UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE),
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2003
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
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. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ( X ) No ( )
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 $69.50 per share on February 25, 2004. Based upon
such price, the aggregate market value of the issuer's shares held by
nonaffiliates was $99,796,926.50.
As of February 27, 2004, 1,686,214 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 13, 2004, dated March 12, 2004, are
incorporated by reference into Part III.
LCNB Corp.
For the year ended December 31, 2003
TABLE OF CONTENTS
Page
PART I.
Item 1. Business . . . . . . . . . . . . . . . . . . . . . 3-17
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .18
Item 3. Legal proceedings. . . . . . . . . . . . . . . . . . .19
Item 4. Submission of matters to a vote of security holders. .19
Part II.
Item 5. Market for registrant's common equity and
related stockholder matters . . . . . . . . . . . . .20
Item 6. Selected financial data. . . . . . . . . . . . . . 21-22
Item 7. Management's discussion and analysis of
financial condition and results of operations . . 23-38
Item 7A. Quantitative and qualitative disclosures about
market risk . . . . . . . . . . . . . . . . . . . 39-41
Item 8. Financial statements and supplementary data. . . . . .42
Item 9. Changes in and disagreements with accountants
on accounting and financial disclosure. . . . . . . .42
Item 9A. Controls and procedures. . . . . . . . . . . . . . . .42
Part III.
Item 10. Directors and executive officers of the registrant . .43
Item 11. Executive compensation. . . . . . . . . . . . . . . . 43
Item 12. Security ownership of certain beneficial owners
and management. . . . . . . . . . . . . . . . . . . .43
Item 13. Certain relationships and related transactions . . . .43
Item 14. Principal accounting fees and services . . . . . . . .43
PART IV.
Item 15. Exhibits, financial statement schedules, and
Reports on 8-K. . . . . . . . . . . . . . . . . . . .44
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
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PART I
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, and certificates of deposit.
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, cashier's 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 all of Butler and Warren Counties and portions of 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.
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 from the agency's
customer base over a four-year period.
-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 its 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
directly impacts publicly traded companies, certified public accounting
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:
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1. Certification of financial reports by chief executive officers ("CEOs")
and chief financial officers ("CFOs"), who are 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;
2. Inclusion of an internal controls report in annual reports that include
management's assessment of the effectiveness of a company's internal
controls over financial reporting and a report by the company's auditors
attesting to management's assessment of internal controls;
3. Accelerated reporting of stock trades on Form 4 by directors and
executive officers;
4. 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;
5. Disclosure 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;
6. Disclosure 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
7. Implementation of 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. LCNB meets the requirements for
accelerated filing.
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")
Substantially revised the bank regulatory and funding provisions of the
Federal Deposit Insurance Act and several other federal banking statutes.
Among its many reforms, FDICIA:
1. Required regulatory agencies to take "prompt corrective action" with
financial institutions that do not meet minimum capital requirements;
2. Established five capital tiers: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized;
3. Imposed significant restrictions on the operations of a financial
institution that is not rated well-capitalized or adequately
capitalized;
4. Prohibited a depository institution from making any capital
distributions, including payments of dividends, or paying any
management fee to its holding company if the institution would be
undercapitalized as a result;
5. Implemented a risk-based premium system;
6. Required an audit committee to be comprised of independent, outside
directors;
7. Required a financial institution with more than $500 million in total
assets to issue annual, audited financial statements prepared in
conformity with U.S. generally accepted accounting principles; and
8. Required a financial institution with more than $500 million in total
assets to document, evaluate, and report on the effectiveness of the
entity's internal control system and required an independent public
accountant to attest to management's assertions concerning the bank's
internal control system.
At December 31, 2003, Lebanon Citizens was well capitalized based on FDICIA's
guidelines.
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
-8-
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. Generally, dividends are limited to the aggregate
of current year net income plus the retained net earnings, as defined, of the
two most previous prior years. In addition, dividend payments may not reduce
capital levels below minimum regulatory guidelines.
Employees
As of December 31, 2003, LCNB, Lebanon Citizens, and Dakin employed 217 full-
time equivalent 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.
Availability of Financial Information
LCNB files unaudited quarterly financial reports on Form 10-Q, annual
financial reports on Form 10-K, current reports on Form 8-K, and amendments
to these reports filed or furnished pursuant to Section 13(a) or 15 (d) of
the Securities Exchange Act of 1934 with the Securities and Exchange
Commission ("SEC"). Copies of these reports are available free of charge in
the shareholder information section of Lebanon Citizens' web site,
www.lcnb.com, as soon as reasonably practicable after they are electronically
filed or furnished to the SEC or by writing to:
Steve P. Foster
Executive Vice President, CFO
LCNB Corp.
2 N. Broadway
P.O. Box 59
Lebanon, Ohio 45036
-9-
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
of Financial Condition and Results of Operations, 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 of Financial Condition and Results of Operations.
