UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 2002
Commission file number 000-26121
LCNB Corp.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1626393
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2 North Broadway, Lebanon, Ohio 45036
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(513) 932-1414
----------------------------------------------------
(Registrant's telephone number, including area code)
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 X No
The number of shares outstanding of the issuer's common stock, without par
value, as of July 29, 2002, was 1,775,942 shares.
LCNB Corp.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2002, and December 31, 2001 . . . . . . . . . 1
Consolidated Statements of Income -
Three and Six Months Ended June 30, 2002 and 2001. . . 2
Consolidated Statements of Shareholders' Equity -
Six Months Ended June 30, 2002 and 2001. . . . . . . . 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001. . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . .5-9
Independent Accountants' Review Report. . . . . . . . . 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 11-23
Item 3. Quantitative and Qualitative Disclosures
about Market Risks . . . . . . . . . . . . . . . . . . . . .23
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities and Use of Proceeds . . . . . . 24
Item 3. Defaults by the Company on its Senior Securities . . . 24
Item 4. Submission of Matters to a Vote of Security Holders. . 24
Item 5. Other Information . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 24
Part I - Financial Information
Item 1. Financial Statements
LCNB Corp. and Subsidiaries
Consolidated Balance Sheets
(thousands)
June 30, December 31,
2002 2001
(unaudited) (a)
ASSETS:
Cash and due from banks $ 15,811 14,286
Federal funds sold 16,575 19,950
------- -------
Total cash and cash equivalents 32,386 34,236
------- -------
Securities available for sale, at
market value 114,469 98,610
Federal Reserve Bank stock and
Federal Home Loan Bank stock, at cost 2,820 2,772
Loans 330,254 327,165
Less-allowance for loan losses 2,000 2,000
------- -------
Net loans 328,254 325,165
------- -------
Premises and equipment, net 11,809 11,628
Accrued income receivable 3,136 3,051
Intangible assets 3,428 3,729
Other assets 1,363 1,244
------- -------
TOTAL ASSETS $497,665 480,435
======= =======
LIABILITIES:
Deposits-
Noninterest-bearing $ 56,685 59,137
Interest-bearing 376,702 355,635
------- -------
Total deposits 433,387 414,772
Long-term debt 10,280 12,306
Accrued interest and other liabilities 3,842 3,850
------- -------
TOTAL LIABILITIES 447,509 430,928
------- -------
SHAREHOLDERS' EQUITY:
Common stock-no par value,
authorized 4,000,000 shares; issued
and outstanding 1,775,942 shares 10,560 10,560
Surplus 10,553 10,553
Retained earnings 29,095 27,714
Treasury shares, at cost,
54,917 and 12,997 shares at June 30, 2002
and December 31, 2001, respectively (2,193) (516)
Accumulated other comprehensive
income, net of taxes 2,141 1,196
------- -------
TOTAL SHAREHOLDERS' EQUITY 50,156 49,507
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $497,665 480,435
======= =======
(a) Financial information as of December 31, 2001, has been derived from
the audited, consolidated financial statements of the Registrant.
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
-1-
LCNB Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
INTEREST INCOME:
Interest and fees on loans $6,206 6,916 12,460 14,011
Interest on federal funds sold 93 252 188 379
Dividends on Federal Reserve Bank
and Federal Home Loan Bank stock 44 51 68 51
Interest on investment securities-
Taxable 763 650 1,415 1,313
Non-taxable 431 368 838 741
----- ----- ------ ------
TOTAL INTEREST INCOME 7,537 8,237 14,969 16,495
----- ----- ------ ------
INTEREST EXPENSE:
Interest on deposits 2,554 3,657 5,080 7,617
Interest on borrowings 177 155 366 286
----- ----- ------ ------
TOTAL INTEREST EXPENSE 2,731 3,812 5,446 7,903
----- ----- ------ ------
NET INTEREST INCOME 4,806 4,425 9,523 8,592
PROVISION FOR LOAN LOSSES 71 53 125 110
------ ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,735 4,372 9,398 8,482
----- ----- ------ ------
NON-INTEREST INCOME:
Trust income 230 197 531 405
Service charges and fees 600 583 1,179 1,144
Net gain (loss) on sale of
securities 12 (1) 21 17
Insurance agency income 273 299 524 692
Other operating income 31 35 66 80
----- ----- ------ ------
TOTAL NON-INTEREST INCOME 1,146 1,113 2,321 2,338
----- ----- ------ ------
NON-INTEREST EXPENSE:
Salaries and wages 1,624 1,461 3,239 2,957
Pension and other employee benefits 408 378 885 812
Equipment expenses 159 162 315 328
Occupancy expense, net 265 266 513 522
State franchise tax 131 131 272 262
Marketing 117 103 200 173
Intangible amortization 152 128 301 257
Other non-interest expenses 830 750 1,674 1,492
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 3,686 3,379 7,399 6,803
----- ----- ------ ------
INCOME BEFORE INCOME TAXES 2,195 2,106 4,320 4,017
PROVISION FOR INCOME TAXES 619 570 1,218 1,124
----- ----- ------ ------
NET INCOME $1,576 1,536 3,102 2,893
===== ===== ====== ======
Dividends declared per common share $ 0.50 0.45 1.00 .90
Basic earnings per common share $ 0.92 0.87 1.80 1.63
Average shares outstanding (000's) 1,721 1,772 1,727 1,774
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
-2-
LCNB Corp. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(thousands)
(unaudited)
Accumulated
Other Total
Common Retained Treasury Comprehensive Shareholders'Comprehensive
Shares Surplus Earnings Shares Income Equity Income
Balance January 1,2001 $10,560 10,553 24,916 - 281 46,310
