UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2004
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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
The number of shares outstanding of the issuer's common stock, without par
value, as of May 7, 2004, was 3,363,306 shares.
LCNB Corp.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2004, and December 31, 2003 . . . . . . . .1
Consolidated Statements of Income -
Three Months Ended March 31, 2004
and 2003. . . . . . . . . . . . . . . . . . . . . . .2
Consolidated Statements of Shareholders' Equity -
Three Months Ended March 31, 2004 and 2003. . . . . .3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003. . . . . .4
Notes to Consolidated Financial Statements . . . . . .5-11
Independent Accountants' Review Report . . . . . . . .12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . 13-23
Item 3. Quantitative and Qualitative Disclosures
about Market Risks. . . . . . . . . . . . . . . . . 24
Item 4. Controls and Procedures . . . . . . . . . . . . . . . 24
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 25
Item 2. Changes in Securities and Use of Proceeds . . . . . . 25
Item 3. Defaults by the Company on its Senior Securities. . . 26
Item 4. Submission of Matters to a Vote of Security Holders . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 26
Part I - Financial Information
Item 1. Financial Statements
LCNB Corp. and Subsidiaries
Consolidated Balance Sheets
(thousands)
March 31, December 31,
2004 2003
(unaudited) (a)
ASSETS:
Cash and due from banks $ 16,292 11,784
Federal funds sold 8,875 22,625
------- -------
Total cash and cash equivalents 25,167 34,409
------- -------
Securities available for sale, at
market value 136,868 150,939
Federal Reserve Bank stock and
Federal Home Loan Bank stock, at cost 2,985 2,962
Loans 318,662 317,833
Less-allowance for loan losses 2,150 2,150
------- -------
Net loans 316,512 315,683
------- -------
Premises and equipment, net 12,406 12,009
Intangible assets 2,667 2,832
Other assets 4,571 4,774
------- -------
TOTAL ASSETS $501,176 523,608
======= =======
LIABILITIES:
Deposits-
Noninterest-bearing $ 70,714 66,159
Interest-bearing 368,425 396,874
------- -------
Total deposits 439,139 463,033
Long-term debt 4,182 4,197
Accrued interest and other liabilities 4,315 3,930
------- -------
TOTAL LIABILITIES 447,636 471,160
------- -------
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 34,607 33,872
Treasury shares at cost,
89,728 and 88,754 shares at
March 31, 2004 and December 31,
2003, respectively (4,426) (4,356)
Accumulated other comprehensive
income, net of taxes 2,246 1,819
------- -------
TOTAL SHAREHOLDERS' EQUITY 53,540 52,448
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $501,176 523,608
======= =======
Financial information as of December 31, 2003, 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 share and per share data)
(unaudited)
Three Months Ended
March 31,
-----------------------
2004 2003
INTEREST INCOME:
Interest and fees on loans $ 5,060 5,769
Dividends on Federal Reserve Bank and
Federal Home Loan Bank stock 23 22
Interest on investment securities-
Taxable 747 753
Non-taxable 494 533
Other short-term investments 34 40
----- -----
TOTAL INTEREST INCOME 6,358 7,117
----- -----
INTEREST EXPENSE:
Interest on deposits 1,808 2,251
Interest on short-term borrowings 1 2
Interest on long-term borrowings 53 71
----- -----
TOTAL INTEREST EXPENSE 1,862 2,324
----- -----
NET INTEREST INCOME 4,496 4,793
PROVISION FOR LOAN LOSSES 90 118
----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,406 4,675
----- -----
NON-INTEREST INCOME:
Trust income 365 255
Service charges and fees 899 637
