UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

LNB Bancorp, Inc.

(Exact name of the registrant as specified in its charter)

(440) 244-6000

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          Yes     þ          No     o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.          o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).          Yes     þ          No     o

      The aggregate market value of the voting common stock held by non-affiliates of the registrant at June 30, 2004 was approximately $113,250,969.

      The number of shares of the registrant’s common stock issued on February 28, 2005 was 6,766,867.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

PART 1

Item 1.     Business

Overview

      History. LNB Bancorp, Inc. (the “Corporation”) is a diversified financial services company headquartered in Lorain, Ohio. It was formed under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and received its financial holding company status on March 13, 2000. The Corporation provides banking, mortgage, brokerage and insurance services through two wholly-owned subsidiaries and other affiliated companies. The Corporation’s wholly-owned subsidiaries are The Lorain National Bank (the “Bank”) and Charleston Insurance Agency, Inc. The Bank also has two wholly-owned subsidiaries of its own: North Coast Community Development Corporation and LNB Mortgage LLC. In addition, the Corporation owns a 49% interest in Charleston Title Agency, LLC, and LNB Mortgage LLC owns a 49% interest in TransNational Title Agency.

      Banking. The Bank is a wholly-owned subsidiary of the Corporation and will be celebrating its 100th anniversary in 2005. Its predecessor, the Lorain Banking Company, was a state chartered bank founded in 1905 that merged with the National Bank of Lorain in 1961. Upon the consummation of a Plan of Reorganization on March 30, 1984, the Bank became a wholly-owned subsidiary of the Corporation. Through the reorganization, shareholders of the Bank became shareholders of the Corporation, receiving one share of voting Common Stock of the Corporation in exchange for each share of Common Stock of the Bank.

      The Bank specializes in personal, mortgage and commercial banking products along with investment management and trust services. The Bank operates 20 banking centers and 23 ATMs in the Ohio communities of Lorain, Elyria, Elyria Township, Amherst, Avon, Avon Lake, LaGrange, Oberlin, Olmsted Township, Vermilion and Westlake. The Bank’s deposit services include traditional transaction and time deposit accounts, as well as cash management services for corporate and municipal depositors. Deposits of the Bank are insured by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation (the “FDIC”).

      The Bank’s commercial lending activities consist of commercial real estate loans, construction and equipment loans, letters of credit, revolving lines of credit, Small Business Administration loans, government guaranteed loans, and Federal Home Loan Bank program loans. The Bank’s wholly-owned subsidiary, North Coast Community Development Corporation, offers commercial loans with preferred interest rates on projects that meet the standards for the New Markets Tax Credit Program, which is a Federal program to provide tax credits for investment in low and moderate income areas of local communities.

      Other bank services offered include safe deposit boxes, night depository, U. S. savings bonds, travelers’ checks, money orders, cashiers checks, ATM’s, debit cards, wire transfer, ACH, foreign drafts, foreign currency, notary public services, payroll services, electronic banking by phone or through the internet, bill payment, lockbox and other services tailored for both individuals and businesses.

      Mortgage Services. The Bank’s residential mortgage lending activities consist primarily of loans originated for sale through the Bank’s wholly-owned subsidiary, LNB Mortgage LLC. These loans are for the purchase of personal residences. Consumer lending activities consist of traditional forms of financing for automobile and personal loans, indirect automobile loans, second mortgages, and home equity lines of credit.

      Brokerage Services. For brokerage services, the Bank operates under an agreement with Online Brokerage Services, Inc. Online Brokerage Services, Inc. is a member of NASD/ SIPC/ NFA and offers mutual funds, variable annuity and life insurance products, and investments in stocks and bonds.

      Insurance Services. Charleston Insurance Agency, Inc. offers term life, whole life, universal life and term care insurance, and fixed annuity products.

      Competition. The Corporation competes with sixteen other financial institutions in Lorain County, which range in size from approximately $1 million to over $112 billion in deposits. These competitors, as well

as credit unions and financial intermediaries operating in Lorain County, compete for county deposits in excess of $3.1 billion. The Bank’s market share of total deposits in Lorain County was 18.0% in 2004 and 17.8% in 2003, and the Bank ranked number two in market share, based on total deposits, in 2004 and 2003.