Comprehensive Income:
Net income 2,893 2,893 $2,893
Net unrealized gain on
available-for-sale securities
(net of taxes of $461) 895 895 895
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $6) (11) (11) (11)
-----
Total comprehensive income $3,777
=====
Treasury shares purchased (420) (420)
Cash dividends declared (1,594) (1,594)
------ ------ ------ ------ ------ ------
Balance June 30, 2001 $10,560 10,553 26,215 (420) 1,165 48,073
====== ====== ====== ====== ====== ======
Balance January 1,2002 $10,560 10,553 27,714 (516) 1,196 49,507
Comprehensive Income:
Net income 3,102 3,102 $3,102
Net unrealized gain on
available-for-sale securities
(net of taxes of $494) 959 959 959
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $7) (14) (14) (14)
-----
Total comprehensive income $4,047
=====
Treasury shares purchased (1,677) (1,677)
Cash dividends declared (1,721) (1,721)
------ ------ ------ ------ ------ ------
Balance June 30, 2002 $10,560 10,553 29,095 (2,193) 2,141 50,156
====== ====== ====== ====== ====== ======
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-3-
LCNB Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(thousands)
(unaudited)
Six Months Ended
June 30,
------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,102 2,893
Adjustments to reconcile net income to net cash
Depreciation, amortization, and accretion 1,303 1,039
Provision for loan losses 125 110
Deferred income tax benefit (117) (64)
Realized (gain) loss on sales of securities
available for sale (21) (20)
Origination of mortgage loans for sale (2,806) (4,098)
Proceeds from sales of mortgage loans 2,827 4,113
(Increase) decrease in income receivable (85) 48
Increase (decrease) in other liabilities (1,023) (272)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,305 3,749
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 8,075 7,209
Proceeds from maturities of securities available
for sale 9,426 6,716
Purchases of securities available for sale (32,271) (11,279)
Purchases of Federal Home Loan Bank stock - (252)
Net decrease (increase) in loans (3,429) (2,144)
Purchases of premises and equipment (603) (911)
Proceeds from sale of premises and equipment - 188
------ ------
NET CASH USED IN INVESTING ACTIVITIES (18,802) (473)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 18,615 6,062
Net change in short-term borrowings 456 1,268
Proceeds from long-term debt - 2,000
Principal payments on long-term debt (2,026) (25)
Cash dividends paid (1,721) (1,594)
Purchases of treasury shares (1,677) (420)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,647 7,291
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,850) 10,567
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,236 18,262
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $32,386 28,829
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 5,691 8,103
Income taxes paid 1,388 1,200
The accompanying notes to the consolidated financial statements are an integral part of these statements.
-4-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Substantially all of the assets, liabilities and operations of LCNB Corp.
("LCNB") are attributable to its wholly owned subsidiaries, Lebanon Citizens
National Bank ("Lebanon Citizens") and Dakin Insurance Agency, Inc.
("Dakin"). The accompanying unaudited consolidated financial statements
include the accounts of LCNB, Lebanon Citizens, and Dakin.
The statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and the instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited
consolidated financial statements include all adjustments (consisting of
normal, recurring accruals) considered necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Results of operations for the three and six months ended June 30, 2002 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2002. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements,
accounting policies and financial notes thereto included in LCNB's 2001
Form 10-K filed with the Securities and Exchange Commission.
The financial information presented on pages one through ten of this
Form 10-Q has been subject to a review by J.D. Cloud & Co., L.L.P., LCNB's
independent certified public accountants, as described in their report on
page ten.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. LCNB's
capital structure includes no potential for dilution. There are no
outstanding warrants, options or other arrangements that would increase the
number of shares outstanding.
-5-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 3 - LOANS
Major classifications of loans at June 30, 2002 and December 31, 2001 are
as follows (thousands):
June 30, December 31,
2002 2001
-------- -----------
Commercial and industrial $ 36,815 $ 40,486
Commercial, secured by real estate 78,739 72,477
Residential real estate 160,077 165,710
Consumer, excluding credit card 46,797 41,006
Agricultural 1,937 2,020
Credit card 2,584 2,658
Other loans 825 112
Lease financing 1,737 2,088
------- -------
329,511 326,557
Deferred net origination costs 743 608
------- -------
330,254 327,165
Allowance for loan losses (2,000) (2,000)
------- -------
Loans - net $328,254 325,165
======= =======
Mortgage loans sold to and serviced for the Federal Home Loan Mortgage
Corporation ("FHLMC") are not included in the accompanying balance sheets.
The unpaid principal balances of those loans at June 30, 2002 and December
31, 2001 were $24,288,000 and $23,734,000, respectively. Loans sold to the
FHLMC during the three and six months ended June 30, 2002 totaled $534,000
and $2,806,000, respectively, and $3,544,000 and $4,098,000 during the three
and six months ended June 30, 2001, respectively.