Net gain on sale of securities 127 -
Insurance agency income 326 361
Gains from sales of mortgage loans 21 227
Gain from sale of credit card portfolio 403 -
Other operating income 37 35
----- -----
TOTAL NON-INTEREST INCOME 2,178 1,515
----- -----
NON-INTEREST EXPENSE:
Salaries and wages 1,772 1,704
Pension and other employee benefits 532 484
Equipment expenses 248 232
Occupancy expense - net 296 281
State franchise tax 137 117
Marketing 135 107
Intangible amortization 152 150
ATM expense 76 69
Other non-interest expense 932 791
----- -----
TOTAL NON-INTEREST EXPENSE 4,280 3,935
----- -----
INCOME BEFORE INCOME TAXES 2,304 2,255
PROVISION FOR INCOME TAXES 642 649
----- -----
NET INCOME $ 1,662 1,606
===== =====
Dividends declared per common share $ .55 .525
Earnings per common share:
Basic $ .99 .93
Diluted .99 .93
Average shares outstanding:
Basic 1,686,791 1,720,676
Diluted 1,687,267 1,720,676
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, 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
====== ====== ====== ===== ====== ======
Balance January 1, 2004 $10,560 10,553 33,872 (4,356) 1,819 52,448
Net income 1,662 1,662 1,662
Net unrealized gain on
available-for-sale securities
(net of taxes of $264) 512 512 512
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $43) (85) (85) (85)
-----
Total comprehensive income $ 2,089
=====
Treasury shares purchased (70) (70)
Cash dividends declared-
$0.55 per share (927) (927)
------ ------ ------ ----- ------ ------
Balance March 31, 2004 $10,560 10,553 34,607 (4,426) 2,246 53,540
====== ====== ====== ===== ====== ======
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,
---------------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,662 1,606
Adjustments to reconcile net income to net cash
Provided by operating activities -
Depreciation, amortization and accretion 783 749
Provision for loan losses 90 118
Federal Home Loan Bank stock dividends (23) (22)
Realized gain on sales of securities
available for sale (127) -
Realized gain on sale of credit card portfolio (403) -
Origination of mortgage loans for sale (578) (9,725)
Realized gains from sales of mortgage loans (21) (227)
Proceeds from sales of mortgage loans 593 9,855
(Increase) decrease in income receivable 229 (148)
(Increase) decrease in other assets (29) (210)
Increase (decrease) in other liabilities 383 471
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,559 2,467
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 11,510 -
Proceeds from maturities of securities available
for sale 13,676 9,803
Purchases of securities available for sale (10,618) (14,332)
Proceeds from sale of credit card portfolio 2,963 -
Net decrease (increase) in loans (3,551) 4,467
Purchases of premises and equipment (659) (183)
Proceeds from sales of premises and equipment 2 -
------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 13,323 (245)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits (23,894) 3,136
Net change in short-term borrowings (218) (2,618)
Principal payments on long-term debt (15) (14)
Cash dividends paid (927) (903)
Purchases of treasury shares (70) (43)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES (25,124) (442)
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (9,242) 1,780
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,409 25,604
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $25,167 27,384
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,949 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, 2004 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2004. 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
contained herein.
