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, 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 April 17, 2001, was 1,775,942 shares.
LCNB Corp. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2001, and December 31, 2000 . . . . . . . . . 1 Consolidated Statements of Income - Three Months Ended March 31, 2001 and 2000. . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity - Three Months Ended March 31, 2001 and the Year Ended December 31, 2000. . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000. . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . 5-7 Independent Accountants' Review Report . . . . . . . . . .8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . 9-18 Item 3. Quantitative and Qualitative Disclosures about Market Risks. . . . . . . . . . . . . . . . . . . 18 Part II. Other Information Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 19 Item 2. Changes in Securities and Use of Proceeds . . . . . . . . 19 Item 3. Defaults by the Company on its Senior Securities. . . . . 19 Item 4. Submission of Matters to a Vote of Security Holders . . . 19 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 19 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 19
Part I - Financial Information Item 1. Financial Statements <TABLE> LCNB Corp. and Subsidiary Consolidated Balance Sheets (thousands) <CAPTION> March 31, December 31, 2001 2000 (unaudited) (a) <S> <C> <C> ASSETS: Cash and due from banks $ 15,951 18,262 Federal funds sold 19,600 - ------- ------- Total cash and cash equivalents 35,551 18,262 Federal Reserve Bank stock 647 647 Federal Home Loan Bank stock 1,741 1,741 Securities available for sale, at market value 76,156 82,506 Loans 334,349 330,439 Less-allowance for loan losses 2,000 2,000 ------- ------- Net loans 332,349 328,439 Premises and equipment, net 10,605 10,502 Accrued income receivable 3,068 3,139 Intangible assets 4,087 4,210 Other assets 1,722 1,554 ------- ------- TOTAL ASSETS $465,926 451,000 ======= ======= LIABILITIES: Deposits- Noninterest-bearing $ 50,768 51,697 Interest-bearing 357,796 343,089 ------- ------- Total deposits 408,564 394,786 Long-term debt 6,344 6,356 Accrued interest and other liabilities 3,422 3,548 ------- ------- TOTAL LIABILITIES 418,330 404,690 ------- ------- 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 25,474 24,916 Accumulated other comprehensive income, net of taxes 1,009 281 ------- ------- TOTAL SHAREHOLDERS' EQUITY 47,596 46,310 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $465,926 451,000 ======= ======= <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 Subsidiary Consolidated Statements of Income (In thousands except per share data) (unaudited) <CAPTION> Three Months Ended March 31, ----------------------- 2001 2000 <S> <C> <C> INTEREST INCOME: Interest and fees on loans $ 7,095 6,179 Interest on federal funds sold 127 70 Interest on deposits in banks - 70 Interest on investment securities- Taxable 663 1,020 Non-taxable 373 395 ----- ----- TOTAL INTEREST INCOME 8,258 7,734 ----- ----- INTEREST EXPENSE: Interest on deposits 3,960 3,635 Interest on short-term borrowings 11 18 Interest on long-term debt 120 6 ----- ----- TOTAL INTEREST EXPENSE 4,091 3,659 ----- ----- NET INTEREST INCOME 4,167 4,075 PROVISION FOR LOAN LOSSES 57 34 ----- ----- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,110 4,041 ----- ----- NON-INTEREST INCOME: Trust income 208 275 Service charges and fees 561 497 Net gain (loss) on sale of securities 18 (14) Insurance agency commissions 393 180 Other operating income 45 30 ----- ----- TOTAL NON-INTEREST INCOME 1,225 968 ----- ----- NON-INTEREST EXPENSE: Salaries and wages 1,496 1,412 Pension and other employee benefits 434 404 Equipment 166 131 Occupancy, net 256 258 State franchise tax 131 125 Marketing 70 108 Intangible amortization 129 163 Other 742 783 ----- ----- TOTAL NON-INTEREST EXPENSE 3,424 3,384 ----- ----- INCOME BEFORE INCOME TAXES 1,911 1,625 PROVISION FOR INCOME TAXES 554 440 ----- ----- NET INCOME $ 1,357 1,185 ===== ===== Dividends declared per common share $ .45 .30 Basic earnings per common share $ .76 .67 Average shares outstanding (000's) 1,776 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 Comprehensive Shareholders' Comprehensive Shares Surplus Earnings Income Equity Income <S> <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 gain on available-for-sale securities (net of taxes of $817) 1,587 1,587 1,587 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of tax benefit of $4) (8) (8) (8) ----- Total comprehensive income $6,819 ===== Cash dividends declared ($1.80 per share) (3,196) (3,196) ------ ------ ------ ----- ------ Balance December 31, 2000 $10,560 10,553 24,916 281 46,310 Comprehensive Income: Net income 1,357 1,357 $1,357 Net unrealized gain on available-for-sale securities (net of tax benefit of $381) 740 740 740 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of tax benefit of $6) (12) (12) (12) ----- Total comprehensive income $2,085 ===== Cash dividends declared ($.45 per share) (799) (799) ------ ------ ------ ------ ------ Balance March 31, 2001 $10,560 10,553 25,474 1,009 47,596 ====== ====== ====== ====== ====== 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> Three Months Ended March 31, --------------------- 2001 2000 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,357 1,185 Adjustments for non-cash items - Depreciation and amortization 503 483 Provision for loan losses 57 34 Deferred