-6-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 3 - LOANS (continued)
Changes in the allowance for loan losses were as follows (thousands):
June 30, June 30,
2002 2001
--------- ---------
Balance - beginning of year $2,000 2,000
Provision for loan losses 125 110
Charge offs (146) (134)
Recoveries 21 24
----- -----
Balance - end of period $2,000 2,000
===== =====
Loans accounted for on a nonaccrual basis totaled $210,000 at June 30, 2002,
and consisted of three loans secured by 1-4 family residential properties.
There were no nonaccrual loans at December 31, 2001.
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES
LCNB is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments included commitments to extend credit. They involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheets. Exposure to credit loss in the event
of nonperformance by the other parties to financial instruments for
commitments to extend credit is represented by the contract amount of those
instruments.
LCNB uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Financial
instruments whose contract amounts represent off-balance-sheet credit risk
at June 30, 2002 and December 31, 2001 were as follows (thousands):
June 30, December 31,
2002 2001
--------- ---------
Commitments to extend credit $76,767 56,738
Standby letters of credit 6,461 6,410
-7-
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
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 or other termination
clauses. Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. At June 30, 2002
and December 31, 2001, outstanding guarantees of $1,571,000 and $1,520,000,
respectively, were issued to developers and contractors. These guarantees
generally expire within one year and are fully secured. In addition, LCNB
has an approximate $5 million participation at June 30, 2002 and December 31,
2001 in a letter of credit securing payment of principal and interest on a
bond issue. This letter of credit will expire July 15, 2005, and is secured
by an assignment of rents and the underlying real property.
LCNB evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary, is based on
management's credit evaluation of the borrower. Collateral held varies, but
may include accounts receivable; inventory; property, plant and equipment;
residential realty; and income-producing commercial properties.
LCNB and its subsidiaries are parties to various claims and proceedings
arising in the normal course of business. Management, after consultation
with legal counsel, believes that the liabilities, if any, arising from such
proceedings and claims will not be material to the consolidated financial
position or results of operations.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENT
On January 1, 2002, the Company adopted Statement of Financial Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
provides that goodwill shall not be amortized but should be tested for
impairment on an annual basis, using criteria prescribed in the statement.
If the carrying amount of goodwill exceeds its implied fair value, as
recalculated, an impairment loss equal to the excess shall be recognized.
Recognized intangible assets other than goodwill should be amortized over
their useful lives and reviewed for impairment in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (superseded by SFAS No. 144, which substantially
carries over the applicable provisions of SFAS No. 121).
The Company's intangible assets at June 30, 2002 are classified as
"intangible assets other than goodwill" and primarily represent the
unamortized intangible related to the Company's 1997 acquisition of three
branch offices from another bank. At June 30, 2002, the carrying amount of
this intangible was $3.3 million, net of accumulated amortization of $2.7
million, and is being amortized on a straight line basis over ten years in
accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions," which was not superseded by SFAS No. 142.
-8-
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENT (continued)
On May 10, 2002, the Financial Accounting Standards Board issued an exposure
draft titled "Acquisitions of Certain Financial Institutions, " which amends
certain provisions of SFAS No. 72. If adopted, the proposal will remove
acquisitions of financial institutions from the scope of SFAS No. 72 and will
require that such acquisitions be accounted for in accordance with SFAS No.
141, "Business Combinations." If the acquisition meets the definition of a
business combination, it shall be accounted for by the purchase method in
accordance with the provisions of SFAS No. 141. Any goodwill that results
will be accounted for in accordance with the provisions of SFAS No. 142. If
the acquisition does not meet the definition of a business combination, the
cost of the assets acquired shall be allocated to the individual assets
acquired and liabilities assumed based on their relative fair values and
shall not give rise to goodwill. In addition, this proposed statement would
amend SFAS No. 144 to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and borrower-
relationship intangible assets and credit-cardholder intangible assets.
Consequently, those intangible assets would be subject to the same
undiscounted cash flow recoverability tests and impairment loss recognition
and measurement provisions that SFAS No. 144 requires for long-term tangible
assets and other finite-lived intangible assets that are held and used.
Existing unidentifiable intangible assets, as that term is defined in SFAS
No. 72, previously recognized under the provisions of SFAS No. 72 shall
continue to be amortized (consistent with the existing clarifying provisions
of Emerging Issues Task Force Topic D-100) unless:
(a) the transaction in which the intangible asset arose met the
definition of a business combination, and
(b) intangible assets acquired in the transaction were recognized apart
from the unidentifiable intangible asset and those intangible
assets were accounted for separately from the unidentifiable
intangible asset after the date of acquisition.
Management does not believe these criteria have been met and intends to
continue amortizing the intangible over ten years, subject to periodic review
of its useful life.
-9-
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders
LCNB Corp. and subsidiaries
Lebanon, Ohio
We have reviewed the accompanying consolidated balance sheet of LCNB Corp.
and subsidiaries as of June 30, 2002, the related consolidated statements of
income for each of the three-month and six-month periods ended June 30, 2002
and 2001, and the related consolidated statements of cash flows and
shareholders' equity for each of the six-month periods ended June 30, 2002 and
2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with U.S. generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements
for them to be in conformity with U.S. generally accepted accounting
principles.