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. The computations
were as follows for the three months ended March 31 (thousands, except share
and per share data):
-5-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(Continued)
For the Three Months
Ended March 31,
2004 2003
Net income (loss) $ 1,662 1,606
========= =========
Weighted average number of shares outstanding
used in the calculation of basic earnings
per common share 1,686,791 1,720,676
Add - Dilutive effect of stock options 476 -
--------- ---------
Adjusted weighted average number of shares
outstanding used in the calculation of
diluted earnings per common share 1,687,267 1,720,676
========= =========
Basic earnings per common share $0.99 0.93
========= =========
Diluted earnings per common share $0.99 0.93
========= =========
NOTE 3 - INVESTMENT SECURITIES
Available-for-sale investment securities, recorded at estimated market value,
consist of the following (thousands):
March 31, December 31,
2004 2003
-------- -----------
U.S. Treasury notes $ - 2,149
U.S. Agency notes 43,065 61,822
U.S. Agency mortgage-backed securities 29,848 20,988
Municipal securities:
Non-taxable 53,202 54,409
Taxable 10,753 11,571
------- -------
$136,868 150,939
======= =======
-6-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 4 - LOANS
Major classifications of loans at March 31, 2004 and December 31, 2003 are
as follows (thousands):
March 31, December 31,
2004 2003
-------- -----------
Commercial and industrial $ 30,680 30,519
Commercial, secured by real estate 100,590 99,461
Residential real estate 145,245 139,305
Consumer, excluding credit card 39,632 43,283
Agricultural 1,337 1,192
Credit card 28 2,707
Other loans 239 212
Lease financing 377 588
------- -------
318,128 317,267
Deferred net origination costs 534 566
------- -------
318,662 317,833
Allowance for loan losses (2,150) (2,150)
------- -------
Loans - net $316,512 315,683
======= =======
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, 2004 and December
31, 2003 were $52,856,000 and $54,802,000, respectively. Loans sold to the
FHLMC during the quarters ended March 31, 2004 and 2003 totaled $579,000
and $9,725,000, 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 $6,000 and $96,000 in mortgage servicing rights were
capitalized during the quarters ended March 31, 2004 and 2003, respectively,
and are being amortized to loan servicing income in proportion to and over
the period of estimated servicing income.
-7-
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 4 - LOANS (continued)
Changes in the allowance for loan losses were as follows (thousands):
For the Three Months Ended
March 31,
2004 2003
--------- ---------
Balance - beginning of year $2,150 2,000
Provision for loan losses 90 118
Charge-offs (107) (138)
Recoveries 17 20
----- -----
Balance - end of period $2,150 2,000
===== =====
Charge-offs for the three months ended March 31, 2004 and 2003, consisted
of consumer and credit card loans. There were no charge-offs on residential
real estate or commercial loans for either period.
Nonaccrual loans at March 31, 2004 and December 31, 2003 totaled $2,791,000
and $794,000, respectively. Included in these balances were commercial loans
in the amount of $2,594,000 at March 31, 2004 and $564,000 at December 31,
2003. The March 31, 2004 amount includes $2,030,000 of related commercial
loans that were previously classified as loans past due 90 days or more and
still accruing at December 31, 2003. These loans are secured by a
combination of mortgages and other collateral. Information received during
the first quarter, 2004 raised uncertainties concerning the collectibility of
certain collateral and management transferred the loans to the nonaccrual
classification.
-8-
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 4 - LOANS (continued)
At March 31, 2004 and December 31, 2003, loans past due 90 days or more and
still accruing were $366,000 and $2,442,000. The decrease is primarily due
to the reclassification of commercial loans mentioned above.
NOTE 5 - OTHER BORROWINGS
At March 31, 2004 and December 31, 2003, accrued interest and other
liabilities included U.S. Treasury demand note borrowings of approximately
$415,000 and $633,000, respectively.
NOTE 6 - 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, 2004 and December 31, 2003 were as follows (thousands):
March 31, December 31,
2004 2003
--------- ---------
Commitments to extend credit $67,272 74,828
Standby letters of credit 6,729 6,770
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, 2004
and December 31, 2003, outstanding guarantees of $1,839,000 and $1,880,000,
respectively, were issued to developers and contractors. These guarantees
generally expire within one year and are fully secured. In addition, LCNB
has an approximate $4.9 million participation at March 31, 2004 and December
31, 2003 in a letter of credit securing payment of principal and interest on
a bond issue. This letter of credit will expire July 15, 2006, and is
secured by an assignment of rents and the underlying real property.
-9-
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 6 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
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.
At March 31, 2004, LCNB is committed under various contracts to expend
approximately $320,000 to complete certain building renovation projects and
information technology system improvements.
LCNB and its subsidiaries are parties to various claims and proceedings
arising in the normal course of business. Management, after consultation
with legal counsel, believes that the liabilities, if any, arising from such
proceedings and claims will not be material to the consolidated financial
position or results of operations.
