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 June 30, 2001 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 July 28, 2001, was 1,765,147 shares.
LCNB Corp. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2001, and December 31, 2000 . . . . . . . . . 1 Consolidated Statements of Income - Three and Six Months Ended June 30, 2001 and 2000 . . 2 Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity - Year Ended December 31, 2000 and Six Months Ended June 30, 2001 . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 . . . . . . . 4 Notes to Consolidated Financial Statements . . . . .. 5-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . .10-22 Item 3. Quantitative and Qualitative Disclosures about Market Risks . . . . . . . . . . . . . . . . . . . . .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 <TABLE> LCNB Corp. and Subsidiaries Consolidated Balance Sheets At June 30, 2001, and December 31, 2000 (thousands) <CAPTION> June 30, December 31, 2001 2000 (unaudited) (a) <s> <c> <c> ASSETS: Cash and due from banks $ 11,804 18,262 Federal funds sold 17,025 - ------- ------- Total cash and cash equivalents 28,829 18,262 Federal Reserve Bank stock 647 647 Federal Home Loan Bank stock 2,024 1,741 Securities available for sale, at market value 81,094 82,506 Loans 332,260 330,439 Less-allowance for loan losses 2,000 2,000 ------- ------- Net loans 330,260 328,439 Premises and equipment, net 10,790 10,502 Accrued income receivable 3,091 3,139 Intangible assets 3,965 4,210 Other assets 1,392 1,554 ------- ------- TOTAL ASSETS $462,092 451,000 ======= ======= LIABILITIES: Deposits- Noninterest-bearing $ 53,307 51,697 Interest-bearing 347,541 343,089 ------- ------- Total deposits 400,848 394,786 Long-term debt 8,331 6,356 Accrued interest and other liabilities 4,840 3,548 ------- ------- TOTAL LIABILITIES 414,019 404,690 ------- ------- SHAREHOLDERS' EQUITY: Common stock-no par value, authorized 4,000,000 shares; issued and outstanding 1,765,347 shares at June 30, 2001 and 1,775,942 shares at December 31, 2000 10,560 10,560 Surplus 10,553 10,553 Retained earnings 26,215 24,916 Treasury shares, at cost, 10,595 shares at June 30, 2001 (420) - Accumulated other comprehensive income, net of taxes 1,165 281 ------- ------- TOTAL SHAREHOLDERS' EQUITY 48,073 46,310 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $462,092 451,000 ======= ======= <FN> (a) Financial information as of December 31, 2000, has been derived from the audited, consolidated financial statements of the Registrant. </FN> The accompanying notes to financial statements are an integral part of these statements. </TABLE> -1-
<TABLE> LCNB Corp. and Subsidiaries Consolidated Statements of Income (In thousands except per share data) (unaudited) <CAPTION> Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2001 2000 2001 2000 <s> <c> <c> <c> <c> INTEREST INCOME: Interest and fees on loans $6,916 6,402 14,011 12,581 Interest on federal funds sold 252 32 379 102 Interest on deposits in banks - 74 - 144 Dividends on Federal Reserve Bank and Federal Home Loan Bank stock 51 19 51 19 Interest on investment securities- Taxable 650 898 1,313 1,919 Non-taxable 368 420 741 815 ----- ----- ------ ------ TOTAL INTEREST INCOME 8,237 7,845 16,495 15,580 ----- ----- ------ ------ INTEREST EXPENSE: Interest on deposits 3,657 3,723 7,617 7,358 Interest on short-term borrowings 8 37 19 55 Interest on long-term debt 147 47 267 53 ----- ----- ------ ------ TOTAL INTEREST EXPENSE 3,812 3,807 7,903 7,466 ----- ----- ------ ------ NET INTEREST INCOME 4,425 4,038 8,592 8,114 PROVISION FOR LOAN LOSSES 53 48 110 83 ------ ----- ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,372 3,990 8,482 8,031 ----- ----- ------ ------ NON-INTEREST INCOME: Trust income 197 285 405 560 Service charges and fees 583 523 1,144 1,020 Net gain (loss) on sale of securities (1) 1 17 (13) Insurance agency commissions 299 235 692 415 Other operating income 35 32 80 62 ----- ----- ------ ------ TOTAL NON-INTEREST INCOME 1,113 1,076 2,338 2,044 ----- ----- ------ ------ NON-INTEREST EXPENSE: Salaries and wages 1,461 1,425 2,957 2,837 Pension and other employee benefits 378 337 812 741 Equipment 162 131 328 262 Occupancy, net 266 274 522 532 State franchise tax 131 117 262 242 Marketing 103 77 173 185 Intangible amortization 128 162 257 325 Other 750 746 1,492 1,529 ----- ----- ------ ------ TOTAL NON-INTEREST EXPENSE 3,379 3,269 6,803 6,653 ----- ----- ------ ------ INCOME BEFORE INCOME TAXES 2,106 1,797 4,017 3,422 PROVISION FOR INCOME TAXES 570 505 1,124 945 ----- ----- ------ ------ NET INCOME $1,536 1,292 2,893 2,477 ===== ===== ====== ====== Dividends declared per common share $ 0.45 0.30 0.90 .60 Basic earnings per common share $ 0.87 0.73 1.63 1.39 Average shares outstanding (000's) 1,772 1,776 1,774 1,776 The accompanying notes to financial statements are an integral part of these statements. </TABLE> -2-