We previously audited, in accordance with U.S. generally accepted auditing
standards, the consolidated balance sheet as of December 31, 2001 (presented
herein), and the related consolidated statements of income, shareholders'
equity, and cash flows for the year then ended (not presented herein), and
in our report dated January 11, 2002, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 2001, is fairly stated in all material respects.
/s/ J.D. Cloud & Co. L.L.P.
Cincinnati, Ohio
July 24, 2002
-10-
LCNB Corp. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
Certain matters disclosed herein may be deemed to be forward-looking
statements that involve risks and uncertainties, including regulatory policy
changes, interest rate fluctuations, loan demand, loan delinquencies and
losses, and other risks. Actual strategies and results in future time periods
may differ materially from those currently expected. Such forward-looking
statements represent management's judgment as of the current date. The
Company disclaims, however, any intent or obligation to update such forward-
looking statements.
RESULTS OF OPERATIONS
LCNB earned $1,576,000, or $0.92 per share, for the three months ended
June 30, 2002 compared to $1,536,000, or $0.87 per share, for the three
months ended June 30, 2001. The return on average assets (ROAA) was 1.29% and
the return on average equity (ROAE) was 12.73% for the second quarter of 2002,
compared with an ROAA of 1.26% and an ROAE of 12.25% for the second quarter of
2001.
LCNB earned $3,102,000, or $1.80 per share, during the first six months of
2002 compared to $2,893,000, or $1.63 per share, for the first six months
of 2001. The ROAA and ROAE for the first six months of 2002 were 1.29% and
12.66%, respectively. The comparable ratios for the first six months of 2001
were 1.26% and 12.25%, respectively.
NET INTEREST INCOME
LCNB's primary source of earnings is net interest income, which is the
difference between earnings from loans and other investments and interest paid
on deposits and other liabilities. The following table presents, for the
three and six months ended June 30, 2002 and 2001, average balances for
interest-earning assets and interest-bearing liabilities, the income or
expense related to each item, and the resultant average yields earned or rates
paid.
-11-
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
(Dollars in thousands)
Interest-earning Assets:
Average balance (1) $460,138 437,510 454,112 429,782
Interest income (2) 7,768 8,427 15,416 16,877
Average rate 6.77% 7.73% 6.85% 7.92%
Interest-bearing Liabilities:
Average balance 381,529 367,632 376,205 361,576
Interest expense 2,731 3,812 5,446 7,903
Average rate 2.87% 4.16% 2.92% 4.41%
Net interest income 5,037 4,615 9,970 8,974
Net interest margin on a
taxable equivalent basis (3) 4.39% 4.23% 4.43% 4.21%
(1) Includes nonaccrual loans, if any.
(2) Income from tax-exempt securities is included in interest income on a
taxable basis. Interest income has been divided by a factor comprised
of the complement of the incremental tax rate of 34%.
(3) The net interest margin is the taxable-equivalent net interest income
divided by average interest-earning assets.
THREE MONTHS ENDED JUNE 30, 2002 VS. 2001. The following table presents the
changes in taxable-equivalent basis interest income and expense for each major
category of interest-earning assets and interest-bearing liabilities and the
amount of change attributable to volume and rate changes for the three months
ended June 30, 2002 as compared to the comparable period in 2001. Changes not
solely attributable to rate or volume have been allocated to volume and rate
changes in proportion to the relationship of absolute dollar amounts of the
changes in each.
-12-
Three Months Ended
June 30,
2002 vs 2001
--------------------------
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-earning Assets
Loans $ (144) (557) (701)
Federal funds sold (4) (155) (159)
Federal Reserve Bank stock - (1) (1)
Federal Home Loan Bank stock 3 (9) (6)
Investment securities
Taxable 233 (120) 113
Nontaxable 173 (78) 95
------ ----- -----
Total interest income 261 (920) (659)
Interest-bearing Liabilities
Deposits 109 (1,212) (1,103)
Short-term borrowings (3) (2) (5)
Long-term debt 52 (25) 27
------ ----- -----
Total interest expense 158 (1,239) (1,081)
------ ----- -----
Net interest income $ 103 319 422
====== ===== =====
Net interest income on a fully tax equivalent basis for the three months ended
June 30, 2002 totaled $5,037,000, an increase of $422,000 from the comparable
period in 2001. Total interest income decreased $659,000 and was more than
offset by a decrease in total interest expense of $1,081,000. The decreases
in both interest income and expense were primarily a result of decreases in
the average rate earned on loans and investments and the average rate paid for
deposits and borrowings. The rate decreases reflect a 475 basis point (a
basis point equals 0.01%) decrease in the intended federal funds rate, as set
by the Federal Reserve Board, during 2001.
The net interest margin (net interest income divided by average total earning
assets) is a measure of the revenue generated by a financial institution's
earning assets, after deducting interest expense. The net interest margin for
the second quarter of 2002 was 4.39%, as compared to 4.23% for the second
quarter, 2001. The net interest margin and net interest income increased due
to rates paid for deposits and other borrowings decreasing more rapidly than
rates earned on loans and other investments.
