-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L+79Gg9GHBgnepN+DX9WlntzISS8+0gL8BVqaaaunu0glf0s3kqj4vpxhhBKPOYG ryywz9rDDAG6xWrde1blSg== 0001012364-03-000012.txt : 20030430 0001012364-03-000012.hdr.sgml : 20030430 20030430144427 ACCESSION NUMBER: 0001012364-03-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LCNB CORP CENTRAL INDEX KEY: 0001074902 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 311626393 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26121 FILM NUMBER: 03672394 BUSINESS ADDRESS: STREET 1: 2 NORTH BROADWAY CITY: LEBANON STATE: OH ZIP: 45036 BUSINESS PHONE: 5139321414 MAIL ADDRESS: STREET 1: 2 NORTH BROADWAY CITY: LEBANON STATE: OH ZIP: 45036 10-Q 1 lcnb10qfirstqtr.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended March 31, 2003 Commission file number 000-26121 LCNB Corp. ------------------------------------------------------ (Exact name of registrant as specified in its charter) OHIO 31-1626393 - -------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 2 North Broadway, Lebanon, Ohio 45036 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (513) 932-1414 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the issuer's common stock, without par value, as of April 29, 2003, was 1,719,727 shares. LCNB Corp. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2003, and December 31, 2002 . . . . . . . . .1 Consolidated Statements of Income - Three Months Ended March 31, 2003 and 2002. . . . . . . . . . . . . . . . . . . . . . . .2 Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 2003 and 2002. . . . . . .3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2003 and 2002. . . . . . .4 Notes to Consolidated Financial Statements . . . . . . . 5-9 Independent Accountants' Review Report . . . . . . . . . 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . 11-22 Item 3. Quantitative and Qualitative Disclosures about Market Risks. . . . . . . . . . . . . . . . . . .22 Item 4. Controls and Procedures . . . . . . . . . . . . . . . . .22 Part II. Other Information Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . .23 Item 2. Changes in Securities and Use of Proceeds . . . . . . . .23 Item 3. Defaults by the Company on its Senior Securities. . . . .23 Item 4. Submission of Matters to a Vote of Security Holders . . .23 Item 5. Other Information . . . . . . . . . . . . . . . . . . . .23 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . .23 Part I - Financial Information Item 1. Financial Statements LCNB Corp. and Subsidiaries Consolidated Balance Sheets (thousands)
March 31, December 31, 2003 2002 (unaudited) (a) ASSETS: Cash and due from banks $ 15,384 13,679 Federal funds sold 12,000 11,925 ------- ------- Total cash and cash equivalents 27,384 25,604 ------- ------- Securities available for sale, at market value 141,169 136,178 Federal Reserve Bank stock and Federal Home Loan Bank stock, at cost 2,893 2,871 Loans 320,193 324,832 Less-allowance for loan losses 2,000 2,000 ------- ------- Net loans 318,193 322,832 ------- ------- Premises and equipment, net 11,633 11,688 Intangible assets 3,066 3,121 Other assets 4,834 4,457 ------- ------- TOTAL ASSETS $509,172 506,751 ======= ======= LIABILITIES: Deposits- Noninterest-bearing $ 60,774 58,921 Interest-bearing 384,582 383,299 ------- ------- Total deposits 445,356 442,220 Long-term debt 6,239 6,253 Accrued interest and other liabilities 4,480 6,348 ------- ------- TOTAL LIABILITIES 456,075 454,821 ------- ------- SHAREHOLDERS' EQUITY: Common stock, no par value, authorized 4,000,000 shares; issued and outstanding 1,775,942 shares 10,560 10,560 Surplus 10,553 10,553 Retained earnings 31,471 30,768 Treasury shares at cost, 55,749 and 54,917 shares at March 31, 2003 and December 31, 2002, respectively (2,236) (2,193) Accumulated other comprehensive income, net of taxes 2,749 2,242 ------- ------- TOTAL SHAREHOLDERS' EQUITY 53,097 51,930 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $509,172 506,751 ======= ======= (a) Financial information as of December 31, 2002, has been derived from the audited, consolidated financial statements of the Registrant. The accompanying notes to the consolidated financial statements are an integral part of these statements.
