EX-13 3 exhibit13c.txt EXHIBIT 13 LCNB Corp. 2000 Annual Report President's Letter to Shareholders (pages 2-3 of Annual Report): ---------------------------------- Dear Shareholders, The title of this year's Annual Report is "Built for the Future", a theme that emphasizes how well LCNB Corp. is positioned to meet the challenges and opportunities that will face the financial services industry in this new century. In my letter I will cover our financial performance for the year 2000, our dynamic market area, our diverse and competitive product mix, the multiple delivery channels we have developed to deliver those products, the strength of the service culture that is our tradition and mainstay, and my thoughts on the future prospects for our financial holding company. Our form 10-K report filed annually with the Securities and Exchange Commission is available and contains additional information and details. Page 24 of this report gives you several options for obtaining the SEC report. This was the fifteenth consecutive year that the Board of Directors approved an increase in the dividend rate. The dividend rate increased by 12.5% to $1.80 per share in 2000 from $1.60 per share in 1999. Net income for 2000 was $5.24 million representing a 1.2% return on average assets and an 11.84% return on average shareholders' equity. Total assets increased to $451 million from $439 million one year ago. Total capital or shareholders equity at December 31, 2000 is $46.31 million having increased 8.5% from December 31, 1999. I direct your attention to the graphs included in this report. These graphs display key statistical information highlighting LCNB's performance for the last five years. Our ability to reinvest customer deposits back into the communities we serve in the form of loans remains the key to our earnings success. In 2000, we were able to increase our loan totals by $42.8 million or 15%. The most important accomplishment through all of this loan growth has been our ability to maintain credit quality. We ended 2000 with an exceptionally low delinquency rate of .23% and no non-performing loans. On the deposit side, we experienced only a 1% growth in a highly competitive and tight market. This lack of deposit growth forced us to use other more expensive sources of funds to fuel our loan growth, which had a negative effect on earnings. We were able to significantly shift our deposit mix, letting higher cost certificate of deposits run off, reducing that category by $16.1 million, while increasing core deposits by $14.7 million. We now have 87.9% of our total deposits in "core deposits", a fact that will serve us well as we go forward. At year-end our loan to deposit ratio had increased to 83.7% from 73.5% at December 31, 1999. We remain well positioned for future growth with liquid assets at $100.8 million or 22.4% of total assets at year-end. Shifting back to our "Built for the Future" theme, it is important to understand the market we serve and where we have built our offices. While extremely competitive, our market area is one of the most dynamic in the world, serving an area in southwest Ohio, with a primary service area stretching from the Indiana border to the eastern border of Clinton County. The core of our market area consists of the two counties that divide Cincinnati from Dayton. Warren and Butler Counties are consistently among the fastest growing counties in Ohio, attesting to the fact that Cincinnati and Dayton are growing together into one major metropolitan area. We serve this core area with 15 of our 18 offices and 23 of our 26 ATM locations. We have received Regulatory approval to establish a new full-service banking office and it will also be located in this core area in the City of Hamilton. No less important to our future growth are single offices in Clinton, Clermont and Hamilton Counties. Our market area is prosperous and will allow for the growth and expansion we will need for many years to come. As a financial holding company, we have built an impressive and complete line of financial products. We offer these products through three very specialized areas to provide both the competence and personal service our customers need and desire. First, is the complete line of traditional bank products offered through our bank subsidiary, Lebanon Citizens National Bank. These include loan and deposit products, and support products like safe deposit boxes, lockbox service, sweep accounts, ACH origination, credit cards, debit cards and cash management services. The second area is our trust and investment department providing complete trust and administrative functions, agency accounts, escrow services, mutual funds and retirement savings products to individuals, partnerships, corporations, institutions and municipalities. The third area is our insurance subsidiary, Dakin Insurance Agency, Inc., providing a complete array of insurance products including property and casualty insurance, life and health products and annuities. We truly have become a one-stop financial services provider. On the delivery side, we have used a combination of brick and mortar offices and technology to build a delivery system for our products that is