<TABLE> LCNB Corp. and Subsidiaries Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity (thousands) (unaudited) <CAPTION> Accumulated Other Total Common Retained Treasury Comprehensive Shareholders'Comprehensive Shares Surplus Earnings Shares Income Equity Income <s> <c> <c> <c> <c> <c> <c> <c> Balance January 1, 2000 $10,560 10,553 22,872 - (1,298) 42,687 Comprehensive Income: Net income 5,240 5,240 $5,240 Net unrealized loss 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 Comprehensive Income: Net income 2,893 2,893 $2,893 Net unrealized gain on available-for-sale securities (net of taxes of $461) 895 895 895 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $6) (11) (11) (11) ----- Total comprehensive income $3,777 ===== Treasury shares purchased (420) (420) Cash dividends declared (1,594) (1,594) ------ ------ ------ ------ ------ ------ Balance June 30, 2001 $10,560 10,553 26,215 (420) 1,165 48,073 ====== ====== ====== ====== ====== ====== The accompanying notes to financial statements are an integral part of these statements. </TABLE> -3-
<TABLE> LCNB Corp. and Subsidiaries Consolidated Statements of Cash Flows (thousands) (unaudited) <CAPTION> Six Months Ended June 30 ------------------ 2001 2000 <s> <c> <c> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,893 2,477 Adjustments for non-cash items - Depreciation and amortization 1,039 981 Provision for loan losses 110 83 Deferred tax benefit (64) (98) Realized (gain) loss on sales of securities (20) 13 Origination of mortgage loans for sale (4,098) - Proceeds from sales of mortgage loans 4,113 - (Increase) decrease in accrued income receivable 48 68 Other, net (272) (300) ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 3,749 3,224 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available for sale 6,716 12,030 Proceeds from sales of securities available for sale 7,209 3,988 Purchases of securities available for sale (11,279) (5,517) Purchase of Federal Home Loan Bank stock (252) (427) Net increase in loans (2,144) (26,393) Purchases of premises and equipment (911) (2,131) Proceeds from sale of premises and equipment 188 - ------ ------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (473) (18,450) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 6,062 5,247 Net change in short-term borrowings 1,268 6,282 Proceeds from long-term debt 2,000 - Principal payments on note payable (25) - Cash dividends paid (1,594) (1,065) Purchase of treasury shares (420) - ------ ------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,291 10,464 ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS 10,567 (4,762) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,262 24,140 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $28,829 19,378 ====== ====== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 8,103 7,452 Income taxes paid 1,200 1,014 The accompanying notes to financial statements are an integral part of these statements. </TABLE> -4-
LCNB Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) NOTE 1 - BASIS OF PRESENTATION Effective May 18, 1999, Lebanon Citizens National Bank ("Lebanon Citizens"), was reorganized into a one-bank holding company structure. On April 11, 2000, LCNB Corp. ("LCNB"), the new consolidated holding company, elected to become a financial holding company pursuant to the Gramm-Leach-Bliley Act ("GLB Act"). The GLB Act, which became effective March 12, 2000, permits bank holding companies and national banks to own many types of non-banking subsidiaries such as insurance agencies and securities brokerage firms. The GLB Act allows a bank holding company to become a financial holding company and to make non-bank acquisitions. Substantially all of the assets, liabilities and operations of LCNB are attributable to its wholly owned subsidiaries, Lebanon Citizens and Dakin Insurance Agency, Inc. ("Dakin")(see Note 3). The accompanying unaudited consolidated financial statements include the accounts of LCNB, Lebanon Citizens and Dakin. The statements have been prepared in accordance with 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 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 financial information presented on pages one through eight of this Form 10-Q has been subject to a review by J.D. Cloud & Co., L.L.P., LCNB's independent certified public accountants, as described in their report on page nine. The preparation of financial statements in conformity with 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 and six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year ending December 31, 2001. 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 2000 Form 10-K filed with the Securities and Exchange Commission. -5-
