-Leach-Bliley Act of 1999. There will
be continued pressure on expenses related to
health care, legal, audit, compliance and
telecommunications. Initiatives in the last
two years should provide cost containment on
salaries, non-health benefits and core data
processing.

The efficiency ratio is expressed as
noninterest expense (excluding non-recurring
expenses) as a percentage of the sum of net
interest income (FTE) plus noninterest
income (excluding non-recurring income). The
efficiency ratio for 2003 increased to
63.01% from 61.41% for 2002 and 60.96% for
2001. The higher efficiency during 2003 was
due to net interest income compression.

Pretax Income and Taxes

Pretax income was $11,126 in 2003
representing a decrease of $2,239 or 16.8%
from 2002. The Corporations average tax
rate was 30.7% in 2003, 31.4% in 2002 and
32.1% in 2001. This trend reflects the impact
of the BOLI investment in 2002. The
Corporation expects this trend to continue
in 2004 with the award of $9 million of new
market tax credits to North Coast Community
Development Corporation (NCCDC), a
wholly-owned subsidiary of Lorain National
Bank. On December 29, 2003, NCCDC received
official notification of this tax credit
award. Over the next seven to twelve years,
it is expected that projects will be
financed which will improve the overall
economic conditions in Lorain County, and
generate additional net interest income and
material tax savings for the Corporation.

Loans

Commercial loans comprised 56.8% of the
total loan portfolio at December 31, 2003,
increasing from 51.0% in 2002. This growth in
the portfolio represents business
development efforts in the existing market.
The amount of collateral required on
commercial loans is generally determined on
a loan-by-loan basis. Loan-to-value ratios
for commercial loans typically range from
50% to 100%. Other factors include the
purpose of the loan, the current financial
status of the borrower and the prior credit
history of the borrower.

Installment and home equity loans comprised
21.9% of the total loan portfolio at
December 31, 2003, increasing from 20.2% in
2002. The Corporation makes installment
loans on a secured and unsecured basis,
based on the term and purpose of the loan.
In 2003 the Corporation sold its credit card
portfolio with loans outstanding totaling
$5,297. The proceeds from this sale were
absorbed into new home equity loans and
secured installment loans that the
Corporation purchases from another financial
institution on a periodic basis.

Real estate loans, including construction
and mortgage loans, comprised 21.3% of the
total loan portfolio at December 31, 2003,
decreasing from 27.8% in 2002. This decline
was the result of two factors. First, the
volume of refinance activity in the market
continued to be very high in 2003. Second,
the Corporations mortgage portfolio
consists of very seasoned adjustable rate
mortgages. With fixed mortgage rates at
40-year lows there was a
migration of our adjustable rate portfolio
to our fixed rate mortgage product. The
Corporation sells its fixed rate mortgage
production in the secondary market resulting
in the decline in the overall portfolio
balances. The Corporation generally requires
a loan-to-value ratio of 80% or private
mortgage insurance for loan-to-value ratios
in excess of 80%.

In Table 5 loan balances and loan mix are
presented by type for the five years ended
December 31, 2003.

LNB BANCORP, INC.  2003
ANNUAL REPORT    40





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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS Table 5: Loan Portfolio Distribution December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial
    
    $
    303,683
    
    
    $
    259,993
    
    
    $
    219,511
    
    
    $
    186,866
    
    
    $
    157,897Mortgage
    
    
    113,649
    
    
    
    141,405
    
    
    
    158,221
    
    
    
    157,575
    
    
    
    152,825Installment
    
    
    59,217
    
    
    
    54,219
    
    
    
    57,886
    
    
    
    69,821
    
    
    
    74,682Home equity lines
    
    
    57,762
    
    
    
    48,816
    
    
    
    37,008
    
    
    
    31,662
    
    
    
    29,001Credit cards
    
    
    -0
    -
    
    
    5,117
    
    
    
    4,862
    
    
    
    5,216
    
    
    
    5,111Total loans
    
    
    534,311
    
    
    
    509,550
    
    
    
    477,488
    
    
    
    451,140
    
    
    
    419,516Reserve for loan losses
    
    
    (7,730
    )
    
    
    (6,653
    )
    
    
    (5,890
    )
    
    
    (5,250
    )
    
    
    (4,667
    )Net loans
    
    $
    526,581
    
    
    $
    502,897
    
    
    $
    471,598
    
    
    $
    445,890
    
    
    $
    414,849
 Loan mix percent at December 31,
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial
    
    
    56.8
    %
    
    
    51.0
    %
    
    
    46.0
    %
    
    
    41.4
    %
    
    
    37.6
    %Mortgage
    
    
    21.3
    
    
    
    27.8
    
    
    
    33.1
    
    
    
    34.9
    
    
    
    36.4Installment
    
    
    11.1
    
    
    
    10.6
    
    
    
    12.1
    
    
    
    15.5
    
    
    
    17.8Home Equity
    
    
    10.8
    
    
    
    9.6
    
    
    
    7.8
    
    
    
    7.0
    
    
    
    6.9Credit cards
    
    
    0.0
    
    
    
    1.0
    
    
    
    1.0
    
    
    
    1.2
    
    
    
    1.3Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Table 6 shows the amount of commercial loans
outstanding as of December 31, 2003, based
on the remaining scheduled principal
payments or principal amounts due in the
periods indicated. Amounts due after one
year which are subject to more frequent
repricing are included in the due in 1-year
classification. Table 6: Commercial Loan Maturity and Repricing Analysis December
31(Dollars in thousands)
    