second- to-none. Strategically placed offices, supplemented by several 24-hour a day, 7-day a week delivery channels, make our products conveniently available to all individuals and businesses in our defined market area. Telephone banking (Bankline), PC/Internet Banking (LCNB.com), electronic banking (Direct Link) and our ATM network (MAC), which is connected worldwide with debit and credit cards, supplement our eighteen bank branches and six insurance offices. Given all that we have constructed for the future, nothing is more important than the service culture that has been built over the past 24 years at both Lebanon Citizens National Bank and Dakin Insurance. I know I write and talk about it often, but our service culture is the most important asset we have and the biggest key to our future success. Everyone today talks about sales culture and developing a more intense sales culture will be important to us. But, we are building our sales culture on the foundation of our -2- service culture. We must maintain, nurture and expand our service culture and the sales will come. It is the 237 people that make up the LCNB family, taking care of our customers and each other that will cause us to grow and prosper. LCNB Corp. is truly "Built for the Future". We believe that our dynamic market area, our diverse and competitive products, our convenient delivery channels and our tradition of service will enhance future financial performances. We are positioned for a good year in 2001 with targeted net income return on average assets and asset growth exceeding this year's performance. The annual meeting for LCNB Corp. will be April 17th at 10:00 a.m. at our main banking office, 2 North Broadway in Lebanon, Ohio. Proxy material will be sent to you in a separate mailing in mid-March. Please review, sign and return the proxy upon receipt of that material. We would like to have you attend that meeting if it is possible. Thank you for your continued support. Stephen P. Wilson -3- Financial Statements and Supplementary Data (pages 15-24 of Annual Report) ------------------------------------------- -4- INDEPENDENT AUDITORS' REPORT To the Shareholders LCNB Corp. and Subsidiaries Lebanon, Ohio We have audited the accompanying consolidated balance sheets of LCNB Corp. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income and changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LCNB Corp. and Subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with U.S. generally accepted accounting principles. /s/J.D. Cloud & Co. L.L.P. ----------------------------- Certified Public Accountants Cincinnati, Ohio January 13, 2001 -5- LCNB Corp. and Subsidiaries Consolidated Balance Sheets At December 31, 2000 (thousands)
2000 1999 ASSETS: Cash and due from banks $ 18,262 18,840 Federal funds sold - 5,300 ------- ------- Total cash and cash equivalents 18,262 24,140 Interest-bearing deposits in banks - 5,492 Securities available for sale, at market value 82,506 104,911 Federal Reserve Bank stock 647 647 Federal Home Loan Bank stock 1,741 - Loans, net 328,439 285,608 Premises and equipment, net 10,502 8,231 Accrued income receivable 3,139 3,363 Intangibles 4,210 4,763 Other assets 1,554 2,083 ------- ------- TOTAL ASSETS $451,000 439,238 ======= ======= LIABILITIES: Deposits- Demand $ 51,697 49,477 NOW 47,085 55,512 Money fund deposits 41,297 21,926 Savings 87,170 81,191 IRA 30,157 29,983 Certificates - $100,000 and over 36,213 45,357 Other time certificates 101,167 108,123 ------- ------- Total deposits 394,786 391,569 Long-term debt 6,356 403 Accrued interest and other liabilities 3,548 4,579 ------- ------- TOTAL LIABILITIES 404,690 396,551 ------- ------- SHAREHOLDERS' EQUITY: Common shares-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 24,916 22,872 Accumulated other comprehensive income net of taxes 281 (1,298) ------- ------- TOTAL SHAREHOLDERS' EQUITY 46,310 42,687 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $451,000 439,238 ======= ======= The accompanying notes to financial statements are an integral part of these statements. -6-
LCNB Corp. and Subsidiaries Consolidated Statements of Income For the years ended December 31 ($000s, except per share amounts)
2000 1999 1998 INTEREST INCOME: Interest and fees on loans $26,233 22,743 23,047 Interest on federal funds sold 459 463 796 Interest on deposits in banks 241 281 289 Interest on Federal Reserve Bank and Federal Home Loan Bank stock 70 39 39 Interest on investment securities- Taxable 3,542 4,914 4,612 Non-taxable 1,606 1,251 816 ------ ------ ------ TOTAL INTEREST INCOME 32,151 29,691 29,599 ------ ------ ------ INTEREST EXPENSE: Interest on deposits- Money fund and NOW accounts 2,303 1,912 1,706 Savings 3,217 2,382 1,769 IRA 1,794 1,608 1,737 Certificates - $100,000 and over 2,594 1,916 1,871 Other time certificates 5,693 5,420 6,949 ------ ------ ------ Total interest on deposits 15,601 13,238 14,032 Interest on short-term borrowings 83 43 48 Interest on long-term debt 270 24 - ------ ------ ------ TOTAL INTEREST EXPENSE 15,954 13,305 14,080 ------ ------ ------ NET INTEREST INCOME 16,197 16,386 15,519 PROVISION FOR LOAN LOSSES 197 208 191 ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,000 16,178 