LCNB Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) 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. LCNB's capital structure includes no potential for dilution. There are no warrants, options or other arrangements that would increase the number of shares outstanding. NOTE 3 - ACQUISITION On April 11, 2000, Dakin was acquired and became a wholly-owned subsidiary of LCNB. Under the terms of the agreement, Dakin shareholders received 15,942 shares of LCNB common stock in a private offering. The transaction qualifies as a tax-free reorganization and has been accounted for using the pooling method of accounting. Accordingly, the consolidated financial statements of LCNB have been restated to retroactively combine the financial statements of LCNB and Dakin as if the acquisition had occurred at the beginning of the earliest period presented. NOTE 4 - LOANS Major classifications of loans at June 30, 2001 and December 31, 2000 are as follows (thousands): <TABLE> <CAPTION> June 30, December 31, 2001 2000 -------- ----------- <s> <c> <c> Commercial and industrial $ 39,760 $ 36,449 Commercial, secured by real estate 64,439 59,043 Residential real estate 176,063 185,013 Consumer, excluding credit card 43,347 40,860 Agricultural 2,438 2,238 Credit card 2,471 3,049 Other loans 976 863 Lease financing 2,076 2,219 ------- ------- 331,570 329,734 Deferred net origination costs 690 705 ------- ------- 332,260 330,439 Allowance for loan losses (2,000) (2,000) ------- ------- Loans - net $330,260 328,439 ======= ======= </TABLE> -6-
LCNB Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) 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 June 30, 2001 and December 31, 2000 were $16,597,000 and $14,046,000, respectively. Loans sold to the FHLMC during the three and six months ended June 30, 2001 totaled $3,544,000 and $4,098,000. No loans were sold to the FHLMC during the three and six months ended June 30, 2000. <TABLE> Changes in the allowance for loan losses were as follows (thousands): <CAPTION> June 30, June 30, 2001 2000 --------- --------- <s> <c> <c> Balance - beginning of year $2,000 2,000 Provision for loan losses 110 83 Charge offs (134) (107) Recoveries 24 24 ----- ----- Balance - end of period $2,000 2,000 ===== ===== </TABLE> There were no nonaccrual loans at June 30, 2001 or December 31, 2000. NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", on July 20, 2001. SFAS No. 141 provides that all business combinations shall be accounted for using the purchase method of accounting; the use of the pooling-of-interests method will be prohibited. The provisions of SFAS No. 141 will apply to all business combinations initiated after June 30, 2001 or all business combinations accounted for by the purchase method that are completed after June 30, 2001. LCNB was not involved in any business combination discussions on June 30, 2001. SFAS No 142 provides that goodwill shall not be amortized but should be tested for impairment on an annual basis, using criteria prescribed in the statement. If the carrying amount of goodwill exceeds its implied fair value, as recalculated, an impairment loss equal to the excess shall be recognized. Recognized intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". -7-
LCNB Corp. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Continued) SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. Accordingly, LCNB will adopt the statement on January 1, 2002. Upon initial application of SFAS No. 142, goodwill and other intangible assets arising from acquisitions completed before July 1, 2001 shall be accounted for in accordance with the provisions of this statement. An initial impairment test is to be completed on all goodwill within six months of initially applying the statement. Any impairment loss recognized as a result of completing the initial impairment test is to be recognized in the first interim period financial statements, regardless of the interim period in which the measurement of the loss is completed. Included in intangible assets of $3,965,000 at June 30, 2001, was goodwill totaling $1,349,000. The goodwill is being amortized over 15 years; approximately $59,000 was amortized to expense during the first half of 2001. In accordance with SFAS No. 142, LCNB will discontinue amortizing goodwill and will perform the required impairment tests. The first impairment test will be completed on or before June 30, 2002 and the corresponding impairment loss, if any, recognized in the 2002 financial statements. -8-
INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Shareholders and Board of Directors LCNB Corp. We have reviewed the accompanying consolidated balance sheet of LCNB Corp. and subsidiaries as of June 30, 2001, and the related consolidated statements of income, and cash flows for each of the three-month and six-month periods ended June 30, 2001 and 2000, and the related consolidated statement of comprehensive income and changes in shareholders' equity for the six-month period ended June 30, 2001. 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 as of December 31, 2000 (presented herein), and the related consolidated statements of income, comprehensive income and changes in shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated January 13, 2001, 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, 2000, is fairly stated in all material respects. /s/ J.D. Cloud & Co. L.L.P. --------------------------- J.D. Cloud & Co. L.L.P. Cincinnati, Ohio July 26, 2001 -9-
