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 March 31, 2003
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
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(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 April 29, 2003, was 1,719,727 shares.
LCNB Corp.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2003, and December 31, 2002 . . . . . . . . .1
Consolidated Statements of Income -
Three Months Ended March 31, 2003
and 2002. . . . . . . . . . . . . . . . . . . . . . . .2
Consolidated Statements of Shareholders' Equity -
Three Months Ended March 31, 2003 and 2002. . . . . . .3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002. . . . . . .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. . . . . 11-22
Item 3. Quantitative and Qualitative Disclosures
about Market Risks. . . . . . . . . . . . . . . . . . .22
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . .22
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . .23
Item 2. Changes in Securities and Use of Proceeds . . . . . . . .23
Item 3. Defaults by the Company on its Senior Securities. . . . .23
Item 4. Submission of Matters to a Vote of Security Holders . . .23
Item 5. Other Information . . . . . . . . . . . . . . . . . . . .23
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . .23
Part I - Financial Information
Item 1. Financial Statements
LCNB Corp. and Subsidiaries
Consolidated Balance Sheets
(thousands)
March 31, December 31,
2003 2002
(unaudited) (a)
ASSETS:
Cash and due from banks $ 15,384 13,679
Federal funds sold 12,000 11,925
------- -------
Total cash and cash equivalents 27,384 25,604
------- -------
Securities available for sale, at
market value 141,169 136,178
Federal Reserve Bank stock and
Federal Home Loan Bank stock, at cost 2,893 2,871
Loans 320,193 324,832
Less-allowance for loan losses 2,000 2,000
------- -------
Net loans 318,193 322,832
------- -------
Premises and equipment, net 11,633 11,688
Intangible assets 3,066 3,121
Other assets 4,834 4,457
------- -------
TOTAL ASSETS $509,172 506,751
======= =======
LIABILITIES:
Deposits-
Noninterest-bearing $ 60,774 58,921
Interest-bearing 384,582 383,299
------- -------
Total deposits 445,356 442,220
Long-term debt 6,239 6,253
Accrued interest and other liabilities 4,480 6,348
------- -------
TOTAL LIABILITIES 456,075 454,821
------- -------
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 31,471 30,768
Treasury shares at cost,
55,749 and 54,917 shares at
March 31, 2003 and December 31,
2002, respectively (2,236) (2,193)
Accumulated other comprehensive
income, net of taxes 2,749 2,242
------- -------
TOTAL SHAREHOLDERS' EQUITY 53,097 51,930
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $509,172 506,751
======= =======
(a) Financial information as of December 31, 2002, 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
March 31,
-----------------------
2003 2002
INTEREST INCOME:
Interest and fees on loans $ 5,769 6,228
Dividends on Federal Reserve Bank and
Federal Home Loan Bank stock 22 24
Interest on investment securities-
Taxable 753 652
Non-taxable 533 407
Other short-term investments 40 95
----- -----
TOTAL INTEREST INCOME 7,117 7,406
----- -----
INTEREST EXPENSE:
Interest on deposits 2,251 2,516
Interest on short-term borrowings 2 4
Interest on long-term borrowings 71 185
----- -----
TOTAL INTEREST EXPENSE 2,324 2,705
----- -----
NET INTEREST INCOME 4,793 4,701
PROVISION FOR LOAN LOSSES 118 54
----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,675 4,647
----- -----
NON-INTEREST INCOME:
Trust income 255 301
Service charges and fees 637 579
Net gain on sale of securities - 9
Insurance agency income 361 251
Gains from sales of mortgage loans 227 26
Other operating income 35 35
----- -----
TOTAL NON-INTEREST INCOME 1,515 1,201
----- -----
NON-INTEREST EXPENSE:
Salaries and wages 1,704 1,615
Pension and other employee benefits 484 477
Equipment expenses 232 156
Occupancy expense - net 281 248
State franchise tax 117 141
Marketing 107 83
Intangible amortization 150 149
ATM expense 69 100
Other non-interest expense 791 754
----- -----
TOTAL NON-INTEREST EXPENSE 3,935 3,723
----- -----
INCOME BEFORE INCOME TAXES 2,255 2,125
PROVISION FOR INCOME TAXES 649 599
----- -----
NET INCOME $ 1,606 1,526
===== =====
Dividends declared per common share $ .525 .50
Earnings per common share:
Basic $ .93 .88
Diluted .93 .88
Average shares outstanding (000's):
Basic 1,721 1,732
Diluted 1,721 1,732
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, 2002 $10,560 10,553 27,714 (516) 1,196 49,507
Net income 1,526 1,526 1,526
Net unrealized loss on
available-for-sale securities
(net of tax benefit of $99) (193) (193) (193)
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $3) (6) (6) (6)
-----
Total comprehensive income $ 1,327
=====
Treasury shares purchased (1,677) (1,677)
Cash dividends declared-
$0.50 per share (860) (860)
------ ------ ------ ----- ------ ------
Balance March 31, 2002 $10,560 10,553 28,380 (2,193) 997 48,297
====== ====== ====== ===== ====== ======
Balance January 1, 2003 $10,560 10,553 30,768 (2,193) 2,242 51,930
Net income 1,606 1,606 1,606