      Business Strategy. The Bank competes with larger financial institutions by providing exceptional local service that emphasizes direct customer access to the Bank’s officers. It competes against smaller local banks by providing distribution channels that the Bank believes are more convenient and provide a wider array of products. It endeavors to provide informed and courteous personal services. Management believes that the Bank is well positioned to compete successfully in its market area. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, the relative level of service charges, the quality and scope of the services rendered, the convenience of the banking centers and, in the case of loans to commercial borrowers, relative lending limits. Management believes that the commitment of the Bank to provide quality personal service, as well as its local community involvement, gives the Bank a competitive advantage.

      Acquisition. On September 2, 2004, the Corporation announced that it purchased the assets and acquired certain liabilities of Mortgage One Banc Financial Services, Inc., a mortgage broker headquartered in Lorain, Ohio. The transaction closed on August 31, 2004. The Corporation formed a new entity, LNB Mortgage LLC, as a wholly-owned subsidiary of the Bank. It will conduct business under the name “Mortgage One Banc” and will provide an array of mortgage financing products.

      Supervision and Regulation. The Corporation is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The BHC Act requires prior approval of the Federal Reserve Board before acquiring or holding more than a 5% voting interest in any bank. It also restricts interstate banking activities.

      The Bank is subject to extensive regulation, supervision and examination by applicable federal banking agencies, including the FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve Board.

      Employees. As of December 31, 2004, the Corporation employed 259 full-time equivalent employees. The Corporation is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be good. Employee benefits programs are considered by management to be competitive with benefits programs provided by other financial institutions and major employers within the Corporation’s current market area.

      Risk Management. The Corporation is not dependent upon any single significant customer or specific industry. The business of the Corporation is not seasonal to any material degree. In the opinion of management, the Corporation does not have exposure to material costs associated with environmental hazardous waste clean up. Management is not aware of any aggregation of loans which would be considered a concentration of lending in any particular industry or group of industries, nor are there significant amounts of loans made to agricultural or energy related businesses.

      Credit risk is managed through the Bank’s loan loss review policy, which requires the loan review officer, lending officers, and the loan review committee to manage loan quality. The Corporation’s credit policies are reviewed and modified on an ongoing basis. At December 31, 2004, there were no significant concentrations of credit risk in the loan portfolio. Other risk elements, including market risk, interest risk, and operational risk, are closely monitored by the Corporation’s Asset/ Liability Management Committee (the “ALCO”).

      No material loan amounts have been classified by regulatory examiners as loss or doubtful. Management is not aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on the liquidity, capital resources or operations of the Corporation.

Industry Segments

      The Corporation and subsidiary companies are engaged in one line of business, which is banking services. The subsidiaries, except for the Bank, did not represent a significant part of LNB Bancorp, Inc. at

December 31, 2004. Item 8 of this Form 10-K provides financial information pertaining to the Corporation’s business.

Available Information

      The Corporation’s internet website is www.4lnb.com. Copies of the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available through this website, or directly through the Securities and Exchange Commission website, which is www.sec.gov.

Item 2.     Properties

      The Corporation’s principal executive offices (the “Main Office”) are located at 457 Broadway, Lorain, Ohio. The Corporation owns the land and buildings occupied by the Main Office, twelve of its banking centers, the Professional Development Center Building, the Maintenance Building, the Purchasing Building and the Technology Center. The remaining nine banking centers are subject to lease obligations with various parties and varying lease terms.

      There is no outstanding mortgage debt on any of the properties that the Corporation owns. The location of the Corporation’s banking centers, loan production offices and customer service facilities are as follows:

      The Corporation also owns automated teller machines as well as other equipment for use in its business. The Main Office is currently 75% occupied. The remaining space will be utilized as the Corporation continues

to grow. The Corporation considers all its facilities to be in good condition, well maintained and adequate to conduct the business of banking.

Item 3.     Legal Proceedings

      There are no material legal proceedings, other than ordinary routine litigation incidental to its business, to which the Corporation or any of its subsidiaries is a party or to which any of its properties are subject.

Item 4.     Submission of Matters to a Vote of Security Holders

      During the fourth quarter of the fiscal year ended December 31, 2004, there were no matters submitted to a vote of the Corporation’s shareholders.