-13-
The decrease in total interest income was primarily due to a 96 basis point
reduction in the average rate earned on earning assets, from 7.73% for the
second quarter of 2001 to 6.77% for the second quarter of 2002. This decrease
was partially offset by a $22.6 million increase in average total earning
assets. Average investment securities increased $29.9 million, partially
offset by a $7.1 million decrease in average loans. Average loans decreased
primarily because of payoffs from loan refinances and sales of new fixed-rate
residential loans to the Federal Home Loan Mortgage Corporation.
The significant decrease in total interest expense was due to a 129 basis
point decrease in the average rate paid, slightly offset by a $13.9 million
increase in average interest-bearing liabilities. Average interest-bearing
deposits increased $10.9 million and average long-term debt increased $3.3
million. The deposit increase was primarily in regular savings accounts,
reflecting customer prefrence for highly liquid, short-term investment
products during the current rate cycle. The increase in long-term debt
reflects additional borrowings of $4.0 from the Federal Home Loan Bank
during December, 2001 to lock in additional long-term funding at current,
historically low market rates, offset by the maturation of a $2.0 million
advance in June, 2002.
SIX MONTHS ENDED JUNE 30, 2002 VS. 2001. The following table presents the
changes in taxable-equivalent basis interest income and expense for each major
category of interest-earning assets and interest-bearing liabilities and the
amount of change attributable to volume and rate changes for the six months
ended June 30, 2002 as compared to the comparable period in 2001.
Six Months Ended
June 30,
2002 vs 2001
--------------------------
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-earning Assets
Loans $ (330) (1,206) (1,536)
Federal funds sold 122 (313) (191)
Federal Reserve Bank stock - (1) (1)
Federal Home Loan Bank stock 6 12 18
Investment securities
Taxable 385 (283) 102
Nontaxable 301 (154) 147
------ ----- -----
Total interest income 484 (1,945) (1,461)
-14-
Six Months Ended
June 30,
2002 vs 2001
--------------------------
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-bearing Liabilities
Deposits 210 (2,747) (2,537)
Short-term borrowings 1 (13) (12)
Long-term debt 145 (53) 92
------ ----- -----
Total interest expense 356 (2,813) (2,457)
------ ----- -----
Net interest income $ 128 868 996
====== ===== =====
Net interest income on a fully tax equivalent basis for the first half of 2002
totaled $9,970,000, an increase of $996,000 from the first half of 2001.
Total interest income decreased $1,461,000 and was more than offset by a
decrease in total interest expense of $2,457,000.
The decrease in total interest income was primarily due to a 107 basis point
decrease in the average rate earned on earning assets, from 7.92% for the
first half of 2001 to 6.85% for the first half of 2002. This decrease was
partially offset by a $24.3 million increase in average total earning assets.
Average investment securities increased $24.8 million, partially offset by a
$8.0 million decrease in average loans. Average loans decreased primarily
because of payoffs from loan refinances and sales of new fixed-rate
residential loans to the Federal Home Loan Mortgage Corporation.
The decrease in total interest expense was due to a 149 basis point decrease
in the average rate paid, slightly offset by a $14.6 million increase in
average interest-bearing liabilities. Average interest-bearing deposits
increased $10.0 million and average long-term debt increased $4.6 million
for substantially the same reasons discussed in the previous section.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The total provision for loan losses is determined based upon management's
evaluation as to the amount needed to maintain the allowance for credit losses
at a level considered appropriate in relation to the risk of losses inherent
in the portfolio. The total loan loss provision and the other changes in the
allowance for loan losses are shown below.
-15-
Quarter Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(In thousands)
Balance, beginning of period $2,000 2,000 2,000 2,000
----- ----- ----- -----
Charge-offs 78 70 146 134
Recoveries 7 17 21 24
----- ----- ----- -----
Net charge-offs 71 53 125 110
----- ----- ----- -----
Provision for loan losses 71 53 125 110
----- ----- ----- -----
Balance, end of period $2,000 2,000 2,000 2,000
====== ====== ====== ======
Charge-offs for the first half of 2002 and 2001 are attributable to consumer
loans, including $23,000 in credit card charge-offs for both 2002 and 2001.
The following table sets forth information regarding the past due, non-accrual
and renegotiated loans of the Bank at the dates indicated:
June 30 December 31
2002 2001
-------- -----------
(In thousands)
Loan accounted for on
non-accrual basis $210 -
Accruing loans which are
past due 90 days or more 148 146
Renegotiated loans - -
--- ---
Total $358 146
=== ===
The non-accrual loans at June 30, 2002, consist of three loans secured by 1-4
family residential property.
Accruing loans which are past due 90 days or more at June 30, 2002 and
December 31, 2001 consist of installment loans and loans secured by 1-4
family residential property.
-16-
NON-INTEREST INCOME
THREE MONTHS ENDED JUNE 30, 2002 VS. 2001. Total non-interest income for the
second quarter of 2002 was $33,000 or 3.0% greater than for the second quarter
of 2001 primarily due to increases in trust income, service charges and fees,
and net gains from sales of securities, all partially offset by a decrease in
insurance agency income. Total service charges and fees increased primarily
due to an increase in check card fees caused by increased usage of the cards
by LCNB customers. Insurance agency income decreased primarily due to a
decrease in the dollar amount of new life insurance policies written.