Net unrealized gain on
available-for-sale securities
(net of taxes of $261) 507 507 507
-----
Total comprehensive income $ 2,113
=====
Treasury shares purchased (43) (43)
Cash dividends declared-
$0.525 per share (903) (903)
------ ------ ------ ----- ------ ------
Balance March 31, 2003 $10,560 10,553 31,471 (2,236) 2,749 53,097
====== ====== ====== ===== ====== ======
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)
Three Months Ended
March 31,
---------------------
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,606 1,526
Adjustments to reconcile net income to net cash
Provided by operating activities -
Depreciation, amortization and accretion 749 631
Provision for loan losses 118 54
Realized gain on sales of securities
available for sale - (9)
Origination of mortgage loans for sale (9,725) (2,271)
Proceeds from sales of mortgage loans 9,855 2,287
(Increase) decrease in income receivable (148) (90)
(Increase) decrease in other assets (459) (304)
Increase (decrease) in other liabilities 471 (228)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,467 1,596
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale - 5,942
Proceeds from maturities of securities available
for sale 9,803 2,179
Purchases of securities available for sale (14,332) (9,476)
Net decrease (increase) in loans 4,467 4,849
Purchases of premises and equipment (183) (192)
------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (245) 3,302
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 3,136 3,221
Net change in short-term borrowings (2,618) 1,513
Principal payments on long-term debt (14) (13)
Cash dividends paid (903) (860)
Purchases of treasury shares (43) (1,677)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES (442) 2,184
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,780 7,082
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,604 34,236
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $27,384 41,318
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,306 2,935
Income taxes - -
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 U.S. 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 months ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2003. 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 2002 Form 10-K filed
with the Securities and Exchange Commission.
The financial information presented on pages one through nine of this Form
10-Q has been subject to a review by J.D. Cloud & Co. L.L.P., the Company'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. Diluted
earnings per share is adjusted for the dilutive effects of stock options.
The diluted average number of common shares outstanding has been increased
for the assumed exercise of stock options with proceeds used to purchase
treasury shares at the average market price for the period.
-5-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 3 - LOANS
Major classifications of loans at March 31, 2003 and December 31, 2002 are
as follows (thousands):
March 31, December 31,
2003 2002
-------- -----------
Commercial and industrial $ 27,504 35,198
Commercial, secured by real estate 92,935 80,882
Residential real estate 144,717 151,502
Consumer, excluding credit card 49,473 51,184
Agricultural 1,233 1,314
Credit card 2,577 2,689
Other loans 44 57
Lease financing 1,006 1,256
------- -------
319,489 324,082
Deferred net origination costs 704 750
------- -------
320,193 324,832
Allowance for loan losses (2,000) (2,000)
------- -------
Loans - net $318,193 322,832
======= =======
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 March 31, 2003 and December
31, 2002 were $42,640,000 and $36,592,000, respectively. Loans sold to the
FHLMC during the quarters ended March 31, 2003 and 2002 totaled $9,725,000
and $2,271,000, respectively.
Mortgage servicing rights on originated mortgage loans that have been sold
are capitalized by allocating the total cost of the loans between mortgage
servicing rights and the loans based on their relative fair values.
Approximately $96,000 in mortgage servicing rights were capitalized during
the quarter ended March 31, 2003 and are being amortized to loan servicing
income in proportion to and over the period of estimated servicing income.
-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):
March 31, March 31,
2003 2002
--------- ---------
Balance - beginning of year $2,000 2,000
Provision for loan losses 118 54
Charge offs (138) (68)
Recoveries 20 14
----- -----
Balance - end of period $2,000 2,000
===== =====
There were no nonaccrual loans at March 31, 2003 or December 31, 2002.
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
March 31, 2003 and December 31, 2002 were as follows (thousands):
March 31, December 31,
2003 2002
--------- ---------
Commitments to extend credit $75,302 69,521
Standby letters of credit 6,606 6,938
-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 March 31, 2003
and December 31, 2002, outstanding guarantees of $1,716,000 and $2,048,000,
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 March 31, 2003 and December
31, 2002 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.
