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
(MARK ONE)
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934 for the fiscal year ended December 31, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934 for the Transition period from to
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Commission file number 000-26121
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LCNB Corp.
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(Exact name of registrant as specified in its charter)
OHIO 31-1626393
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2 North Broadway, Lebanon, Ohio 45036
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(Address of principal executive offices) (Zip Code)
(513) 932-1414
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
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Securities registered pursuant to 12(g) of the Exchange Act:
Common stock, No Par Value
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(Title of Class)
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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405) of this chapter is not contained
herein, and will not be contained, to the best of the 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. ( )
The issuer's common shares are not traded on any securities exchange and are
not quoted by a national quotation service. Management is aware of a sale of
the issuer's shares for $54.00 per share on February 25, 2003. Based upon
such price, the aggregate market value of the issuer's shares held by
nonaffiliates was $77,665,770.
As of February 27, 2003, 1,720,593 common shares were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement included in the Notice of Annual Meeting of
Shareholders to be held April 15, 2003, dated March 10, 2003, are
incorporated by reference into Part III.
LCNB Corp.
For the year ended December 31, 2002
TABLE OF CONTENTS
Page
PART I.
Item 1. Business . . . . . . . . . . . . . . . . . . . . . 3-16
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .17
Item 3. Legal proceedings. . . . . . . . . . . . . . . . . . .18
Item 4. Submission of matters to a vote of security holders. .18
Part II.
Item 5. Market for registrant's common equity and
related stockholder matters . . . . . . . . . . . . .19
Item 6. Selected financial data. . . . . . . . . . . . . . 19-20
Item 7. Management's discussion and analysis . . . . . . . 21-37
Item 7A. Quantitative and qualitative disclosures about
market risk . . . . . . . . . . . . . . . . . . . 38-40
Item 8. Financial statements and supplementary data. . . . . .41
Item 9. Changes in and disagreements with accountants
on accounting and financial disclosure. . . . . . . .41
Part III.
Item 10. Directors and executive officers of the registrant . .42
Item 11. Executive compensation. . . . . . . . . . . . . . . . 42
Item 12. Security ownership of certain beneficial owners
and management. . . . . . . . . . . . . . . . . . . .42
Item 13. Certain relationships and related transactions . . . .42
Item 14. Controls and procedures. . . . . . . . . . . . . . . .42
PART IV.
Item 15. Exhibits, financial statements and Reports on 8-K . . 43
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
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Item 1. Business
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.
LCNB Corp. disclaims, however, any intent or obligation to update such
forward-looking statements.
DESCRIPTION OF LCNB CORP.'S BUSINESS
General Description
LCNB Corp. ("LCNB"), an Ohio corporation formed in December, 1998, is a
financial holding company headquartered in Lebanon, Ohio. Through its
subsidiaries, Lebanon Citizens National Bank ("Lebanon Citizens") and Dakin
Insurance Agency, Inc. ("Dakin"), LCNB is engaged in the commercial banking
and insurance agency businesses.
The predecessor of LCNB, Lebanon Citizens, was formed as a national banking
association in 1877. On May 19, 1999, Lebanon Citizens became a wholly owned
subsidiary of LCNB. Lebanon Citizens' main office is located in Warren
County, Ohio and 17 branch offices are located in Warren, Butler, Clinton,
Clermont, and Hamilton Counties, Ohio. In addition, Lebanon Citizens
operates 29 automated teller machines ("ATMs") in its market area.
Lebanon Citizens is a full service community bank offering a wide range of
commercial and personal banking services. Deposit services include checking
accounts, NOW accounts, savings accounts, Christmas and vacation savings,
money market deposit accounts, Classic 50 accounts (a Senior Citizen
program), individual retirement accounts, certificates of deposit, and
overdraft protection. Deposits of Lebanon Citizens are insured up to
applicable limits by the Bank Insurance Fund, which is administered by the
Federal Deposit Insurance Corporation.
Loan products offered include commercial loans, commercial and residential
real estate loans, construction loans, various types of consumer loans, Small
Business Administration loans, Visa and MasterCard credit cards, and
commercial leases. Lebanon Citizens' residential mortgage lending activities
consist primarily of loans for purchasing or refinancing personal residences,
home equity lines of credit, and loans for commercial or consumer purposes
secured by residential mortgages. Consumer lending activities include
automobile, boat, home improvement and personal loans. Lebanon Citizens also
offers indirect automobile financing through various automotive dealers.
-3-
The Trust and Investment Management Division of Lebanon Citizens performs
complete trust administrative functions and offers agency and trust services,
retirement savings products, and mutual fund investment products to
individuals, partnerships, corporations, institutions and municipalities.
Security brokerage services were first offered by Lebanon Citizens in April,
2002 through arrangements with UVEST Investment Services, Inc., a registered
broker/dealer. A licensed broker offers a full range of investment services
and products, including financial needs analysis, mutual funds, securities
trading, annuities, and life insurance.
Other services offered include safe deposit boxes, night depositories, U.S.
savings bonds, travelers' checks, money orders, cashiers checks, bank-by-
mail, ATMs, cash and transaction services, debit cards, wire transfers,
electronic funds transfer, utility bill collections, notary public service,
personal computer based cash management services, 24 hour telephone banking,
PC Internet banking, and other services tailored for both individuals and
businesses.
Lebanon Citizens is not dependent upon any one significant customer or
specific industry. Business is not seasonal to any material degree.
The address of the main office of Lebanon Citizens is 2 North Broadway,
Lebanon, Ohio 45036; telephone (513) 932-1414. Its primary market area
encompasses portions of Warren, Butler, Clinton, Clermont and Hamilton
Counties.
Dakin, an Ohio corporation, has been an independent insurance agency in
Lebanon, Ohio since 1876. Its primary office is at 24 East Mulberry Street,
Lebanon, Ohio 45036; telephone (513) 932-4010. Since being acquired by LCNB
on April 11, 2000, Dakin has opened additional offices in Lebanon Citizens'
Columbus Avenue, Waynesville, Springboro, Maineville, Goshen, and Wilmington
offices. Dakin is engaged in selling and servicing personal and commercial
insurance products and annuity products and is regulated by the Ohio
Department of Insurance. During 2002, Dakin expanded its offerings in life,
health, and long-term care insurance products when it hired an agent
specializing in these services.
Effective September 1, 2002, Dakin purchased substantially all of the
insurance renewal rights and client list of an insurance agency located in
Dayton, Ohio. As part of the purchase, Dakin will receive all commission
income received after September 1, 2002, and assignments of agency agreements
that the agency has with insurers with whom Dakin does not already have an
agreement. In consideration for the assets purchased, Dakin will pay to the
seller certain percentages of the commissions received over a four-year
period from the agency's customer base.
-4-
Competition
Lebanon Citizens faces strong competition both in making loans and attracting
deposits. The deregulation of the banking industry and the wide spread
enactment of state laws that permit multi-bank holding companies as well as
the availability of nationwide interstate banking has created a highly
competitive environment for financial services providers. Lebanon Citizens
competes with other national and state banks, savings and loan associations,
credit unions, finance companies, mutual funds, insurance companies,
brokerage and investment banking companies and other financial intermediaries
operating in its market and elsewhere, many of whom have substantially larger
financial and managerial resources.
Lebanon Citizens seeks to minimize the competitive effect of other financial
corporations through a community banking approach that emphasizes direct
customer access to Lebanon Citizens' president and other officers in an
environment conducive to friendly, informed and courteous personal services.
Management believes that Lebanon Citizens is well positioned to compete
successfully in its primary market area. Competition among financial
institutions is based upon interest rates offered on deposit accounts,
interest rates charged on loans and other credit and service charges, the
quality and scope of the services rendered, the convenience of the banking
facilities and, in the case of loans to commercial borrowers, relative
lending limits.
Management believes the commitment of Lebanon Citizens to personal service,
innovation, and involvement in the communities and primary market areas it
serves, as well as their commitment to quality community banking service, are
factors that contribute to its competitive advantage.
Dakin competes with numerous other independent and exclusive insurance
agencies (an exclusive agent sells for only one insurance company) and with
insurance companies that sell direct to individuals and businesses without
using agents. Dakin competes by representing high quality insurance
companies, providing personalized and responsive service to its clients, and
providing convenient office locations.