SIX MONTHS ENDED JUNE 30, 2002 VS. 2001. Total non-interest income for the
first six months of 2002 was $17,000 or 0.7% less than for the comparable
period in 2001 due to a $168,000 decrease in insurance agency income. This
decrease was mitigated in part by increases in trust income and service
charges and fees, substantially for the same reasons mentioned in the previous
section. Insurance agency income decreased due to the absence of $189,000 in
contingency commissions received during the first quarter of 2001, but not in
2002. Contingency commissions are profit-sharing arrangements on property and
casualty policies between the originating agency and the underwriter and are
generally based on underwriting results and written premium. As such, the
amount received each year can vary significantly depending on loss experience.
NON-INTEREST EXPENSE
THREE MONTHS ENDED JUNE 30, 2002 VS. 2001. Total non-interest expense
increased $307,000 or 9.1% during the second quarter, 2002 compared with the
second quarter, 2001 primarily due to increases in salaries and wages, pension
and other employee benefits, and other non-interest expenses. Salaries and
wages increased $163,000 or 11.2% due to normal pay increases and the addition
of several new employees. A small increase in the number of staff was
necessary because of the opening of a full-service office in Hamilton, Ohio in
September, 2001. Pension and other employee benefits increased $30,000 or
7.9% primarily due to increased health insurance costs. Other non-interest
expenses increased $80,000 or 10.7% due to:
a. a $35,000 increase in computer maintenance costs due to new hardware
and software required for a conversion to a new operating system; and
b. a $38,000 increase in automatic teller machine (ATM) expenses due to
increased usage of ATMs, an increase in fees paid the ATM processor,
and the cost for a new maintenance contract on ATMs.
SIX MONTHS ENDED JUNE 30, 2002 VS. 2001. Total non-interest expense increased
$596,000 or 8.8% during the first half, 2002 compared with the first half of
2001 primarily due to increases in salaries and wages, pension and other
employee benefits, and other non-interest expenses. Salaries and wages
increased $282,000 or 9.5% for the same reasons mentioned in the previous
section. Pension and other employee benefits increased $73,000 or 9.0%
primarily due to increased health insurance costs and to increased Social
Security and Medicare matching as a result of increased salaries and wages.
Other non-interest expenses increased $182,000 or 12.2% primarily due to a
$64,000 increase in computer maintenance costs and a $78,000 increase in
automatic teller machine (ATM) expenses for the same reasons mentioned in the
previous section.
-17-
FINANCIAL CONDITION
The following table highlights the changes in the balance sheet. The analysis
uses quarterly averages to give a better indication of balance sheet trends.
CONDENSED QUARTERLY AVERAGE BALANCE SHEETS
June 30, March 31, December 31,
2002 2002 2001
(In thousands)
ASSETS
Interest-earning:
Federal funds sold $ 22,329 24,911 24,172
Investment securities 111,464 100,471 90,746
Loans 326,345 322,636 332,340
------- ------- -------
Total interest-earning assets 460,138 448,018 447,258
Noninterest-earning:
Cash and due from banks 13,419 14,195 13,291
All other assets 19,590 19,562 19,323
Allowance for credit losses (2,002) (2,002) (2,001)
------- ------- -------
Total assets $491,145 479,773 477,871
======= ======= =======
LIABILITIES
Interest-bearing:
Interest-bearing deposits $369,410 357,373 356,127
Short-term borrowings 514 1,148 1,296
Long-term debt 11,605 12,300 9,226
------- ------- -------
Total interest-bearing liabilities 381,529 370,821 366,649
Noninterest-bearing:
Noninterest-bearing deposits 57,363 57,203 57,953
All other liabilities 2,627 2,594 3,273
------- ------- -------
Total liabilities 441,519 430,618 427,875
SHAREHOLDERS' EQUITY 49,626 49,155 49,996
------- ------- -------
Total liabilities and shareholders'
equity $491,145 479,773 477,871
======= ======= =======
-18-
Total average assets increased approximately $11.4 million or 2.4% during the
second quarter, 2002 when compared to the first quarter, 2002. Substantially
all of the growth, approximately $11.0 million, was in investment securities.
Average loans increased $3.7 million. The increase in average loans was
primarily in the installment, Homeline (secured residential line of credit),
and commercial loan portfolios; the real estate loan portfolio decreased $3.7
million on an average basis. The decrease was due to payoffs on loans
refinanced combined with the sale of $534,000 in new fixed-rate mortgage loans
during the second quarter. With limited opportunities to invest deposit
growth in the loan portfolio, management purchased additional investment
securities available for sale, which can readily be sold if the funds should
be needed for future loan growth.
Total average interest-bearing liabilities for the second quarter, 2002, were
$10.7 million or 2.9% greater than for the first quarter, 2002. The growth
was in interest-bearing deposits, which increased $12.0 million on an average
basis - $7.0 of the growth was in highly liquid savings and NOW account
products and $5.0 million was in certificates of deposit and IRA accounts.