-8-
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 5 - STOCK OPTIONS
LCNB established an Ownership Incentive Plan (the "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 were
granted during 2002. Stock options for 2,764 shares were granted to key
executive officers of LCNB during the first quarter, 2003.
LCNB accounts for the Plan under the recognition and measurement principles
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted had an
exercise price equal to the market value of the underlying common stock on
the date of grant. The pro-forma effect on net income and earnings per share
if LCNB had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation was not material. Because
this is the first quarter stock options were outstanding, this quarter's pro-
forma effect is not indicative of the pro-forma effect on future quarters and
years.
-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 March 31, 2003, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three-month periods ended March 31, 2003 and 2002. 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 of LCNB Corp. and subsidiaries as of
December 31, 2002 (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 24, 2003, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2002, is fairly stated in all material respects.
/s/ J.D. Cloud & Co. L.L.P.
Cincinnati, Ohio
April 14, 2003
-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 $1,606,000 for the three months ended March 31, 2003, which was
$80,000 or 5.24% greater than the $1,526,000 earned during the three months
ended March 31, 2002. Basic earnings per share were $0.93 for the first
quarter of 2003, compared with $0.88 per share earned in the first quarter of
2002. Annualized performance ratios for the 2003 period included a return on
average assets of 1.28% and a return on average equity of 12.36%, compared
with 1.29% and 12.59%, respectively, for the comparable period in 2002.
Return on average assets and average equity decreased despite the growth in
earnings due to growth in average assets and average equity.
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 first quarter of 2003 and 2002, average balances for the different types
of 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
March 31,
-----------------------
2003 2002
(Dollars in thousands)
Interest-earning Assets:
Average balance (1) $476,746 448,018
Interest income (2) 7,397 7,622
Average rate 6.29% 6.90%
Interest-bearing Liabilities:
Average balance 390,856 370,821
Interest expense 2,324 2,705
Average rate 2.41% 2.96%
Net interest income 5,073 4,917
Net interest margin on a
taxable equivalent basis (3) 4.32% 4.45%
(1) Includes nonaccrual loans, if any.
(2) Income from tax-exempt loans and investment 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 margin is the taxable-equivalent net interest income
divided by average interest-earning assets.
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 three months ended March 31, 2003 and 2002. 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
March 31,
2003 vs. 2002
--------------------------
Increase (decrease) due to
--------------------------
Volume Rate Total
(In thousands)
Interest Earning Assets
Loans $ 39 (499) (460)
Federal funds sold (34) (21) (55)
Federal Home Loan Bank stock 1 (3) (2)
Investment securities
Taxable 212 (111) 101
Nontaxable 236 (45) 191
--- ----- -----
Total interest income 454 (679) (225)
Interest Bearing Liabilities
Deposits 178 (443) (265)
Short-term borrowings (2) - (2)
Long-term debt (76) (38) (114)
--- ----- -----
Total interest expense 100 (481) (381)
--- ----- -----
Net interest income $354 (198) 156
=== ===== =====
Net interest income on a fully tax equivalent basis for the first quarter of
2003 totaled $5,073,000, an increase of $156,000 from the first quarter of
2002. Total interest expense decreased $381,000, partially offset by a
decrease in total interest income of $225,000. 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 525 basis point (a basis point
equals 0.01%) decrease in the intended federal funds rate, as set by the
Federal Reserve Board, during 2001 and 2002.
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 first quarter of 2003 was 4.32%, as compared to 4.45% for the first
quarter, 2002. The net interest margin decreased because rates earned on
loans and other investments decreased more rapidly than rates paid for
deposits and other borrowings.
-13-
The decrease in total interest income was primarily due to a 61 basis point
decrease in the average rate on earning assets, from 6.90% for the first
quarter of 2002 to 6.29% for the first quarter of 2003. This decrease was
partially offset by a $28.7 million increase in average total earning assets.
Average investment securities increased $37.3 million while average federal
funds sold, which had an average interest rate of only 1.14% during the first
quarter, 2003, decreased $10.7 million as funds were reallocated the higher
earning investment portfolio. The balance of the increase in investments
securities was funded from deposit growth.
Average loans increased $2.0 million in the first quarter, 2003 as compared
to the first quarter, 2002 primarily due to a $10.1 million increase in
average commercial loans and an $8.5 million increase in average home equity
line of credit loans, offset by an $18.3 million decrease in real estate
mortgage loans. Real estate mortgage loans decreased because of payoffs from
loan refinances and sales of most new fixed-rate loans to the Federal Home
Loan Mortgage Corporation ("FHLMC").