15,328 ------ ------ ------ NON-INTEREST INCOME: Trust income 1,365 1,160 1,082 Service charges and fees 2,087 2,137 2,007 Net gain on sale of securities 12 20 234 Insurance agency income 811 939 750 Other operating income 125 114 140 ------ ------ ------ TOTAL NON-INTEREST INCOME 4,400 4,370 4,213 ------ ------ ------ NON-INTEREST EXPENSE: Salaries and wages 5,529 5,392 4,882 Pension and other employee benefits 1,415 1,315 1,092 Equipment expenses 629 534 508 Occupancy expense - net 1,044 954 904 State franchise tax 407 581 578 Marketing 422 423 441 Intangible amortization 581 631 618 Other non-interest expenses 3,042 2,820 2,632 ------ ------ ------ TOTAL NON-INTEREST EXPENSE 13,069 12,650 11,655 ------ ------ ------ INCOME BEFORE INCOME TAXES 7,331 7,898 7,886 PROVISION FOR INCOME TAXES 2,091 2,323 2,426 ------ ------ ------ NET INCOME $ 5,240 $ 5,575 $ 5,460 ====== ====== ====== Basic earnings per common share $ 2.95 3.14 3.07 ====== ====== ====== Weighted average shares outstanding (000's) 1,776 1,776 1,776 ====== ====== ====== The accompanying notes to financial statements are an integral part of these statements. -7-
LCNB Corp. and Subsidiaries Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity For the three years ended December 31, 2000 (000's, except per share amounts)
Accumulated Other Total Common Retained Comprehensive Shareholders' Comprehensive Shares Surplus Earnings Income Equity Income Balance January 1, 1998 $10,560 11,016 17,118 86 38,780 Net income 5,460 5,460 $5,460 Transition adjustments for the effect of a change in accounting principle 473 473 473 Net unrealized gain on available-for-sale securities (net of taxes of $124) 241 241 241 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $80) (154) (154) (154) ----- Total comprehensive income 6,020 ===== Cash dividends declared- $1.40 per share (2,465) (2,465) ------ ------ ------ --- ------ Balance December 31, 1998 $10,560 11,016 20,113 646 42,335 Net income 5,575 5,575 5,575 Treasury shares purchased (463) (463) Net unrealized loss on available-for-sale securities (net of taxes of $995) (1,931) (1,931) (1,931) Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of tax benefit of $7) (13) (13) (13) ----- Total comprehensive income 3,631 ===== Cash dividends declared $1.60 per share (2,816) (2,816) ------- ------ ------ ----- ------ Balance December 31, 1999 10,560 10,553 22,872 (1,298) 42,687 Net income 5,240 5,240 5,240 Net unrealized gain on available-for-sale securities (net of taxes of $817) 1,587 1,587 1,587 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of tax benefit of $4) (8) (8) (8) ----- Total comprehensive income $6,819 ===== Cash dividends declared $1.80 per share (3,196) (3,196) ------- ------ ------ ----- ------ Balance December 31, 2000 $10,560 10,553 24,916 281 46,310 ====== ====== ====== ====== ====== The accompanying notes to financial statements are an integral part of these statements. -8-
LCNB Corp. and Subsidiaries Consolidated Statements of Cash Flows For the years ended December 31 (000's)
2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,240 5,575 5,460 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation, amortization and accretion 1,997 1,893 1,429 Provision for loan losses 197 208 191 Deferred income tax benefit (70) (87) (51) Realized gains on securities available for sale (12) (20) (234) Origination of mortgage loans for sale - (2,441) (11,600) Proceeds from sales of mortgage loans - 2,443 11,707 (Increase) decrease in income receivable 223 (346) (54) Increase (decrease) in interest payable 176 125 (110) Increase (decrease) in accrued expenses, net (19) (454) 78 ------ ------ ------ TOTAL ADJUSTMENTS 2,492 1,321 1,356 ------ ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 7,732 6,896 6,816 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in interest-bearing deposits in banks 5,492 - (1,492) Proceeds from sales of securities available for sale 5,852 12,776 8,315 Proceeds from maturities of securities available for sale 28,899 45,603 10,201 Proceeds from maturities of securities held to maturity - - 32,010 Purchases of securities available for sale (10,224) (43,705) (67,634) Purchases of FHLB stock (1,741) - - Purchases of securities held to maturity - - (4,474) Net decrease (increase) in loans (43,666) (20,869) 3,086 Purchases of premises and equipment (3,067) (607) (1,363) Proceeds from certain asset sales - - 274 ------ ------ ------ NET CASH USED IN INVESTING ACTIVITIES (18,455) (6,802) (21,077) ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 3,216 4,563 9,655 Net increase (decrease) in short-term borrowings (1,175) 1,520 (2,553) Advances of long-term debt 6,000 - - Cash dividends paid (3,196) (2,816) (2,465) ------ ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 4,845 3,267 4,637 ------ ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS (5,878) 3,361 (9,624) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,140 20,779 30,403 ------ ------ ------ CASH AND CASH EQUIVALENTS AT END OF YEAR $18,262 24,140 20,779 ====== ====== ====== SUPPLEMENTAL CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: Interest $15,778 13,180 14,190 Income taxes 1,877 2,706 2,245 NON-CASH TRANSFER OF