-1- LCNB Corp. and Subsidiaries Consolidated Statements of Income (In thousands except per share data) (unaudited)
Three Months Ended March 31, ----------------------- 2003 2002 INTEREST INCOME: Interest and fees on loans $ 5,769 6,228 Dividends on Federal Reserve Bank and Federal Home Loan Bank stock 22 24 Interest on investment securities- Taxable 753 652 Non-taxable 533 407 Other short-term investments 40 95 ----- ----- TOTAL INTEREST INCOME 7,117 7,406 ----- ----- INTEREST EXPENSE: Interest on deposits 2,251 2,516 Interest on short-term borrowings 2 4 Interest on long-term borrowings 71 185 ----- ----- TOTAL INTEREST EXPENSE 2,324 2,705 ----- ----- NET INTEREST INCOME 4,793 4,701 PROVISION FOR LOAN LOSSES 118 54 ----- ----- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,675 4,647 ----- ----- NON-INTEREST INCOME: Trust income 255 301 Service charges and fees 637 579 Net gain on sale of securities - 9 Insurance agency income 361 251 Gains from sales of mortgage loans 227 26 Other operating income 35 35 ----- ----- TOTAL NON-INTEREST INCOME 1,515 1,201 ----- ----- NON-INTEREST EXPENSE: Salaries and wages 1,704 1,615 Pension and other employee benefits 484 477 Equipment expenses 232 156 Occupancy expense - net 281 248 State franchise tax 117 141 Marketing 107 83 Intangible amortization 150 149 ATM expense 69 100 Other non-interest expense 791 754 ----- ----- TOTAL NON-INTEREST EXPENSE 3,935 3,723 ----- ----- INCOME BEFORE INCOME TAXES 2,255 2,125 PROVISION FOR INCOME TAXES 649 599 ----- ----- NET INCOME $ 1,606 1,526 ===== ===== Dividends declared per common share $ .525 .50 Earnings per common share: Basic $ .93 .88 Diluted .93 .88 Average shares outstanding (000's): Basic 1,721 1,732 Diluted 1,721 1,732 The accompanying notes to the consolidated financial statements are an integral part of these statements.
-2- LCNB Corp. and Subsidiaries Consolidated Statements of Shareholders' Equity (thousands) (unaudited)
Accumulated Other Total Common Retained Treasury Comprehensive Shareholders' Comprehensive Shares Surplus Earnings Shares Income Equity Income Balance January 1, 2002 $10,560 10,553 27,714 (516) 1,196 49,507 Net income 1,526 1,526 1,526 Net unrealized loss on available-for-sale securities (net of tax benefit of $99) (193) (193) (193) Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $3) (6) (6) (6) ----- Total comprehensive income $ 1,327 ===== Treasury shares purchased (1,677) (1,677) Cash dividends declared- $0.50 per share (860) (860) ------ ------ ------ ----- ------ ------ Balance March 31, 2002 $10,560 10,553 28,380 (2,193) 997 48,297 ====== ====== ====== ===== ====== ====== Balance January 1, 2003 $10,560 10,553 30,768 (2,193) 2,242 51,930 Net income 1,606 1,606 1,606 Net unrealized gain on available-for-sale securities (net of taxes of $261) 507 507 507 ----- Total comprehensive income $ 2,113 ===== Treasury shares purchased (43) (43) Cash dividends declared- $0.525 per share (903) (903) ------ ------ ------ ----- ------ ------ Balance March 31, 2003 $10,560 10,553 31,471 (2,236) 2,749 53,097 ====== ====== ====== ===== ====== ====== The accompanying notes to the consolidated financial statements are an integral part of these statements.