SUPPLEMENTAL ITEM — EXECUTIVE OFFICERS OF THE REGISTRANT

      Pursuant to General Instruction G (3) of Form 10-K, the following information on executive officers of the Corporation is included as an additional item in Part I:

Executive Officers of the Registrant

PART II

      Market Information. The common shares, par value $1.00 per share, of the Corporation are traded on the NASDAQ Stock Market under the ticker symbol “LNBB.” The Table below shows the high and low sales prices reported on the NASDAQ Stock Market for the periods indicated. All prices reflect inter-dealer prices without markup, markdown or commission and may not necessarily represent actual transactions. As of February 28, 2005, the Corporation had 2,217 shareholders of record, and the common shares had a closing price of $19.05 on February 28, 2005.

Common Stock Trading Ranges and Cash Dividends Declared

      Dividend Information. The Corporation has increased the cash dividend paid to shareholders each year since becoming a holding company in 1984. In the fourth quarter of 2003, the Corporation paid an extra cash dividend that was discretionary and was based upon the Corporation’s growth plans and near-term profitability outlook at that time. At present, the Corporation expects to pay cash dividends to shareholders in 2005 if approved by the Board of Directors.

      Market Makers. The market makers for the Corporation’s common shares include the following:

Item 6.     Selected Financial Data

Five Year Consolidated Financial Summary

      The Corporation has derived the following selected consolidated financial data from notes appearing elsewhere in this Form 10-K.

Condensed Statements of Income and Selected Financial Data

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operation

Introduction

      This was a year of major changes for the Corporation, which serves Lorain County, eastern Erie County and western Cuyahoga County in northern Ohio. The Corporation’s performance is impacted by general trends in the banking industry and by local economic conditions within the geographic area of the Federal Reserve Bank of Cleveland – Fourth District. Because the Corporation derived 73% of its revenues from net interest income in 2004, the economic vitality of this region is an integral factor in the growth of the Corporation. In 2004, our region continued to struggle to recover from recession, and we expect this recovery to continue at a slow pace in 2005.

      During the past year, the Board of Directors conducted an extensive executive search for a permanent President and CEO to replace the interim President, James F. Kidd. This search resulted in selecting Mr. Daniel E. Klimas as President and CEO of the Corporation effective February 7, 2005.

      The year also reflected the full impact of the Sarbanes-Oxley legislation. This legislation requires management to develop and maintain a comprehensive process for assessing the effectiveness of the Corporation’s internal controls over financial reporting, and to issue a report on management’s assessment. As with all publicly traded companies, this was a costly and time consuming process.

      The previously announced first phase of a restructuring of the branch network was completed in 2004. Two new offices were opened in Avon and Avon Lake, serving two important growth areas in eastern Lorain County. The Corporation also opened a loan production office in Westlake, Ohio in 2004.

      In 2004, the Corporation purchased the assets and assumed certain liabilities of Mortgage One Banc Financial Services, Inc. and is now operating the business as LNB Mortgage LLC, a wholly owned subsidiary of the Bank. LNB Mortgage LLC serves as a local mortgage broker that management feels will substantially improve the ability of the Corporation to grow mortgage revenue in the future.

      The Corporation’s mission is 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.

Key Indicators and Material Trends

      Growth in net interest income continues to be a challenge in the banking industry. Management can effect balance sheet changes that can insulate the net interest margin from dramatic changes in interest rates. In absolute terms, however, management believes that the Corporation will be realizing smaller margins in the future. Since the Corporation is dependent on net interest income for a large percentage of its revenue (73% in 2004), minimizing this compression is critical. The Corporation’s net interest margin historically has compared favorably with peer banks, and this trend continued in 2004. 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 began to rise in late 2004, the Corporation began to see some net interest margin improvement.