NOTE 7 - 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. Stock options for
2,027 shares with an exercise price of $70.63 were granted to key executive
officers of LCNB during the first quarter, 2004. At March 31, 2004, 4,791
stock options with a weighted average exercise price of $60.10 were
outstanding. The options expire in 2013 and 2014. No options have been
exercised as of March 31, 2004.
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
2002 was the first year stock options were outstanding, this quarter's pro-
forma effect is not indicative of the pro-forma effect on future quarters and
years.
-10-
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 8 - EMPLOYEE BENEFITS
LCNB has a noncontributory defined benefit retirement plan that covers all
regular full-time employees. The components of net periodic pension cost for
the three months ended March 31, 2004 and 2003, are summarized as follows
(thousands):
For the Three Months Ended
March 31,
2004 2003
--------- ---------
Service cost $163 163
Interest cost 62 56
Expected return on plan assets (81) (78)
Amortization on net(gain)loss 18 24
---- ---
Net periodic pension cost $162 165
==== ===
LCNB previously disclosed in consolidated financial statements for the year
ended December 31, 2003, that it expected to contribute $650,000 to its
pension plan in 2004. As of March 31, 2004, no contributions have been made.
NOTE 9 - SUBSEQUENT EVENT
The Board of Directors of LCNB at their regular meeting of April 13, 2004
declared a stock dividend of one share for each share owned to shareholders
of record April 20, 2004. The stock dividend was paid on April 30, 2004 and
will be accounted for as a stock split.
NOTE 10 - ACCOUNTING POLICIES
Statement of Financial Accounting Standards ("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, including certain disclosures to
be included in interim period financial statements. Such disclosures are
reflected in Note 8 to these financial statements.
-11-
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, 2004, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three-month periods ended March 31, 2004 and 2003. 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, 2003 (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 16, 2004, 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, 2003, is fairly stated in all material
respects.
/s/ J.D. Cloud & Co. L.L.P.
----------------------------------
J.D. Cloud & Co. L.L.P.
Cincinnati, Ohio
April 14, 2004
-12-
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 $1,662,000 for the three months ended March 31, 2004, which was
$56,000 or 3.49% greater than the $1,606,000 earned during the three months
ended March 31, 2003. Basic earnings per share were $0.99 for the first
quarter of 2004, compared with $0.93 per share earned in the first quarter of
2003. Annualized performance ratios for the 2003 period included a return on
average assets of 1.32% and a return on average equity of 12.61%, compared
with 1.28% and 12.36%, respectively, for the comparable period in 2003.
LCNB's earnings for the quarter ended March 31, 2004 included $530,000, or
$350,000 on an after tax basis, in gains from sales of investment securities
totaling $11.4 million and credit card receivables totaling approximately
$2.6 million. The proceeds from the investment securities sale were
primarily used to purchase securities with a slightly longer maturity and
higher average interest rate than the ones sold. LCNB management decided to
exit the credit card market and sell its receivables to MBNA America because
of the high administrative costs of servicing a small credit card portfolio.
LCNB will continue to offer credit card products under a marketing agreement
with MBNA. Without these gains, LCNB's return on average assets and return
on average equity for the first quarter, 2004, would have been 1.04% and
9.95%, respectively.
NET INTEREST INCOME
LCNB's primary source of earnings is net interest income, which is the
difference between earnings from loans and other investments and interest
paid on deposits and other liabilities. The following table presents, for
the first quarter of 2004 and 2003, 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.