-3- LCNB Corp. and Subsidiaries Consolidated Statements of Cash Flows (thousands) (unaudited)
Three Months Ended March 31, --------------------- 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,606 1,526 Adjustments to reconcile net income to net cash Provided by operating activities - Depreciation, amortization and accretion 749 631 Provision for loan losses 118 54 Realized gain on sales of securities available for sale - (9) Origination of mortgage loans for sale (9,725) (2,271) Proceeds from sales of mortgage loans 9,855 2,287 (Increase) decrease in income receivable (148) (90) (Increase) decrease in other assets (459) (304) Increase (decrease) in other liabilities 471 (228) ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 2,467 1,596 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale - 5,942 Proceeds from maturities of securities available for sale 9,803 2,179 Purchases of securities available for sale (14,332) (9,476) Net decrease (increase) in loans 4,467 4,849 Purchases of premises and equipment (183) (192) ------ ------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (245) 3,302 ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 3,136 3,221 Net change in short-term borrowings (2,618) 1,513 Principal payments on long-term debt (14) (13) Cash dividends paid (903) (860) Purchases of treasury shares (43) (1,677) ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES (442) 2,184 ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS 1,780 7,082 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,604 34,236 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $27,384 41,318 ====== ====== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 2,306 2,935 Income taxes - - The accompanying notes to the consolidated financial statements are an integral part of these statements.
-4- LCNB Corp. and Subsidiaries Notes to the Consolidated Financial Statements (Unaudited) NOTE 1 - BASIS OF PRESENTATION Substantially all of the assets, liabilities and operations of LCNB Corp. ("LCNB") are attributable to its wholly owned subsidiaries, Lebanon Citizens National Bank ("Lebanon Citizens"), and Dakin Insurance Agency, Inc. ("Dakin"). The accompanying unaudited consolidated financial statements include the accounts of LCNB, Lebanon Citizens, and Dakin. The statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year ending December 31, 2003. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2002 Form 10-K filed with the Securities and Exchange Commission. The financial information presented on pages one through nine of this Form 10-Q has been subject to a review by J.D. Cloud & Co. L.L.P., the Company's independent certified public accountants, as described in their report on page ten. NOTE 2 - EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is adjusted for the dilutive effects of stock options. The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options with proceeds used to purchase treasury shares at the average market price for the period. -5- LCNB Corp. and Subsidiaries Notes to the Consolidated Financial Statements (Unaudited) (Continued) NOTE 3 - LOANS Major classifications of loans at March 31, 2003 and December 31, 2002 are as follows (thousands):
March 31, December 31, 2003 2002 -------- ----------- Commercial and industrial $ 27,504 35,198 Commercial, secured by real estate 92,935 80,882 Residential real estate 144,717 151,502 Consumer, excluding credit card 49,473 51,184 Agricultural 1,233 1,314 Credit card 2,577 2,689 Other loans 44 57 Lease financing 1,006 1,256 ------- ------- 319,489 324,082 Deferred net origination costs 704 750 ------- ------- 320,193 324,832 Allowance for loan losses (2,000) (2,000) ------- ------- Loans - net $318,193 322,832 ======= =======
Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation ("FHLMC") are not included in the accompanying balance sheets. The unpaid principal balances of those loans at March 31, 2003 and December 31, 2002 were $42,640,000 and $36,592,000, respectively. Loans sold to the FHLMC during the quarters ended March 31, 2003 and 2002 totaled $9,725,000 and $2,271,000, respectively. Mortgage servicing rights on originated mortgage loans that have been sold are capitalized by allocating the total cost of the loans between mortgage servicing rights and the loans based on their relative fair values. Approximately $96,000 in mortgage servicing rights were capitalized during the quarter ended March 31, 2003 and are being amortized to loan servicing income in proportion to and over the period of estimated servicing income. -6- LCNB Corp. and Subsidiaries Notes to the Consolidated Financial Statements (Unaudited) (Continued) NOTE 3 - LOANS (continued) Changes in the allowance for loan losses were as follows (thousands):