      The generation of noninterest income is becoming more critical to the long-term success of the Corporation. While the Corporation historically has compared quite favorably to peers in this regard, there have been initiatives in the past year to diversify this revenue base. Competitive threats exist to the traditional deposit service charges and other transaction related fees. Additionally, changes in the industry have impacted the Corporation’s electronic banking fees. The volume of electronic transactions is growing, but per transaction revenue on debit and ATM transactions is declining. This is the result of VISA pricing. We were also impacted by changes in MasterCard standards regarding fee minimums and merchant underwriting standards. This necessitated a reengineering of our delivery of merchant services to over 600 customers. This had the impact of reducing our electronic banking revenues and the related costs in the fourth quarter of 2004. The profitability of this activity will be approximately the same, but gross merchant revenue will be down

approximately $1 million per year. To address these threats, the Corporation has made changes to its investment and trust services and its mortgage banking operations. Additionally, the Corporation launched a transaction lending initiative. In 2005, the Corporation plans to continue to further develop its corporate cash management and mortgage businesses.

      Management believes that asset quality is a key indicator of financial strength, and the Corporation continues to manage credit risk aggressively. In 2004, the level of nonperforming loans decreased over the prior year. The Corporation’s risk profile is improving with better loan underwriting, more aggressive management of problem loans and slightly increasing economic conditions.

      Since the ability to generate deposits is a key indicator 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 2004, as measured by the FDIC at June 30, 2004, the Corporation’s market share of deposits grew slightly, and now stands at 18.0%. The Corporation continues to do very well generating deposits in its historically strong city markets of Lorain, Elyria and Amherst. The partial year performance of the new offices in Avon Lake and Avon has exceeded our expectations. These branch initiatives that were completed in 2004 are designed to 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 $7,475 or $1.13 per diluted share in 2004, down from $7,715 or $1.17 per diluted share in 2003, and down from $9,165 or $1.39 per diluted share in 2002. Included in 2004 earnings was a $1,158 non-cash pretax charge to recognize other than temporary impairment of the Corporation’s investment in FNMA and FHLMC preferred securities. Included in 2003 earnings was an $832 gain on the sale of the Corporation’s credit card portfolio. As a percent of average assets, net income in 2004 represents a return of .98%. This compares to 1.05% and 1.33% in 2003 and 2002, respectively. Return on assets is one measure of operating efficiency. As a percent of average shareholders’ equity, net income in 2004 represented a return of 10.75%, as compared to 11.33% and 14.24% in 2003 and 2002, 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 of 35%. Net interest income is the most significant component of the Corporation’s revenue, accounting for 73% in 2004, 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 the net interest margin for the three years ended December 31, 2004.

Table 1:     Net Interest Income

      The Corporation’s net interest income was $28,337 in 2004, which is a decline of $710 from 2003. This follows a decrease in net interest income of $600 in 2003 as compared to 2002. The net interest margin was 4.01% in 2004, which is a decline of 22 basis points from 2003. This follows a decrease of 35 basis points in 2003 as compared to 2002. Declining net interest income is primarily the result of the continued low interest rate environment through the first nine months of 2004, coupled with the slow recovery of the local economy. This decline can be seen in Table 3, which segments the change in net interest income into volume and rate components. The negative impact of rates is much more pronounced in 2003 and 2004 than the impact of volume. In 2002 and early 2003, the Corporation offset some of the net interest margin compression caused by declining rates with balance sheet growth. However, for much of 2003 and into the middle of 2004, assets grew much more slowly than the 7.6% average asset growth rate in 2002. Asset growth for 2004 did not occur until the latter part of the year, indicating that general economic conditions in the market are slowly improving. Net interest income and the net interest margin in the fourth quarter of 2004 were $7,353 and 4.10% as compared to $7,121 and 4.05% for the same period in 2003. Also impacting the Corporation’s net interest income was a higher dependence on non-core funding sources. This trend is highlighted in Table 12. Although these funds are not necessarily more expensive than other funding sources of comparable term, as our funding mix shifts from such extremely low cost sources, like savings accounts, to these alternative funding sources, the potential for further margin compression increases.

      In 2004, the Corporation attempted to keep asset maturities short and loan volume on a variable rate basis, to be properly positioned for the rising rate environment that began late in the year. At December 31, 2004, the Corporation’s cumulative twelve month GAP position was a positive $129 million, which means that assets that could potentially reprice in the next twelve months exceeded liabilities by this amount. Consequently, the Corporation is positioned to materially benefit from anticipated increases in interest rates as evidenced in the second half of 2004.