-13-
Three months ended March 31,
----------------------------
2004 2003
---- ----
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans(1) $318,089 $ 5,062 6.45% $324,666 $ 5,774 7.21%
Federal funds sold 14,206 34 0.97 14,246 40 1.14
Federal Reserve Bank stock 647 - - 647 - -
Federal Home Loan Bank stock 2,315 23 4.03 2,225 22 4.01
Investment securities:
Taxable 88,049 747 3.44 77,863 753 3.92
Non-taxable(2) 53,675 748 5.65 57,099 808 5.74
------- ------ ------- ------
Total earning assets 476,981 6,614 5.62 476,746 7,397 6.29
Non-earning assets 33,504 33,122
Allowance for loan losses (2,153) (2,005)
------- -------
Total assets $508,332 $507,863
======= =======
Interest-bearing deposits $378,089 1,808 1.94 $383,986 2,251 2.38
Short-term debt 430 1 0.94 624 2 1.30
Long-term debt 4,189 53 5.13 6,246 71 4.61
------- ------ ------- ------
Total interest-bearing liabilities 382,708 1,862 1.97 390,856 2,324 2.41
------ ------
-14-
Three months ended March 31,
----------------------------
2004 2003
---- ----
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Demand deposits 69,571 61,194
Other liabilities 3,017 3,141
Capital 53,036 52,672
------- -------
Total liabilities and capital $508,332 $507,863
======= =======
Net interest rate spread(3) 3.65 3.88
Net interest margin on a taxable
equivalent basis(4) $ 4,752 4.04 $ 5,073 4.32
====== ======
Ratio of interest-earning assets
to interest-bearing liabilities 124.63% 121.97%
(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.
-15-
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, 2004 compared to the three months ended
March 31, 2003. 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.
Three Months Ended
March 31,
2004 vs. 2003
--------------------------
Increase (decrease) due to
--------------------------
Volume Rate Total
(In thousands)
Interest Earning Assets
Loans $(115) (597) (712)
Federal funds sold - (6) (6)
Federal Home Loan Bank stock 1 - 1
Investment securities
Taxable 92 (98) (6)
Nontaxable (48) (12) (60)
--- ----- -----
Total interest income (70) (713) (783)
Interest Bearing Liabilities
Deposits (34) (409) (443)
Short-term debt (1) - (1)
Long-term debt (25) 7 (18)
--- ----- -----
Total interest expense (60) (402) (462)
--- ----- -----
Net interest income $(10) (311) (321)
=== ===== =====
Net interest income on a fully tax equivalent basis for the first quarter of
2004 totaled $4,752,000, a decrease of $321,000 from the first quarter of
2003. Total interest income decreased $783,000, partially offset by a
decrease of $462,000 in total interest expense. The decreases in both
interest income and expense were primarily a result of market-driven
decreases in the average rate earned on loans and investments and the
average rate paid for deposits and borrowings.
-16-
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 2004 was 4.04%, as compared to 4.32% for the first
quarter, 2003. The net interest margin decreased because rates earned on
loans and other investments decreased more rapidly than rates paid for
deposits and other borrowings.
The decrease in total interest income was primarily due to a 67 basis point
(a basis point equals 0.01%) decrease in the average rate on earning assets,
from 6.29% for the first quarter of 2003 to 5.62% for the first quarter of
2004. A secondary component to the decrease in total interest income was a
$6.6 million decrease in average loans. The decrease in loans was primarily
in installment loans and real estate mortgage loans, partially offset by
increases in "Homeline" home equity loans and commercial loans. These
decreases to total interest income were slightly offset by the positive
effect of a $6.8 million increase in average investment securities.
The decrease in total interest expense was primarily due to a 44 basis point
decrease in the average liability rate, from 2.41% for the first quarter,
2003 to 1.97% for the first quarter, 2004, and secondarily to an $8.1 million
decrease in average interest-bearing liabilities. Average interest-bearing
deposits decreased $5.9 million and average long-term debt decreased $2.1
million.
-17-
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,
2004 2003
(thousands)
Balance, beginning of period $ 2,150 2,000
Charge-offs (107) (138)
Recoveries 17 20
----- -----
Net charge-offs (90) (118)
----- -----
Provision for loan losses 90 118
----- -----
Balance, end of period $ 2,150 2,000
===== =====
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,
2004 2003
------------- ----------
(thousands)
Loans accounted for on
non-accrual basis $2,791 794
Accruing loans which are
past due 90 days or more 366 2,442
Renegotiated loans - -
------ -----
Total $3,157 3,236
====== =====
The increase in non-accrual loans and the decrease in accruing loans which
are past due 90 days or more is due to the reclassification of $2,030,000 in
commercial loans from accruing at December 31, 2003 to non-accrual at March
31, 2004.