Supervision and Regulation
The Sarbanes-Oxley Act of 2002 ("SOA") was signed into law by President
George W. Bush on July 30, 2002. The purpose of SOA is to strengthen
accounting oversight and corporate accountability by enhancing disclosure
requirements, increasing accounting and auditor regulation, creating new
federal crimes, and increasing penalties for existing federal crimes. SOA
will directly impact publicly traded companies, certified public accountant
firms auditing public companies, attorneys who work for public companies or
have public companies as clients, brokerage firms, investment bankers, and
financial analysts who work for brokerage firms or investment bankers. Key
provisions affecting LCNB include:
-5-
certification of financial reports by chief executive officers ("CEOs")
and chief financial officers ("CFOs"), who will be responsible for
designing and monitoring internal controls to ensure that material
information relating to the issuer and its consolidated subsidiaries is
made known to the certifying officers by others within the company;
accelerated reporting of stock trades on Form 4 by directors and
executive officers;
disgorgement requirements of incentive pay or stock-based compensation
profits received within twelve months of the release of financial
statements if the company is later required to restate those financial
statements due to material noncompliance with any financial reporting
requirement that resulted from misconduct;
disclosing in a company's periodic reports if it has adopted a code of
ethics for its CFO and principal accounting officer or controller and
immediate disclosure of any change in or waiver of this code of ethics;
disclosing in a company's periodic reports if at least one member of the
audit committee is a "financial expert," as that term is defined by the
Securities and Exchange Commission ("SEC"); and
new duties and responsibilities for a company's audit committee,
including independence requirements, the direct responsibility to appoint
the outside auditing firm and to provide oversight of the auditing firm's
work, and a requirement to establish procedures for the receipt,
retention, and treatment of complaints from a company's employees
regarding questionable accounting, internal control, or auditing matters.
Some SOA provisions became effective upon enactment; others have delayed
implementation or must await rulemaking by the SEC. In addition, the SEC
adopted final rules on September 5, 2002, requiring accelerated filing of
quarterly and annual reports by a newly defined class of "accelerated
filers." After an initial three-year phase-in period, accelerated filers
will be required to file their annual reports on Form 10-K no later than 60
days after fiscal year end and their quarterly reports on Form 10-Q no later
than 35 days after fiscal quarter ends. Current requirements are 90 days and
45 days, respectively.
LCNB and Lebanon Citizens are subject to an extensive array of banking
laws and regulations that are intended primarily for the protection of the
customers and depositors of LCNB's subsidiaries rather than holders of
LCNB's securities. These laws and regulations govern such areas as
permissible activities, loans and investments, and rates of interest that can
be charged on loans and reserves. LCNB and Lebanon Citizens also are subject
to general U.S. federal laws and regulations and to the laws and regulations
of the State of Ohio. Set forth below are brief descriptions of selected
laws and regulations applicable to LCNB and Lebanon Citizens.
-6-
LCNB, as a financial holding company, is regulated under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is subject to the
supervision and examination of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). The Act requires the prior approval of
the Federal Reserve Board for a bank or financial holding company to acquire
or hold more than a 5% voting interest in any bank and restricts interstate
banking activities.
On September 29, 1994, the Act was amended by the Interstate Banking and
Branch Efficiency Act of 1994, which authorizes interstate bank acquisitions
anywhere in the country, effective one year after the date of enactment, and
interstate branching by acquisition and consolidation, effective June 1,
1997, in those states that have not opted out by that date.
The Gramm-Leach-Bliley Act, which amended the Bank Holding Company Act of
1956 and other banking related laws, was signed into law on November 12,
1999. The Gramm-Leach-Bliley Act repealed certain sections of the Glass-
Steagall Act and substantially eliminated the barriers separating the
banking, insurance, and securities industries. Effective March 11, 2000,
qualifying bank holding companies could elect to become financial holding
companies. Financial holding companies have expanded investment powers,
including affiliating with securities and insurance firms and engaging in
other activities that are "financial in nature or incidental to such
financial activity" or "complementary to a financial activity." The Gramm-
Leach-Bliley Act defines "financial in nature" to include:
a. securities underwriting, dealing, and market making;
b. sponsoring mutual funds and investment companies;
c. insurance underwriting and agency;
d. merchant banking activities; and
e. other activities that the Federal Reserve Board, in consultation
with and subject to the approval of the Treasury Department,
determines are financial in nature.
Financial holding companies may commence the activities listed above or
acquire a company engaged in any of those activities without additional
approval from the Federal Reserve. Notice of the commencement or acquisition
must be provided the Federal Reserve within thirty days of the start of the
activity. Sixty days advance notice is required before the start of any
activity that is "complementary to a financial activity."
The Financial Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
provides that a holding company and its controlled insured depository
institutions are liable for any loss incurred by the Federal Deposit
Insurance Corporation in connection with the default of any FDIC assisted
transaction involving an affiliated insured bank or savings association.
Lebanon Citizens is subject to the provisions of the National Bank Act.
Lebanon Citizens is subject to primary supervision, regulation and
examination by the Office of the Comptroller of the Currency ("OCC"). Lebanon
Citizens is also subject to the rules and regulations of the Board of
Governors of the Federal Reserve System and the Federal Deposit Insurance
Corporation ("FDIC"). Under the Bank Holding Company Act of 1956, as
amended, and under Regulations of the Federal Reserve Board pursuant thereto,
a bank or financial holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit.
-7-
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
covers an expanse of banking regulatory issues. FDICIA deals with the
recapitalization of the Savings Association Insurance Fund, with deposit
insurance reform including requiring the FDIC to establish a risk-based
premium assessment system with a number of other regulatory and supervisory
matters. Lebanon Citizens will be required to make payments for the
servicing of obligations of the Financing Corporation ("FICO") issued in
connection with the resolution of savings and loan associations, so long as
such obligations remain outstanding.
LCNB and Lebanon Citizens are also subject to the state banking laws of
Ohio. Ohio adopted nationwide reciprocal interstate banking effective
October, 1988. However, banking laws of other states may restrict branching
of banks to other counties within the state and acquisitions or mergers
involving banks and bank holding companies located in other states.
Additionally, Dakin Insurance Agency, Inc. is subject to State of Ohio
insurance regulations and rules and its activities are regulated by The State
of Ohio Department of Insurance.
Noncompliance with laws and regulations by bank holding companies and banks
can lead to monetary penalties and/or an increased level of supervision or a
combination of these two items. Management is not aware of any current
instances of noncompliance with laws and regulations and does not anticipate
any problems maintaining compliance on a prospective basis. Recent
regulatory inspections and examinations of LCNB and Lebanon Citizens
have not disclosed any significant instances of noncompliance. The minor
instances of noncompliance detected during these inspections and examinations
were promptly corrected by Management and no action was taken by regulators
against LCNB or Lebanon Citizens.
The earnings and growth of LCNB are affected not only by general economic
conditions, but also by the fiscal and monetary policies of the federal
government and its agencies, particularly the Federal Reserve Board. Its
policies influence the amount of bank loans and deposits and the interest
rates charged and paid thereon and thus have an effect on earnings. The
nature of future monetary policies and the effect of such policies on the
future business and earnings of LCNB and Lebanon Citizens cannot be
predicted.
A substantial portion of LCNB's cash revenues is derived from dividends
paid by Lebanon Citizens. These dividends are subject to various legal and
regulatory restrictions.
Employees
As of December 31, 2002, LCNB, Lebanon Citizens, and Dakin employed 251
employees. LCNB is not a party to any collective bargaining agreement.
Management considers its relationship with its employees to be very good.
Employee benefits programs are considered by Management to be competitive
with benefits programs provided by other financial institutions and major
employers within Lebanon Citizens' market area.
-8-
Availability of Financial Information
LCNB files unaudited quarterly financial reports under Form 10-Q and annual
financial reports under Form 10-K with the Securities and Exchange Commission
("SEC"). Copies of these reports may be obtained in the shareholder
information section of Lebanon Citizens' web site, www.lcnb.com, or by
writing to:
Steve P. Foster
Executive Vice President, CFO
LCNB Corp.
2 N. Broadway
P.O. Box 59
Lebanon, Ohio 45036
Financial reports and other materials filed by LCNB with the SEC may also be
read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the Public Reference
Room may be obtained from the SEC by calling 1-800-SEC-0330. The SEC also
maintains an internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding registrants that file
reports electronically, as LCNB does.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
LCNB and its subsidiaries do not have any offices located in foreign
countries and have no foreign assets, liabilities or related income and
expense for the years presented.
STATISTICAL INFORMATION
The following tables and certain tables appearing in Item 7, Management's
Discussion and Analysis, present additional statistical information about
LCNB Corp. and its operations and financial condition. They should be read
in conjunction with the consolidated financial statements and related notes
and the discussion included in Item 7, Management's Discussion and Analysis,
and Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates
and Interest Differential
The table presenting an average balance sheet, interest income and expense,
and the resultant average yield for average interest-earning assets and
average interest-bearing liabilities is included in Item 7, Management's
Discussion and Analysis.
The table analyzing changes in interest income and expense by volume and rate
is included in Item 7, Management's Discussion and Analysis.