      Table 2 reflects the detailed components of the Corporation’s net interest income for each of the three years ended December 31, 2004. Rates are computed on a tax equivalent basis and nonaccrual loans are included in the average loan balances.

Table 2:     Condensed Consolidated Average Balance Sheets

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

      Net interest income also may 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, 2004. 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.

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

Table 4:     Details of Noninterest Income:

     2004 versus 2003 Noninterest Income Comparison

      Noninterest income decreased $1,182, or 10.2%, in 2004 as compared to 2003. Included in 2004 results is a non-cash write-down of $1,158, to recognize an other than temporary impairment on FNMA and FHLMC equity securities owned by the Corporation. Although these securities are still investment grade, the recent troubles at these two agencies have impacted the value of the equity securities issued by these agencies. Also

impacting the value of these securities has been the interest rate environment. Although these securities have variable rate structures, they have long reset periods. In Table 4, the sources of noninterest income are presented for the three years ended December 31, 2004. To aid in the discussion of core noninterest income trends, totals are presented including and excluding the 2004 impairment charge and the 2003 gain on sale of the Corporation’s credit card portfolio.

      Core noninterest income was $11,600 in 2004, an increase of $808 or 7.5% as compared to 2003. As can been seen in Table 4, investment and trust services improved 18.7% in 2004 versus 2003. This reflects improved business development efforts, general stock market conditions, and pricing changes in 2004. Offsetting a portion of this improvement were declines in deposit service charges and electronic banking fees. The decline in deposit service charges was attributable to local economic conditions. The decline in electronic banking fees was attributable to changes in the interchange income earned on VISA debit card and ATM transactions. The Corporation experienced increased card usage in 2004, but these increases were offset by the latest reductions in VISA’s per transaction pricing. Electronic banking fees were lower in 2004 as the Corporation made changes to its merchant service processing. Due to changes in MasterCard pricing and capital requirements, the Corporation outsourced the delivery of merchant processing in the fourth quarter. This service had generated annual revenue in excess of $1 million in recent years. However, the profit margin was relatively low, resulting in a pre-tax profit of only about $100 per year. Management believes that the changes that would have been required to remain a MasterCard merchant processor would have made this service unprofitable. Management expects that this new outsourcing solution will generate approximately the same pre-tax income as previously earned before the MasterCard changes. The gain on the sale of loans in 2004 was $181, representing a $56 decrease from 2003. In 2004 these gains were primarily due to the sale of SBA loans. In 2003, the sale of SBA loans was supplemented by the sale of 1-4 family real estate loans to FHLMC. The Corporation did not sell 1-4 family loans in the third or fourth quarter of 2004. The gain on the sale of securities in 2004 was $381, a decrease of $68 from 2003. The 2004 gains were primarily from the sale of non-rated municipal bonds. In 2004, the Corporation sold its former Avon Lake office after the new Avon Lake office opened in the second quarter. The Corporation also sold one of its parking lots in downtown Lorain. The sale of these two assets resulted in a $378 gain on sale of other assets in 2004 as compared to $2 in 2003. The increase in other income in 2004 of $749, as compared to 2003, was primarily attributable to revenue earned by the Corporation’s new mortgage company in the last four months of 2004.

     2003 versus 2002 Noninterest Income Comparison

      Core noninterest income in 2003 was $10,792, excluding the sale on the credit card portfolio. This was a decline of $294 from 2002. Investment and trust services were $1,762 in 2003, a decrease of 15.3% from 2002 which is dependent upon the overall performance of the financial markets. The 2003 decrease was attributable to the weak stock market. In 2003, deposit service charges were $4,260, an increase of 4.3% over 2002. This increase was attributable to the increase in the number of demand deposit accounts. Electronic banking fees were down $89 in 2003, or 3.5% as compared to 2002. The decline was primarily due to the first of several VISA pricing changes that reduced the Corporation’s revenue per ATM and debit card transaction. The gain on the sale of loans was $236 in 2003, an increase of $142 from 2002. In 2002 gains on the sale of loans resulted from the sale of mortgage loans to FHLMC. In 2003, the sale of mortgage loans continued, but approximately 50% of the gains on the sale of loans resulted from the sale of SBA loans. In 2002 and 2003, the gains on the sale of securities were the result of the Corporation’s repositioning of its securities portfolio to prepare for the anticipated rising rate environment. Other income was $207 in 2003, a decline of $220 from 2002. This decline was due to lower title company and insurance income in 2003.