The decrease in total interest expense was due to a 55 basis point decrease
in the average liability rate, slightly offset by a $20.0 million increase in
average interest-bearing liabilities. Average interest-bearing deposits
increased $26.6 million, while average long-term debt decreased $6.1 million.
The deposit increase was primarily in the regular savings product, reflecting
customer preference for highly liquid, short-term investment products during
the current rate cycle. The $6.1 million decrease in long-term debt reflects
the maturation of a $2.0 million Federal Home Loan Bank advance in June, 2002,
and the early payoff of two other advances totaling $4.0 million during
August, 2002.
-14-
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 loan 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.
Quarter Ended March 31,
2003 2002
(thousands)
Balance, beginning of period $ 2,000 2,000
Charge-offs (138) (68)
Recoveries 20 14
----- -----
Net charge-offs (118) (54)
----- -----
Provision for loan losses 118 54
----- -----
Balance, end of period $ 2,000 2,000
===== =====
The $70,000 increase in charge-offs was in the installment loan category.
The following table sets forth information regarding the past due, non-
accrual and renegotiated loans of LCNB at the dates indicated:
March 31, December 31,
2003 2002
------------- ----------
(thousands)
Loans accounted for on
non-accrual basis $ - -
Accruing loans which are
past due 90 days or more 548 232
Renegotiated loans - -
--- ---
Total $548 232
=== ===
The increase in accruing loans past due 90 days or more is due to one loan
secured by a mortgage on land.
-15-
NON-INTEREST INCOME
Non-interest income increased $314,000 or 26.1% during the first quarter of
2003 as compared to the first quarter of 2002. Service charges and fees
increased $58,000 or 10.0% primarily due to pricing adjustments for non-
sufficient fund fees and to an increase in the number of non-sufficient fund
charges. Insurance agency income increased $110,000 or 43.8% compared to the
first quarter of 2002 due to a $55,000 increase in contingency commissions
recognized during 2003 and to commissions received on new and renewing
policies. 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. Gains from sales of mortgage loans increased
$201,000 due to an increase in the volume of loans sold during the first
quarter of 2003 as compared to the first quarter of 2002.
Partially offsetting the increases listed above was a $46,000 or 15.3%
decrease in trust income for the first quarter of 2003 compared to the same
period in 2002. Total trust assets under management at March 31, 2003 were
$9.9 million greater than at March 31, 2002, but the mix of assets has
changed enough to create the decrease in income.
NON-INTEREST EXPENSE
Total non-interest expense increased $212,000 or 5.7% during the first
quarter, 2003 compared with the first quarter, 2002. Salaries and wages
increased $89,000 or 5.5% primarily due to routine salary and wage increases.
Equipment expense increased $76,000 or 48.7% primarily due to the rental costs
for a new phone system installed during 2002 and to depreciation charges on
new furniture and computer hardware and software purchased during 2002.
Occupancy expense increased $33,000 or 13.3% primarily due to $31,000 in snow
removal and salt application costs paid during the first quarter, 2003.
Partially offsetting these increases was a $31,000 decrease in ATM expenses
caused by a change in the ATM transaction processor.
-16-
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 AVERAGE QUARTERLY BALANCE SHEETS
------------------------------------------
March 31, December 31, September 30,
2003 2002 2002
(thousands)
ASSETS
Interest-earning:
Federal funds sold $ 14,246 21,877 17,169
Investment securities 137,834 130,460 123,186
Loans 324,666 328,505 332,638
------- ------- -------
Total interest-earning assets 476,746 480,842 472,993
Noninterest-earning:
Cash and due from banks 14,065 13,992 13,619
All other assets 19,058 19,163 19,458
Allowance for credit losses (2,005) (2,001) (2,001)
------- ------- -------
Total assets $507,864 511,996 504,069
======= ======= =======
LIABILITIES
Interest bearing:
Interest-bearing deposits $383,986 389,117 380,957
Short-term borrowings 624 1,089 1,078
Long-term debt 6,246 6,260 8,708
------- ------- -------
Total interest-bearing
liabilities 390,856 396,466 390,743
Noninterest-bearing:
Noninterest-bearing deposits 61,194 60,457 59,415
All other liabilities 3,141 3,443 3,128
------- ------- -------
Total liabilities 455,191 460,366 453,286
SHAREHOLDERS' EQUITY 52,673 51,630 50,783
------- ------- -------
Total liabilities and
shareholders' equity $507,864 511,996 504,069
======= ======= =======
-17-
March 31, 2003 vs. December 31, 2002. Total average interest-earning assets
decreased $4.1 million when comparing the quarter ended March 31, 2003 to the
quarter ended December 31,2002. Securities available for sale increased $7.4
million, while federal funds sold decreased $7.6 million. During the quarter
funds were re-allocated from federal funds to the higher-earning investment
securities portfolio. Loans decreased $3.8 million on an average basis
because of refinance activity and the sale of most new fixed-rate loans in
the secondary market.