    2003Maturing and repricing in one year or less
    
    $
    247,216Maturing and repricing after one year
but within five years
    
    
    19,927Maturing and repricing beyond five years
    
    
    36,540Total Commercial Loans
    
    $
    303,683Loans repricing beyond one year:Fixed rate
    
    $
    30,732Variable rate
    
    
    5,808Total
    
    $
    36,540
 Provision and Reserve for Loan Losses The reserve for loan losses is maintained by
the Corporation at a level considered
adequate to cover probable losses. The
amount of the provision for loan losses
charged to operating expenses is the amount
necessary, in the estimation of management,
to maintain the reserve for loan losses at
an adequate level. Management determines the
adequacy of the reserve based on past
experience, changes in portfolio size and
mix, relative quality of the loan portfolio
and the rate of loan growth, assessments of
current and future economic conditions,
information about specific borrower
situations, including their financial
position and collateral values,
and other factors, which are subject to
change over time. While Managements
periodic analysis of the reserve for loan
losses may dictate portions of the reserve
be allocated to specific problem loans, the
entire amount is available for any loan
charge-offs that may occur. Table 7 presents
the detailed activity in the reserve for
loans losses and related charge-off activity
for the five years ended December 31, 2003. The reserve for loan losses on December 31,
2003, was $7,730 or 1.46% of outstanding
loans, compared to $6,653, or 1.31% at
year-end 2002. The provision charged to
operating expense was $2,695 and $2,200 in
2003 and 2002, respectively. Net charge-offs for 2003 were $1,618, as
compared to $1,437 for 2002, while net
charge-offs as a percentage of average loans
outstanding for 2003 was .31%, compared to .29% for 2002. Table 7: Reserve for Loan Losses For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Balance at beginning of year
    
    $
    6,653
    
    
    $
    5,890
    
    
    $
    5,250
    
    
    $
    4,667
    
    
    $
    3,483Charge-offs:Commercial
    
    
    (1,207
    )
    
    
    (738
    )
    
    
    (490
    )
    
    
    (25
    )
    
    
    (23
    )Real estate
    
    
    (1
    )
    
    
    (15
    )
    
    
    (26
    )
    
    
    (59
    )
    
    
    (359
    )Consumer
    
    
    (750
    )
    
    
    (1,030
    )
    
    
    (1,223
    )
    
    
    (1,249
    )
    
    
    (668
    )Total charge-offs
    
    
    (1,958
    )
    
    
    (1,783
    )
    
    
    (1,739
    )
    
    
    (1,333
    )
    
    
    (1,050
    )Recoveries:Commercial
    
    
    87
    
    
    
    163
    
    
    
    64
    
    
    
    14
    
    
    
    23Real estate
    
    
    -0
    -
    
    
    1
    
    
    
    14
    
    
    
    9
    
    
    
    108Consumer
    
    
    253
    
    
    
    182
    
    
    
    101
    
    
    
    193
    
    
    
    103Total recoveries
    
    
    340
    
    
    
    346
    
    
    
    179
    
    
    
    216
    
    
    
    234Net charge-offs
    
    
    (1,618
    )
    
    
    (1,437
    )
    
    
    (1,560
    )
    
    
    (1,117
    )
    
    
    (816
    )Provision for loan losses
    
    
    2,695
    
    
    
    2,200
    
    
    
    2,200
    
    
    
    1,700
    
    
    
    2,000Balance at end of year
    
    $
    7,730
    
    
    $
    6,653
    
    
    $
    5,890
    
    
    $
    5,250
    
    
    $
    4,667
 LNB BANCORP, INC.  2003
ANNUAL REPORT    41




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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS Table 8: Net charge-offs (recoveries) For the Calendar Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial
    
    $
    1,120
    
    
    $
    575
    
    
    $
    426
    
    
    $
    11
    
    
    $
    -0-Real estate
    
    
    1
    
    
    
    14
    
    
    
    12
    
    
    
    50
    
    
    
    251Consumer
    
    
    497
    
    
    
    848
    
    
    
    1,122
    
    
    
    1,056
    
    
    
    565Total net charge-offs
    
    $
    1,618
    
    
    $
    1,437
    
    
    $
    1,560
    
    
    $
    1,117
    
    
    $
    816Net charge-offs to:Average total loans
    
    
    .31
    %
    
    
    0.29
    %
    
    
    0.34
    %
    
    
    0.26
    %
    
    
    0.20
    %Total loans at year end
    
    
    .30
    
    
    
    0.28
    
    
    
    0.33
    
    
    
    0.25
    
    
    
    0.19Provision for loan losses
    
    
    60.04
    
    
    
    65.32
    
    
    
    70.91
    
    
    
    65.71
    
    
    
    40.80Reserve for loan losses
    
    
    20.93
    
    
    
    21.60
    
    
    
    26.49
    
    
    
    21.28
    
    
    
    17.48Reserve for loan losses to:Average total loans
    
    
    1.47
    
    
    
    1.34
    
    
    
    1.28
    
    
    
    1.20
    
    
    
    1.16Total loans at year end
    
    
    1.46
    
    
    
    1.31
    
    
    
    1.23
    
    
    
    1.16
    
    
    
    1.11
 Table 9: Allocation of Year-end Reserve for Loan Losses December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial
    
    $
    5,495
    
    
    $
    4,145
    
    
    $
    3,750
    
    
    $
    2,729
    
    
    $
    1,803Real estate
    
    
    405
    
    
    
    412
    
    
    
    363
    
    
    
    338
    
    
    
    530Consumer
    
    
    1,237
    
    
    
    1,475
    
    
    
    1,351
    
    
    
    1,738
    
    
    
    1,236Off-balance sheet risk
    
    
    113
    
    
    
    113
    
    
    
    113
    
    
    
    150
    
    
    
    150Unallocated
    
    
    480
    
    
    
    508
    
    
    
    313
    
    
    
    295
    
    
    