SECURITIES FROM HELD-TO- MATURITY TO AVAILABLE-FOR-SALE CLASSIFICATION - 42,768 - COMMON SHARES OF DAKIN PURCHASED IN EXCHANGE FOR NOTE PAYABLE - 448 - The accompanying notes to financial statements are an integral part of these statements. -9- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES LCNB Corp. (the Company) was incorporated in December 1998. In the second quarter of 1999, each shareholder of Lebanon Citizens National Bank (the Bank) received ten common shares of the Company in exchange for each share of the Bank. Lebanon Citizens National Bank, as a result of the merger, became a wholly-owned subsidiary of LCNB Corp. In April 2000, the Company acquired Dakin Insurance Agency, Inc. (Dakin) as a wholly-owned subsidiary of LCNB Corp. and accounted for the merger as a pooling of interests. The Bank was founded in 1877 and provides full banking services, including trust services, to customers primarily in the southwestern Ohio area of Warren, Hamilton, Clermont, Clinton and Butler counties. Dakin is an independent insurance agency founded in 1876 and offers a wide range of insurance products for businesses and individuals in the Bank's primary market area. BASIS OF PRESENTATION- The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. All comparative financial statements and share and per share information have been restated to give effect to the ten-for-one exchange in the formation of the holding company and the pooling of interest accounting related to the Dakin acquisition. USE OF ESTIMATES- 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. INVESTMENT SECURITIES- Debt securities which the Company has the intent and ability to hold to maturity are reported at amortized cost. Debt securities classified as available for sale and all equity securities are reported at fair value with unrealized holding gains and losses reported net of income taxes as Accumulated Other Comprehensive Income, a separate component of shareholders' equity. Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the level yield method. Realized gains or losses from the sale of securities are computed using the specific identification method. Currently, the Company and its subsidiaries do not hold any derivatives or conduct hedging activities. Federal Home Loan Bank (FHLB) stock is an equity interest in the Federal Home Loan Bank of Cincinnati. It can be sold only at its par value of $100 per share and only to the FHLB or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company, because of the oversight role exercised by the Federal Housing Finance Board in the process of budgeting and approving dividends. Federal -10- Reserve Bank stock is similarly restricted in marketability and value. Although catagorized as securities available for sale, both investments are carried at cost, which is their par value. LOANS AND ALLOWANCE FOR LOAN LOSSES- Loans are stated at the principal amount outstanding, net of unearned income, deferred origination fees and costs, and the allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. The accrual of interest on impaired loans is discontinued when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Subsequent cash receipts on nonaccrual 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 nonaccrual status is charged against earnings. Previous years' accrued interest is charged against the allowance for loan losses. Loan origination fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of loan yields. These amounts are being amortized over the lives of the related loans. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses 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, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Loans are considered impaired when management believes, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured by the present value of expected future cash flows using the loan's effective interest rate. Impaired collateral-dependent loans may be measured based on collateral value. Smaller- balance homogenous loans, including residential mortgage and consumer installment loans, are collectively evaluated for impairment. PREMISES AND EQUIPMENT- Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on both the straight-line and accelerated methods over the estimated useful lives of the assets. Costs incurred for maintenance and repairs are expensed currently. INTANGIBLE ASSETS- Intangible assets representing the excess of the costs of acquired operations over the fair value of net tangible assets acquired are being amortized using the straight-line method over fifteen years. The Company periodically reviews intangible assets for possible impairment. -11- MARKETING EXPENSE- Marketing costs are expensed as incurred. EMPLOYEE BENEFITS- The Bank has a noncontributory pension plan covering full-time employees. The retirement plan cost is made up of several components that reflect different aspects of the Bank's financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. INCOME TAXES- Certain income and expenses are recognized in different periods for financial reporting than for purposes of computing income taxes currently payable. Deferred taxes are provided on such temporary differences between the financial reporting and tax bases of the related assets and liabilities. STATEMENTS OF CASH FLOWS- For purposes of reporting cash flows, cash equivalents include all highly liquid investments with original maturities of three months or less. 