March 31, March 31, 2003 2002 --------- --------- Balance - beginning of year $2,000 2,000 Provision for loan losses 118 54 Charge offs (138) (68) Recoveries 20 14 ----- ----- Balance - end of period $2,000 2,000 ===== =====
There were no nonaccrual loans at March 31, 2003 or December 31, 2002. NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments included commitments to extend credit. They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments. LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2003 and December 31, 2002 were as follows (thousands):
March 31, December 31, 2003 2002 --------- --------- Commitments to extend credit $75,302 69,521 Standby letters of credit 6,606 6,938
-7- LCNB Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES (continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. At March 31, 2003 and December 31, 2002, outstanding guarantees of $1,716,000 and $2,048,000, respectively, were issued to developers and contractors. These guarantees generally expire within one year and are fully secured. In addition, LCNB has an approximate $5 million participation at March 31, 2003 and December 31, 2002 in a letter of credit securing payment of principal and interest on a bond issue. This letter of credit will expire July 15, 2005, and is secured by an assignment of rents and the underlying real property. LCNB evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable; inventory; property, plant and equipment; residential realty; and income-producing commercial properties. LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations. -8- LCNB Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) NOTE 5 - STOCK OPTIONS LCNB established an Ownership Incentive Plan (the "Plan") during 2002 that allows for stock-based awards to eligible employees. The awards may be in the form of stock options, share awards, and/or appreciation rights. The Plan provides for the issuance of up to 50,000 shares. No awards were granted during 2002. Stock options for 2,764 shares were granted to key executive officers of LCNB during the first quarter, 2003. LCNB accounts for the Plan under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The pro-forma effect on net income and earnings per share if LCNB had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation was not material. Because this is the first quarter stock options were outstanding, this quarter's pro- forma effect is not indicative of the pro-forma effect on future quarters and years. -9- INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Shareholders LCNB Corp. and subsidiaries Lebanon, Ohio We have reviewed the accompanying consolidated balance sheet of LCNB Corp. and subsidiaries as of March 31, 2003, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three-month periods ended March 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with U.S. generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles. We previously audited, in accordance with U.S. generally accepted auditing standards, the consolidated balance sheet of LCNB Corp. and subsidiaries as of December 31, 2002 (presented herein), and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated January 24, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002, is fairly stated in all material respects. /s/ J.D. Cloud & Co. L.L.P. Cincinnati, Ohio April 14, 2003 -10- LCNB Corp. and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Certain matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties, including regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, and other risks. Actual strategies and results in future time periods may differ materially from those currently expected. Such forward- looking statements represent management's judgment as of the current date. The Company disclaims, however, any intent or obligation to update such forward-looking statements. RESULTS OF OPERATIONS LCNB earned $1,606,000 for the three months ended March 31, 2003, which was $80,000 or 5.24% greater than the $1,526,000 earned during the three months ended March 31, 2002. Basic earnings per share were $0.93 for the first quarter of 2003, compared with $0.88 per share earned in the first quarter of 2002. Annualized performance ratios for the 2003 period included a return on average assets of 1.28% and a return on average equity of 12.36%, compared with 1.29% and 12.59%, respectively, for the comparable period in 2002. Return on average assets and average equity decreased despite the growth in earnings due to growth in average assets and average equity. NET INTEREST INCOME LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities. The following table presents, for the first quarter of 2003 and 2002, average balances for the different types of interest earning assets and interest bearing liabilities, the income or expense related to each item, and the resultant average yields earned or rates paid. -11-