    948Total
    
    $
    7,730
    
    
    $
    6,653
    
    
    $
    5,890
    
    
    $
    5,250
    
    
    $
    4,667
 Nonperforming Assets Total nonperforming assets consist of
nonperforming loans, loans which have been
restructured, and other foreclosed assets.
Nonperforming loans are loans which are 90
days past due and, in managements
estimation, collection of interest is
doubtful. These loans no longer accrue
interest and are accounted for on a cash
basis. Loans are classified as restructured
when, due to deterioration of a customers
financial ability, the original terms have
been favorably modified or either principal
or interest has been forgiven. Nonperforming assets at year-end 2003 were
$5,743 compared to $1,885 at year-end 2002.
At December 31, 2003, 1% of nonperforming
loans were commercial loans, 3% were
personal loans and 96% were mortgage
loans. This compares to 8% for commercial
loans, 9% for personal loans and 83% for
mortgage loans at year-end 2002. The level of nonperforming assets increased
by $3,858 during 2003. This increase is the
result from the net increase in nonaccrual
loans of $3,291 and the net increase in
other foreclosed assets in the amount of
$567. The increase in other foreclosed
assets results from the acquisition of four
commercial properties in the amount of $589
less liquidations of repossessed vehicles of
$22. The increase in nonaccrual loans is due
to decreases in nonaccrual principal
balances of $2,772 which have been paid off
or brought current, loans charged-off in the
amount of $1,144, liquidation of nonaccrual
loans of $448 and increases in nonaccrual
principal balances of $5,654. The increase
in nonaccrual loans during
2003 was due primarily to twenty-three
commercial loan customers, five mortgage
loan customers and several personal loan
customers. Management does not believe that
this increase in non-
accrual loans is indicative of a failing
local economy and that this change did not
result from any change in underwriting
standards. The nonperforming loans at December 31, 2003
were substantially secured by commercial
real estate. Nonperforming loans did not
have a material impact on interest income
during 2003, 2002 and 2001. For additional
information on nonperforming assets, see
Note 7. The overall quality of the portfolio
remains good, although the ratio of
nonperforming loans to total loans increased
to .96% at year-end 2003, as compared to
..37% and .30% at year-end 2002 and 2001
respectively. While this is a higher level
of nonperforming loans than in 2002 and
2001, it compares to a ratio of .76% for
banks of similar size at September 30, 2003,
the last date available for peer group
information. There were no particular
industry or geographic concentrations in
non-performing or delinquent loans or net
charge-offs. The Corporations credit policies are
reviewed and modified on an ongoing basis in
order to remain suitable for the management
of credit risks within the loan portfolio as
conditions change. At December 31, 2003,
there were no significant concentrations of
credit risk in the loan portfolio. More
information about the loan portfolio is
presented in Note 7 to the consolidated
financial statements. Table 10: Nonperforming Assets December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Mortgage loans
    
    $
    4,938
    
    
    $
    1,554
    
    
    $
    1,152
    
    
    $
    1,652
    
    
    $
    816Commercial loans
    
    
    76
    
    
    
    142
    
    
    
    51
    
    
    
    378
    
    
    
    42Consumer loans
    
    
    140
    
    
    
    167
    
    
    
    113
    
    
    
    189
    
    
    
    385Total nonperforming loans
    
    
    5,154
    
    
    
    1,863
    
    
    
    1,316
    
    
    
    2,219
    
    
    
    1,243Other foreclosed assets
    
    
    589
    
    
    
    22
    
    
    
    123
    
    
    
    98
    
    
    
    96Total nonperforming assets
    
    $
    5,743
    
    
    $
    1,885
    
    
    $
    1,439
    
    
    $
    2,317
    
    
    $
    1,339Loans 90 days past due accruing interest
    
    $
    46
    
    
    $
    45
    
    
    $
    149
    
    
    $
    306
    
    
    $
    555Reserve for loan losses to nonperforming loans
    
    
    150.0
    %
    
    
    357.1
    %
    
    
    447.6
    %
    
    
    236.6
    %
    
    
    375.5
    %
 LNB BANCORP, INC.  2003
ANNUAL REPORT    42




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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS Securities The maturity distribution of the securities
portfolio for the year ended December 31,
2003 is presented in Note 5 to the
consolidated financial statements. In
addition to the information contained in
this note, the mortgage backed securities
portfolio has an average life of
approximately 3.6 years,and is expected to
generate approximately $18 million of
cashflow in 2004. The Corporation continues
to utilize the securities portfolio for
management of its interest rate risk and
liquidity needs. The Corporation currently
has a portfolio that consists of
approximately 45%
U.S. government agencies, 40% U.S. agency
mortgage backed securities, 8% municipals
and 7% in other securities. Other securities
consist of Federal Home Loan Bank stock,
Federal Reserve Bank stock and U.S. Federal
agency preferred stock. At December 31,
2003, the securities portfolio had a net
$326 unrealized loss. This represents .26%
of total securities at December 31, 2003.
New investment is primarily in shortterm
agencies and short average life mortgage
backed securities and intermediate, high
quality municipal bonds. Table 11: Maturity Distribution of Debt Securities at Amortized Cost December 31,2003
    
    2002
    
    2001From 1
    
    From 5
    
    After(Dollars in thousands)
    
    to 5 years
    
    to 10 years
    
    10 years
    
    Total
    
    Total
    
    TotalSecurities available for sale:U.S, Government agencies and corporations
    
    $
    66,176
    
    
    $
    59,061
    
    
    $
    2,334
    
    
    $
    127,571
    
    
    $
    120,599
    
    
    $
    122,232State and political subdivisions
    
    
    690
    
    
    
    4,862
    
    
    
    5,688
    
    
    
    11,240
    
    
    
    10,515
    
    
    
    10,883Total securities available for sale
    
    
    66,866
    
    
    
    63,923
    
    
    
    8,022
    
    
    
    138,811
    
    
    
    131,114
    
    
    
    133,115Securities held to maturity:U.S, Government agencies and corporations
    
    
    2,993
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    2,993
    
    
    
    7,335
    
    
    
    13,386State and political subdivisions
    
    
    325
    
    
    
    -0
    -
    
    
    1,471
    
    
    
    1,796
    
    
    
    3,313
    
    
    
    3,805Total securities held to maturity
    
    
    3,318
    
    
    
    -0
    -
    
    
    1,471
    
    
    
    4,789
    
    
    
    10,648
    
    
    
    17,191Total securities
    
    $
    70,184
    
    
    $
    63,923
    
    
    $
    9,493
    
    
    $
    143,600
    
    
    $
    141,762
    
    
    $
    150,306
 The weight-average yield for each range of
maturities of debt securities is shown below
as of December 31, 2003: December 31,2003
    
    2002
    
    2001From 1
    
    From 5
    
    Afterto 5 years
    
    to 10 years
    
    10 years
    
    Total
    
    Total
    
    TotalSecurities available for sale:U.S, Government agencies and corporations
    
    
    2.97
    %
    
    
    4.37
    %
    
    
    4.76
    %
    
    
    3.63
    %
    
    
    4.92
    %
    
    
    5.47
    %State and political subdivisions (1)
    
    
    4.37
    
    
    
    4.34
    
    
    
    5.47
    
    
    
    4.91
    
    
    
    5.05
    
    
    
    6.75Total securities available for sale
    
    
    2.98
    
    
    
    4.37
    
    
    