LCNB Corp. and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations COMPARATIVE FINANCIAL INFORMATION Effective May 18, 1999, Lebanon Citizens National Bank was reorganized into a one-bank holding company structure. On April 11, 2000, LCNB Corp, the new consolidated holding company, pursuant to the Gramm-Leach-Bliley Act, elected to become a financial holding company. Additionally, effective April 11, 2000, LCNB acquired Dakin. The transaction has been accounted for using the pooling method of accounting. Accordingly, the financial information included herein has been restated to retroactively combine the financial statements of LCNB and Dakin as if the acquisition had occurred at the beginning of the earliest period. Comparative earnings per share information is presented on a pro forma basis. 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 $1.536 million, or $0.87 per share, for the three months ended June 30, 2001 compared to $1.292 million, or $0.73 per share, for the three months ended June 30, 2000. The return on average assets (ROAA) was 1.26% and the return on average equity (ROAE) was 12.25% for the second quarter of 2001, compared with an ROAA of 1.19% and an ROAE of 11.94% for the second quarter of 2000. LCNB earned $2.893 million, or $1.63 per share, during the first six months of 2001 compared to $2.477 million, or $1.39 per share, for the first six months of 2000. The ROAA and ROAE for the first six months of 2001 were 1.26% and 12.25%, respectively. The comparable ratios for the first six months of 2000 were 1.14% and 11.52%, respectively. NET INTEREST INCOME LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities. The following table presents, for the three and six months ended June 30, 2001 and 2000, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resultant average yields earned or rates paid. -10-
<TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2001 2000 2001 2000 (Dollars in thousands) <s> <c> <c> <c> <c> Interest-earning Assets: Average balance (1) $437,510 408,810 429,782 406,504 Interest income (2) 8,427 7,988 16,877 15,857 Average rate 7.73% 7.86% 7.92% 7.84% Interest-bearing Liabilities: Average balance 367,632 343,362 361,576 340,597 Interest expense 3,812 3,807 7,903 7,466 Average rate 4.16% 4.46% 4.41% 4.40% Net interest income 4,615 4,181 8,974 8,391 Net interest margin on a taxable equivalent basis (3) 4.23% 4.11% 4.21% 4.15% </TABLE> <FN> (1) Includes nonaccrual loans, if any. (2) Income from tax-exempt securities is included in interest income on a taxable 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. </FN> THREE MONTHS ENDED JUNE 30, 2001 VS. 2000 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 June 30, 2001 as compared to the comparable period in 2000. 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. -11-
<TABLE> <CAPTION> Three Months Ended June 30, 2001 vs 2000 -------------------------- Increase (decrease) due to: Volume Rate Total (In thousands) <s> <c> <c> <c> Interest-earning Assets Loans $ 605 (91) 514 Federal funds sold 227 (7) 220 Deposits in banks (37) (37) (74) Federal Reserve Bank stock - 1 1 Federal Home Loan Bank stock 29 2 31 Investment securities Taxable (194) (54) (248) Nontaxable 176 (181) (5) ------ --- ----- Total interest income 806 (367) 439 Interest-bearing Liabilities Deposits 291 (357) (66) Short-term borrowings (19) (10) (29) Long-term debt 105 (5) 100 ------ --- ----- Total interest expense 377 (372) 5 ------ --- ----- Net interest income $ 429 5 434 ====== === ===== </TABLE> Net interest income on a fully tax equivalent basis for the three months ended June 30, 2001 totaled $4,615,000, an increase of $434,000 from the comparable period in 2000. Total interest income increased $439,000, offset slightly by an increase in total interest expense of $5,000. The increase in total interest income was primarily due to a $28.7 million increase in average total earning assets, partially offset by a 13 basis point (a basis point equals 0.01%) reduction in the average rate earned. The slight increase in total interest expense was primarily due to a $24.3 million increase in average interest-bearing liabilities, almost entirely offset by a 30 basis point decrease in the average rate paid. The increase in average earning assets was primarily due to a $29.2 million increase in the average loan portfolio and a $20.7 million increase in average federal funds sold, which is a short-term type of investment. A $23.0 million decrease in average investment securities and deposits in other banks, along with a $24.3 million increase in average interest-bearing liabilities were used to fund the loan and federal funds sold increases. The increase in average interest-bearing liabilities was primarily from a $20.0 million -12-