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. The Company's capital structure includes no potential for dilution. There are no warrants, options or other arrangements that would increase the number of shares outstanding. RECENT PRONOUNCEMENTS AND ACCOUNTING CHANGES- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". In most instances the standard, once adopted, precludes any held-to-maturity security from being designated as a hedged item. The Bank adopted SFAS No. 133 in the fourth quarter of 1998. To provide the flexibility in the future to designate securities as hedged items, the Bank recategorized its held-to-maturity securities as available for sale. The amortized cost and related unrealized net gain of the transferred securities was $42,768,000 and $716,000, respectively, at the date of transfer. This change in accounting principle had no effect on reported net income. Comprehensive income increased $473,000 after income taxes of $243,000. NOTE 2 - ACQUISTION In April 2000, Dakin was acquired and became a wholly-owned subsidiary of LCNB Corp. Under the terms of the agreement, Dakin shareholders received 15,942 shares of LCNB Corp. common stock in a private offering. The transaction qualifies as a tax-free reorganization and has been accounted for using the pooling of interests method of accounting. Accordingly, the consolidated financial statements of LCNB Corp. have been restated to retroactively combine the financial statements of LCNB Corp. and Dakin as if the acquisition had occurred at the beginning of the earliest period presented. -12-
The following table presents the revenues of Dakin included as a component of non-interest income, the net income of Dakin, and a reconciliation of the net income and earnings per common share previously reported by LCNB Corp. to those items presented in the accompanying financial statements (thousands, except earnings per common share):
2000 1999 1998 Dakin Insurance Agency, Inc. Revenues prior to acquisition $ 182 951 758 Revenues since acquisition 635 - - ----- ----- ----- $ 817 951 758 ===== ===== ===== Net income: Consolidated LCNB Corp. $5,204 5,548 5,447 Dakin Insurance Agency, Inc. prior to acquisition 36 27 13 ----- ----- ----- $ 5,240 5,575 5,460 ===== ===== ===== Earnings per common share: As previously reported $3.15 3.09 As restated 3.14 3.07 NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale investment securities at December 31 are summarized as follows ($000's):
2000 ----------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury notes $ 3,002 17 1 3,018 U.S. Agency notes 20,142 30 126 20,046 U.S. Agency mortgage- backed securities 12,234 19 89 12,164 Corporate notes 8,708 18 247 8,479 Municipal securities: Non-taxable 31,692 848 75 32,465 Taxable 6,303 58 27 6,334 ------ --- --- ------ $82,081 990 565 82,506 ====== === === ====== -13- 1999 ----------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury notes $ 6,511 7 36 6,482 U.S. Agency notes 30,750 - 823 29,927 U.S. Agency mortgage- backed securities 15,486 2 419 15,069 Corporate notes 17,179 41 162 17,058 Municipal securities: Non-taxable 32,593 117 518 32,192 Taxable 4,361 - 178 4,183 ------- --- ----- ------- $106,880 167 2,136 104,911 ======= === ===== =======
Contractual maturities of debt securities at December 31, 2000 were as follows ($000's). Actual maturities may differ from contractual maturities when borrowers have the right to call or prepay obligations.
Amortized Market Cost Value Due within one year $11,726 11,737 Due from one to five years 35,495 35,412 Due from five to ten years 14,702 14,778 Due after ten years 7,924 8,415 ------ ------ 69,847 70,342 U.S. Agency mortgage- backed securities 12,234 12,164 ------ ------ $82,081 82,506 ====== ====== Gross gains realized on sales of securities available for sale were $31,000, $26,000 and $234,000 for 2000, 1999 and 1998 respectively. Realized losses during 2000 and 1999 amounted to $19,000 and $6,000 respectively. There were no realized losses during 1998. Investment securities with a carrying value of $56,116,000 and $82,897,000 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. -14- NOTE 4 - LOANS
Major classifications of loans at December 31 are as follows ($000's):
2000 1999 Commercial and industrial $ 36,449 26,347 Commercial, secured by real estate 59,043 56,671 Residential real estate 185,013 162,087 Consumer, excluding credit card 40,860 36,402 Agricultural 2,238 2,343 Credit card 3,049 2,764 Other loans 863 285 Lease financing 2,219 183 ------- ------ 329,734 287,082 Deferred net origination costs 705 526 ------- ------- 330,439 287,608 Allowance for loan losses (2,000) (2,000) ------- ------- Loans-net $328,439 285,608 ======= ======= Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation are not included in the accompanying balance sheets. The unpaid principal balances of those loans at December 31, 2000, 1999 and 1998 were $14,046,000, $15,379,000, and $14,747,000 respectively.