    5.26
    
    
    
    3.73
    
    
    
    4.93
    
    
    
    5.49Securities held to maturity:U.S, Government agencies and corporations
    
    
    4.17
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    4.17
    
    
    
    6.21
    
    
    
    5.65State and political subdivisions (1)
    
    
    5.18
    
    
    
    0.00
    
    
    
    5.76
    
    
    
    5.66
    
    
    
    5.10
    
    
    
    7.62Total securities held to maturity
    
    
    4.27
    
    
    
    0.00
    
    
    
    5.76
    
    
    
    4.73
    
    
    
    5.86
    
    
    
    6.09Total securities
    
    
    3.04
    %
    
    
    4.37
    %
    
    
    5.33
    %
    
    
    3.76
    %
    
    
    5.00
    %
    
    
    5.57
    %
 (1) Yields on tax-exempt obligations are computed on a tax equivalent basis
based upon a 35% statutory Federal income tax rate. LNB BANCORP, INC.  2003 ANNUAL REPORT    43




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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS Table 12: Funding Sources Annual Average Outstanding
    
    Average Rate Paid(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Demand deposits
    
    $
    89,928
    
    
    $
    82,665
    
    
    $
    81,097
    
    
    
    .00
    %
    
    
    .00
    %
    
    
    .00
    %Now Accounts
    
    
    59,041
    
    
    
    58,068
    
    
    
    57,736
    
    
    
    .27
    
    
    
    .77
    
    
    
    1.08Interest Checking
    
    
    13,754
    
    
    
    6,708
    
    
    
    -0
    -
    
    
    .21
    
    
    
    .55
    
    
    
    N/AMoney Market
    
    
    15,434
    
    
    
    16,706
    
    
    
    14,949
    
    
    
    .82
    
    
    
    2.86
    
    
    
    3.06Market Access
    
    
    88,201
    
    
    
    93,619
    
    
    
    68,449
    
    
    
    1.08
    
    
    
    1.86
    
    
    
    3.62Savings Deposits
    
    
    102,100
    
    
    
    95,893
    
    
    
    93,272
    
    
    
    .36
    
    
    
    .83
    
    
    
    1.35Time Deposits
    
    
    213,743
    
    
    
    194,461
    
    
    
    195,656
    
    
    
    2.63
    
    
    
    3.29
    
    
    
    5.01Total Deposits
    
    $
    582,201
    
    
    $
    548,120
    
    
    $
    511,159
    
    
    
    1.60
    %
    
    
    2.25
    %
    
    
    3.48
    %Short-term borrowings
    
    
    18,185
    
    
    
    22,604
    
    
    
    26,263
    
    
    
    1.09
    
    
    
    1.80
    
    
    
    3.24FHLB borrowings
    
    
    64,880
    
    
    
    50,609
    
    
    
    32,649
    
    
    
    2.68
    
    
    
    3.54
    
    
    
    4.68Total borrowings
    
    
    83,065
    
    
    
    73,213
    
    
    
    58,912
    
    
    
    2.33
    
    
    
    3.00
    
    
    
    4.04Total Funding
    
    $
    665,266
    
    
    $
    621,333
    
    
    $
    570,071
    
    
    
    1.69
    %
    
    
    2.34
    %
    
    
    3.54
    %
 Funding Sources The Corporation obtains funding through many
sources. The primary source of funds
continues to be the generation of deposit
accounts in its primary market. This is
achieved by offering retail and business
customers a full line of deposit products.
These include checking accounts, savings
accounts, money market investment accounts
and time certificates of deposit. The
Corporation also generates funds through
local and national market borrowings
arrangements. Local borrowings consist
primarily of business sweep accounts and
fixed rate term repurchase agreements.
National market borrowings are lines of
credit with correspondent banks, the Federal
Home Loan Bank of Cincinnati and the Federal
Reserve Bank of Cleveland. Table 12
highlights the average balances and the
average rates paid on these sources of funds
for the three years ended December 31, 2003. Average deposit balances grew 5.8% in 2003
compared to increases of 8.2% in 2002 and
5.3% in 2001. The Corporation continues to
benefit from a large concentration of low
cost deposit funding. Sources such as demand
deposit accounts, savings accounts and
interest checking accounts comprised 48.4%
of the Corporations average funding in
2003, and grew by 2.7% in 2003 and by 15.6%
in 2002. These funds had an average yield of
..59% in 2003. Although the rates on these
funds have reached practical floors they
still represent the primary reason for the
strength in the net interest margin. The
Corporation introduced new High Performance
demand and interest bearing products in
2002, and the success of these products is
reflected in 2002 and 2003 average
balances. Average certificate of deposit
balances increased 9.9% in 2003 after
declining .6% in 2002 and by 5.0% in
2001. The current interest rate environment,
and the prospects for higher rates have made
these deposits less attractive to customers
in the last two years. The increase in
certificates of deposit that was experienced
in 2003 was the result of increased public
fund investment rather than a substantial
change in the preferences of retail
customers for term investments. Average borrowings increased 13.5% in 2003
as compared to an increase of 24.3% in 2002
and a decline of .7% in 2001. Trends in
borrowings can be attributed to two factors.
The Corporation is pursuing local borrowing
sources such as sweep accounts and fixed
rate repurchase accounts. These products are
relatively inexpensive and a necessary
component of our initiatives to improve our
corporate cash management product. The other
factor is interest rate risk management. To
the extent that the market demands fixed
rate loans, prudent risk management demands
that we find term funding to assure a stable
margin over the life of the loan. In the
last two years, with rates at 40-year lows,
fixed rate loan demand has been increasing.
The increases that have occurred in our
national market borrowings are primarily the
result of the Corporations management of
this risk. The Corporation expects that
these trends will continue. Liquidity Lorain National Bank (the Bank) Management of liquidity is a continual
process in the banking industry. The
liquidity of the Bank reflects its ability
to meet loan demand, the possible outflow of
deposits and to take advantage of market
opportunities made possible by potential
rate environments. Assuring adequate
liquidity is achieved by managing the
cashflow characteristics of the assets the
Bank originates and the availability of
alternative funding sources. The Bank
monitors liquidity according to limits
established in the liquidity policy. This
policy establishes minimums for the ratio of
cash and cash equivalents to total assets
and the loan to deposit ratio. At December
31, 2003 the Bank was in compliance with
these policy limits. In addition to maintaining a stable source
of core deposits, the Bank manages adequate
liquidity by assuring continual cashflow in
the securities portfolio. At December 31,
2003, securities with maturies or expected
cash flow in one year or less totaled $68.3
million. The Bank maintains borrowing capacity at the
Federal Home Loan Bank of Cincinnati, the
Federal Reserve Bank of Cleveland and
Federal Funds lines with correspondent
banks. Table 13 highlights the total
capacity, current unused capacity and
collateral pledged for each borrowing
arrangement. Table 13: Liquidity Borrowing
    