Management believes the growth in the savings products reflects investor
preference for short-term, highly liquid investments during the current
economic cycle. This means much of the recent savings deposit growth could
be quickly withdrawn if interest rates increase. Management is attempting
to lock in a portion of these funds by offering special rates and terms on
selected certificate of deposit products. The $695,000 decrease in average
long-term debt reflects the maturation and pay-off of a $2.0 million advance
at the beginning of June, 2002.
ASSETS UNDER MANAGEMENT
In addition to assets recorded in its balance sheet, LCNB, as a fiduciary,
manages assets for customers and investors as a part of its normal operations.
The following table shows balances for the different types of assets managed.
June 30, December 31,
2002 2001
---------- ----------
(In thousands)
Total consolidated assets
recorded on the LCNB Corp.
consolidated balance sheet $497,665 480,435
Assets managed by the
Trust Department, at fair market value 109,258 109,456
Mortgage loans serviced for others 24,288 23,734
Business cash management, at fair market value 17,452 26,163
Brokerage accounts, at fair market value 1,671 -
------- -------
Total assets managed $650,334 639,788
======= =======
-19-
CAPITAL
Lebanon Citizens and LCNB are required by regulators to meet certain
minimum levels of capital adequacy. These are expressed in the form of certain
ratios. Capital is separated into Tier 1 capital (essentially shareholders'
equity less goodwill and other intangibles) and Tier 2 capital (essentially
the allowance for loan losses limited to 1.25% of risk-weighted assets). The
first two ratios, which are based on the degree of credit risk in LCNB's
assets, provide for weighting assets based on assigned risk factors and
include off-balance sheet items such as loan commitments and stand-by letters
of credit. The ratio of Tier 1 capital to risk-weighted assets must be at
least 4.0% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital)
to risk-weighted assets must be at least 8.0%. The capital leverage ratio
supplements the risk-based capital guidelines. Banks are required to maintain
a minimum ratio of Tier 1 capital to adjusted quarterly average total assets
of 3.0%. A summary of the regulatory capital and capital ratios of LCNB
follows:
At At
June 30, December 31,
2002 2001
(Dollars in thousands)
Regulatory Capital:
Shareholders' equity $50,156 49,507
Goodwill and other intangibles (3,428) (3,729)
Net unrealized securities gains (2,193) (1,196)
------ ------
Tier 1 risk-based capital 44,535 44,582
Eligible allowance for loan losses 2,000 2,000
------ ------
Total risk-based capital $46,535 46,582
======= ======
Capital Ratios:
Total risk-based 14.84% 15.40%
Tier 1 risk-based 14.20% 14.74%
Leverage 9.17% 9.46%
Minimum Required Capital Ratios:
Total risk-based 8.00% 8.00%
Tier 1 risk-based 4.00% 4.00%
Tier 1 leverage 3.00% 3.00%
-20-
On April 17, 2001, LCNB's Board of Directors authorized three separate stock
repurchase programs, two phases of which continue. The shares purchased will
be held for future corporate purposes.
Under the "Market Repurchase Program" LCNB will purchase up to 50,000 shares
of its stock through market transactions with a selected stockbroker. Through
June 30, 2002, 7,565 shares had been purchased under this program.
The "Private Sale Repurchase Program" is available to shareholders who wish
to sell large blocks of stock at one time. Because LCNB's stock is not widely
traded, a shareholder releasing large blocks may not be able to readily sell
all shares through normal procedures. Purchases of blocks will be considered
on a case-by-case basis and will be made at prevailing market prices. A total
of 46,897 shares had been purchased under this program at June 30, 2002.
LIQUIDITY
LCNB depends on dividends from its subsidiaries for the majority of its liquid
assets, including the cash needed to pay dividends to its shareholders.
National banking law limits the amount of dividends Lebanon Citizens may pay
to the sum of retained net income, as defined, for the current year plus
retained net income for the previous two years. Prior approval from the
Office of the Comptroller of the Currency, Lebanon Citizens primary regulator,
would be necessary for Lebanon Citizens to pay dividends in excess of this
amount. In addition, dividend payments may not reduce capital levels below
minimum regulatory guidelines. Management believes Lebanon Citizens will be
able to pay anticipated dividends to LCNB without needing to request approval.
Liquidity is the ability to have funds available at all times to meet the
commitments of LCNB. Asset liquidity is provided by cash and assets which
are readily marketable or pledgeable or which will mature in the near future.
Liquid assets include cash, federal funds sold and securities available for
sale. At June 30, 2002, LCNB liquid assets amounted to $146.9 million or
29.5% of total gross assets, an increase from $132.8 million or 27.7% at
December 31,2001.
Liquidity is also provided by access to core funding sources, primarily core
depositors in the bank's trade area. Approximately 90.0% of total deposits
at June 30, 2002 were "core" deposits. Core deposits, for this purpose, are
defined as total deposits less public funds and certificates of deposit
greater than $100,000. LCNB does not solicit brokered deposits as a funding
source.
Secondary sources of liquidity include LCNB's ability to sell loan
participations, borrow funds from the Federal Home Loan Bank, and purchase
federal funds. Management closely monitors the level of liquid assets
available to meet ongoing funding needs. It is management's intent to
maintain adequate liquidity so that sufficient funds are readily available
at a reasonable cost. LCNB experienced no liquidity or operational problems
as a result of the current liquidity levels.