Three Months Ended March 31, ----------------------- 2003 2002 (Dollars in thousands) Interest-earning Assets: Average balance (1) $476,746 448,018 Interest income (2) 7,397 7,622 Average rate 6.29% 6.90% Interest-bearing Liabilities: Average balance 390,856 370,821 Interest expense 2,324 2,705 Average rate 2.41% 2.96% Net interest income 5,073 4,917 Net interest margin on a taxable equivalent basis (3) 4.32% 4.45%
(1) Includes nonaccrual loans, if any. (2) Income from tax-exempt loans and investment securities is included in interest income on a taxable equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34%. (3) The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets. The following table presents the changes in interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended March 31, 2003 and 2002. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each. -12-
Three Months Ended March 31, 2003 vs. 2002 -------------------------- Increase (decrease) due to -------------------------- Volume Rate Total (In thousands) Interest Earning Assets Loans $ 39 (499) (460) Federal funds sold (34) (21) (55) Federal Home Loan Bank stock 1 (3) (2) Investment securities Taxable 212 (111) 101 Nontaxable 236 (45) 191 --- ----- ----- Total interest income 454 (679) (225) Interest Bearing Liabilities Deposits 178 (443) (265) Short-term borrowings (2) - (2) Long-term debt (76) (38) (114) --- ----- ----- Total interest expense 100 (481) (381) --- ----- ----- Net interest income $354 (198) 156 === ===== =====
Net interest income on a fully tax equivalent basis for the first quarter of 2003 totaled $5,073,000, an increase of $156,000 from the first quarter of 2002. Total interest expense decreased $381,000, partially offset by a decrease in total interest income of $225,000. The decreases in both interest income and expense were primarily a result of decreases in the average rate earned on loans and investments and the average rate paid for deposits and borrowings. The rate decreases reflect a 525 basis point (a basis point equals 0.01%) decrease in the intended federal funds rate, as set by the Federal Reserve Board, during 2001 and 2002. The net interest margin (net interest income divided by average total earning assets) is a measure of the revenue generated by a financial institution's earning assets, after deducting interest expense. The net interest margin for the first quarter of 2003 was 4.32%, as compared to 4.45% for the first quarter, 2002. The net interest margin decreased because rates earned on loans and other investments decreased more rapidly than rates paid for deposits and other borrowings. -13- The decrease in total interest income was primarily due to a 61 basis point decrease in the average rate on earning assets, from 6.90% for the first quarter of 2002 to 6.29% for the first quarter of 2003. This decrease was partially offset by a $28.7 million increase in average total earning assets. Average investment securities increased $37.3 million while average federal funds sold, which had an average interest rate of only 1.14% during the first quarter, 2003, decreased $10.7 million as funds were reallocated the higher earning investment portfolio. The balance of the increase in investments securities was funded from deposit growth. Average loans increased $2.0 million in the first quarter, 2003 as compared to the first quarter, 2002 primarily due to a $10.1 million increase in average commercial loans and an $8.5 million increase in average home equity line of credit loans, offset by an $18.3 million decrease in real estate mortgage loans. Real estate mortgage loans decreased because of payoffs from loan refinances and sales of most new fixed-rate loans to the Federal Home Loan Mortgage Corporation ("FHLMC"). The decrease in total interest expense was due to a 55 basis point decrease in the average liability rate, slightly offset by a $20.0 million increase in average interest-bearing liabilities. Average interest-bearing deposits increased $26.6 million, while average long-term debt decreased $6.1 million. The deposit increase was primarily in the regular savings product, reflecting customer preference for highly liquid, short-term investment products during the current rate cycle. The $6.1 million decrease in long-term debt reflects the maturation of a $2.0 million Federal Home Loan Bank advance in June, 2002, and the early payoff of two other advances totaling $4.0 million during August, 2002. -14- PROVISION AND ALLOWANCE FOR LOAN LOSSES The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. The total loan loss provision and the other changes in the allowance for loan losses are shown below.