-9-
Investment Portfolio
The following table presents the carrying values of securities for the years
indicated:
At December 31,
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2002 2001 2000
(Dollars in thousands)
Securities available for sale:
U.S. Treasury notes $ 1,019 2,044 3,018
U.S. Agency notes 47,089 36,328 20,046
U.S. Agency mortgage-back
Securities 19,052 9,570 12,164
Corporate notes - - 8,479
Municipal securities 69,018 50,668 38,799
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Total securities available
for sale 136,178 98,610 82,506
Federal Reserve Bank Stock 647 647 647
Federal Home Loan Bank Stock 2,224 2,125 1,741
------- ------- ------
Total securities $139,049 101,382 84,894
======= ======= ======
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Contractual maturities of debt securities at December 31, 2002, were as
follows. Actual maturities may differ from contractual maturities when
issuers have the right to call or prepay obligations.
Amortized Market
Cost Value Yield
--------- ------ -----
(Dollars in thousands)
U.S. Treasury notes:
Within one year $ 999 1,019 5.83%
One to five years - - -%
Five to ten years - - -%
After ten years - - -%
------- ------- -----
Total U.S Treasury notes $ 999 1,019 5.83%
------- ------- -----
U.S. Agency notes:
Within one year $ 2,001 2,010 5.20%
One to five years 39,579 40,165 3.38%
Five to ten years 4,856 4,914 4.56%
After ten years - - -%
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Total U.S. Agency notes $ 46,436 47,089 3.58%
------- ------- -----
Municipal securities (1):
Within one year $ 12,317 12,438 4.72%
One to five years 33,994 35,420 5.25%
Five to ten years 14,402 14,876 5.80%
After ten years 5,892 6,284 7.50%
------- ------- -----
Total Municipal securities $ 66,605 69,018 5.47%
------- ------- -----
U.S. Agency mortgage-backed
securities $ 18,742 19,052 4.65%
------- ------- -----
$132,782 136,178 4.70%
======= ======= =====
(1) Yields on tax-exempt obligations are computed on a tax equivalent
basis based upon a 34% statutory Federal income tax rate.
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies,
there were no investments in securities of any one issuer that exceeded 10%
of LCNB's consolidated shareholders' equity at December 31, 2002.
-11-
Loan Portfolio
The following table summarizes the distribution of the loan portfolio for
the years indicated:
At December 31,
---------------
2002 2001 2000 1999 1998
(Dollars in thousands)
Commercial and industrial $ 35,198 40,486 36,449 26,347 20,640
Commercial, secured by
real estate 80,882 72,477 59,043 56,671 53,907
Residential real estate 151,502 165,710 185,013 162,087 154,111
Consumer, excluding
credit card 51,184 41,006 40,860 36,402 32,302
Agricultural 1,314 2,020 2,238 2,343 2,370
Credit card 2,689 2,658 3,049 2,764 2,574
Lease Financing 1,256 2,088 2,219 183 -
Other 57 112 863 285 966
------- ------- ------- ------- -------
Total loans 324,082 326,557 329,734 287,082 266,870
Deferred costs (fees), net 750 608 705 526 187
------- ------- ------- ------- -------
324,832 327,165 330,439 287,608 267,057
Allowance for loan losses (2,000) (2,000) (2,000) (2,000) (2,000)
------- ------- ------- ------- -------
Loans, net $322,832 325,165 328,439 285,608 265,057
======= ======= ======= ======= =======
As of December 31, 2002, there were no concentrations of loans exceeding 10%
of total loans that are not already disclosed as a category of loans in the
above table.
-12-
The following tables summarize the commercial and agricultural loan
maturities and sensitivities to interest rate changes at December 31, 2002:
(Dollars in thousands)
----------------------
Maturing in one year or less $ 27,990
Maturing after one year, but within five years 9,521
Maturing beyond five years 79,883
-------
Total commercial and agricultural loans $117,394
=======
Loans repricing beyond one year:
Fixed rate $ 50,488
Variable rate 38,916
-------
Total $ 89,404
=======
Risk Elements
The accrual of interest on impaired loans is discontinued when there is a
clear indication that the borrower's cash flow may not be sufficient to meet
payments as they become due. Subsequent cash receipts on non-accrual loans
are recorded as a reduction of principal, and interest income is recorded
once principal recovery is reasonably assured. The current year's accrued
interest on loans placed on non-accrual status is charged against earnings.
Previous years' accrued interest is charged against the allowance for loan
losses.
A summary of accruing loans past due 90 days or more at December 31, follows:
Accruing loans past due 90 days
-------------------------------
(Dollars in thousands)
2002 $232
2001 146
2000 111
1999 68
1998 374
The increase at December 31, 2002 was due to installment loans and
residential mortgage loans. There were no commercial loans in the "accruing
loans past due 90 days or more" category at December 31, 2002 or 2001.
-13-
There were no nonaccrual or restructured loans at December 31, for each of
the years ended 1998 through 2002. Interest income that would have been
recorded in each of the years 1998 through 2002 if loans on nonaccrual status
at various times during the respective years had been current and in
accordance with their original terms was not material. For each of the years
ended December 31, 1998 through 2002, the recorded investments in loans for
which impairment has been recognized in accordance with SFAS Statement No.
114 was not material. LCNB is not committed to lend additional funds to
debtors whose loans have been modified to provide a reduction or deferral of
principal or interest because of deterioration in the financial position of
the borrower.
At December 31, 2002, there were no material additional loans not already
disclosed as nonaccrual, restructured, or accruing loans past due 90 days or
more where known information about possible credit problems of the borrowers
causes management to have serious doubts as to the ability of such borrowers
to comply with present loan repayment terms.
-14-
Summary of Loan Loss Experience
The table summarizing the activity relating to the allowance for loan losses
is included in Item 7, Management's Discussion and Analysis.
The following table presents the allocation of the allowance for loan loss.
At December 31,
-----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- --------------- -------------- -------------- -------------
Percent of Percent of Percent of Percent of Percent of
loans to loans to loans to loans to loans to
Total Total Total Total Total
Amount loans Amount loans Amount loans Amount loans Amount loans
(Dollars in thousands)
Commercial and
industrial $ 744 10.86% 647 12.40% 381 11.05% 304 9.17% 286 7.73%
Commercial, secured
by real estate - 24.96 - 22.19 - 17.91 - 19.74 - 20.21
Residential real
estate - 46.75 - 50.75 - 56.11 - 56.45 - 57.75
Consumer 871 15.79 774 12.56 714 12.39 514 12.70 345 12.10
Agricultural - 0.40 - 0.62 - 0.68 - 0.82 - 0.89
Credit card 77 0.83 82 0.81 40 0.93 38 0.96 48 0.96
Lease financing - 0.39 - 0.64 - 0.67 - 0.06 - -
Other - 0.02 - 0.03 - 0.26 - 0.10 - 0.36
Unallocated 3 497 865 1,144 1,321
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
Total $2,000 100.00% 2,000 100.00% 2,000 100.00% 2,000 100.00% 2,000 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
This allocation is made for analytical purposes. The total allowance is
available to absorb losses from any category of the portfolio. The allowance
allocated to the commercial and consumer categories has increased over the
five year period due to the increase in outstandings in these loan categories
which, by nature, have greater risk elements.
-15-
Deposits
The statistical information regarding average amounts and average rates paid
for the deposit categories is included in the "Distribution of Assets,
Liabilities and Shareholders' Equity" table included in Item 7, Management's
Discussion and Analysis.
The following table presents the contractual maturity of time deposits of
$100,000 or more at December 31, 2002:
(Dollars in thousands)
----------------------
Maturity within 3 months $ 5,969
After 3 but within 6 months 2,070
After 6 but within 12 months 1,760
After 12 months 19,922
------
$29,721
======
Return of Equity and Assets
The statistical information regarding the return on assets, return on equity,
dividend payout ratio, and equity to assets ratio is presented in Item 6,
Selected Financial Data.