Total average interest-bearing liabilities decreased $5.6 million when
comparing the March 31 and December 31 quarters. Most of the decrease was in
interest-bearing deposits, which decreased $5.1 million on an average basis.
Most of the decrease was in prime savings and certificates of deposit
accounts, partially offset by growth in regular savings accounts, which grew
$13.5 million on an average basis.
Management believes the growth in regular savings accounts 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.
-18-
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.
March 31, December 31,
2003 2002
---------- ----------
(thousands)
Total consolidated assets
as reported on the balance sheet $509,172 506,751
Assets managed by the
Trust Department * 119,012 119,263
Mortgage loans serviced for others 42,640 36,592
Business cash management * 18,688 16,668
Brokerage accounts * 5,125 3,639
------- -------
Total assets managed $694,637 682,913
======= =======
* at fair market value
CAPITAL
Lebanon Citizens and LCNB Corp. 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:
-19-
At At
March 31, December 31,
2003 2002
(Dollars in thousands)
Regulatory Capital:
Shareholders' equity $ 53,097 51,930
Goodwill and other intangibles (3,066) (3,121)
Net unrealized securities gains (2,749) (2,242)
------ ------
Tier 1 risk-based capital 47,282 46,567
Eligible allowance for loan losses 2,000 2,000
------ ------
Total risk-based capital $ 49,282 48,567
====== ======
Capital Ratios:
Total risk-based 15.46% 15.36%
Tier 1 risk-based 14.83% 14.73%
Tier 1 leverage 9.43% 9.21%
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%
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 March 31, 2003, 8,397 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
March 31, 2003.
-20-
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 included cash, federal funds sold and securities available for
sale. At March 31, 2003, LCNB liquid assets amounted to $168.6 million or
33.1% of total assets, an increase from $161.8 million or 31.9% at December
31, 2002.
Liquidity is also provided by access to core funding sources, primarily core
depositors in the bank's primary market area. LCNB does not solicit brokered
deposits as a funding source. The liquidity of LCNB is enhanced by the fact
that 90.2% of total deposits at March 31, 2003 were "core" deposits. Core
deposits, for this purpose, are defined as total deposits less public funds
and certificates of deposit greater than $100,000.
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 current liquidity levels.
-21-
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, 2002 see Item 7A, Quantitative and
Qualitative Disclosures about Market Risks, in the recently filed Form 10-K
for the year ended December 31, 2002. There have been no material changes
in LCNB's market risks, which for LCNB is primarily interest rate risk.
Item 4. 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.
-22-
PART II. OTHER INFORMATION
LCNB Corp. and Subsidiary
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 - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Title
99.1 Certification of Chief Executive Officer
under Section 302 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of Chief Financial Officer
under Section 302 of the Sarbanes-Oxley
Act of 2002.
99.3 Certification of Chief Executive Officer
and Chief Financial Officer under Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
LCNB filed a report on Form 8-K on January 15, 2003 to announce
earnings for the year ended December 31, 2002.
-23-
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 /s/Steve P. Foster
- ------------------------- -------------------------
Stephen P. Wilson Steve P. Foster
President, CEO & Chairman Executive Vice President
of the Board of Directors and Chief Financial Officer
April 30, 2003 April 30, 2003
-24-
Exhibit 99.1
CERTIFICATIONS
In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the
period ending March 31, 2003, 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 quarterly report on Form 10-Q of LCNB Corp.;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the Evaluation Date); and
c. Presented in this quarterly 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 quarterly 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
April 30, 2003
-25-
Exhibit 99.2
CERTIFICATIONS
In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the
period ending March 31, 2003, 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 quarterly report on Form 10-Q of LCNB Corp.;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the Evaluation Date); and
c. Presented in this quarterly 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 quarterly 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
April 30, 2003
-26-
Exhibit 99.3
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of LCNB Corp. (the "Company") on
Form 10-Q for the period ending March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), we, Stephen P.
Wilson, Chief Executive Officer, and Steve P. Foster, Chief Financial
Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Stephen P. Wilson /s/ Steve P. Foster
- ----------------------- -----------------------
Stephen P. Wilson Steve P. Foster
Chief Executive Officer Chief Financial Officer
Date: April 30, 2003
-27-