Quarter Ended March 31, 2003 2002 (thousands) Balance, beginning of period $ 2,000 2,000 Charge-offs (138) (68) Recoveries 20 14 ----- ----- Net charge-offs (118) (54) ----- ----- Provision for loan losses 118 54 ----- ----- Balance, end of period $ 2,000 2,000 ===== =====
The $70,000 increase in charge-offs was in the installment loan category. The following table sets forth information regarding the past due, non- accrual and renegotiated loans of LCNB at the dates indicated:
March 31, December 31, 2003 2002 ------------- ---------- (thousands) Loans accounted for on non-accrual basis $ - - Accruing loans which are past due 90 days or more 548 232 Renegotiated loans - - --- --- Total $548 232 === ===
The increase in accruing loans past due 90 days or more is due to one loan secured by a mortgage on land. -15- NON-INTEREST INCOME Non-interest income increased $314,000 or 26.1% during the first quarter of 2003 as compared to the first quarter of 2002. Service charges and fees increased $58,000 or 10.0% primarily due to pricing adjustments for non- sufficient fund fees and to an increase in the number of non-sufficient fund charges. Insurance agency income increased $110,000 or 43.8% compared to the first quarter of 2002 due to a $55,000 increase in contingency commissions recognized during 2003 and to commissions received on new and renewing policies. Contingency commissions are profit-sharing arrangements on property and casualty policies between the originating agency and the underwriter and are generally based on underwriting results and written premium. As such, the amount received each year can vary significantly depending on loss experience. Gains from sales of mortgage loans increased $201,000 due to an increase in the volume of loans sold during the first quarter of 2003 as compared to the first quarter of 2002. Partially offsetting the increases listed above was a $46,000 or 15.3% decrease in trust income for the first quarter of 2003 compared to the same period in 2002. Total trust assets under management at March 31, 2003 were $9.9 million greater than at March 31, 2002, but the mix of assets has changed enough to create the decrease in income. NON-INTEREST EXPENSE Total non-interest expense increased $212,000 or 5.7% during the first quarter, 2003 compared with the first quarter, 2002. Salaries and wages increased $89,000 or 5.5% primarily due to routine salary and wage increases. Equipment expense increased $76,000 or 48.7% primarily due to the rental costs for a new phone system installed during 2002 and to depreciation charges on new furniture and computer hardware and software purchased during 2002. Occupancy expense increased $33,000 or 13.3% primarily due to $31,000 in snow removal and salt application costs paid during the first quarter, 2003. Partially offsetting these increases was a $31,000 decrease in ATM expenses caused by a change in the ATM transaction processor. -16- FINANCIAL CONDITION The following table highlights the changes in the balance sheet. The analysis uses quarterly averages to give a better indication of balance sheet trends.
CONDENSED AVERAGE QUARTERLY BALANCE SHEETS ------------------------------------------ March 31, December 31, September 30, 2003 2002 2002 (thousands) ASSETS Interest-earning: Federal funds sold $ 14,246 21,877 17,169 Investment securities 137,834 130,460 123,186 Loans 324,666 328,505 332,638 ------- ------- ------- Total interest-earning assets 476,746 480,842 472,993 Noninterest-earning: Cash and due from banks 14,065 13,992 13,619 All other assets 19,058 19,163 19,458 Allowance for credit losses (2,005) (2,001) (2,001) ------- ------- ------- Total assets $507,864 511,996 504,069 ======= ======= ======= LIABILITIES Interest bearing: Interest-bearing deposits $383,986 389,117 380,957 Short-term borrowings 624 1,089 1,078 Long-term debt 6,246 6,260 8,708 ------- ------- ------- Total interest-bearing liabilities 390,856 396,466 390,743 Noninterest-bearing: Noninterest-bearing deposits 61,194 60,457 59,415 All other liabilities 3,141 3,443 3,128 ------- ------- ------- Total liabilities 455,191 460,366 453,286 SHAREHOLDERS' EQUITY 52,673 51,630 50,783 ------- ------- ------- Total liabilities and shareholders' equity $507,864 511,996 504,069 ======= ======= =======
-17- March 31, 2003 vs. December 31, 2002. Total average interest-earning assets decreased $4.1 million when comparing the quarter ended March 31, 2003 to the quarter ended December 31,2002. Securities available for sale increased $7.4 million, while federal funds sold decreased $7.6 million. During the quarter funds were re-allocated from federal funds to the higher-earning investment securities portfolio. Loans decreased $3.8 million on an average basis because of refinance activity and the sale of most new fixed-rate loans in the secondary market. Total average interest-bearing liabilities decreased $5.6 million when comparing the March 31 and December 31 quarters. Most of the decrease was in interest-bearing deposits, which decreased $5.1 million on an average basis. Most of the decrease was in prime savings and certificates of deposit accounts, partially offset by growth in regular savings accounts, which grew $13.5 million on an average basis. Management believes the growth in regular savings accounts reflects investor preference for short-term, highly liquid investments during the current economic cycle. This means much of the recent savings deposit growth could be quickly withdrawn if interest rates increase. Management is attempting to lock in a portion of these funds by offering special rates and terms on selected certificate of deposit products. -18- ASSETS UNDER MANAGEMENT In addition to assets recorded in its balance sheet, LCNB, as a fiduciary, manages assets for customers and investors as a part of its normal operations. The following table shows balances for the different types of assets managed.