The table analyzing changes in interest income and expense by volume and rate
is included in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-10-
Investment Portfolio
The following table presents the carrying values of securities for the years
indicated:
At December 31,
---------------
2003 2002 2001
(Dollars in thousands)
Securities available for sale:
U.S. Treasury notes $ 2,149 1,019 2,044
U.S. Agency notes 61,822 47,089 36,328
U.S. Agency mortgage-back
Securities 20,988 19,052 9,570
Municipal securities 65,980 69,018 50,668
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Total securities available
for sale 150,939 136,178 98,610
Federal Reserve Bank Stock 647 647 647
Federal Home Loan Bank Stock 2,315 2,224 2,125
------- ------- -------
Total securities $153,901 139,049 101,382
======= ======= =======
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Contractual maturities of debt securities at December 31, 2003, 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 $ - - -%
One to five years 2,137 2,149 2.02%
Five to ten years - - -%
After ten years - - -%
------- ------- -----
Total U.S Treasury notes $ 2,137 2,149 2.02%
------- ------- -----
U.S. Agency notes:
Within one year $ 2,014 2,039 4.89%
One to five years 57,367 57,752 2.74%
Five to ten years 2,016 2,031 3.62%
After ten years - - -%
------- ------- -----
Total U.S. Agency notes $ 61,397 61,822 2.84%
------- ------- -----
Municipal securities (1):
Within one year $ 12,234 12,412 5.01%
One to five years 30,078 31,322 4.96%
Five to ten years 15,247 15,660 5.21%
After ten years 6,140 6,586 7.28%
------- ------- -----
Total Municipal securities $ 63,699 65,980 5.25%
------- ------- -----
U.S. Agency mortgage-backed
securities $ 20,951 20,988 3.95%
------- ------- -----
$148,184 150,939 4.02%
======= ======= =====
(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, 2003.
-12-
Loan Portfolio
The following table summarizes the distribution of the loan portfolio for
the years indicated:
At December 31,
---------------
2003 2002 2001 2000 1999
(Dollars in thousands)
Commercial and industrial $ 30,519 35,198 40,486 36,449 26,347
Commercial, secured by
real estate 99,461 80,882 72,477 59,043 56,671
Residential real estate 139,305 151,502 165,710 185,013 162,087
Consumer, excluding
credit card 43,283 51,184 41,006 40,860 36,402
Agricultural 1,192 1,314 2,020 2,238 2,343
Credit card 2,707 2,689 2,658 3,049 2,764
Lease Financing 588 1,256 2,088 2,219 183
Other 212 57 112 863 285
------- ------- ------- ------- -------
Total loans 317,267 324,082 326,557 329,734 287,082
Deferred costs, net 566 750 608 705 526
------- ------- ------- ------- -------
317,833 324,832 327,165 330,439 287,608
Allowance for loan losses (2,150) (2,000) (2,000) (2,000) (2,000)
------- ------- ------- ------- -------
Loans, net $315,683 322,832 325,165 328,439 285,608
======= ======= ======= ======= =======
As of December 31, 2003, 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.
-13-
The following tables summarize the commercial and agricultural loan
maturities and sensitivities to interest rate changes at December 31, 2003:
(Dollars in thousands)
----------------------
Maturing in one year or less $ 34,099
Maturing after one year, but within five years 6,933
Maturing beyond five years 90,140
-------
Total commercial and agricultural loans $131,172
=======
Loans maturing beyond one year:
Fixed rate $ 49,454
Variable rate 47,619
-------
Total $ 97,073
=======
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. Generally, loans are placed on non-accrual
status at ninety days past due, unless the loan is well-secured and in the
process of collection. 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)
2003 $2,442
2002 232
2001 146
2000 111
1999 68
-14-
Approximately $2,030,000 of the increase at December 31, 2003 was due to
related commercial loans secured by a combination of mortgage and other
liens. These loans are considered well-secured and in the process of
collection. After receipt of specified payments in accordance with a
negotiated agreement, Lebanon Citizens will re-write the remaining balance of
the loans. 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.
Nonaccrual loans at December 31, 2003 totaled $794,000, which included a
commercial loan in the amount of $564,000 and a consumer loan in the amount of
$146,000. There were no nonaccrual loans at December 31 for each of the years
ended 1999 through 2002. Interest income that would have been recorded during
2003 if loans on a nonaccrual status at December 31, 2003 had been current and
in accordance with their original terms was approximately $72,000. Interest
income that would have been recorded in each of the years 1999 through 2002
for loans on nonaccrual status was not material. There were no restructured
loans at December 31, 1999 through 2003. For each of the years ended December
31, 1999 through 2002, the recorded investments in loans for which impairment
has been recognized in accordance with SFAS Statement No. 114 was not
material. Loans that were considered to be impaired in accordance with SFAS
No. 114 totaled $2,824,000 at December 31, 2003, of which $2,740,000 had a
related allowance for loan losses of $674,000 and $84,000 did not have a
related allowance for loan losses. The average balance of these impaired
loans during 2003 was $2,857,000. During 2003, the Company accrued interest
income totaling $183,000 on impaired loans classified as past due 90 days or
more and still accruing because they are considered well-secured and in the
process of collection.