Table 5:     Details of Noninterest Expense:

     2004 versus 2003 Noninterest Expense Comparison

      Noninterest expense was $26,290 in 2004, a decrease of $177 or ..7% over the prior year. In 2003 noninterest expense included $1,712 in severance expenses. Excluding this expense, noninterest expense in 2004 would have increased $1,565 over 2003. The largest increases in noninterest expense in 2004 were in salaries and employee benefits, furniture and equipment expense, marketing, and other expenses.

      Salaries and employee benefits expense was $12,995 in 2004, which if severance costs are excluded from the 2003 totals, increased $893 over 2003. The salary component of this expense was primarily driven by the salaries associated with the LNB Mortgage LLC addition, which added $467 to salaries in 2004. Benefit costs were up $323, or 12.2%, in 2004 versus 2003. Most benefit costs were well controlled in 2004, however, the Corporation did experience a $206 increase in employment services expense related to the CEO and other management searches, and a $64 increase in pension cost related to the minimum pension liability.

      Furniture and equipment expenses totaled $2,784, an increase of $267 as compared to 2003. This increase was primarily due to increased software maintenance and amortization related to the upgrade of core systems, the replacement of the mainframe computer and licensing fees resulting from increased users and the necessity to increase servers and server capacity. The continuing trend in equipment expense stems from a technology upgrade of $4.5 million that began in 2002 and was nearing completion in 2004.

      Electronic banking expenses were $1,257 in 2004, down 9.9% from 2003. The change in 2004 as compared to 2003 primarily was the result of the out-sourcing of merchant processing. As discussed in the noninterest income section of this report, this change in processing will reduce card related revenue in future years, but the cost associated with this operation also is reduced.

      Outside services expense decreased 18% to $1,182 in 2004, from $1,441 in 2003. Outside services include general corporate legal expenses, compliance, audit, trust processing, technology consulting and other services. Legal fees decreased in 2004 as a result of the Corporation’s settlement of a complaint brought by the SEC. Technology consulting and compliance costs have also returned to more normal levels after increasing in 2003 as the Corporation updated its technology platform and compliance programs. Management expects that the legal and technology expenses will continue to grow modestly, however, compliance costs and audit fees related to Sarbanes-Oxley compliance are expected to increase.

      Marketing and public relations expense was $1,047 in 2004, an increase of $285 compared to 2003. This increase was primarily due to continued marketing costs related to the High Performance Checking products and marketing expenses in support of the new branch offices opened in 2004. Also impacting marketing costs were $104 incurred in support of the new mortgage operation. This expense was primarily attributable to mail and billboard advertising.

     2003 versus 2002 Noninterest Expense Comparison

      Excluding severance expenses in 2003, core noninterest expense was $24,755, nearly unchanged from 2002. Including severance expenses, noninterest expense was $26,467, a 6.9% increase over 2002.

      Salary and employee benefit expense was $12,102 in 2003, which excluding the severance expenses in 2003 was a decline of $127, or 1.0% decrease over 2002. This decrease was due primarily to a $322 reduction in pension costs as this plan was frozen as of December 31, 2002, and a $249 reduction in the contribution to the ESOP plan, partially offset by normal salary increases and higher 401(k) expenses.

      Furniture and equipment costs were $2,517 in 2003, an increase of 14.8% over 2002. This increase was due to higher equipment depreciation and software amortization.

      Electronic banking expense increased 5.3% in 2003 to $1,395 versus 2002 due to management’s decision to outsource the ATM and debit card processing, as well as increased transaction volume. ATM and debit card processing was an in-house operation in prior years, and this cost was reflected in equipment and software costs in periods prior to 2003.

      Outside services were $1,441 in 2003, a 10.3% increase over 2002. The increase in 2003 reflected legal fees related to a complaint brought by the SEC as well as higher than normal compliance fees related to new compliance programs in many areas of the Corporation and technology consulting fees related to the technology projects underway in 2003.

      Marketing and public relations expense was $762 in 2003, a decrease of 26.2% compared to 2002. The decrease was due primarily to a reduction in marketing costs related to the introduction of the High Performance Checking products in 2002.