Changes in the allowance for loan losses were as follows ($000's):
2000 1999 1998 BALANCE-BEGINNING OF YEAR $2,000 2,000 2,200 Provision for loan losses 197 208 191 Charge offs (255) (272) (418) Recoveries 58 64 27 ----- ----- ----- BALANCE-END OF YEAR $2,000 2,000 2,000 ===== ===== ===== There were no nonaccrual loans at December 31, 2000 or 1999. Interest income that would have been recorded in 2000, 1999 and 1998 if loans on nonaccrual status at various times during the respective years had been current and in accordance with their original terms, was not material. At December 31, 2000 and 1999, the recorded investment in loans for which impairment has been -15- recognized in accordance with SFAS Statement No. 114 was not material. The Bank 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 a deterioration in the financial position of the borrower. NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows ($000's):
2000 1999 Land $ 1,876 1,870 Buildings 9,365 7,477 Equipment 7,938 6,726 ------ ------ Total 19,179 16,073 Less-Accumulated depreciation 8,677 7,842 ------ ------ Premises and Equipment-Net $10,502 8,231 Depreciation charged to income was $796,000 in 2000, $688,000 in 1999 and $636,000 in 1998. Some of the Bank's branches and equipment are leased under agreements expiring at various dates through 2049. These leases are accounted for as operating leases. At December 31, 2000, required minimum annual rentals due in the future on noncancelable leases having terms in excess of one year aggregated $1,447,000. Minimum annual rentals for each of the years 2000 through 2004 are approximately $60,000. Rental expense for all leased branches and equipment amounted to $119,000 in 2000, $101,000 in 1999 and $115,000 in 1998. NOTE 6 - DEPOSIT LIABILITIES
Contractual maturities of certificates of deposit at December 31, 2000 were as follows ($000's):
Certificates All other over $100,000 Certificates Total Year ending December 31 2001 $25,510 66,621 92,131 2002 8,518 26,696 35,214 2003 1,212 3,185 4,397 2004 468 1,196 1,664 2005 405 3,143 3,548 Thereafter 100 326 426 ------ ------- ------- $36,213 101,167 137,380 ====== ======= ======= -16- NOTE 7 - EMPLOYEE BENEFITS The Bank's noncontributory defined benefit retirement plan covers all regular full-time employees. The benefits are based on years of service and the employee's highest average compensation during five consecutive years. Pension costs are funded based on the Plan's actuarial cost method and are limited to amounts currently deductible for federal income tax purposes.
The components of net periodic pension cost are summarized as follows ($000's):
2000 1999 1998 Service cost $423 378 279 Interest cost 205 182 157 Expected return on Plan assets (192) (161) (140) Amortization of unrecognized transition obligation 17 17 17 Recognized net actuarial loss (gain) 55 (13) 43 --- --- --- Net periodic pension cost $508 403 356 === === ===
A summary of the Plan's prepaid benefit cost, included in Other Assets on the balance sheets, and the Plan's funded status at December 31 follows ($000's):
2000 1999 Change in projected benefit obligations --------------------------------------- Projected benefit obligation at beginning of year $3,786 3,308 Service cost 423 378 Interest cost 205 182 Actuarial gains (437) (79) Benefits paid (123) (3) ----- ----- Projected benefit obligation at end of year 3,854 3,786 ----- ----- Change in plan assets --------------------- Fair value of plan assets at beginning of year 3,466 2,880 Actual return on plan assets 140 133 Employer contribution 546 456 Benefits paid (123) (3) ----- ----- Fair value of plan assets at end of year 4,029 3,466 ----- ----- -17- Funded status 175 (320) Unrecognized net actuarial loss 625 1,064 Unrecognized transition obligation 27 44 ----- ----- Prepaid benefit cost $ 827 788 ===== =====
The Plan's assets are exclusively certificates of deposit with the Bank. In determining the actuarial present value of the projected benefit obligation, the following assumptions were used:
2000 1999 Assumed discount rate 5.50% 5.50% Expected long-term rate of return on Plan assets 5.50% 5.50% Rate of increase in future compensation levels 4.00% 4.00% The Bank has a benefit plan which permits eligible officers to defer a portion of their compensation. The deferred compensation, with accrued interest, is distributable in cash after retirement or termination of employment. The amount of such deferred compensation at December 31, 2000 and 1999, was $401,000 and $324,000, respectively. The Bank also has a supplemental income plan which provides a covered employee an amount based on a percentage of average compensation, payable annually for ten years upon retirement. The projected benefit obligation included in other liabilities for this supplemental income plan at December 31, 2000 and 1999, is $90,000 and $70,000, respectively. The discount rate used to determine the present value of the obligation was 6.5% in 2000 and 1999. The service cost associated with this plan in each of the three years 2000, 1999 and 1998 was approximately $16,000. Interest costs were not material. Both of these plans are nonqualified and unfunded. Participation in each plan is limited to a select group of management. NOTE 8 - LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following at December 31 (thousands):
2000 1999 Federal Home Loan Bank notes $6,000 - Note payable to former shareholder of Dakin 356 403 ----- --- Total $6,356 403 ===== === -18-
Maturities of long-term debt in the years ending December 31 are as follows:
2001 $ 50 2002 2,053 2003 56 2004 2,060 2005 2,064 The Federal Home Loan Bank borrowings consist of three notes with two, four and five-year maturities and have a weighted average interest rate of 7%. Interest on the notes is fixed and payable monthly. The notes are collateralized by a blanket pledge of 1-4 family residential mortgage loans. The note payable matures in 2006. Payments are due monthly at a nominal interest rate of 6%. At December 31, 2000 and 1999, accrued interest and other liabilities include U.S. Treasury demand note borrowings of approximately $1,099,000 and $2,274,000, respectively. NOTE 9 - INCOME TAXES
The provision for federal income taxes consists of ($000's):
2000 1999 1998 Income taxes currently payable $2,161 2,410 2,477 ----- ----- ----- Deferred income taxes resulting from temporary differences- Provision for loan losses - - 68 Loan origination fees-net (19) (33) (73) Pension and deferred compensation (11) (16) 12 Depreciation and amortization (40) (38) (58) ----- ----- ----- Total deferred income tax benefit (70) (87) (51) ----- ----- ----- Provision for income taxes $2,091 2,323 2,426 ===== ===== ===== -19-
A reconciliation between the statutory income tax rate and the Bank's effective tax rate follows:
2000 1999 1998 Statutory tax rate 34.0% 34.0 34.0 Increase (decrease) resulting from- Tax exempt interest (6.5) (4.6) (2.9) Other-net 1.0 - ( .3) ---- ---- ---- Effective tax rate 28.5% 29.4 30.8 ==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Bank has not recorded a valuation reserve related to deferred tax assets. Deferred tax assets and liabilities at December 31 consist of the following ($000's):
2000 1999 Deferred tax assets: Allowance for loan losses $ 522 522 Unrealized losses on securities available for sale - 669 Amortization of intangibles 202 153 --- ----- 724 1,344 --- ----- Deferred tax liabilities: Depreciation of premises and equipment (187) (175) Unrealized gains on securities available for sale (113) - Deferred loan fees (117) (161) Pension and deferred compensation (125) (137) --- ----- (542) (473) --- ----- Net deferred tax $182 871 === ===== NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES The Bank 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 include commitments to extend credit. They involve, to varying degrees, elements of credit and interest rate risk in excess of the -20- amount recognized in the balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contract amount of those instruments.
The Bank 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 December 31 were as follows (thousands):
2000 1999 Commitments to extend credit $55,034 52,198 Standby letters of credit 5,768 5,783 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 by the Bank to guarantee the performance of a customer to a third party. At December 31, 2000 and 1999, outstanding guarantees of $768,000 and $783,000, respectively, were issued to developers and contractors. These guarantees generally expire within one year and are fully secured. In addition, the Bank is a participant for the amount of $5 million in a letter of credit securing payment of principal and interest on a bond issue. This letter of credit will expire July 15, 2005, and is secured by an assignment of rents and the underlying real property. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank 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. The Company 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 11 - RELATED PARTY TRANSACTIONS The Bank has entered into related party transactions with various directors and executive officers. Such transactions originate in the normal course of the Bank's operations as a depository and lending institution. At December 31, 2000 and 1999, certain executive officers, directors and associates of such persons were indebted to the Bank directly or as guarantors in the aggregate -21- amount of $3,000,000 and $3,576,000, respectively. During 2000, $180,000 in new loans were made; repayments totaled $756,000. NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values of financial instruments as of December 31, were as follows ($000's):
2000 1999 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value FINANCIAL ASSETS: Cash and cash equivalents $ 18,262 18,262 24,140 24,140 Interest-bearing deposits in banks - - 5,492 5,492 Federal Reserve Bank stock 647 647 647 647 Federal Home Loan Bank stock 1,741 1,741 - - Securities available for sale 82,506 82,506 104,911 104,911 Loans, net 328,439 317,299 285,608 278,149 FINANCIAL LIABILITIES: Deposits $394,786 393,798 391,569 390,221 Short-term borrowings 1,099 1,099 2,274 2,274 Long-term debt 6,356 6,652 403 403 The fair value of off-balance-sheet financial instruments at December 31, 2000 and 1999 was not material. Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions. In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of the Bank. The following methods and assumptions were used to estimate the fair value of certain financial instruments: Cash and cash equivalents: The carrying amounts presented are deemed to approximate fair value. Interest-bearing deposits in banks: Fair value is estimated for these certificates of deposit by discounting the future cash flows at current rates. Investment Securities: Fair values are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. -22- Loans: Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowings: The carrying amounts of federal funds purchased and U.S. Treasury notes are deemed to approximate fair value of short-term borrowings. For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rate. NOTE 13 - REGULATORY MATTERS The Federal Reserve Act requires depository institutions to maintain cash reserves with the Federal Reserve Bank. In 2000 and 1999, the Bank was required to maintain average reserve balances of $8,356,000 and $8,018,000, respectively.