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, 2003, 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.
-15-
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 of Financial Condition and Results of Operations.
The following table presents the allocation of the allowance for loan loss.
At December 31,
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- --------------- -------------- -------------- -------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Commercial and
industrial $1,069 9.62% 744 10.86% 647 12.40% 381 11.05% 304 9.17%
Commercial, secured
by real estate - 31.35 - 24.96 - 22.19 - 17.91 - 19.74
Residential real
estate - 43.91 - 46.75 - 50.75 - 56.11 - 56.45
Consumer 676 13.64 871 15.79 774 12.56 714 12.39 514 12.70
Agricultural - 0.38 - 0.40 - 0.62 - 0.68 - 0.82
Credit card 42 0.85 77 0.83 82 0.81 40 0.93 38 0.96
Lease financing - 0.07 - 0.39 - 0.64 - 0.67 - 0.06
Other - 0.18 - 0.02 - 0.03 - 0.26 - 0.10
Unallocated 363 308 497 865 1,144
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
Total $2,150 100.00% 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. Consumer and credit card allocations were less at December 31, 2003 as
compared to December 31, 2002 because of general economic improvements in late 2003. The commercial and
industrial allocation was greater at December 31, 2003 to reflect increased delinquencies.
-16-
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 of Financial Condition and Results of Operations.
The following table presents the contractual maturity of time deposits of
$100,000 or more at December 31, 2003:
(Dollars in thousands)
----------------------
Maturity within 3 months $ 9,256
After 3 but within 6 months 3,089
After 6 but within 12 months 1,836
After 12 months 26,446
------
$40,627
======
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.
-17-
Item 2. Properties
Lebanon Citizens conducts its business from the following offices:
Name of Office Address
-------------- -------
1. Main Office 2 North Broadway Owned
Lebanon, Ohio 45036
2. Auto Bank 36 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.
-18-
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
-19-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
LCNB had approximately 630 registered holders of its Common Stock as of
December 31, 2003. The number of shareholders includes banks and brokers who
act as nominees, each of whom may represent more than one shareholder. The
Common Stock is currently traded on the Nasdaq Over-The-Counter Bulletin
Board service under the symbol "LCNB". Several market-makers facilitate the
trading of the shares of Common Stock. Trade prices for shares of LCNB
Common Stock, reported through registered securities dealers, are set forth
below. Trades have occurred during the periods indicated without the
knowledge of LCNB. The trade prices shown below are interdealer without
retail markups, markdowns or commissions.
High Low
---- ---
2003
- ----
First Quarter $55.00 $49.50
Second Quarter 58.50 52.00
Third Quarter 85.00 58.00
Fourth Quarter 76.00 65.25
2002
- ----
First Quarter $44.00 $39.00
Second Quarter 45.00 42.50
Third Quarter 60.00 43.26
Fourth Quarter 60.50 46.00
-20-
The following table presents cash dividends per share declared and paid in
the periods shown:
2003 2002
---- ----
First Quarter $0.525 0.50
Second Quarter 0.525 0.50
Third Quarter 0.525 0.50
Fourth Quarter 0.550 0.525
------ -----
Total $2.125 2.025
====== =====
It is expected that LCNB will continue to pay dividends on a similar
schedule, to the extent permitted by business and other factors beyond
management's control. 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 the
Bank may pay to the sum of retained net income, as defined, for the current
year plus net income retained for the previous two years. Prior approval from
the Office of the Comptroller of the Currency, the Bank's primary regulator,
would be necessary for the Bank to pay dividends in excess of this amount. In
addition, dividend payments may not reduce capital levels below minimum
regulatory guidelines. Management believes the Bank will be able to pay
anticipated dividends to LCNB without needing to request approval.
Item 6. Selected Financial Data
The following represents selected consolidated financial data of LCNB for the
years ended December 31, 1999 through 2003 and are derived from LCNB Corp's
consolidated financial statements. 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 of
Financial Condition and Results of Operations 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.