      Ohio franchise tax expense was $673 in 2003, an increase of 34.1% from 2002. In 2002 the Corporation received a refund of Ohio franchise tax paid in prior years. The 2003 expense is a more normal level.

      The efficiency ratio is expressed as noninterest expense as a percentage of the sum of net interest income (FTE) plus noninterest income. The efficiency ratio for 2004 increased to 67.82% from 63.01% for 2003 and 61.41% for 2002. The higher efficiency ratio during 2004 and 2003 was due to continued revenue compression and the expense trends noted above.

Income Taxes

      Federal income tax expense was $3,051 in 2004, representing a decrease of $360 from 2003. In 2003 federal income tax expense was $3,411, representing a $789 decrease from 2002. The Corporation’s average tax rate was 29.0% in 2004, 30.7% in 2003 and 31.4% in 2002. This trend reflects the impact of the Corporation’s $10.4 million Bank Owned Life Insurance investment in 2002 and the impact in 2004 of new markets tax credits being generated by North Coast Community Development Corporation (the “NCCDC”), a wholly-owned subsidiary of the Bank. On December 29, 2003, NCCDC received official notification of this tax credit award. Over the next eleven 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 tax savings for the Corporation. The Corporation made a $4.5 million qualified investment in NCCDC in 2004 which generated a $225 tax credit in 2004.

Balance Sheet Analysis

     Securities

      The maturity distribution of the Corporation’s securities portfolio for the year ended December 31, 2004 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 3.8 years, and is expected to generate approximately $11.6 million of cashflow in 2005. 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 40% U.S. government agencies, 47% U.S. agency mortgage backed securities, 8% municipals and 5% in other securities. Other securities consist of Federal Home Loan Bank stock, Federal Reserve Bank stock and FNMA and FHLMC preferred stock. The preferred stock is classified as equity securities in the financial statements and has been written down through the income statement to its fair value as of December 31, 2004. Subsequent to year-end these equities were sold. At December 31, 2004, the securities portfolio had a net $1,287 unrealized loss. This represents .86% of total securities at December 31, 2004. New investment is primarily in short-term agencies and short average life mortgage backed securities and intermediate, high quality municipal bonds. Tables 6 and 7 present the maturity distribution of securities and the weighted average yield for each maturity range for the year ended December 31, 2004.

Table 6:     Maturity Distribution of Securities at Amortized Cost

Table 7:     The Weighted Average Yield for Each Range of Maturities of Securities

     Loans

      Commercial loans comprised 59.0% of the total loan portfolio at December 31, 2004, increasing from 56.8% in 2003. The growth in the portfolio represents business development efforts in emerging markets. As mentioned earlier, the Corporation’s traditional Lorain County market has been slow to recover from recession. However, expanded lending efforts in Cuyahoga County provided much of the commercial loan growth in 2004. The amount of collateral required on commercial loans generally is determined on a loan-by-loan basis with loan-to-value ratios for commercial loans typically ranging from 50% to 100%. Other factors impacting loan-to-value ratios 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 21.4% of the total loan portfolio at December 31, 2004, decreasing slightly from 21.9% in 2003. The Corporation makes installment loans on a secured and unsecured basis, based on the term and purpose of the loan. The Corporation also purchases loans from another financial institution in the Cleveland area.

      Real estate loans, including construction and mortgage loans, comprised 19.6% of the total loan portfolio at December 31, 2004, decreasing from 21.3% in 2003. This decline was the result of two factors. First, the Corporation’s mortgage portfolio consists of seasoned adjustable rate mortgages. With fixed mortgage rates at 40-year lows, this portfolio experienced about a 25% prepayment rate in 2004. Second, the Corporation now generates all mortgage business through LNB Mortgage LLC. LNB Mortgage LLC sells all production, both fixed and variable rates, in the secondary market. The combination of these two factors has reduced 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%.

      Loan balances and loan mix are presented by type for the five years ended December 31, 2004 in Table 8.

Table 8:     Loan Portfolio Distribution

      Table 9 shows the amount of commercial loans outstanding as of December 31, 2004, 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 9:     Commercial Loan Maturity and Repricing Analysis