-16-
Item 2. Properties
Lebanon Citizens conducts its business from the following offices:
Name of Office Address
-------------- -------
1. Main Office 2 North Broadway Owned (1)
Lebanon, Ohio 45036
2. Auto Bank 26 North Broadway Owned
Lebanon, Ohio 45036
3. Columbus Avenue Office 730 Columbus Avenue Owned (2)
Lebanon, Ohio 45036
4. Goshen Office 6726 Dick Flynn Blvd. Owned (2)
Goshen, Ohio 45122
5. Hamilton Office 794 NW Washington Blvd. Owned
Hamilton, Ohio 45013
6. Hunter Office 3878 State Route 122 Owned
Franklin, Ohio 45005
7. Loveland Office 615 West Loveland Avenue Owned
Loveland, Ohio 45140
8. Maineville Office 7795 South State Route 48 Owned (2)
Maineville, Ohio 45039
9. Mason/West Chester Office 1050 Reading Road Owned
Mason, Ohio 45040
10. Middletown Office 4441 Marie Drive Owned
Middletown, Ohio 45044
11. Okeana Office 6225 Cincinnati-Brookville Road Owned
Okeana, Ohio 45053
12. Otterbein Office State Route 741 Leased
Lebanon, Ohio 45036
13. Oxford Office 30 West Park Place (1) (3)
Oxford, Ohio 45056
14. Rochester/Morrow Office Route 22-3 at 123 Owned
Morrow, Ohio 45152
15. South Lebanon Office 209 East Forrest Street Leased
South Lebanon, Ohio 45065
16. Springboro/Franklin Office 525 West Central Avenue Owned (2)
Springboro, Ohio 45066
17. Waynesville Office 9 North Main Street Owned (2)
Waynesville, Ohio 45068
18. Wilmington Office 1243 Rombach Avenue Owned (2)
Wilmington, Ohio 45177
(1) Excess space in this office is leased to third parties.
(2) A Dakin office is located in this office.
(3) Lebanon Citizens owns the Oxford Office building and leases the land.
Dakin owns its main office at 20 & 24 East Mulberry Street, Lebanon, Ohio
45036. Excess space in this office is leased to third parties. Dakin's six
other offices are located in Lebanon Citizens' branch offices.
-17-
Item 3. Legal Proceedings
Except for routine litigation incident to their businesses, LCNB and its
subsidiaries are not a party to any material pending legal proceedings and
none of their property is the subject of any such proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
-18-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information contained in the Notice of Annual Meeting of Shareholders and
Proxy Statement (dated March 10, 2003), relating to "Market Price of Stock
and Dividend Data", is incorporated herein by reference.
Item 6. Selected Financial Data
The following represents selected consolidated financial data of LCNB
for the years ended December 31, 1998 through 2002 and are derived from LCNB
Corp's consolidated financial statements. Certain reclassifications of
income statement amounts for the years 1998 through 2001 have been made to
conform to current year presentation. Such reclassifications had no effect
on net income. This data should be read in conjunction with the consolidated
financial statements and the notes thereto included in Item 8 of this Form
10-K and Management's Discussion and Analysis and Quantitative and
Qualitative Disclosures about Market Risk included in Items 7 and 7A,
respectively, of this Form 10-K, and are qualified in their entirety thereby
and by other detailed information elsewhere in this Form 10-K.
-19-
For the Years Ended December 31,
--------------------------------
2002 2001 2000 1999 1998
(Dollars in thousands,
except ratios and data per share)
Income Statement
Interest Income $ 30,163 $ 32,164 $ 32,151 $ 29,689 $ 29,492
Interest Expense 10,670 14,340 15,922 13,282 14,062
------- ------- ------- ------- -------
Net Interest Income 19,493 17,824 16,229 16,407 15,430
Loan Loss Provision 348 237 197 208 191
------- ------- ------- ------- -------
Net Interest Income
after Provision 19,145 17,587 16,032 16,199 15,239
Other Operating Income 5,623 4,842 4,400 4,372 4,320
Operating Expenses 15,705 13,922 13,101 12,673 11,673
------- ------- ------- ------- -------
Income before
Income Taxes 9,063 8,507 7,331 7,898 7,886
Provision for
Income Taxes 2,523 2,440 2,091 2,323 2,426
------- ------- ------- ------- -------
Net Income $ 6,540 $ 6,067 $ 5,240 $ 5,575 $ 5,460
======= ======= ======= ======= =======
Balance Sheet
Securities $139,049 $101,382 $ 84,894 $105,558 $123,687
Loans - net 322,832 325,165 328,439 285,608 265,057
Total Assets 506,751 480,435 451,000 439,238 432,364
Total Deposits 442,221 414,772 394,786 391,569 387,006
Long-Term Debt 6,253 12,306 6,356 403 -
Total Shareholders'
Equity 51,930 49,507 46,310 42,687 42,335
Selected Financial Ratios
and Other Data
Return on average
assets 1.32% 1.30% 1.17% 1.29% 1.30%
Return on average
equity 13.00% 12.50% 11.84% 13.01% 13.57%
Equity-to-assets
ratio 10.25% 10.30% 10.27% 9.72% 9.79%
Dividend payout
ratio 53.43% 53.94% 61.02% 50.96% 45.60%
Earnings per
share(1) $3.79 3.43 2.95 3.14 3.07
Dividends declared
per share(1) $2.025 1.85 1.80 1.60 1.40
(1) All per share data have been adjusted to reflect the ten-for-one stock
exchange in 1999 and the pooling of interests accounting method for
the Dakin acquisition in 2000.
-20-
Item 7. Management's Discussion and Analysis
Introduction
The following is management's discussion and analysis of the financial
condition and results of operations of LCNB Corp. ("LCNB"). It is intended
to amplify certain financial information regarding LCNB and should be read in
conjunction with the Consolidated Financial Statements and related Notes
and the Financial Highlights contained in the 2002 Annual Report to
Shareholders.
Comparative Financial Information
Effective May 18, 1999, Lebanon Citizens National Bank ("Lebanon Citizens")
was reorganized into a one-bank holding company structure. Prior to that
date, the financial information presented represents the assets, liabilities
and operations of Lebanon Citizens. Comparative earnings per share
information is presented on pro forma basis.
On April 11, 2000 LCNB issued 15,942 shares of common stock in exchange
for all outstanding shares of Dakin Insurance Agency, Inc. ("Dakin"). On
that date, Dakin merged with and into an interim subsidiary of LCNB. As a
result of the merger, Dakin became a wholly owned subsidiary of LCNB. The
merger was accounted for as a pooling-of-interests and, accordingly, all
financial statements presented herein have been restated to include the
financial position and results of operations of Dakin.
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.
LCNB disclaims, however, any intent or obligation to update such forward-
looking statements.
-21-
Net Income
LCNB earned $6,540,000 in 2002 compared to $6,067,000 in 2001. Earnings per
share were $3.79, a 10.50% or $0.36 per share increase from 2001.
Performance ratios for 2002 included a return on average assets of 1.32% and
a return on average equity of 13.00% compared to ratios of 1.30% and 12.50%,
respectively, for 2001.
LCNB earned $6,067,000 in 2001 compared to $5,240,000 in 2000. Earnings per
share were $3.43, a 16.27% or $0.48 per share increase from 2000.
Performance ratios for 2001 included a return on average assets of 1.30% and
a return on average equity of 12.50% compared to ratios of 1.17% and 11.84%,
respectively, for 2000.
Net Interest Income
The amount of net interest income earned by LCNB is influenced by the dollar
amount ("volume") and mix of interest earning assets and interest bearing
liabilities and the rates earned or paid on each. The following table
presents, for the years indicated, the distribution of average assets,
liabilities and shareholders' equity, as well as the total dollar amounts of
interest income from average interest earning assets and the resultant yields
on a fully taxable equivalent basis, and the dollar amounts of interest
expense and average interest-bearing liabilities and the resultant rates
paid.
-22-
Years ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans(1) $327,561 $24,821 7.58% $332,634 $27,309 8.21% $309,658 $26,264 8.48%
Federal funds sold 21,551 339 1.57 19,080 667 3.50 7,258 459 6.32
Deposits in banks - - - - - - 4,149 241 5.81
Federal Reserve
Bank stock 647 39 6.03 647 39 6.03 647 39 6.03
Federal Home Loan
Bank stock 2,165 100 4.62 1,957 132 6.75 418 31 7.42
Investment securities:
Taxable 66,577 3,068 4.61 47,394 2,601 5.49 67,100 3,542 5.28
Non-taxable(2) 47,107 2,765 5.87 33,592 2,211 6.58 26,233 2,433 9.27
------- ------ ------- ------ ------- ------
Total earning assets 465,608 31,132 6.69 435,304 32,959 7.57 415,463 33,009 7.95
Non-earning assets 33,247 33,705 33,707
Allowance for
loan losses (2,002) (2,002) (2,002)
------- ------- -------
Total assets $496,853 $467,007 $447,168
======= ======= =======
Savings deposits $108,768 1,708 1.57 $ 96,440 2,529 2.62 84,156 3,217 3.82
NOW and money fund 84,562 918 1.09 81,204 1,925 2.37 81,215 2,303 2.84
IRA and time
certificates 180,990 7,476 4.13 175,098 9,283 5.30 178,842 10,049 5.62
Short-term debt 957 13 1.36 964 33 3.42 1,250 83 6.64
Long-term debt 9,699 555 5.72 8,062 570 7.07 3,855 270 7.00
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 384,976 10,670 2.77 361,768 14,340 3.96 349,318 15,922 4.56
------ ------ ------
-23-
Years ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Demand deposits 58,620 53,959 52,059
Other liabilities 2,950 2,723 1,527
Capital 50,307 48,557 44,264
------- ------- -------
Total liabilities
and capital $496,853 $467,007 $447,168
======= ======= =======
Net interest rate
spread(3) 3.92 3.61 3.39
Net interest margin on
a taxable equivalent
basis(4) 20,462 4.39 $18,619 4.28 $17,087 4.11
====== ====== ======
Ratio of interest-earning
assets to interest-bearing
liabilities 120.94% 120.33% 118.94%
(1) Includes nonaccrual loans if any. Income from tax-exempt loans is included in interest income on a
taxable equivalent basis, using an incremental rate of 34%.