-21-
For the Years Ended December 31,
--------------------------------
2003 2002 2001 2000 1999
(Dollars in thousands,
except ratios and data per share)
Income Statement
Interest Income $ 27,437 30,163 32,164 32,151 29,689
Interest Expense 8,680 10,670 14,340 15,922 13,282
------- ------- ------- ------- -------
Net Interest Income 18,757 19,493 17,824 16,229 16,407
Provision for Loan Losses 658 348 237 197 208
------- ------- ------- ------- -------
Net Interest Income
after Provision 18,099 19,145 17,587 16,032 16,199
Other Operating Income 6,797 5,623 4,842 4,400 4,372
Operating Expenses 15,725 15,705 13,922 13,101 12,673
------- ------- ------- ------- -------
Income before
Income Taxes 9,171 9,063 8,507 7,331 7,898
Provision for
Income Taxes 2,434 2,523 2,440 2,091 2,323
------- ------- ------- ------- -------
Net Income $ 6,737 6,540 6,067 5,240 5,575
======= ======= ======= ======= =======
Balance Sheet
Securities $153,901 139,049 101,382 84,894 105,558
Loans - net 315,683 322,832 325,165 328,439 285,608
Total Assets 523,608 506,751 480,435 451,000 439,238
Total Deposits 463,033 442,220 414,772 394,786 391,569
Long-Term Debt 4,197 6,253 12,306 6,356 403
Total Shareholders'
Equity 52,448 51,930 49,507 46,310 42,687
Selected Financial Ratios
and Other Data
Return on average
assets 1.31% 1.32% 1.30% 1.17% 1.29%
Return on average
equity 12.64% 13.00% 12.50% 11.84% 13.01%
Equity-to-assets
ratio 10.02% 10.25% 10.30% 10.27% 9.72%
Dividend payout
ratio 53.93% 53.43% 53.94% 61.02% 50.96%
Basic and diluted
earnings per share (1) $3.94 3.79 3.43 2.95 3.14
Dividends declared
per share (1) $2.125 2.025 1.85 1.80 1.60
(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.
-22-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The following is management's discussion and analysis of financial condition
and results of operations 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 2003 Annual Report to Shareholders.
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.
Net Income
LCNB earned $6,737,000 in 2003 compared to $6,540,000 in 2002. Basic and
diluted earnings per share were $3.94, a 3.96% or $0.15 per share increase
from 2002. Performance ratios for 2003 included a return on average assets
of 1.31% and a return on average equity of 12.64% compared to ratios of 1.32%
and 13.00%, respectively, for 2002.
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.
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.
-23-
Years ended December 31,
------------------------
2003 2002 2001
---- ---- ----
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) $319,771 $22,007 6.88% $327,561 $24,821 7.58% $332,634 $27,309 8.21%
Federal funds sold 17,089 177 1.04 21,551 339 1.57 19,080 667 3.50
Federal Reserve
Bank stock 647 39 6.03 647 39 6.03 647 39 6.03
Federal Home Loan
Bank stock 2,258 90 3.99 2,165 100 4.62 1,957 132 6.75
Investment securities:
Taxable 87,273 3,040 3.48 66,577 3,068 4.61 47,394 2,601 5.49
Non-taxable(2) 57,886 3,182 5.50 47,107 2,765 5.87 33,592 2,211 6.58
------- ------ ------- ------ ------- ------
Total earning assets 484,924 28,535 5.88 465,608 31,132 6.69 435,304 32,959 7.57
Non-earning assets 33,265 33,247 33,705
Allowance for
loan losses (2,037) (2,002) (2,002)
------- ------- -------
Total assets $516,152 $496,853 $467,007
======= ======= =======
Savings deposits $119,838 1,458 1.22 $108,768 1,708 1.57 96,440 2,529 2.62
NOW and money fund 95,234 702 0.74 84,562 918 1.09 81,204 1,925 2.37
IRA and time
certificates 172,963 6,235 3.60 180,990 7,476 4.13 175,098 9,283 5.30
Short-term debt 681 6 0.88 957 13 1.36 964 33 3.42
Long-term debt 6,115 279 4.56 9,699 555 5.72 8,062 570 7.07
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 394,831 8,680 2.20 384,976 10,670 2.77 361,768 14,340 3.96
------ ------ ------
-24-
Years ended December 31,
------------------------
2003 2002 2001
---- ---- ----
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 64,686 58,620 53,959
Other liabilities 3,315 2,950 2,723
Capital 53,320 50,307 48,557
------- ------- -------
Total liabilities
and capital $516,152 $496,853 $467,007
======= ======= =======
Net interest rate
spread(3) 3.68 3.92 3.61
Net interest margin on
a taxable equivalent
basis(4) 19,855 4.09 $20,462 4.39 $18,619 4.28
====== ====== ======
Ratio of interest-earning
assets to interest-bearing
liabilities 122.82% 120.94% 120.33%
(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.