    Unused
    
    CollateralLender
    
    Capacity
    
    Capacity
    
    PledgedFHLB Cincinnati
    
    $
    94,655
    
    
    $
    23,115
    
    
    $
    259,746FRB Cleveland
    
    
    46,694
    
    
    
    46,694
    
    
    
    54,934Federal Funds Lines
    
    
    24,000
    
    
    
    24,000
    
    
    
    -0
    -Total
    
    $
    165,349
    
    
    $
    93,809
    
    
    $
    314,680
 LNB Bancorp, Inc. LNB Bancorp, Inc. is the financial holding
company of Lorain National Bank and conducts
no operations. Its only need for liquidity
is the payment of the quarterly shareholder
dividend, and miscellaneous expenses related
to the regulatory and reporting requirements
of a publicly traded corporation. The
holding corporations only source of
operating liquidity is the dividend that it
receives from Lorain National Bank. Lorain
National Bank has regulatory established
capital limits that limit the payment of
dividends to the holding corporation. At
December 31, 2003 there was $12.1 million
available for payment of dividends to the
holding corporation. The holding corporation
has access to additional sources of
liquidity through correspondent lines of
credit, but no such agreements were in place
as of December 31, 2003. LNB BANCORP, INC.  2003 ANNUAL REPORT    44




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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS Capital Resources Shareholders equity at year-end 2003
totaled $68,135, compared to $66,613 and
$62,138 at year-end 2002 and 2001
respectively. This increase in 2003 resulted
from net income of $7,715, less the payment
of dividends of $4,626, less a $1,758 change
in comprehensive income and a slight decline
in treasury stock. The comprehensive income
change was due to the change in the fair
value of securities classified as available
for sale and the minimum pension liability. Total cash dividends declared in 2003,
including the $.02 extra dividend declared
by the Board of Directors in November, rose
to $4,626. In each of the last 20 years, the
Board of Directors has approved an increase
in the regular cash dividend, with the 2003
dividend representing a 168% increase from
1993 when $1,725 in total cash dividends
were declared. The dividend payout ratio, representing
dividends per share divided by earnings per
share, was 59.98% and 48.75% for the years
2003 and 2002,
respectively. The increase in the dividend
payout ratio is attributable to the decrease
in earnings in 2003. At December 31, 2003, the Corporations
market capitalization was $134.3 compared to
$119.4 at December 31, 2002. There were 2,257
shareholders of record at the 2003 year-end.
LNB Bancorp, Inc.s common stock is traded
on the Nasdaq Stock Market under the ticker
symbol LNBB. The Federal Reserve Board has established
risk-based capital guidelines that must be
observed by financial holding companies and
banks. The Corporation has consistently
maintained the regulatory capital ratios of
the Corporation and its bank subsidiary,
Lorain National Bank, above well
capitalized levels. For further information
on capital ratios see Notes 1 and 14 of the
consolidated financial statements. (BAR CHARTS) Contractual Obligations, Commitments,
Contingent Liabilities and Off-balance
Sheet Arrangements Note 20 to the consolidated financial
statements presents, as of December 31,
2003, the Corporations significant fixed
and determinable contractual obligations by
payment date. The payment amounts represent
those amounts contractually due to the
recipient and do not
include any unamortized premiums or
discounts, hedge basis adjustments, or other
similar carrying value adjustments. In
addition, the Corporation has commitments
under a defined benefit pension plan as
described in Note 16 to the consolidated
financial statements. Table 14: Contractual Obligations One
    
    Two
    
    Four
    
    OverNote
    
    Year
    
    and Three
    
    and Five
    
    Five(Dollars in thousands)
    
    Ref.
    
    or Less
    
    Years
    
    Years
    
    Years
    
    TotalDeposits
    
    
    9
    
    
    $
    197,573
    
    
    $
    166,317
    
    
    $
    -0
    -
    
    $
    -0
    -
    
    $
    363,890Certificates of deposit
    
    
    9
    
    
    
    156,282
    
    
    
    43,122
    
    
    
    17,530
    
    
    
    520
    
    
    
    217,454Short-term borrowings
    
    
    10
    
    
    
    15,023
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    15,023FHLB advances
    
    
    11
    
    
    
    32,235
    
    
    
    39,190
    
    
    
    -0
    -
    
    
    115
    
    
    
    71,540Operating leases
    
    
    8
    
    
    
    271
    
    
    
    231
    
    
    
    107
    
    
    
    17
    
    
    
    626Benefit Payments
    
    
    16
    
    
    
    245
    
    
    
    582
    
    
    
    178
    
    
    
    9,938
    
    
    
    10,943Severance payments
    
    
    N/A
    
    
    
    514
    
    
    
    384
    
    
    
    247
    
    
    
    453
    
    
    
    1,598
 Forward-looking Statements Certain statements contained herein are not
based on historical facts and are
forward-looking statements within the
meaning of Section 21A of the Securities and
Exchange Act of 1934. Forward-looking
statements which are based on various
assumptions, some of which are beyond the
control of the Corporation, may be
identified by reference to a future period
or periods, or by the use of forward-looking
terminology, such as may, will,
believe, expect, estimate,
anticipate, continue, or similar terms
or variations on those terms, or the negative
of those terms. Actual results could differ
materially from those set forth in
forward-looking statements due to a variety
of factors, including, but not limited to,
those related to the economic environment,
particularly in the market areas in which
the Corporation operates, competitive
products and pricing, fiscal and monetary
policies of the U.S. Government, changes in
government regulations affecting financial
institutions, including regulatory fees and
capital requirements, changes in prevailing
interest rates, acquisitions and the
integration of acquired businesses, credit
risk management, asset/liability management,
the financial and securities markets and the
availability of and costs associated with
sources of liquidity. The Corporation does not undertake, and
specifically disclaims any obligation, to
publicly release the result of any revisions
which may be made to any forward-looking
statements to reflect the occurrence of
anticipated or unanticipated events or
circumstances after the date of such
statements. LNB BANCORP, INC.  2003 ANNUAL REPORT    45