March 31, December 31, 2003 2002 ---------- ---------- (thousands) Total consolidated assets as reported on the balance sheet $509,172 506,751 Assets managed by the Trust Department * 119,012 119,263 Mortgage loans serviced for others 42,640 36,592 Business cash management * 18,688 16,668 Brokerage accounts * 5,125 3,639 ------- ------- Total assets managed $694,637 682,913 ======= =======
* at fair market value CAPITAL Lebanon Citizens and LCNB Corp. are required by regulators to meet certain minimum levels of capital adequacy. These are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in LCNB's assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%. The capital leverage ratio supplements the risk- based capital guidelines. Banks are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%. A summary of the regulatory capital and capital ratios of LCNB follows: -19-
At At March 31, December 31, 2003 2002 (Dollars in thousands) Regulatory Capital: Shareholders' equity $ 53,097 51,930 Goodwill and other intangibles (3,066) (3,121) Net unrealized securities gains (2,749) (2,242) ------ ------ Tier 1 risk-based capital 47,282 46,567 Eligible allowance for loan losses 2,000 2,000 ------ ------ Total risk-based capital $ 49,282 48,567 ====== ====== Capital Ratios: Total risk-based 15.46% 15.36% Tier 1 risk-based 14.83% 14.73% Tier 1 leverage 9.43% 9.21% Minimum Required Capital Ratios: Total risk-based 8.00% 8.00% Tier 1 risk-based 4.00% 4.00% Tier 1 leverage 3.00% 3.00%
On April 17, 2001, LCNB's Board of Directors authorized three separate stock repurchase programs, two phases of which continue. The shares purchased will be held for future corporate purposes. Under the "Market Repurchase Program." LCNB will purchase up to 50,000 shares of its stock through market transactions with a selected stockbroker. Through March 31, 2003, 8,397 shares had been purchased under this program. The "Private Sale Repurchase Program" is available to shareholders who wish to sell large blocks of stock at one time. Because LCNB's stock is not widely traded, a shareholder releasing large blocks may not be able to readily sell all shares through normal procedures. Purchases of blocks will be considered on a case-by-case basis and will be made at prevailing market prices. A total of 46,897 shares had been purchased under this program at March 31, 2003. -20- LIQUIDITY LCNB depends on dividends from its subsidiaries for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. National banking law limits the amount of dividends Lebanon Citizens may pay to the sum of retained net income, as defined, for the current year plus retained net income for the previous two years. Prior approval from the Office of the Comptroller of the Currency, Lebanon Citizens primary regulator, would be necessary for Lebanon Citizens to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes Lebanon Citizens will be able to pay anticipated dividends to LCNB without needing to request approval. Liquidity is the ability to have funds available at all times to meet the commitments of LCNB. Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets included cash, federal funds sold and securities available for sale. At March 31, 2003, LCNB liquid assets amounted to $168.6 million or 33.1% of total assets, an increase from $161.8 million or 31.9% at December 31, 2002. Liquidity is also provided by access to core funding sources, primarily core depositors in the bank's primary market area. LCNB does not solicit brokered deposits as a funding source. The liquidity of LCNB is enhanced by the fact that 90.2% of total deposits at March 31, 2003 were "core" deposits. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000. Secondary sources of liquidity include LCNB's ability to sell loan participations, borrow funds from the Federal Home Loan Bank and purchase federal funds. Management closely monitors the level of liquid assets available to meet ongoing funding needs. It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems as a result of current liquidity levels. -21- Item 3. Quantitative and Qualitative Disclosures about Market Risks For a discussion of LCNB's asset and liability management policies and gap analysis for the year ended December 31, 2002 see Item 7A, Quantitative and Qualitative Disclosures about Market Risks, in the recently filed Form 10-K for the year ended December 31, 2002. There have