-25-
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,
--------------------------------
2003 vs. 2002 2002 vs. 2001
------------- -------------
Increase (decrease) due to Increase (decrease) due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
(Dollars in thousands)
Interest income
attributable to:
Loans (1) $ (579) (2,235) (2,814) (411) (2,077) (2,488)
Federal funds sold (61) (101) (162) 77 (405) (328)
Federal Home Loan
Bank stock 4 (14) (10) 13 (45) (32)
Investment securities:
Taxable 823 (851) (28) 932 (465) 467
Non-taxable(2) 602 (185) 417 814 (260) 554
----- ----- ----- ----- ----- -----
Total interest income 789 (3,386) (2,597) 1,425 (3,252) (1,827)
Interest expense
attributable to:
Savings deposits 162 (412) (250) 292 (1,113) (821)
NOW and money fund 106 (322) (216) 77 (1,084) (1,007)
IRA and time
certificates (321) (920) (1,241) 303 (2,110) (1,807)
Short-term borrowings (3) (4) (7) - (20) (20)
Long-term debt (178) (98) (276) 105 (120) (15)
----- ----- ----- ----- ----- -----
Total interest expense (234) (1,756) (1,990) 777 (4,447) (3,670)
----- ----- ----- ----- ----- -----
Net interest income $1,023 (1,630) (607) 648 1,195 1,843
===== ===== ===== ===== ===== =====
(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%.
-26-
2003 vs. 2002. Tax equivalent interest income decreased $2,597,000 primarily
due to an 81 basis point (a basis point equals 0.01%) decline in the average
rate earned on average interest-earning assets, partially offset by a $19.3
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 $31.5 million on an average basis. The average rate
earned decreased primarily because of continued general market wide decreases
in interest rates.
Interest expense decreased $1,990,000 because of a 57 basis point decrease
in the average rate paid for deposits and borrowings, partially offset by a
$9.9 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. The increase in average interest-bearing liabilities was in
average savings deposits, which increased $11.1 million, and in average NOW
and money fund deposits, which increased $10.7 million. IRA and time
certificates decreased $8.0 million and long term borrowings decreased $3.6
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 growth in savings deposits
during the past several years 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.
Average long-term borrowings decreased primarily due to the early payoff in
August, 2002 of $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 2002 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, 2002 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 minimize the anticipated
decline in net interest margin. Another $2.0 million FHLB note with an
average interest rate of 3.61% matured in December, 2003.
The net interest margin decreased from 4.39% during 2002 to 4.09% during 2003
because of the 81 basis point decrease in average rates earned from interest-
earning assets, partially offset by the 57 basis point decrease in average
rates for interest bearing liabilities.
-27-
2002 vs. 2001. Tax equivalent interest income decreased $1,827,000 due to an
88 basis point 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.
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.
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 1999 through 2003.
-28-
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in thousands)
Balance - Beginning of year $2,000 2,000 2,000 2,000 2,000
Loans charged off:
Commercial and industrial - 36 - - -
Commercial, secured by real estate - - - - -
Residential real estate 25 26 - - -
Consumer, excluding credit card 504 273 237 222 252
Agricultural - - - - -
Credit Card 31 55 40 33 20
Other - - - - -
----- ----- ----- ----- -----
Total loans charged off 560 390 277 255 272
----- ----- ----- ----- -----
Recoveries:
Commercial and industrial - 8 - - -
Commercial, secured by real estate - - - - -
Residential real estate - - - - -
Consumer, excluding credit card 46 31 38 55 62
Agricultural - - - - -
Credit Card 6 3 2 3 2
Other - - - - -
----- ----- ----- ----- -----
Total recoveries 52 42 40 58 64
----- ----- ----- ----- -----
Net charge-offs 508 348 237 197 208
Provision charged to operations 658 348 237 197 208
----- ----- ----- ----- -----
Balance - End of year $2,150 2,000 2,000 2,000 2,000
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average loans outstanding 0.16% 0.11% 0.07% 0.06% 0.08%
==== ==== ==== ==== ====
Ratio of allowance for loan losses
to total loans at year-end 0.68% 0.62% 0.61% 0.61% 0.70%
==== ==== ==== ==== ====
-29-
Non-Interest Income
2003 vs. 2002. Total non-interest income for 2003 was $1,174,000 or 20.88%
more than for 2002. Trust income increased $163,000 due to an increase in
the market value of assets under management, on which fees are based, and to
fees received for brokerage services, a new service first offered in April,
2002. The market value of trust assets under management grew $46.2 million
or 38.77% during 2003, partially due to increased market values and partially
due to new clients. During the same period, brokerage accounts managed grew
$10.0 million or 274.06%. Service charges and fees increased $605,000
primarily due to the introduction of a new overdraft protection program and
to an increase in rates charged for non-sufficient fund checks.
Insurance agency income increased $300,000 primarily due to an increase in
the volume of policies written and secondarily to an $83,000 increase in
contingency commissions recognized. The increase in policies written was
partially due to the purchase on September 1, 2002, of 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 from the agency's
customer base over a four-year period. 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 $523,000 due to increased
activity in the real estate mortgage loan secondary market during 2003 as
compared to 2002. Loans sold during 2003 total $35.1 million, compared with
$20.9 million for 2002. The increased loan volume sold reflects increased
refinancing activity caused by an historical low in market rates for fixed
rate loans. Market rates for real estate mortgage loans began increasing
during the fourth quarter, 2003 and management does not anticipate refinance
activity will be as great in the foreseeable future as it was during 2002 and
2003. The dollar volume of mortgage loan sales are expected to decrease and,
consequently, so will the gain recognized from sales.