-18-
NON-INTEREST INCOME
Non-interest income for 2004, excluding the investment security and credit
card gains, was $133,000 or 8.8% greater during the first quarter of
2004 as compared to the first quarter of 2003. Trust income was $110,000
greater primarily due to growth in trust assets and an increase in brokerage
income due to new business. Total trust assets grew from $119.0 million at
March 31, 2003 to $168.6 million at March 31, 2004. Service charges and fees
increased $262,000 or 41.1% primarily due to an increase in the number of
non-sufficient fund charges. Partially offsetting the increases and the
gains from the sales of investment securities and credit card receivables was
a $206,000 or 90.7% decrease in gains from sales of mortgage loans. This was
due to a decrease in the volume of loans sold from $9,725,000 for the first
quarter of 2003 to $579,000 during the first quarter of 2004.
NON-INTEREST EXPENSE
Total non-interest expense increased $345,000 or 8.8% during the first
quarter, 2004 compared with the first quarter, 2003. Salaries and wages
increased $68,000 or 4.0% primarily due to routine salary and wage increases.
Pension and other employee benefits increased $48,000 or 9.9% due to
increased pension expense, increased expense for social security and medicare
tax matching, and increased educational costs for employees. Other non-
interest expense increased $141,000 or 17.8% due to increased expenses for
maintenance contracts on computer software, postage, office supplies, legal
fees because of work related to loan delinquencies, and other miscellaneous
costs.
INCOME TAXES
LCNB's effective tax rates for the three months ended March 31, 2004 and 2003
were 27.9% and 28.8%, respectively. The difference between the statutory
rate of 34.0% and the effective tax rate is primarily due to tax-exempt
interest income.
-19-
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,
2004 2003 2003
(thousands)
ASSETS
Interest-earning:
Federal funds sold $ 14,206 18,633 17,016
Investment securities 144,686 153,753 152,989
Loans 318,089 315,818 318,357
------- ------- -------
Total interest-earning assets 476,981 488,204 488,362
Noninterest-earning:
Cash and due from banks 13,992 13,525 14,019
All other assets 19,512 20,469 19,210
Allowance for credit losses (2,153) (2,108) (2,031)
------- ------- -------
Total assets $508,332 520,090 519,560
======= ======= =======
LIABILITIES
Interest bearing:
Interest-bearing deposits $378,089 387,680 390,455
Short-term debt 430 747 731
Long-term debt 4,189 5,769 6,218
------- ------- -------
Total interest-bearing
liabilities 382,708 394,196 397,404
Noninterest-bearing:
Noninterest-bearing deposits 69,571 69,268 65,147
All other liabilities 3,017 3,163 3,560
------- ------- -------
Total liabilities 455,296 466,627 466,111
SHAREHOLDERS' EQUITY 53,036 53,463 53,449
------- ------- -------
Total liabilities and
shareholders' equity $508,332 520,090 519,560
======= ======= =======
-20-
March 31, 2004 vs. December 31, 2003. Total average interest-earning assets
decreased $11.2 million when comparing the quarter ended March 31, 2004 to
the quarter ended December 31,2003. Federal funds sold decreased $4.4
million and investment securities decreased $9.1 million, while loans
increased $2.3 million. Average balances in the real estate mortgage loan,
Homeline home equity loan, and commercial loan portfolios grew during the
first quarter, while average installment loans decreased. Real estate
mortgage loans grew during the quarter because management has placed more new
loans in the portfolio and has sold fewer new loans in the secondary market,
combined with a much lower level of refinance activity.