(2) Income from tax-exempt securities is included in interest income on a taxable equivalent basis.
Interest income has been divided by a factor comprised of the complement of the incremental tax
rate of 34%.
(3) The net interest spread is the difference between the average rate on total interest-earning
assets and interest-bearing liabilities.
(4) The net interest margin is the taxable-equivalent net interest income divided by average
interest-earning assets.
-24-
The following table presents the changes in 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 years indicated. 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.
For the years ended December 31,
--------------------------------
2002 vs. 2001 2001 vs. 2000
------------- -------------
Increase (decrease) due to Increase (decrease) due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
(Dollars in thousands)
Interest income
attributable to:
Loans (1) $ (411) (2,077) (2,488) 1,905 (860) 1,045
Federal funds sold 77 (405) (328) 485 (277) 208
Deposits in banks - - - (241) - (241)
Federal Reserve
Bank stock - - - - - -
Federal Home Loan
Bank stock 13 (45) (32) 104 (3) 101
Investment securities:
Taxable 932 (465) 467 (1,076) 135 (941)
Non-taxable(2) 814 (260) 554 585 (807) (222)
----- ----- ----- ----- --- -----
Total interest income 1,425 (3,252) (1,827) 1,762 (1,812) (50)
Interest expense
attributable to:
Savings deposits 292 (1,113) (821) 423 (1,111) (688)
NOW and money fund 77 (1,084) (1,007) - (378) (378)
IRA and time
certificates 303 (2,110) (1,807) (207) (559) (766)
Short-term borrowings - (20) (20) (16) (34) (50)
Long-term debt 105 (120) (15) 297 3 300
----- ----- ----- ----- ----- -----
Total interest expense 777 (4,447) (3,670) 497 (2,079) (1,582)
----- ----- ----- ----- ----- -----
Net interest income $ 648 1,195 1,843 1,265 267 1,532
===== ===== ===== ===== ===== =====
(1) Nonaccrual loans, if any, are included in average loan balances.
(2) Change in interest income from non-taxable loans and investment
securities is computed based on interest income determined on a
taxable equivalent yield basis. Interest income has been divided by
a factor comprised of the complement of the incremental tax rate of
34%.
-25-
2002 vs. 2001. Tax equivalent interest income decreased $1,827,000 due to an
88 basis point (a basis point equals 0.01%) decline in the average rate
earned on average interest-earning assets, partially offset by a $30.3
million increase in average interest-earning assets. The increase in average
interest-earning assets was due to increases in the investment securities
portfolio, which grew $32.7 million on an average basis. The average rate
earned decreased primarily because of a general market wide decrease in
interest rates. During 2001 the Federal Reserve Board decreased the intended
federal funds rate by a dramatic 475 basis points and by an additional 50
basis points in November, 2002.
Interest expense decreased $3,670,000 because of a 119 basis point decrease
in the average rate paid for deposits and borrowings, partially offset by a
$23.2 million increase in average interest-bearing liabilities. The decrease
in average rates paid was also due to the general decline in market rates
discussed above. Much of the increase in average interest-bearing
liabilities was in average savings deposits, which increased $12.3 million.
Average NOW and money fund deposits increased $3.4 million and IRA and time
certificates increased $5.9 million. Management believes that, due to the
current declining rate economic environment, investors are showing a
preference for highly liquid, short-term instruments. This means much of the
recent growth in savings deposits 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 net interest margin increased from 4.28% during 2001 to 4.39% during 2002
because of the 119 basis point decrease in average rates for interest bearing
liabilities, partially offset by the 88 basis point decrease in average rates
earned from interest-earning assets.
During August, 2002, LCNB paid in full $4.0 million in Federal Home Loan Bank
("FHLB") notes with an average interest rate of 7.72%, which otherwise would
have been due in June, 2004 and June, 2005. The prepayment fees on the early
payoffs totaled approximately $425,000, which is included in other non-
interest expenses in the consolidated statements of income.
To negate the financial impact of the prepayment fees, LCNB sold $17.7
million of U.S. Agency securities bearing an average coupon rate of 5.24%
during August and recorded a gain of $408,000 from the sales. At
approximately the same time as the sales, LCNB purchased securities totaling
$19.9 million and bearing an average tax-equivalent coupon rate (some of the
securities purchased were tax-exempt municipals) of 4.94%.
The transactions described were consummated to improve the projected net
interest margin.
-26-
2001 vs. 2000. Tax equivalent interest income decreased $50,000 due to a 38
basis point decline in the average rate earned, largely offset by an increase
of $19.8 million in average interest-earning assets. The average rate earned
decreased primarily because of the general market wide decrease in interest
rates. Most of the increase in average interest-earning assets was in the
loan portfolio, which grew $23.0 million on an average basis. A significant
influence on the average loan balance for 2001 was a $42.8 million increase
in loans during 2000.
Interest expense decreased $1,582,000 because of a 60 basis point decrease in
the average rate paid for deposits and borrowings, partially offset by a
$12.5 million increase in average interest-bearing liabilities. The decrease
in average rates paid was also due to the general decline in market rates
during 2001. Most of the increase in average interest-bearing liabilities
was in average savings deposits, which increased $12.3 million, and in
average long term debt, which increased $4.2 million. Management borrowed
$6.0 million from the Federal Home Loan Bank during 2001 in an attempt to
lock-in some long-term funding at current, historically low, market rates.
The net interest margin increased from 4.11% during 2000 to 4.28% during 2001
because of the 60 basis point decrease in average rates for interest bearing
liabilities, partially offset by the 38 basis point decrease in average rates
for interest earning assets.
Provisions and Allowance for Loan Losses
The provision for loan losses is determined by Management based upon it's
evaluation of the amount needed to maintain the allowance for loan losses at
a level considered appropriate in relation to the estimated risk of losses
inherent in the portfolio. In addition to historic charge-off percentages,
factors taken into consideration to determine the adequacy of the allowance
for loan losses include the nature, volume and consistency of the loan
portfolio, overall portfolio quality, a review of specific problem loans, and
current economic conditions that may affect borrowers ability to pay. The
following table presents the total loan provision and the other changes in
the allowance for loan losses for the years 1998 through 2002.
-27-
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Balance - Beginning of year $2,000 2,000 2,000 2,000 2,200
Loans charged off:
Commercial and industrial 36 - - - 227
Commercial, secured by real estate - - - - -
Residential real estate 26 - - - 3
Consumer, excluding credit card 273 237 222 252 153
Agricultural - - - - -
Credit Card 55 40 33 20 36
Other - - - - -
----- ----- ----- ----- -----
Total loans charged off 390 277 255 272 419
----- ----- ----- ----- -----
Recoveries:
Commercial and industrial 8 - - - -
Commercial, secured by real estate - - - - -
Residential real estate - - - - -
Consumer, excluding credit card 31 38 55 62 26
Agricultural - - - - -
Credit Card 3 2 3 2 2
Other - - - - -
----- ----- ----- ----- -----
Total recoveries 42 40 58 64 28
----- ----- ----- ----- -----
Net charge-offs 348 237 197 208 391
Provision charged to operations 348 237 197 208 191
----- ----- ----- ----- -----
Balance - End of year $2,000 2,000 2,000 2,000 2,000
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average loans outstanding 0.11% 0.07% 0.06% 0.08% 0.14%
==== ==== ==== ==== ====
Ratio of allowance for loan losses
to total loans at year-end 0.62% 0.61% 0.61% 0.70% 0.75%
==== ==== ==== ==== ====
The $63,000 increase in consumer loans charged off, net of recoveries, in
1999 over 1998 is attributable, in part, to the adoption of a new uniform
charge-off policy in 1999 for consumer, credit card, and home mortgage loans
as mandated by the Federal Financial Institution's Examination Council for
all banks and thrifts. Generally, it includes a requirement to charge off
open-end credit at 180 days delinquency and closed-end credit at 120 days
delinquency.