Offsetting the increases described above was a $420,000 decrease in net gain
on sales of securities. Most of the decrease relates to a $408,000 gain
recognized in August, 2002 and more fully described in a previous section of
this document titled "Net Interest Income, 2003 vs. 2002."
-30-
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 mentioned
above. 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.
Gains from sales of mortgage loans increased $168,000 during 2002 due to an
increase in the volume of loans sold. Loans sold during 2002 totaled $20.9
million compared to sales of $13.4 million during 2001.
Non-Interest Expense
2003 vs. 2002. Total non-interest expense increased $20,000 or 0.13%
during 2003 compared with 2002. Contributing to the increase were (a) a
$277,000 or 4.24% increase in salaries and wages, (b) a $144,000 or 16.42%
increase in equipment expenses, and (c) an $86,000 or 8.36% increase in
occupancy expense. Offsetting the increases were a $120,000 or 29.13%
decrease in ATM expense and a $417,000 or 11.51% decrease in other non-
interest expenses.
Salaries and wages increased due to normal pay increases. Equipment expenses
increased primarily due to rental costs for a new phone system installed
during 2002 and to depreciation charges on new furniture purchased during
2003 and computer hardware and software purchased as part of the conversion
to a new data processing system that occurred during September, 2002.
ATM expense decreased primarily due to a change in the ATM transaction
processor. The decrease in other non-interest expenses was primarily due to
the absence during 2003 of a $425,000 prepayment fee on Federal Home Loan
Bank notes recognized during 2002 and previously discussed in the section
titled "Net Interest Income, 2003 vs. 2002" and of a $263,000 charge for
training and conversion expenses related to Lebanon Citizen's conversion to
a new data processing system in September, 2002.
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.
-31-
The increase in other non-interest expenses was primarily due to a $425,000
prepayment fee on Federal Home Loan Bank notes and to $263,000 in training
and conversion expenses, both discussed above.
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 the 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.
Income Taxes
LCNB's effective tax rates for the years ended December 31, 2003, 2002,
and 2001 were 26.54%, 27.84%, and 28.68%, 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 $20.8 million during 2003, fueling a $16.9 million or
3.33% increase in total assets. During the same period, total loans
decreased $7.0 million.
The decrease in loans during 2003 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 2003. Approximately $35.1 million of loans were sold to
FHLMC during 2003, while $20.9 million were sold during 2002. LCNB continues
to sell the loans after management determined in recent years 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
2003, the funds were invested in the securities portfolio, which grew $14.8
million or 10.84% during 2003, and in federal funds sold, which increased
$10.7 million or 89.73% during 2003. 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 2003 totaled $1,394,000, largely
offset by depreciation expense of $1,040,000.
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Deposits
Total deposits of $463.0 million at December 31, 2003, were $20.8 million or
4.71% greater than total deposits at December 31, 2002. The growth was in
the savings, money fund, checking, and NOW account categories, which
increased $23.6 million during the year. Approximately $15.5 million of this
increase was due to a new trust account that was obtained near year end. The
funds were temporarily deposited in a liquid account at Lebanon Citizens
until the trust department could invest them in other instruments. Time
deposits decreased $2.8 million during 2003. Management believes this
reflects investor preference for short-term, highly liquid investments during
the current economic cycle.
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, 2003, totaled $74.8 million and
standby letters of credit totaled $6.8 million and are more fully described
in Note 10 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.
Capital expenditures include improvements made to LCNB's eighteen offices and
it's information technology system. At year end, 2003, the Main Office's
second and third floors were in the midst of a major renovation project and
improvements made to the Waynesville office had just been completed. Costs
outstanding or required to complete these two projects total an estimated
$750,000. Information technology system improvements in process at year end
will require about an additional $30,000 to complete. LCNB has no other
material commitments for capital expenditures outstanding as of December 31,
2003.
The liquidity of LCNB is enhanced by the fact that 89.92% of total deposits
at December 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.
An additional source of funding is borrowings from the Federal Home Loan Bank
("FHLB"). Total borrowings from the FHLB at December 31, 2002 were $4.0
million. The total remaining borrowing capacity from the FHLB at that date
was approximately $74 million.
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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, 2003,
LCNB's liquid assets amounted to $185.3 million or 35.40% of total gross
assets, up from $161.8 million or 31.93% of total gross assets at December
31, 2002. The primary reason for the increase was growth in securities
available for sale and growth in federal funds sold.