increase in average interest-bearing deposits and a $6.0 million increase in average long-term debt. Three Federal Home Loan Bank advances of $2.0 million each obtained during June, 2000 and a $2.0 million Federal Home Loan Bank advance obtained in April, 2001 account for the increase in long-term debt. Growth in the debt. Growth in the money fund investment account and prime savings, both premium rate savings accounts, account for the increase in average deposits. Management theorizes that, due to the falling rate economic environment, investors are reducing long-term investments and placing the funds in highly liquid, short-term instruments. This means that much of the recent growth in deposits could be quickly withdrawn when interest rates start to increase again. Management is attempting to lock-in a portion of these funds by offering special rates and terms on selected certificate of deposit products. The decrease in average rates earned and paid between the three months ended June 30, 2001 and 2000 reflects a general decline in market rates primarily caused by decreases in the federal funds rate approved by the Open Market Committee of the Federal Reserve Board. SIX MONTHS ENDED JUNE 30, 2001 VS. 2000 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 six months ended June 30, 2001 as compared to the comparable period in 2000. <TABLE> <CAPTION> Six Months Ended June 30, 2001 vs 2000 -------------------------- Increase (decrease) due to: Volume Rate Total (In thousands) <s> <c> <c> <c> Interest-earning Assets Loans $1,487 (57) 1,430 Federal funds sold 293 (16) 277 Deposits in banks (72) (72) (144) Federal Reserve Bank stock - 1 1 Federal Home Loan Bank stock 29 2 31 Investment securities Taxable (533) (73) (606) Nontaxable (64) 95 31 ------ --- ----- Total interest income 1,140 (120) 1,020 -13-
Interest-bearing Liabilities Deposits 344 (85) 259 Short-term borrowings (26) (10) (36) Long-term debt 217 (3) 214 ------ --- ----- Total interest expense 535 (98) 437 ------ --- ----- Net interest income $ 605 (22) 583 ====== === ===== </TABLE> Net interest income on a fully tax equivalent basis for the first half of 2001 totaled $8,974,000, an increase of $583,000 from the first half of 2000. Total interest income increased $1,020,000, partially offset by an increase in total interest expense of $437,000. The increase in total interest income was primarily due to a $23.3 million increase in average total earning assets and to a change in the mix of earning assets. Average loans increased $35.3 million and average federal funds sold increased $12.9 million, while average taxable investment securities and deposits in other banks decreased approximately $26.7 million. The proceeds from the sales and maturities of the securities and deposits in other banks were used to fund growth in the loan portfolio and in federal funds sold. Also helping to fund loan growth was a $21.0 million increase in interest-bearing liabilities. The increase in total interest expense was primarily due to a $16.0 million increase in average interest-bearing deposits and to a $6.0 million increase in average long-term debt, for substantially the same reasons discussed in the previous section. 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 credit 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. <TABLE> <CAPTION> Quarter Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 (thousands) (thousands) <s> <c> <c> <c> <c> Balance, beginning of period $2,000 2,000 2,000 2,000 ----- ----- ----- ----- Charge-offs 70 59 134 107 Recoveries 17 11 24 24 ----- ----- ----- ----- Net charge-offs 53 48 110 83 ----- ----- ----- ----- -14-
Provision for loan losses 53 48 110 83 ----- ----- ----- ----- Balance, end of period $2,000 2,000 2,000 2,000 ====== ====== ====== ====== </TABLE> Charge-offs for the first half of 2001 and 2000 are attributable to consumer loans, including $23,000 and $19,000 in credit card charge-offs for 2001 and 2000, respectively. The following table sets forth information regarding the past due, non-accrual and renegotiated loans of the Bank at the dates indicated: <TABLE> <CAPTION> June 30 December 31 2001 2000 -------- ----------- (thousands) <s> <c> <c> Loan accounted for on non-accrual basis $ - - Accruing loans which are past due 90 days or more 93 111 Renegotiated loans - - --- --- Total $ 93 111 === === </TABLE> Accruing loans which are past due 90 days or more at June 30, 2001 and December 31, 2000 consist of installment loans and loans secured by 1-4 family residential property NON-INTEREST INCOME Total non-interest income of $1,113,000 increased $37,000 or 3.4% during the second quarter of 2001 compared to the second quarter of 2000 primarily due to increases in service charges and fees and insurance agency commissions, partially offset by a decrease in trust income. Total service charges and fees increased $60,000 or 11.5% primarily due to increases in return check fees and check card income. LCNB increased the returned check fee from $20 to $25 in December, 2000. The check card fees increased primarily due to a greater number of cards outstanding during the second quarter, 2001. Insurance agency commissions increased $64,000 or 27.2% primarily due to an increase in the volume of new policies written. Since being acquired by LCNB in April, 2000, Dakin has opened offices in 5 LCNB offices and has added agents to operate the new offices. Trust income decreased $88,000 or 30.9% due to a decrease in the market value of assets under management, on which fees are based. The decline in asset market value was primarily the result of general market conditions. -15-