-28-
Non-Interest Income
2002 vs. 2001. Total non-interest income for 2002 was $781,000 or 16.13%
more than for 2001 largely due to the $408,000 gain on securities already
discussed. The remaining $373,000 increase was due to a $194,000 increase in
service charges and fees and to smaller increases in the other line items.
Service charges and fees increased primarily due to increased fee income from
non-sufficient-fund ("NSF") checks and to increased check card interchange
income.
Trust income increased due to fees received for brokerage services, a new
service first offered in April, 2002. Insurance agency income increased
primarily due to an increase in the volume of new policies written, partially
offset by a $119,000 decline in contingency commissions. 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.
A $168,000 increase in gains from loans sold, from $67,000 during 2001 to
$235,000 during 2002, caused the increase in other operating income. The
increased loan volume sold during 2002 reflects increased refinancing
activity caused by an historical low in market rates for fixed-rate loans.
Loans sold during 2002 totaled $20.8 million compared to sales of $13.4
million during 2001.
2001 vs. 2000. Non-interest income increased $442,000, or 10.05%, to
$4,842,000 in 2001 from $4,400,000 in 2000. The increase was primarily due
to a $240,000 increase in service charges and fees and a $297,000 increase
in insurance agency income, partially offset by a $250,000 decrease in trust
income.
The increase in service charges and fees from 2000 to 2001 was due to
pricing adjustments made to NSF fees in December, 2000 and to increased check
card income. Check card fees increased primarily because a greater number of
cards were outstanding during 2001 than during 2000.
The increase in insurance agency income is primarily due to contingency
commissions received during the first quarter, 2001. Contingency
commissions received during the first quarter, 2001 totaled $189,000, but
only $6,000 during the first quarter, 2000. The balance of the increase in
2001 was generated from commissions received on new and renewing policies.
Trust fee income decreased in 2001 due to a decrease in the market value of
assets under management, on which fees are based. The decline in asset
market value was primarily the result of general market conditions.
-29-
Non-Interest Expense
2002 vs. 2001. Total non-interest expense increased $1,783,000 or 12.81%
during 2002 compared with 2001 largely due to a $569,000 or 9.54% increase in
salaries and wages and a $793,000 or 28.02% increase in other non-interest
expenses. Salaries and wages increased 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.
The increase in other non-interest expenses was primarily due to the $425,000
prepayment fee on Federal Home Loan Bank notes previously discussed and to
$263,000 in training and conversion expenses relating to Lebanon Citizen's
conversion to a new data processing system, completed in September, 2002.
Pension and other employee benefits increased $125,000 or 7.93% due to
increased health insurance costs, increased pension expense, and increased
Social Security and Medicare matching as a result of increased salaries and
wages. Equipment expenses increased $213,000 or 32.08% primarily due to
rental costs for a new phone system and increased depreciation on furniture
and equipment purchased for new and remodeled offices and the new computer
hardware and software obtained for data processing system conversion. ATM
expense increased $63,000 primarily due to approximately $57,000 in costs
associated with a change in the ATM processor.
2001 vs. 2000. Non-interest expense increased $821,000, or 6.27%, during
2001 as compared to 2000. This increase was primarily due to a $433,000, or
7.83%, increase in salaries and wages and a $162,000, or 11.45%, increase in
pension and other employee benefits. Also contributing to the increase was a
$102,000, or 25.06% increase in state franchise taxes.
Salaries and wages increased as a result of normal salary and wage increases,
an increase in the number of employees, and increased commissions paid
Dakin's agents because of the increase in the volume of policies written. In
addition, a portion of the pay received by LCNB officers and employees is
based on corporate earnings. Since earnings during 2001 were greater than
during 2000, a higher amount of incentive pay was paid to employees.
Pension and other employee benefits increased primarily because of an
increase in pension expense recognized. Other benefits, including social
security and medicare matching and health care costs, also increased.
A bank's state franchise taxes are based on net worth, so the increase in
state franchise taxes reflects growth in shareholders' equity.
-30-
Depreciation on furniture and equipment, which is included in equipment
expense, increased $56,000 and depreciation on bank premises, which is
included in occupancy expense, increased $46,000. These increases were due
to the construction of new offices and facilities. During 2000 LCNB
constructed new offices in Goshen and Oxford and extensively remodeled the
Columbus Avenue office in Lebanon. An electronic branch (a drive-up, stand-
alone ATM) was also constructed on Peck Boulevard in Hamilton. During 2001
a new office was constructed on Washington Boulevard in Hamilton and an
electronic branch was constructed in Harveysburg.
Income Taxes
LCNB's effective tax rates for the years ended December 31, 2002, 2001,
and 2000 were 27.84%, 28.68%, and 28.52%, respectively. The difference
between the statutory rate of 34.00% and the effective tax rate is primarily
due to tax-exempt interest income.
Assets
Total deposits grew $27.4 million during 2002, fueling a $26.3 million or
5.48% increase in total assets. During the same period, total loans
decreased $2.3 million and federal funds sold decreased $8.0 million.
The decrease in loans during 2002 can be attributed to refinancing activity
on residential mortgage loans because of the general decline in interest
rates, combined with the sale to the Federal Home Loan Mortgage Corporation
("FHLMC") of a large majority of the fixed rate residential mortgage loans
originated during 2002. Approximately $20.9 million of loans were sold to
FHLMC during 2002, while $13.4 million were sold during 2001. Management
decided to sell the loans after determining that current, historically low
market rates for residential mortgage loans were not profitable in the long
run.
Since management was not able to invest deposit growth in loan growth during
2002, the funds were invested in the securities portfolio, which grew $37.6
million or 38.10% during 2002, and in the $6.0 million early payoff of FHLB
debt previously discussed. All of LCNB's investment securities are
classified "available for sale" and can be readily sold if the funds are
needed to support loan growth in the future.
Premises and equipment additions during 2002 totaled $1,061,000, largely
offset by depreciation expense of $999,000. Approximately $367,000 of the
additions were for computer hardware and software needed for the data
processing system conversion. Hardware and software costs capitalized during
2001 for the system conversion totaled $437,000, bringing the total
capitalized expenditures for the computer conversion to $804,000. Another
$207,000 of expenditures during 2002 was for a backoffice remodeling project
at the main office.
-31-
Deposits
Total deposits of $442.2 million at December 31, 2002, were $27.4 million or
6.62% greater than total deposits at December 31, 2001. Much of the
growth was in the savings and NOW account categories, which increased $11.2
and $10.1 million, respectively, during the year. Management believes this
reflects investor preference for short-term, highly liquid investments during
the current economic cycle. Other deposit categories increased by smaller
amounts, except for certificates with balances of $100,000 and over. This
category decreased $9.4 million.
Liquidity
Liquidity is the ability to have funds available at all times to meet the
commitments of LCNB. These commitments may include paying dividends to
shareholders, funding new loans for borrowers, funding withdrawals by
depositors, paying general and administrative expenses, and funding capital
expenditures. Sources of liquidity include growth in deposits, principal
payments received on loans, proceeds from the sale of loans, the sale or
maturation of investment securities, cash generated by operating activities,
and the ability to borrow funds. Management closely monitors the level of
liquid assets available to meet ongoing funding requirements. 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 during the past year as a result of current liquidity
levels.
Commitments to extend credit at December 31, 2002, totaled $69.5 million and
standby letters of credit totaled $6.9 million and are more fully described
in Note 9 to LCNB's Financial Statements. Since many commitments to extend
credit may expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
A contract with Jack Henry & Associates for replacement of Lebanon Citizens'
check imaging system, including computer hardware and software, is
tentatively expected to cost $240,000 during 2003. LCNB has no other
material commitments for capital expenditures as of December 31, 2002.
The liquidity of LCNB is enhanced by the fact that 90.89% of total deposits
at December 31, 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.
An additional source of funding is borrowings from the Federal Home Loan Bank
("FHLB"). Total borrowings from the FHLB at December 31, 2002 were $6.0
million. The total remaining borrowing capacity from the FHLB at that date
ranges from approximately $38 million to $73 million. Any borrowings in
excess of $38 million will require the purchase of additional FHLB stock.
-32-
Liquid assets include cash, federal funds sold and securities available for
sale. Except for investments in the stock of the Federal Reserve Bank and
FHLB, all of LCNB's investment portfolio is classified as "available-for-
sale" and can be readily sold to meet liquidity needs. At December 31, 2002,
LCNB's liquid assets amounted to $161.8 million or 31.93% of total gross
assets, up from $132.8 million or 27.65% of total gross assets at December
31, 2001. The primary reason for the increase was growth in securities
available for sale.