Besides supporting loan growth, the declines in federal funds sold and
investment securities were used to fund an $11.5 million decrease in total
average interest-bearing liabilities. Most of the decrease was in
interest-bearing deposits, which decreased $9.6 million on an average basis,
while average long-term debt decreased $1.6 million. Most of the deposit
decrease was in NOW and certificates of deposit accounts, partially offset by
growth in money fund investment and regular savings accounts. Long-term debt
decreased because of the maturation of a $2.0 million borrowing during
December, 2003.
Total deposits at March 31, 2004 were approximately $23.9 million less than
total deposits at December 31, 2003. Approximately $15.5 million of this
decrease was due to a new trust account that was obtained near year end,
2003. The funds were temporarily deposited in a liquid account at Lebanon
Citizens National Bank until the trust department could invest them in other
instruments during early 2004.
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%.
-21-
A summary of the regulatory capital and capital ratios of LCNB follows:
At At
March 31, December 31,
2004 2003
(Dollars in thousands)
Regulatory Capital:
Shareholders' equity $ 53,540 52,448
Goodwill and other intangibles (2,391) (2,550)
Net unrealized securities gains (2,246) (1,819)
------ ------
Tier 1 risk-based capital 48,903 48,079
Eligible allowance for loan losses 2,150 2,150
------ ------
Total risk-based capital $ 51,053 50,229
====== ======
Capital Ratios:
Total risk-based 16.16% 15.58%
Tier 1 risk-based 15.48% 14.91%
Tier 1 leverage 9.72% 9.34%
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%
-22-
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, 2004, LCNB liquid assets amounted to $162.0 million or
32.3% of total assets, a decrease from $185.3 million or 35.4% at December
31, 2003.
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 89.8% of total deposits at March 31, 2004 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("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, including certain disclosures to
be included in interim period financial statements. Such disclosures are
reflected in Note 8 to these financial statements.
-23-
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, 2003 see Item 7A, Quantitative and
Qualitative Disclosures about Market Risks, in the Form 10-K for the year
ended December 31, 2003, incorporated by reference. There have been no
material changes in LCNB's market risks, which for LCNB is primarily interest
rate risk.
Item 4. Controls and Procedures
a) Disclosure controls and procedures. The Chief Executive Officer and the
Chief Financial Officer have carried out an evaluation of the effectiveness
of LCNB's 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 Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. Based
upon this evaluation, these officers have concluded, that as of September 30,
2003, LCNB's disclosure controls and procedures were adequate.
b) Changes in internal control over financial reporting. During the period
covered by this report, there were no changes in LCNB's internal control over
financial reporting that have materially affected, or are reasonably likely
to materially affect, LCNB's internal control over financial reporting.
-24-
PART II. OTHER INFORMATION
LCNB Corp. and Subsidiary
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds
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, 2004, 17,051 shares have been purchased under this program.
The following table shows information relating to the repurchase of shares
under the Market Repurchase Program during the three months ended March 31,
2004:
Total Number Maximum
of Shares Number
Purchased as of Shares
Part of Publicly that May Yet Be
Total Number Average Announced Purchased Under
of Shares Price Paid Plans or the Plans or
Purchased Per Share Programs Programs
--------- --------- -------- --------
January - $ - - 33,923
February 974 72.15 974 32,949
March - - - 32,949
---- ----
Total 974 $ 72.15 974 32,949
==== ======= ==== ======
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. No shares were purchased under this program during the three months
ended March 31, 2004 and a total of 72,222 shares have been purchased under
this program since its inception.
-25-
Item 3. Defaults Upon 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
15 Letter regarding unaudited interim financial
information.
31.1 Certification of Chief Executive Officer
under Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer
under Section 302 of the Sarbanes-Oxley
Act of 2002.
32 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
Form 8-K dated January 15, 2004, reporting under Item 9 the
issuance of a press release, announcing earnings of LCNB for the
year ended December 31, 2003.
-26-
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
May 10, 2004 May 10, 2004
-27-