Total non-interest income for the first six months of 2001 was $294,000 or 14.4% greater than for the comparable period in 2000 primarily due to increases in service charges and fees and insurance agency commissions, partially offset by a decrease in trust income. Service charges and fees increased $124,000 or 12.2% and trust income decreased $155,000 or 27.7% for substantially the same reasons mentioned above. Insurance agency commissions for the first half of 2001 were $277,000 or 66.7% greater than for the first half of 2000 largely due to contingency commissions received during the first quarter, 2001. 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. Contingency commissions received during the first quarter, 2001 totaled $189,000, but only $6,000 during the first quarter, 2000. The balance of the increase was generated from commissions received on new and renewing policies. NON-INTEREST EXPENSE Total non-interest expense increased $110,000 or 3.4% in the second quarter, 2001 compared with the second quarter, 2000 and $150,000 or 2.3% during the first six months of 2001 compared with the first six months of 2000. The following table shows the increases or decreases for various expense categories for the three and six months ended June 30, 2001 as compared to same periods in 2000: <TABLE> <CAPTION> Increase (Decrease) Increase (Decrease) 3 Months Ended 6 Months Ended June 30, 2001 June 30, 2001 $ % $ % (Dollars in thousands) <s> <c> <c> <c> <c> Salaries and wages $ 36 2.5% $120 4.2% Pension and other employee benefits 41 12.2 71 9.6 Equipment 31 23.7 66 25.2 Occupancy, net (8) (2.9) (10) (1.9) State franchise tax 14 12.0 20 8.3 Marketing 26 33.8 (12) (6.5) Intangible amortization (34) (21.0) (68) (20.9) Other 4 0.5 (37) (2.4) ---- ---- Totals $110 3.4 $150 2.3 ==== ==== </TABLE> -16-
Salaries and wages increased due to normal salary and wage increases, an increase in the number of employees, and increased commissions paid Dakin's agents because of the increase in the volume of policies written. Pension and other employee benefits increased due to higher pension expense and health insurance costs. Equipment expense increased primarily due to depreciation recognized on furniture and equipment purchased during 2000 for the newly constructed Oxford and Goshen offices and the extensively remodeled Columbus Avenue office. Marketing was $26,000 greater during the second quarter, 2001 compared to the second quarter, 2000, but $12,000 lower for the first half of 2001 compared to the same period in 2000. This is due to timing of promotional campaigns. Management expects that total marketing expenses for 2001 will be similar to total costs for 2000. Other non-interest expense decreased $37,000 for the six months ended June 30, 2001 compared to the same period in the previous year due to decreased write-offs of returned checks, decreased office supplies and printing costs due to expense control initiatives established during 2000, and the absence of costs related to the Dakin acquisition. These positive variances were partially offset by increased ATM expenses largely due to the increased number of ATMs in LCNB's network. On June 29, 2001, LCNB signed a contract with Jack Henry & Associates for replacement of LCNB's core processing system, including computer hardware and software. Conversion from the current system to the new system is tentatively scheduled for the third quarter of 2002, but some enhancements and improvements will be installed in 2001 and 2003. Management believes the operating efficiencies and improved customer service the new system will provide will be beneficial to LCNB in the long run, but, as with most improvements, there will be a cost. Anticipated software and hardware costs total approximately $1,086,000, which will be capitalized and charged to depreciation expense over the estimated lives of the assets, primarily seven years. The current system is approximately eleven years old and is fully depreciated, so equipment expense in future years will increase by the amount of the depreciation. Costs of converting data files from the current to the new system and costs of training employees on the new system are expected to total $8,000 during 2001, $129,000 during 2002 and $31,000 during 2003 and will be expensed as incurred. -17-