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MANAGEMENTS DISCUSSION AND ANALYSIS Market Risk Management Market risk is the risk that a financial
institutions earnings and capital, or its
ability to meet its business objectives will
be adversely affected by movements in market
rates or prices. These include interest
rates, foreign exchange rates, equity
prices, credit spreads and commodity prices.
For the Corporation, the dominant market
risk is exposure to changes in interest
rates. The negative effect of this exposure
is felt through the net interest spread,
mortgage banking revenues and the market
values of various assets and liabilities. 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 various time horizons, but
without knowing the frequency and basis of
the potential rate changes its predictive
power is limited. The gap information for
the Corporation is presented in Table 15 for
the year ended December 31, 2003. A much more useful tool is earnings-at-risk
simulation. This is a dynamic 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, given changes in customer
preference and interest rates. Market risk
management is a gradual and continuous
process. 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.
The most recent earnings-at-risk simulation
indicates that if rates rise by 100 basis
points over the next 12 months, net interest
income will be enhanced $1.2 million
assuming current pricing strategies. A
shock treatment of the balance sheet, in
which all rates increased immediately,
indicates that in a +100 basis point shock
net interest income would increase $307 and
in a +200 basis point shock, net interest
income would increase $507. The Corporation
would normally shock test -100 and -200
basis point decreases in rates but such
tests would be meaningless given the current
historically low interest rate environment. Table 15: Gap Analysis Expected Maturity/Repricing DateFair(Dollars in thousands):
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Value (1)Securities and other (3)
    
    $
    68,327
    
    
    $
    28,921
    
    
    $
    34,169
    
    
    $
    12,507
    
    
    $
    2,508
    
    
    $
    6,184
    
    
    $
    152,616
    
    
    $
    152,290Weighted average yield
    
    
    2.65
    %
    
    
    3.35
    %
    
    
    2.94
    %
    
    
    3.74
    %
    
    
    4.34
    %
    
    
    4.34
    %
    
    
    2.96
    %Commercial loans
    
    
    247,216
    
    
    
    10,671
    
    
    
    4,187
    
    
    
    2,546
    
    
    
    2,523
    
    
    
    36,540
    
    
    
    303,683
    
    
    
    305,527Weighted average yield
    
    
    5.51
    %
    
    
    5.25
    %
    
    
    6.49
    %
    
    
    5.94
    %
    
    
    5.87
    %
    
    
    5.87
    %
    
    
    5.51
    %Mortgage loans (2)
    
    
    7,959
    
    
    
    5,704
    
    
    
    4,859
    
    
    
    4,846
    
    
    
    4,839
    
    
    
    85,442
    
    
    
    113,649
    
    
    
    114,642Weighted average yield
    
    
    6.64
    %
    
    
    6.75
    %
    
    
    6.64
    %
    
    
    6.74
    %
    
    
    6.15
    %
    
    
    6.15
    %
    
    
    6.00
    %Consumer loans
    
    
    17,806
    
    
    
    15,185
    
    
    
    10,961
    
    
    
    6,996
    
    
    
    5,957
    
    
    
    2,312
    
    
    
    59,217
    
    
    
    59,710Weighted average yield
    
    
    6.86
    %
    
    
    6.46
    %
    
    
    6.74
    %
    
    
    6.91
    %
    
    
    6.94
    %
    
    
    6.94
    %
    
    
    6.05
    %Home equity lines of credit
    
    
    57,762
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    57,762
    
    
    
    58,193Weighted average yield
    
    
    4.11
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    4.11
    %Total interest-earning assets
    
    
    399,070
    
    
    
    60,481
    
    
    
    54,176
    
    
    
    26,895
    
    
    
    15,827
    
    
    
    130,478
    
    
    
    686,927
    
    
    
    690,362Certificates of deposit
    
    
    156,282
    
    
    
    27,450
    
    
    
    15,672
    
    
    
    17,530
    
    
    
    -0
    -
    
    
    520
    
    
    
    217,454
    
    
    
    219,878Weighted average yield
    
    
    2.14
    %
    
    
    2.82
    %
    
    
    3.72
    %
    
    
    3.80
    %
    
    
    0.00
    %
    
    
    3.60
    %
    
    
    2.48
    %Savings deposits
    
    
    41,324
    
    
    
    41,324
    
    
    
    20,662
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    103,310
    
    
    
    103,310Weighted average yield
    
    
    .30
    %
    
    
    .30
    %
    
    
    .30
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    .30
    %Interest-bearing demand
    
    
    69,556
    
    
    
    69,555
    
    
    
    34,776
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    173,887
    
    
    
    173,887Weighted average yield
    
    
    .53
    %
    
    
    .53
    %
    
    
    .53
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    .53
    %Short-term borrowings
    
    
    15,023
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    -0
    -
    
    
    15,023
    
    
    
    15,023Weighted average yield
    
    
    .70
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    .70
    %Federal Home Loan Bank advances
    
    
    32,235
    
    
    
    28,190
    
    
    
    11,000
    
    
    
    -0
    -
    
    
    -0
    -
    
    
    115
    
    
    
    71,540
    
    
    
    70,748Weighted average yield
    
    
    1.72
    %
    
    
    2.17
    %
    
    
    2.90
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    6.03
    %
    
    
    2.33
    %Total interest-bearing liabilities
    
    
    314,420
    
    
    
    166,519
    
    
    
    82,110
    
    
    
    17,530
    
    
    
    -0
    -
    
    
    635
    
    
    
    581,214
    
    
    
    582,846Interest-earning assets less
Interest-bearing liabilities
    
    
    84,650
    
    
    
    (106,038
    )
    
    
    (27,934
    )
    
    
    9,365
    
    
    
    15,827
    
    
    
    129,843
    
    
    
    105,713Cumulative interest-rate gap
    
    $
    84,650
    
    
    $
    (21,388
    )
    
    $
    (49,322
    )
    