The following table provides information concerning LCNB's contractual
obligations at December 31, 2002:
Payments due by period
----------------------------------
More
1 Year 2-3 4-5 than 5
Total or less years years years
(Dollars in thousands)
Long-term debt obligations $ 6,253 2,056 2,124 2,073 -
Operating lease obligations 2,562 268 510 354 1,430
Purchase obligations 240 240 - - -
Certificates of deposit:
$100,000 and over 29,721 9,799 13,179 6,743 -
Other time certificates 111,030 42,685 45,632 22,502 211
-------- ------ ------ ------ ------
Total $149,806 55,048 61,445 31,672 1,641
======== ====== ====== ====== ======
Capital Resources
LCNB and Lebanon Citizens are required by banking regulators to meet
certain minimum levels of capital adequacy. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
material effect on LCNB's and Lebanon Citizens' financial statements. These
minimum levels 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 Lebanon Citizens' 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 4.00% and
the ratio of Total capital (Tier 1 capital plus Tier 2 capital) to risk-
weighted assets must be at least 8.00%. 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 3.00%. A table summarizing the regulatory capital of LCNB and Lebanon
Citizens at December 31, 2002 and 2001, is included in Note 12, "Regulatory
Matters", of the 2002 Annual Report to Shareholders.
-33-
The FDIC, the insurer of deposits in financial institutions, has adopted a
risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is required to pay
successively higher premiums depending on its capital levels and its
supervisory rating by its primary regulator. It is management's intention to
maintain sufficient capital to permit Lebanon Citizens to maintain a "well
capitalized" designation (the FDIC's highest rating).
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 December 31, 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
December 31, 2002.
LCNB established an Ownership Incentive Plan during 2002 that allows for
stock-based awards to eligible employees. The awards may be in the form of
stock options, share awards, and/or appreciation rights. The plan provides
for the issuance of up to 50,000 shares. No awards have been granted as of
December 31, 2002.
The exercise price for stock options granted shall not be less than the fair
market value of the stock on the date of grant. Options vest ratably over a
five-year period and the maximum term for each grant will be specified by the
Board of Directors, but cannot be greater than ten years from the date of
grant. In the event of an optionee's death, incapacity, or retirement, all
outstanding options held by that optionee shall immediately vest and be
exercisable.
-34-
Critical Accounting Policies - Allowance for Loan Losses
The allowance for loan losses (the "allowance") is established through a
provision for loan losses charged to expense. Loans are charged against the
allowance when management believes that the collectibility of the principal is
unlikely.
The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible.
Management's evaluation of the adequacy of the allowance takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, current
economic conditions that may affect borrowers' ability to repay, and prior loan
loss experience.
Loans are considered impaired when management believes, based on current
information and events, it is probable that LCNB will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Smaller-
balance homogenous loans, including residential mortgage and consumer
installment loans, are collectively evaluated for impairment. Larger-balance
commercial loans are individually evaluated for impairment. Impaired loans are
measured by calculating the present value of expected future cash flows using
the loan's effective interest rate or, for collateral-dependent loans, at the
fair value of the collateral. A specific allowance is maintained if the
estimated value of the loan is less than the carrying amount of the loan.
Based on its evaluations, management believes that the allowance for loan
losses will be able to absorb estimated losses inherent in the current loan
portfolio.
-35-
Recent Accounting Pronouncements
Statement of Financial Standards ("SFAS") No. 147, Acquisitions of Certain
Financial Institutions, was issued on October 1, 2002. The Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, on July
20, 2001. SFAS No. 147 amended certain provisions of SFAS No. 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions, and SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No.
147 requires that acquisitions of financial institutions be accounted for in
accordance with SFAS No. 141, Business Combinations, if the acquisition meets
the definition of a business combination. Any goodwill that results will be
accounted for in accordance with the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. 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. Existing
unidentifiable intangible assets shall continue to be amortized unless the
transaction in which the intangible asset arose meets the definition of a
business combination. In addition, SFAS No. 147 requires that long-term
customer-relationship intangible assets of financial institutions, such as
depositor- and borrower-relationship intangible assets and credit-cardholder
intangible assets, 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.
LCNB's intangible assets at December 31, 2002, primarily represent the
unamortized intangible asset related to the Company's 1997 acquisition of
three branch offices from another bank. Management does not believe its 1997
branch office acquisition meets the definition of a business combination and
intends to continue amortizing the intangible over ten years, subject to
periodic review for impairment in accordance with SFAS No. 144. At December
31, 2002, the carrying amount of this intangible was $3.1 million, net of
accumulated amortization of $2.9 million.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others, was issued on November 25, 2002. The Interpretation elaborates
on existing disclosure requirements for most guarantees, including loan
guarantees such as financial and performance standby letters of credit
routinely issued by financial institutions. At the time a guarantor issues
a guarantee, the guarantor must recognize an initial liability for the fair
value of the obligations it assumes under the guarantee. Normally, the fair
value is assumed to be the fee the guarantor receives for issuing the
guarantee. The initial recognition and measurement provisions of the
Interpretation apply to guarantees issued or modified after December 31,
2002, regardless of the guarantor's fiscal year-end. The disclosure
requirements are effective for interim and annual financial statements ending
after December 15, 2002. The provisions of the Interpretation are not
expected to have a material effect on LCNB's financial statements.
-36-
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, was issued by the FASB on December 31, 2002. This statement
amends certain sections of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 recommended, but did not require, companies use
a fair value based method of accounting for stock-based employee
compensation. Under SFAS No. 123, companies electing to adopt the
recommended fair value method were required to apply that method
prospectively for new stock option awards. SFAS No. 148 provides two
additional transition methods, which allows companies to either immediately
recognize stock-based employee compensation cost in the year of adoption
relating to all activity since 1994, or restate all periods presented in the
financial statements to reflect stock-based employee compensation cost for
all periods since 1994. SFAS No. 148 also changed disclosure requirements
for stock-based compensation.
LCNB adopted an Ownership Incentive Plan during 2002 that allows for stock-
based awards to eligible employees, but no awards have been granted as of
December 31, 2002. Management believes any effect on the 2003 financial
statements will be immaterial.
-37-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk for LCNB is primarily interest rate risk. LCNB attempts to
mitigate this risk through asset/liability management strategies designed to
decrease the vulnerability of its earnings to material and prolonged changes
in interest rates. LCNB does not use derivatives such as interest rate
swaps, caps or floors to hedge this risk. LCNB has not entered into any
market risk instruments for trading purposes. Lebanon Citizens' Asset and
Liability Management Committee ("ALCO") primarily uses Interest Rate
Sensitivity Gap Analysis, also known as repricing mismatch analysis, for
measuring and managing interest rate risk.
Interest Rate Sensitivity Gap Analysis
A traditional gap analysis provides a point-in-time measurement of the
relationship between the amounts of interest rate sensitive assets and
liabilities in a given time period. An asset or liability is interest rate
sensitive within a specific time period if it will mature or reprice within
that time period. If liabilities mature or reprice more quickly or to a
greater extent than assets, net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling
interest rates. Conversely, if liabilities mature or reprice more slowly or
to a lesser extent than assets, net interest income would tend to increase
during periods of rising interest rates but decrease during periods of
falling interest rates. ALCO strives to maintain a range for the
relationship of rate sensitive assets to rate sensitive liabilities for gap
analysis purposes of from 75 to 125 percent for the one-year and two- to
four-year periods. Depending on the interest rate environment, other factors
may cause actual results to be outside of this range.
The following table reflects LCNB's gap analysis at December 31, 2002.
The amounts reported in the table are the principal cash flows of rate
sensitive assets and liabilities by expected maturity or repricing timeframe.
Also presented is the related weighted average interest rate. Fixed rate
real estate mortgage loans and mortgage-backed securities are allocated to
the various maturity/repricing periods based on contractual maturities
adjusted for expected prepayments under the current market interest rate
environment. Deposit liabilities without contractual maturities such as NOW
and savings accounts are allocated to the various repricing periods based on
an analysis of forecasted account run-off that takes into consideration the
relatively stable nature of these core deposits. The gap analysis indicates
that LCNB's earnings are sensitive to the repricing of assets in the first
year, the second through the fourth years, and thereafter. The aggregate
ratio of rate sensitive assets to rate sensitive liabilities is 101.60% for
the first year and 144.93% for years two through four. With the current
relatively low market interest rate environment, management believes the
ratios for the one year and two to four year time frames do not expose
LCNB's net interest income to significant risk.