Banks and holding companies must meet certain minimum capital requirements set by federal banking agencies. The minimum regulatory capital ratios are 8% for total risk-based, 4% for Tier 1 risk-based, and 4% for leverage. For various regulatory purposes, institutions are classified into categories based upon capital adequacy. The highest "well-capitalized" category requires capital ratios of at least 10% for total risk-based, 6% for Tier 1 risk-based, and 5% for leverage. As of the most recent notification from their regulators, the Holding Company and Bank were categorized as "well- capitalized" under the regulatory framework for prompt corrective action. A summary of the regulatory capital of the Holding Company and Bank at December 31 follows ($000's):
2000 1999 ---------------------------------- Holding Holding Company Bank Company Bank Regulatory Capital: Shareholders' equity $46,310 41,245 42,987 37,875 Goodwill and other intangibles (4,210) (4,157) (4,710) (4,710) Net unrealized securities losses (gains) (281) (219) 1,298 1,298 ------ ------ ------ ------ Tier 1 risk-based capital 41,819 36,869 39,575 34,463 -23- Eligible allowance for loan losses 2,000 2,000 2,000 2,000 ------ ------ ------ ------ Total risk-based capital $43,819 38,869 41,575 36,463 ====== ====== ====== ====== Capital Ratios: Total risk-based 14.88% 13.30 15.3 13.6 Tier 1 risk-based 14.20% 12.62 14.6 12.8 Tier 1 leverage 9.22% 8.21 9.1 7.9 The principal source of income and funds for LCNB Corp. is dividends paid by the Bank subsidiary. The payment of dividends is subject to restriction by regulatory authorities. For 2000, the restrictions generally limit dividends to the aggregate of net income for the year 2000 plus the retained net earnings for 2000 and 1999. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Accordingly, future dividends may require the prior approval of the Comptroller of the Currency. NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for LCNB Corp. (parent company only) follows ($000's):
Condensed Balance Sheets Year ended December 31 2000 1999 Assets: Cash on deposit with subsidiary $ 48 17 Corporate and municipal debt securities 5,029 4,969 Investment in subsidiary 41,139 37,575 Other assets 94 126 ------ ------ Total assets $46,310 42,687 ====== ====== Liabilities $ - - Shareholders' equity 46,310 42,687 ------ ------ Total liabilities and shareholders' equity $46,310 42,687 ====== ====== -24- Condensed Statements of Income Year ended December 31 Income: Dividends from subsidiary $ 3,197 7,936 Interest 202 2 Gain on sale of investment securities 7 - ----- ----- Total income 3,406 7,938 ----- ----- Expenses: Amortization of organization costs 20 13 Other expense 20 1 ----- ----- Total expense 40 14 ----- ----- Income before income tax benefit and equity in undistributed income of subsidiary 3,366 7,924 Income tax benefit 10 3 Equity in undistributed income (excess dividends) of subsidiary 1,864 (2,352) ----- ----- Net income $5,240 5,575 ===== ===== Condensed Statements of Cash Flows Year ended December 31 2000 1999 Cash flows from operating activities: Net income $5,240 5,575 Adjustments for non-cash items - Equity in undistributed (income) excess dividends of subsidiary (1,864) 2,352 Organization costs - (105) Other, net 59 8 ----- ----- Net cash provided by operating activities 3,435 7,830 ----- ----- Cash flows from investing activities: Capital contribution to subsidiary (185) - Purchases of securities available for sale (2,143) (4,997) Proceeds from sales of securities available for sale 773 - Proceeds from maturities of securities available for sale 1,347 - ----- ----- Cash flow used in investing activities (208) (4,997) ----- ----- -25- Cash flows from financing activities: Cash dividends paid (3,196) (2,816) ----- ----- Net change in cash 31 17 Cash at beginning of year 17 - ----- ----- Cash at end of year $ 48 17 ===== ===== -26-