The following table provides information concerning LCNB's contractual
obligations at December 31, 2003:
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 $ 4,197 2,060 2,131 6 -
Operating lease obligations 1,071 275 513 161 122
Purchase obligations 760 760 - - -
Certificates of deposit:
$100,000 and over 33,526 13,315 11,303 3,993 4,915
Other time certificates 102,765 52,903 34,080 14,566 1,216
------- ------ ------ ------ ------
Total $142,319 69,313 48,027 18,726 6,253
======= ====== ====== ====== =====
The following table provides information concerning LCNB's commercial
commitments at December 31, 2003:
Amount of Commitment Expiration
Per Period
----------------------------------
Total More
Amounts 1 Year 2-3 4-5 than 5
Committed or less years years years
(Dollars in thousands)
Lines of credit $28,515 28,515 - - -
Standby letters of credit 6,770 1,292 4,900 - 578
------ ------ ----- --- ---
Total $35,285 29,807 4,900 - 578
====== ====== ===== === ===
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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, 2003 and 2002, is included in Note 13, "Regulatory
Matters", of the 2003 Annual Report to Shareholders.
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, 2003, 16,077 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 72,222 shares had been purchased under this program at
December 31, 2003.
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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 were granted during 2002.
Stock options for 2,764 shares were granted to key executive officers of LCNB
during the first quarter, 2003.
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.
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.
-36-
Accounting for Intangibles. Approximately $2.4 million of LCNB's intangible
assets at December 31, 2003, represent the unamortized intangible related to
LCNB's 1997 acquisition of three branch offices from another bank.
Management does not believe this acquisition meets the definition of a
business combination, as described in SFAS No. 147, "Acquisitions of Certain
Financial Institutions," and is amortizing the intangible over ten years,
subject to periodic review for impairment in accordance with SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets."
Another $321,000 of LCNB's intangible assets at December 31, 2003 are
comprised of mortgage servicing rights recorded from sales of mortgage loans
to the Federal Home Loan Mortgage Corporation ("FHLMC"). The rights are
amortized to loan servicing income in proportion to and over the period of
estimated servicing income, subject to periodic review for impairment.
Recent Accounting Pronouncements
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities", was issued in April, 2003. It amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities accounted for under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". LCNB does not currently hold any
security investments of the types covered by this SFAS and is therefore not
affected by its provisions.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", was issued in May, 2003, and
establishes new accounting standards for classification and measurement of
certain financial instruments with characteristics of both assets and
liabilities. Many of the instruments covered by the scope of SFAS No. 150
were previously classified as equity; SFAS No. 150 requires that they be
classified as liabilities or, in certain circumstances, as assets. LCNB does
not currently hold any security investments with such characteristics and SFAS
No. 150 therefore has no effect on LCNB Corp.'s financial statements.
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits", was issued in December, 2003, and replaces the
original SFAS No. 132. SFAS No. 132 (revised 2003) retains the disclosures
required by the original SFAS No. 132 and requires additional disclosures
describing types of plan assets, investment strategy, measurement dates, plan
obligations, cash flows, and components of net periodic benefit cost
recognized during interim periods. Such disclosures are reflected in Note 6
to these financial statements.
-37-
FASB Interpretation No. ("FIN") 46 (revised December 2003), "Consolidation of
Variable Interest Entities", was issued in December, 2003 and replaces the
original FASB Interpretation No. 46, which was issued in January, 2003. The
original FIN 46 required a company to consolidate a variable interest entity,
as defined, in its financial statements if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns, or both. The
original FIN 46 also required disclosures about variable interest entities
that a company is not required to consolidate, but in which it has a
significant variable interest. The revised FIN 46 delayed the effective date
of its provisions from January 31, 2003, as required in the original FIN 46,
to December 31, 2003, subject to certain exceptions; expanded the list of
transactions deemed not to be within the scope of the interpretation; and made
other technical changes. LCNB is not the beneficiary of any variable interest
entities and FIN 46 therefore has no effect on LCNB's financial statements.
-38-
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, 2003.
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 and the second through the fourth years. The aggregate ratio of rate
sensitive assets to rate sensitive liabilities is 114.07% for the first year
and 161.63% 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.