-21-
In June, 2001, LCNB signed a contract with Jack Henry & Associates for
replacement of LCNB's core processing system, including computer hardware and
software. Conversion from the current system to the new system is tentatively
scheduled for late 2002 through early 2003. Management believes the new
system will allow LCNB to enhance operating efficiencies and improve customer
service. Anticipated software and hardware costs total approximately
$1,086,000, which will be capitalized and charged to depreciation expense over
the estimated lives of the assets, primarily seven years. Costs of converting
data files from the current to the new system and costs of training employees
on the new system are expected to total approximately $194,000 during 2002 and
$31,000 during 2003 and will be expensed as incurred. It is anticipated the
associated costs will be funded by liquidating short-term assets.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets. " SFAS No. 142
provides that goodwill shall not be amortized but should be tested for
impairment on an annual basis, using criteria prescribed in the statement.
If the carrying amount of goodwill exceeds its implied fair value, as
recalculated, an impairment loss equal to the excess shall be recognized.
Recognized intangible assets other than goodwill should be amortized over
their useful lives and reviewed for impairment in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (superseded by SFAS No. 144, which substantially
carries over the applicable provisions of SFAS No. 121).
The Company's intangible assets at June 30, 2002 are classified as
"intangible assets other than goodwill" and primarily represent the
unamortized intangible related to the Company's 1997 acquisition of three
branch offices from another bank. At June 30, 2002, the carrying amount of
this intangible was $3.3 million, net of accumulated amortization of $2.7
million, and is being amortized on a straight line basis over ten years in
accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions, " which was not superseded by SFAS No. 142.
On May 10, 2002, the Financial Accounting Standards Board issued an exposure
draft titled "Acquisitions of Certain Financial Institutions, " which amends
certain provisions of SFAS No. 72. If adopted, the proposal will remove
acquisitions of financial institutions from the scope of SFAS No. 72 and will
require that such acquisitions be accounted for in accordance with SFAS No.
141, "Business Combinations." If the acquisition meets the definition of a
business combination, it shall be accounted for by the purchase method in
accordance with the provisions of SFAS No. 141. Any goodwill that results
will be accounted for in accordance with the provisions of SFAS No. 142. If
the acquisition does not meet the definition of a business combination, the
cost of the assets acquired shall be allocated to the individual assets
acquired and liabilities assumed based on their relative fair values and
shall not give rise to goodwill. In addition, this proposed statement would
amend SFAS No. 144 to include in its scope long-term customer-relationship
-22-
intangible assets of financial institutions such as depositor- and borrower-
relationship intangible assets and credit-cardholder intangible assets.
Consequently, those intangible assets would be subject to the same
undiscounted cash flow recoverability tests and impairment loss recognition
and measurement provisions that SFAS No. 144 requires for long-term tangible
assets and other finite-lived intangible assets that are held and used.
Existing unidentifiable intangible assets, as that term is defined in SFAS
No. 72, previously recognized under the provisions of SFAS No. 72 shall
continue to be amortized (consistent with the existing clarifying provisions
of Emerging Issues Task Force Topic D-100) unless:
(c) the transaction in which the intangible asset arose met the
definition of a business combination, and
(d) intangible assets acquired in the transaction were recognized apart
from the unidentifiable intangible asset and those intangible
assets were accounted for separately from the unidentifiable
intangible asset after the date of acquisition.
Management does not believe these criteria have been met and intends to
continue amortizing the intangible over ten years, subject to periodic review
of its useful life.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
For a discussion of LCNB's asset and liability management policies and gap
analysis for the year ended December 31, 2000 see Item 7A, Quantitative and
Qualitative Disclosures about Market Risks, in the recently filed Form 10-K
for the year ended December 31, 2001. There have been no material changes in
LCNB's market risks, which for LCNB is primarily interest rate risk.
-23-
PART II. OTHER INFORMATION
LCNB Corp. and Subsidiaries
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults by the Company on its Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -
On April 16, 2002, the Annual Meeting of the shareholders of
LCNB Corp. was held. Two items were voted on by the shareholders of
LCNB:
1. Election of four Class III directors to serve until the 2005
Annual Meeting, and
2. Approval and adoption of the LCNB Corp. Ownership Incentive
Plan.
The following members of the Board of Directors of LCNB Corp.
were elected as Class III directors by the votes indicated:
Director For Against Abstain
-------- ------------- ------- -------
George L. Leasure 1,470,413.501 0 580
William H. Kaufman 1,470,413.501 0 580
James B. Miller 1,465,253.501 0 5,740
Howard E. Wilson 1,468,653.501 0 2,340
The following Class I and III members of the Board of Directors
have terms expiring in 2003 and 2004, respectively:
Class I: Stephen P. Wilson, David S. Beckett, and Robert C.
Cropper
Class II: Corwin M. Nixon, Kathleen Porter Stolle, and Marvin E.
Young
The LCNB Corp. Ownership Incentive Plan was approved by the votes
indicated:
For Against Abstain
------------- ---------- ---------
1,445,425.318 20,377.115 5,191.068
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K - None
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LCNB Corp.
Registrant
Date: July 29, 2002 /s/Steve P. Foster
------------------------
Steve P. Foster
Executive Vice President
and Chief Financial Officer
-25-