been no material changes in LCNB's market risks, which for LCNB is primarily interest rate risk. Item 4. Controls and Procedures The Chief Executive Officer and the Chief Financial Officer have reviewed, as of a date within 90 days of this filing, the disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely and proper manner. Based upon this review, LCNB believes that there are adequate controls and procedures in place. There are no significant changes in the controls or other factors that could affect the controls after the date of evaluation. -22- PART II. OTHER INFORMATION LCNB Corp. and Subsidiary Item 1. Legal Proceedings - Not Applicable Item 2. Changes in Securities and Use of Proceeds - Not Applicable Item 3. Defaults by the Company on its Senior Securities - Not Applicable Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable Item 5. Other Information - Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Title 99.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. 99.3 Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K LCNB filed a report on Form 8-K on January 15, 2003 to announce earnings for the year ended December 31, 2002. -23- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LCNB Corp. Registrant /s/ Stephen P. Wilson /s/Steve P. Foster - ------------------------- ------------------------- Stephen P. Wilson Steve P. Foster President, CEO & Chairman Executive Vice President of the Board of Directors and Chief Financial Officer April 30, 2003 April 30, 2003 -24- Exhibit 99.1 CERTIFICATIONS In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen P. Wilson, President and Chief Executive Officer of LCNB Corp., certify, that: (1) I have reviewed this quarterly report on Form 10-Q of LCNB Corp.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) LCNB Corp.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, as defined in Exchange Act Rules 13a-14 and 15d-14, for LCNB Corp. and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to LCNB Corp., including its consolidated subsidiaries, is made known to us by others with those entities, particularly during the period in which the quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure control and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. (5) LCNB Corp.'s other certifying officer and I have disclosed, based on our most recent evaluation, to LCNB Corp.'s auditors and the audit committee of LCNB Corp.'s board of directors: a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. (6) LCNB Corp.'s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Stephen P. Wilson - ------------------------------------- Stephen P. Wilson President and Chief Executive Officer April 30, 2003 -25- Exhibit 99.2 CERTIFICATIONS In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steve P. Foster, Executive Vice President and Chief Financial Officer of LCNB Corp., certify, that: (1) I have reviewed this quarterly report on Form 10-Q of LCNB Corp.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) LCNB Corp.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, as defined in Exchange Act Rules 13a-14 and 15d-14, for LCNB Corp. and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to LCNB Corp., including its consolidated subsidiaries, is made known to us by others with those entities, particularly during the period in which the quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure control and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. (5) LCNB Corp.'s other certifying officer and I have disclosed, based on our most recent evaluation, to LCNB Corp.'s auditors and the audit committee of LCNB Corp.'s board of directors: a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. (6) LCNB Corp.'s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Steve P. Foster - ---------------------------- Steve P. Foster Executive Vice President and Chief Financial Officer April 30, 2003 -26- Exhibit 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of LCNB Corp. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Stephen P. Wilson, Chief Executive Officer, and Steve P. Foster, Chief Financial Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Stephen P. Wilson /s/ Steve P. Foster - ----------------------- ----------------------- Stephen P. Wilson Steve P. Foster Chief Executive Officer Chief Financial Officer Date: April 30, 2003 -27- -----END PRIVACY-ENHANCED MESSAGE-----