-39-
Expected Maturity/Repricing
---------------------------
2004 2005 2006 2007 2008 Thereafter Total Fair Value
(Dollars in thousands)
ASSETS
Loans: (1)
Fixed rate $ 67,290 24,178 18,247 12,774 7,898 20,284 150,671 155,765
Average interest rate 6.35% 7.76% 7.58% 7.34% 7.13% 7.11%
Variable rate 66,159 15,867 11,747 13,870 20,397 39,122 167,162 170,139
Average interest rate 5.51% 6.63% 6.28% 6.57% 5.84% 7.63%
Securities available
for sale (2) 14,451 24,967 23,596 32,441 15,991 39,493 150,939 150,939
Average interest rate (3) 4.92% 3.60% 3.26% 3.29% 3.77% 4.83%
Federal funds sold 22,625 - - - - - 22,625 22,625
Average interest rate 0.96% - - - - -
Total earning assets 170,525 65,012 53,590 59,085 44,286 98,899 491,397 499,468
Average interest rate 5.19% 5.89% 5.39% 4.94% 5.32% 6.40%
LIABILITIES
NOW and money fund 25,689 4,086 4,087 4,086 4,086 57,959 99,993 99,993
Average interest rate 0.61% 0.56% 0.56% 0.56% 0.56% 0.57%
Savings 44,802 4,419 4,419 4,419 4,419 58,516 120,994 120,994
Average interest rate 0.74% 0.74% 0.74% 0.74% 0.74% 0.74%
IRA's
Fixed rate 6,542 6,309 3,979 10,665 3,293 2,910 33,698 34,934
Average interest
rate 3.36% 5.29% 4.43% 4.78% 3.34% 4.68%
Variable rate 4,173 1,725 - - - - 5,898 5,895
Average interest
rate 1.04% 1.04% - - - -
CD's over $100,000 13,315 6,423 4,880 2,816 1,177 4,915 33,526 34,198
Average interest rate 3.33% 3.65% 4.14% 4.74% 3.14% 3.92%
CD's under $100,000 52,910 22,081 11,999 11,402 3,164 1,209 102,765 104,349
Average interest rate 2.74% 3.55% 4.18% 4.73% 3.48% 4.10%
-40-
Long term debt 2,060 64 2,067 6 - - 4,197 4,481
Average interest rate 4.45% 6.00% 5.55% 6.00% - -
Total interest-bearing
liabilities 149,491 45,107 31,431 33,394 16,139 125,509 401,071 404,844
Average interest rate 1.83% 3.17% 3.34% 3.71% 1.94% 0.91%
Period gap $ 21,034 19,905 22,159 25,691 28,147 (26,610)
Cumulative gap $ 21,034 40,939 63,098 88,789 116,936 90,326
Ratio of rate sensitive assets to rate sensitive liabilities:
First twelve months 114.07%
Years two through four 161.63%
Thereafter 78.80%
(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.
-41-
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data required by this item are
incorporated herein by reference to pages 6 through 32 of the Registrants 2003
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
Item 9A. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer of LCNB have carried
out an evaluation of the effectiveness of LCNB's disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2003.
Based on that evaluation, LCNB's Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2003, LCNB's disclosure controls and
procedures are effective for the purposes set forth in the definition thereof in
Exchange Act Rule 13a-15(e). There have been no significant changes (including
corrective actions with regard to significant deficiencies and material
weaknesses) in LCNB's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their most
recent evaluation.
-42-
PART III
Portions of the Proxy Statement included in the Notice of Annual Meeting
of Shareholders to be held April 13, 2004, dated March 12, 2004, 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 12, 2004), 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 12, 2004), 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 12, 2004), 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 12, 2004), relating to "Certain
Relationships and Related Transactions", is incorporated herein by
reference.
Item 14. Principal Accounting Fees and Services
The information contained in the Notice of Annual Meeting of Shareholders
and Proxy Statement (dated March 12, 2004), relating to "Principal Accounting
Fees and Services", is incorporated herein by reference.
-43-
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on 8-K
(a)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)
11 Computation of Consolidated Earnings Per Common Share
13 Portions of LCNB Corp. 2003 Annual Report (pages 2-3
and 15-24)
14.1 LCNB Corp. Code of Business Conduct and Ethics
14.2 LCNB Corp. Code of Ethics for Senior Financial Officers
21 LCNB Corp. Subsidiaries
23 Consent of Independent Accountants
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32 Section 1350 Certifications
(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
LCNB filed a report on Form 8-K on October 15, 2003 to announce
earnings for the six months ended September 30, 2003.
-44-
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
February 27, 2004
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/Stephen P. Wilson /s/George L. Leasure
- --------------------- ---------------------
Stephen P. Wilson George L. Leasure
President and Chairman Director
(Principal Executive Officer) February 27, 2004
February 27, 2004
/s/Steve P. Foster /s/James B. Miller
- --------------------- ---------------------
Steve P. Foster James B. Miller
Executive Vice President Director
and Chief Financial Officer February 27, 2004
(Principal Financial and
Accounting Officer)
February 27, 2004
/s/David S. Beckett /s/Kathleen Porter Stolle
- --------------------- ---------------------
David S. Beckett Kathleen Porter Stolle
Director Director
February 27, 2004 February 27, 2004
/s/Robert C. Cropper /s/Howard E. Wilson
- --------------------- ---------------------
Robert C. Cropper Howard E. Wilson
Director Director
February 27, 2004 February 27, 2004
/s/William H. Kaufman /s/Marvin E. Young
- --------------------- ---------------------
William H. Kaufman Marvin E. Young
Director Director
February 27, 2004 February 27, 2004
-45-