-38-
Expected Maturity/Repricing
---------------------------
2003 2004 2005 2006 2007 Thereafter Total Fair Value
(Dollars in thousands)
ASSETS
Loans: (1)
Fixed rate $ 26,138 21,488 18,293 15,688 11,277 102,539 195,423 202,038
Average interest rate 8.80% 8.70% 8.56% 8.15% 7.87% 7.74%
Variable rate 77,078 23,962 13,350 3,473 8,539 3,007 129,409 129,409
Average interest rate 5.40% 7.10% 6.79% 7.52% 6.53% 7.89%
Securities available
for sale (2) 15,451 14,233 21,103 31,766 22,689 27,540 132,782 136,178
Average interest rate (3) 6.00% 6.44% 6.02% 5.56% 5.13% 6.92%
Federal funds sold 11,925 - - - - - 11,925 11,925
Average interest rate 1.06% - - - - -
Total earning assets 130,592 59,683 52,746 50,927 42,505 133,086 469,539 479,550
Average interest rate 5.75% 7.52% 7.10% 6.49% 6.14% 7.57%
LIABILTIES
NOW and money fund 20,249 3,989 3,989 3,989 3,989 55,467 91,672 91,672
Average interest rate 1.06% 1.05% 1.05% 1.05% 1.05% 1.06%
Savings 43,251 2,145 2,145 2,145 2,145 61,070 112,901 112,901
Average interest rate 1.53% 1.53% 1.53% 1.53% 1.53% 1.53%
IRA's
Fixed rate 5,633 4,669 5,177 3,704 10,549 942 30,674 33,109
Average interest
rate 3.61% 4.32% 5.98% 4.66% 4.75% 6.40%
Variable rate 4,867 2,434 - - - - 7,301 7,301
Average interest
rate 1.64% 1.64% - - - -
CD's over $100,000 9,799 9,376 3,803 3,898 2,845 - 29,721 29,827
Average interest rate 3.25% 4.09% 4.54% 4.48% 4.73% -
CD's under $100,000 42,685 32,921 12,711 11,426 11,076 211 111,030 115,912
Average interest rate 2.89% 3.80% 4.80% 4.36% 4.78% 6.33%
-39-
Long term debt 2,056 2,060 64 2,067 6 - 6,253 6,545
Average interest rate 3.68% 4.45% 6.00% 5.55% 6.00% -
Total interest-bearing
liabilities 128,540 57,594 27,889 27,229 30,610 117,690 389,552 397,267
Average interest rate 2.17% 3.55% 4.20% 3.80% 4.05% 1.36%
Period gap $ 2,052 2,089 24,857 23,698 11,895 15,396
Cumulative gap $ 2,052 4,141 28,998 52,696 64,591 79,987
Ratio of rate sensitive assets to rate sensitive liabilities:
First twelve months 101.60%
Years two through four 144.93%
Thereafter 113.08%
(1) Excludes adjustments for allowance for loan losses.
(2) At amortized cost.
(3) Rates for tax-exempt securities are adjusted to a taxable equivalent rate.
-40-
Item 8. Financial Statements and Supplementary Data
The Financial Statements required by this item are incorporated herein by
reference to pages 15 through 24 of the Registrants 2002 LCNB Corp. Annual
Report attached to this filing as Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures. - None
-41-
PART III
Portions of the Proxy Statement included in the Notice of Annual Meeting
of Shareholders to be held April 15, 2003, dated March 10, 2003, are
incorporated by reference into Part III.
Item 10. Directors and Executive Officers of the Registrant
The information contained in the Notice of Annual Meeting of Shareholders
and Proxy Statement (dated March 10, 2003), relating to "Directors and
Executive Officers of the Registrant", is incorporated herein by reference.
Item 11. Executive Compensation
The information contained in the Notice of Annual Meeting of Shareholders
and Proxy Statement (dated March 10, 2003), relating to "Compensation of
Directors and Executive Officers", is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Notice of Annual Meeting of Shareholders
and Proxy Statement (dated March 10, 2003), relating to "Section 16(a)
Beneficial Ownership Reporting Compliance" is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information contained in the Notice of Annual Meeting of Shareholders
and Proxy Statement (dated March 10, 2003), relating to "Certain
Relationships and Related Transactions", is incorporated herein by
Reference.
Item 14. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer have reviewed,
as of a date within 90 days of this filing, the disclosure controls and
procedures that ensure that information relating to LCNB required to be
disclosed by LCNB in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported in a timely and proper manner. Based upon this
review, LCNB believes that there are adequate controls and procedures in
place. There are no significant changes in the controls or other factors that
could affect the controls after the date of evaluation.
-42-
PART IV
Item 15. Exhibits, Financial Statements and Reports on 8-K
1. Financial Statements
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Exhibits required by Item 601 Regulation S-K.
(a)Exhibit No. Exhibit Description
---------- -------------------
3.1 Articles of Incorporation of LCNB Corp.(1)
3.2 Code of Regulations of LCNB Corp.(2)
10 Material Contracts:
LCNB Corp. Ownership Incentive Plan (3)
13 Portions of LCNB Corp. 2002 Annual Report (pages 2-3
and 15-24)
21 LCNB Corp. Subsidiaries
99 Certification of Chief Executive Officer and Chief
Financial Officer under Section 906 of the Sarbanes-
Oxley Act of 2002.
(1) Incorporated by reference to Registrant's 1999 Form 10-K,
Exhibit 3.1.
(2) Incorporated by reference to Registrant's Registration
Statement on Form S-4, Exhibit 3.2, Registration
No. 333-70913.
(3) Incorporated by reference to Registrant's Form DEF 14A Proxy
Statement pursuant to Section 14(a), dated March 15, 2002,
Exhibit A.
(b)Reports on Form 8-K
There were no Form 8-Ks filed with the SEC during the fourth quarter
of 2002.
-43-
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)
/s/Stephen P. Wilson
----------------------------
President and Chairman of
the Board of Directors
March 3, 2003
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities and on
the dates indicated:
/s/Steve P. Foster /s/James B. Miller
- --------------------- ---------------------
Steve P. Foster James B. Miller
Executive Vice President Director
And Chief Financial Officer March 3, 2003
March 3, 2003
/s/David S. Beckett /s/Corwin M. Nixon
- --------------------- ---------------------
David S. Beckett Corwin M. Nixon
Director Director
March 3, 2003 March 3, 2003
/s/Robert C. Cropper /s/Kathleen Porter Stolle
- --------------------- -------------------------
Robert C. Cropper Kathleen Porter Stolle
Director Director
March 3, 2003 March 3, 2003
/s/William H. Kaufman /s/Howard E. Wilson
- --------------------- ----------------------
William H. Kaufman Howard E. Wilson
Director Director
March 3, 2003 March 3, 2003
/s/George L. Leasure /s/Marvin E. Young
- --------------------- ----------------------
George L. Leasure Marvin E. Young
Director Director
March 3, 2003 March 3, 2003
-44-
CERTIFICATIONS
In connection with the Annual Report of LCNB Corp. on Form 10-K for the year
ending December 31, 2002, as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), I, Stephen P. Wilson, President and Chief
Executive Officer of LCNB Corp., certify, that:
(1) I have reviewed this annual report on Form 10-K of LCNB Corp.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations,
and cash flows of the registrant as of, and for, the periods
presented in this annual report;
(4) LCNB Corp.'s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as
defined in Exchange Act Rules 13a-14 and 15d-14, for LCNB Corp. and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to LCNB Corp., including its
consolidated subsidiaries, is made known to us by others with
those entities, particularly during the period in which the
annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
control and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
(5) LCNB Corp.'s other certifying officer and I have disclosed, based on
our most recent evaluation, to LCNB Corp.'s auditors and the audit
committee of LCNB Corp.'s board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
(6) LCNB Corp.'s other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Stephen P. Wilson
- -------------------------------------
Stephen P. Wilson
President and Chief Executive Officer
March 3, 2003
-45-
CERTIFICATIONS
In connection with the Annual Report of LCNB Corp. on Form 10-K for the period
ending December 31, 2002, as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), I, Steve P. Foster, Executive Vice President
and Chief Financial Officer of LCNB Corp., certify, that:
(1) I have reviewed this annual report on Form 10-K of LCNB Corp.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations,
and cash flows of the registrant as of, and for, the periods
presented in this annual report;
(4) LCNB Corp.'s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as
defined in Exchange Act Rules 13a-14 and 15d-14, for LCNB Corp. and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to LCNB Corp., including its
consolidated subsidiaries, is made known to us by others with
those entities, particularly during the period in which the
annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
control and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
(5) LCNB Corp.'s other certifying officer and I have disclosed, based on
our most recent evaluation, to LCNB Corp.'s auditors and the audit
committee of LCNB Corp.'s board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
(6) LCNB Corp.'s other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Steve P. Foster
- ----------------------------
Steve P. Foster
Executive Vice President and
Chief Financial Officer
March 3, 2003
-46-