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. <TABLE> <CAPTION> CONDENSED AVERAGE BALANCE SHEETS (thousands) June 30, March 31, December 31, 2001 2001 2000 <s> <c> <c> <c> ASSETS Interest-earning: Interest-bearing deposits with banks $ - - 147 Federal funds sold 22,729 10,107 11,683 Securities available for sale 81,351 80,360 86,523 Loans 333,430 331,501 326,887 ------- ------- ------- Total interest-earning assets 437,510 421,968 425,240 Noninterest-earning: Cash and due from banks 16,556 16,255 15,680 All other assets 18,695 19,402 18,649 Allowance for credit losses (2,003) (2,002) (2,003) ------- ------- ------- Total assets $470,758 455,623 457,566 ======= ======= ======= LIABILITIES Interest-bearing: Interest-bearing deposits $358,464 348,345 349,479 Short-term borrowings 841 758 663 Long-term debt 8,327 6,350 6,325 ------- ------- ------- Total interest-bearing liabilities 367,632 355,453 356,467 Noninterest-bearing: Noninterest-bearing deposits 52,783 50,565 53,007 All other liabilities 2,283 2,430 2,183 ------- ------- ------- Total liabilities 422,698 408,448 411,657 SHAREHOLDERS' EQUITY 48,060 47,175 45,909 ------- ------- ------- Total liabilities and shareholders' equity $470,758 455,623 457,566 ======= ======= ======= </TABLE> -18-
Total average assets increased approximately $15.1 million during the second quarter, 2001 when compared to the first quarter, 2001. Most of the growth, approximately $12.6 million, was in federal funds sold, which is a short-term investment vehicle. Average securities available for sale and average loans did not change materially when comparing second and first quarter balances for 2001. LCNB continues to originate new loans, but, beginning during the first quarter, 2001, has been selling substantially all fixed rate residential loans to the Federal Home Loan Mortgage Corporation (FHLMC) immediately after origination. Approximately $4.1 million of real estate loans were sold to FHLMC during the six months ended June 30, 2001, while no loans were sold during 2000. Management began selling the loans after determining that current, historically low market rates for residential loans were not profitable in the long run. Total loans remain level because of growth in the commercial loan portfolio, which had an average balance during the second quarter, 2001 that was $6.0 million greater than for the first quarter, 2000. Average interest-bearing liabilities for the second quarter, 2001 were $12.2 million greater than for the first quarter, 2001. Average interest-bearing deposits were $10.1 million greater and long-term debt was $2.0 greater. Long-term debt increased due to a $2.0 million advance obtained from the Federal Home Loan Bank on April 2, 2001. Over half of the deposit growth, about $5.4 million, was in LCNB's prime savings product. Average certificates of $100,000 or more and other time certificates grew a combined total of $3.7 million during the second quarter, 2001. CAPITAL Lebanon Citizens and LCNB 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 I capital (essentially shareholders' equity less goodwill and other intangibles) and Tier II 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 I 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-
<TABLE> <CAPTION> At At June 30, December 31, 2001 2000 <s> <c> <c> Regulatory Capital: Shareholders' equity $48,073 46,310 Goodwill and other intangibles (3,965) (4,210) Net unrealized securities gains (1,165) (281) ------ ------ Tier 1 risk-based capital 42,943 41,819 Eligible allowance for loan losses 2,000 2,000 ------ ------ Total risk-based capital $44,943 43,819 ======= ====== Capital Ratios: Total risk-based 15.11% 14.88% Tier 1 risk-based 14.44% 14.20% Leverage 9.22% 9.22% </TABLE> On April 17, 2001, LCNB's Board of Directors authorized three separate stock repurchase programs, to be run consecutively and commence immediately. The shares purchased will be held for future corporate purposes. The first stock repurchase program is an "Odd Lot Repurchase Program." Under the terms of this program, LCNB offered to purchase all the shares of any shareholder who owns 100 or fewer shares of LCNB. Letters were mailed to eligible shareholders on April 20, 2001, and the offer expired on June 4, 2001. The purchase price was $40 per share, which was the fair market value per share on April 12, 2001, plus an additional $5.50 premium. All expenses for this program were paid by LCNB. A total of 385 shares were purchased from seven shareholders under this program. The second repurchase program is a "Market Repurchase Program." LCNB will purchase up to 50,000 shares of its stock through market transactions with a selected stockbroker. The third program is a "Private Sale Repurchase Program." This 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. -20-