    $
    (39,957
    )
    
    $
    (24,130
    )
    
    $
    105,713Cumulative interest-rate gap as a
percentage of total earning assets
at December 31, 2003
    
    
    12.32
    %Cumulative interest-rate gap as a
percentage of total earning assets
at December 31, 2002
    
    
    26.77
    %Cumulative interest-rate gap as a
percentage of total earning assets
at December 31, 2001
    
    
    16.35
    %
 (1) Fair value of loans are gross of deferred fees and costs and allowance for
loan losses. (2) Mortgage loans include mortgages in which the loan is fixed for the first
three or five years of the loan and its interest rate is adjustable thereafter. (3) Securities available for sale are shown at amortized cost. LNB BANCORP, INC.  2003 ANNUAL REPORT    46




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MANAGEMENTS DISCUSSION AND ANALYSIS 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 industries in
which it operates. Application of these
principles requires Management to make
assumptions, estimates and judgments that
affect the amounts reported in the financial
statements and accompanying notes. These
assumptions, estimates and judgments are
based on information available as of the
date of the financial statements. As this
information changes, the financial
statements could reflect different
assumptions, estimates and judgments.
Certain policies inherently have a greater
reliance on assumptions, estimates and
judgments and as such have a greater
possibility of producing results that could
be materially different than originally
reported. Examples of critical assumptions,
estimates and judgments are when assets and
liabilities are required to be recorded at
fair value, when a decline in the value of
an asset not required to be recorded at fair
value warrants an impairment write-down or
valuation reserve to be established, or when
an asset or liability must be recorded
contingent upon a future event. The most significant accounting policies
followed by the Corporation are presented in
Note 1 to the consolidated financial
statements. These policies, along with the
disclosures presented in the notes to the
consolidated financial statements and in the
management discussion and analysis of
financial condition and results of
operations, provide information on how
significant assets and liabilities are
valued and how those values are determined
for the financial statements. Based on the
valuation techniques used and the
sensitivity of financial statement amounts
to assumptions, estimates and judgments
underlying those amounts, management has
identified the determination of the reserve
for loan losses as the accounting area that
requires the most subjective or complex
judgments, and as such could be the most
subject to revision as new information
becomes available. Note 1 to the consolidated financial
statements discusses new accounting policies
adopted by the Corporation in 2003. The
following accounting policies have been
recently issued or proposed but are not yet
required to be adopted. Impacts of Accounting and Regulatory Pronouncements: Corporate management is not aware of any
proposed regulations or current
recommendations by the Financial Accounting
Standards Board or by regulatory
authorities, which, if they were
implemented, would have a material effect on
the liquidity, capital resources, or
operations of the Corporation. However, the
potential impact of certain accounting and
regulatory pronouncements warrant further
discussion. Financial Accounting Standards Board: The Financial Accounting Standards Board (FASB) has issued: SFAS No. 143, Accounting for Asset Retirement Obligations In August 2001, the FASB issued SFAS No.
143,Accounting for Asset Retirement
Obligations. SFAS No. 143 requires an
entity to record a liability for an
obligation associated with the retirement of
an asset at the time the liability is
incurred by capitalizing the cost as part of
the carrying value of the related asset and
depreciating it over the remaining useful
life of that asset. The provisions of SFAS
No. 143 became effective for the Corporation
beginning January 1, 2003, and its adoption
did not have a material impact on our
financial position, results of operations,
or liquidity. SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13,
and Technical Corrections which updates,
clarifies, and simplifies certain existing
accounting pronouncements beginning at
various dates in 2002 and 2003. The Statement
rescinds SFAS No. 4 and SFAS No. 64, which
required net gains or losses from the
extinguishment of debt to be classified as
an extraordinary item in the income
statement. These gains and losses will now
be classified as extraordinary only if they
meet the criteria for such classification as
outlined in APB Opinion 30, which allows for
extraordinary treatment if the item is
material and both unusual and infrequent in
nature. The Statement also rescinds SFAS No.
44 related to the accounting for intangible
assets for motor carriers and amends SFAS
No. 13 to require certain lease
modifications that have economic effects
similar to sale-leaseback transactions to be
accounted for as such. The changes required
by SFAS No. 145 did not have a material
impact on our financial position, results of
operations, or liquidity. SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal
Activities In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit
or Disposal Activities. SFAS No. 146
requires a cost associated with an exit or
disposal activity, such as the sale or
termination of a line of business, the
closure of business activities in a
particular location, or a change in
management structure, to be recorded as a
liability at fair value when it becomes
probable the cost will be incurred and no
future economic benefit will be gained by
the corporation for such cost. Applicable
costs include employee termination benefits,
contract termination costs, and costs to
consolidate facilities or relocate
employees. SFAS No. 146 supersedes EITF
Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and
Other Costs to Exit an Activity, which in
some cases required certain costs to be
recognized before a liability was actually
incurred. The provisions of SFAS No. 146
became effective for the Corporation
beginning January 1, 2003, and adoption was
applied during the fourth quarter of 2003 to
the calculation of the severance expense for
the former chief executive officer. SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging
Activities In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS
No. 149 amends and clarifies financial
accounting and reporting for derivative
instruments, including certain derivative
instruments embedded in other contracts
(collectively referred to as derivatives)
and for hedging activities under FASB
Statement No. 133 Accounting for
Derivatives Instruments and Hedging
Activities. The provisions of SFAS No. 149
became effective for
the Corporation for contracts entered into
or modified after June 30, 2003. The
Corporation adopted SFAS No. 149 during the
third quarter of 2003 and its adoption did
not have a material impact on our financial
position, results of operations, or
liquidity. LNB BANCORP, INC.  2003 ANNUAL REPORT    47




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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS SFAS No. 150 Accounting for Certain
Financial Instruments with
Characteristics of both Liabilities and
Equity In May 2003, the FASB issued SFAS No. 150
Accounting for Certain Financial
Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150
provides guidance on how an issuer
classifies and measures in its statement of
financial position the following financial
instruments with characteristics of both
liabilities and equity: mandatory redeemable
shares, put options and forward purchase
contracts and obligations that can be
settled with shares. It requires that an
issuer classify a financial instrument that
is within its scope as a liability (or an
asset in some circumstances) because that
financial instrument embodies an obligation
of the issuer. The provisions of SFAS No. 150
became effective for financial instruments
entered into or modified after May 31, 2003,
and otherwise shall be effective at the
beginning of the first interim period
beginning after June 15, 2003 except for
certain provisions which have been deferred.
The Corporation adopted SFAS No. 150 during
the third quarter of 2003 and its adoption
did not have a material impact on our
financial position, results of operations,
or liquidity. FASB Interpretation No. 45 (FIN No. 45),
GuarantorsAccounting and Disclosure
Requirements for Guarantees,Including
Indirect Guarantees of Indebtedness of
Others 
In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN No. 45),
Guarantors Accounting and Disclosure
Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of
Others. FIN No. 45 expands the disclosures
to be made by a guarantor in its financial
statements about its obligations under
certain guarantees and requires the
guarantor to recognize a liability for the
fair value of an obligation assumed under a
guarantee. FIN No. 45 clarifies the
requirements of SFAS No. 5,Accounting/or
Contingencies, relating to guarantees. In
general, FIN No. 45 applies to contracts or
indemnification agreements that contingently
require the guarantor to make payments to
the guaranteed party based on changes in an
underlying that is related to an asset,
liability, or equity security of the
guaranteed party. Certain guarantee
contracts are excluded from both the
disclosure and recognition requirements of
this interpretation, including, among
others, guarantees relating to employee
compensation, residual value guarantees
under capital lease arrangements, commercial
letters of credit, loan commitments,
subordinated interests in an SPE, and
guarantees of a corporations own future
performance. Other guarantees are subject to
the disclosure requirements of FIN No. 45
but not to the recognition provisions. The disclosure requirements of FIN No. 45
are effective for the Corporation as of
December 31, 2002. The recognition
requirements of FIN No. 45 are to be applied
prospectively to guarantees issued or
modified after December 31, 2002.
Significant guarantees that have been
entered into by the Corporation are
disclosed in Note 20 of the consolidated
financial statements. The Corporation
adopted FIN No. 45 on December 31, 2002 and
its adoption did not have a material impact
during 2003 on our financial position,
results of operations, or liquidity. FASB Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest
Entities In
January 2003, the FASB issued FASB
Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest
Entities. The objective of this
Interpretation is to provide guidance on how
to identify a variable interest entity (VIE)
and determine when the assets, liabilities,
noncontrolling interests, and results of
operations of a VIE need to be included in a
corporations consolidated financial
statements. A corporation that holds
variable interests in an entity will need to
consolidate the entity if the corporations
interest in the VIE is such that the
corporation will absorb a majority of the
VIEs expected losses and/or receive a
majority of the entitys expected residual
returns, if they occur. The provisions of
this Interpretation became effective upon
issuance. As of December 31, 2003, the
Corporation had no variable interests
entities and therefore, the Interpretation
had no impact on the financial position,
results of operations, or liquidity. Other Statements of Financial Accounting Standards All other applicable Statements of Financial
Accounting Standards that have been issued
and have effective dates impacting 2003 and
prior years financial statements were
adopted by the Corporation. Corporate
management believes there are no Statements
of Financial Accounting Standards, which
have been issued and have implementation
dates in the future that will materially
impact the financial statements of future
years. Significant actions by the Federal
government and its agencies, affecting the
financial institutions industry in general,
are currently having and will continue to
have an impact on the Corporation. A
discussion of these actions follows: Sarbanes-Oxley Act of 2002 On July 30, 2002, the Senate and the House
of Representatives of the United States
(Congress) enacted the Sarbanes-Oxley Act of
2002, a law that addresses, among other
issues, corporate governance, auditing and
accounting, executive compensation, and
enhanced and timely disclosure of corporate
information. The Nasdaq National Stock
Exchange has also proposed corporate
governance rules that were presented to the
Securities and Exchange Commission for
review and approval. The proposed changes
are intended to allow stockholders to more
easily and efficiently monitor the
performance of companies and directors.

Effective August 29, 2002, as directed by
Section 302(a) of Sarbanes-Oxley, LNB
Bancorp, Inc.s chief executive officer and
chief financial officer are each required to
certify that LNB Bancorp, Inc.s Quarterly
and Annual Reports do not contain any untrue
statement of a material fact. The rules have
several requirements, including having these
officers certify that: they are responsible
for establishing, maintaining and regularly
evaluating the effectiveness of LNB Bancorp,
Inc.s internal controls; they have made
certain disclosures to LNB Bancorp, Inc.s
auditors and the audit committee of the
Board of Directors about LNB Bancorp, Inc.s
internal controls; and they have included
information in LNB Bancorp, Inc.s Quarterly
and Annual Reports about their evaluation
and whether there have been significant
changes in LNB
Bancorp, Inc.s internal controls or in
other factors that could significantly
affect internal controls subsequent to the
evaluation. Gramm-Leach-Bliley Act The enactment of the Gramm-Leach-Bliley Act
of 1999 (the GLB Act) represented a pivotal
point in the history of the financial
services industry. The GLB Act removed large
parts of a regulatory framework that had its
origins in the Depression Era of the 1930s.
Effective March 11, 2000, new opportunities
became available for banks, other depository
institutions, insurance companies, and
securities firms to enter into combinations
that permit a single financial services
organization to offer customers a more
complete array of financial products and
services. The GLB Act provides a new
regulatory framework for regulation through
the financial holding corporation, which has
as its umbrella regulator the Federal
Reserve Board. Functional regulation of the
financial holding corporations separately
regulated subsidiaries is conducted by their
primary functional regulator. The GLB Act
requires satisfactory or higher Community
Reinvestment Act compliance for insured
depository institutions and their financial
holding companies in order for them to
engage in new financial activities. The GLB
Act provides a federal right to privacy of
non-public personal information of
individual customers. LNB Bancorp, Inc. and
its subsidiaries are also subject to certain
state laws that deal with the use and
distribution of non-public personal
information. LNB BANCORP, INC.  2003
ANNUAL REPORT    48




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(LNB BANCORP, INC. LOGO) Mail: LNB Bancorp, Inc.
 457 Broadway  Lorain, Ohio 44052-1739
E-Mail: InvestorRelations@4LNB.com Internet: www.4LNB.com
Telephone: (440) 244-6000  Toll Free: (800) 860-1007
Telefax: (440) 244-4815