LIQUIDITY Liquidity is the ability to have funds available at all times to meet the commitments of Lebanon Citizens. 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 and deposits in banks, federal funds sold and securities available for sale. Liquidity is also provided by access to core funding sources, primarily core depositors in the bank's trade area. Lebanon Citizens does not solicit brokered deposits as a funding source. The liquidity of Lebanon Citizens is enhanced by the fact that 87% of total deposits at June 30, 2001 were "core" deposits. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000. At June 30, 2001, Lebanon Citizens liquid assets amounted to $109.9 million or 23.8% of total gross assets, an increase from $100.8 million or 22.3% at December 31,2000. Secondary sources of liquidity include Lebanon Citizens' 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. Lebanon Citizens experienced no liquidity or operational problems as a result of the current liquidity levels. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", on July 20, 2001. SFAS No. 141 provides that all business combinations shall be accounted for using the purchase method of accounting; the use of the pooling-of-interests method will be prohibited. The provisions of SFAS No. 141 will apply to all business combinations initiated after June 30, 2001 or all business combinations accounted for by the purchase method that are completed after June 30, 2001. LCNB was not involved in any business combination discussions on June 30, 2001. Prior to SFAS No. 142, goodwill was amortized over its estimated life, not to exceed forty years. Under SFAS No 142, goodwill will not be amortized but should be tested for impairment on an annual basis, using criteria prescribed in this statement. If the carrying amount of goodwill exceeds its implied fair value, as recalculated, an impairment loss equal to the excess shall be recognized. Recognized intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". -21-
SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. Accordingly, LCNB will adopt the statement on January 1, 2002. Upon initial application of SFAS No. 142, goodwill and other intangible assets arising from acquisitions completed before July 1, 2001 shall be accounted for in accordance with the provisions of this statement. That is, amortization of goodwill should be discontinued and the remaining asset tested for impairment on an annual basis. An initial impairment test is to be completed on all goodwill within six months of initially applying the statement. Any impairment loss recognized as a result of completing the initial impairment test is to be recognized in the first interim period financial statements, regardless of the interim period in which the measurement of the loss is completed. Included in intangible assets of $3,965,000 at June 30, 2001, was goodwill totaling $1,349,000. The goodwill is being amortized over 15 years; approximately $59,000 was amortized to expense during the first half of 2001. In accordance with SFAS No. 142, LCNB will discontinue amortizing goodwill and will perform the required impairment tests. The first impairment test will be completed on or before June 30, 2002 and the corresponding impairment loss, if any, recognized in the 2002 financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risks QUANTITATIVE AND QUALITATIVE DISLCOSURES ABOUT MARKET RISKS For a discussion of LCNB's asset and liability management policies and gap analysis for the year ended December 31, 2000 see Item 7A, Quantitative and Qualitative Disclosures about Market Risks, in the recently filed Form 10-K for the year ended December 31, 2000. There have been no material changes in LCNB's market risks, which for LCNB is primarily interest rate risk. -22-
PART II. OTHER INFORMATION LCNB Corp. and Subsidiaries 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 - On April 17, 2001, the Annual Meeting of the shareholders of LCNB Corp. was held. The following members of the Board of Directors of LCNB Corp. were elected as Class II directors for terms expiring at the Annual Meeting in 2004 by the votes indicated: Director For Against Abstain -------- ----- ------- ------- Marvin E. Young 1,501,218 - 1,060 Kathleen Porter Stolle 1,501,378 - 900 Corwin M. Nixon 1,501,218 - 1,060 The following Class I and III members of the Board of Directors have terms expiring in 2003 and 2002, respectively: Class I: Stephen P. Wilson, David S. Beckett, and Robert C. Cropper Class III: George L. Leasure, William H. Kaufman, James B. Miller and Howard E. Wilson. Item 5. Other Information - Not Applicable Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. On April 17, 2001, LCNB Corp. filed a Form 8-K with the Securities and Exchange Commission reporting the issuance of a press release containing information about a stock repurchase initiative. -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 Date: July 31, 2001 /s/Steve P. Foster ------------------------ Steve P. Foster Executive Vice President and Chief Financial Officer -24-