taxes benefit - (48) Realized (gain) loss on sales of securities (18) 14 Origination of mortgage loans for sale (554) - Proceeds from sales of mortgage loans 558 - Decrease in accrued income receivable 71 318 Other, net 18 (198) ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,992 1,788 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available for sale 2,905 7,181 Proceeds from sales of securities available for sale 4,530 1,987 Purchases of securities available for sale (15) (5,209) Net increase in loans (4,069) (8,521) Purchases of premises and equipment (504) (614) Proceeds from sale of premises and equipment 189 - ------ ------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,036 (5,176) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 13,778 (1,241) Net change in short-term borrowings (706) (1,459) Net change in long-term debt (12) (12) Cash dividends paid (799) (533) ------ ------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 12,261 (3,245) ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS 17,289 (6,633) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,262 24,140 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $35,551 17,507 ====== ====== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 4,262 3,616 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 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 financial information presented on pages one through seven 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 eight. 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, 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-
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. The following table presents the revenues of Dakin included as a component of non-interest income, the net income of Dakin, and reconciles the net income and earnings per common share previously reported by LCNB to those items presented in the accompanying financial statements (thousands, except earnings per common share): <TABLE> <CAPTION> Three Months Ended March 31, 2001 2000 ---- ---- <S> <C> <C> Dakin Insurance Agency, Inc.: Revenues prior to acquisition $ - 182 Revenues since acquisition 395 - ----- ----- $ 395 182 ===== ===== Net income: Consolidated LCNB Corp. $1,278 1,194 Dakin Insurance Agency, Inc. 79 (9) ----- ----- $1,357 1,185 ===== ===== Earnings per common share: As previously reported $ .68 As restated .67 </TABLE> -6-
NOTE 4 - LOANS Major classifications of loans at March 31, 2001 and December 31, 2000 are as follows (thousands): <TABLE> <CAPTION> March 31, December 31, 2001 2000 -------- ----------- <S> <C> <C> Commercial and industrial $ 39,249 $ 36,449 Commercial, secured by real estate 61,223 59,043 Residential real estate 184,323 185,013 Consumer, excluding credit card 42,000 40,860 Agricultural 1,690 2,238 Credit card 2,336 3,049 Other loans 727 863 Lease financing 2,119 2,219 ------- ------- 333,667 329,734 Deferred net origination costs 682 705 ------- ------- 334,349 330,439 Allowance for loan losses (2,000) (2,000) ------- ------- Loans - net $332,349 328,439 ======= ======= </TABLE> 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, 2001 and December 31, 2000 were $14,060,000 and $14,046,000, respectively. Loans sold to the FHLMC during the quarter ended March 31, 2001 totaled $554,000. No loans were sold to the FHLMC during the quarter ended March 31, 2000. <TABLE> Changes in the allowance for loan losses were as follows (thousands): <CAPTION> March 31, March 31, 2001 2000 --------- --------- <S> <C> <C> Balance - beginning of year $2,000 2,000 Provision for loan losses 57 34 Charge offs (64) (48) Recoveries 7 14 ----- ----- Balance - end of period $2,000 2,000 ===== ===== </TABLE> There were no nonaccrual loans at March 31, 2001 or December 31, 2000. -7-
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 March 31, 2001, and the related consolidated statements of income, and cash flows for each of the three-month periods ended March 31, 2001 and 2000, and the related consolidated statement of comprehensive income and changes in shareholders' equity for the three- month period ended March 31, 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. Cincinnati, Ohio April 25, 2001 -8-
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 $1,357,000 for the three months ended March 31, 2001, which was $172,000 or 14.5% greater than the $1,185,000 earned during the three months ended March 31, 2000. Earnings per share were $0.76 for the first quarter of 2001, compared with $0.67 per share earned in the first quarter of 2001. Annualized performance ratios for the 2001 period included a return on average assets of 1.21% and a return on average equity of 11.67%, compared with 1.10% and 11.09%, respectively, for the comparable period in 2000. The increase in earnings is primarily due to a $213,000 increase in insurance agency commissions and a $91,000 increase in net interest income. -9-
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 table below presents, for the first quarter of 2001 and 2000, 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. <TABLE> The table below presents net interest income, average balances and average rates. <CAPTION> 2001 2000 ------------------------------- -------------------------------- Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Interest Earning Assets Loans (1) $331,501 $7,102 8.69% $290,168 $6,179 8.56% Federal funds sold 10,107 127 5.10% 5,023 70 5.60% Deposits in banks - - -% 5,493 70 5.13% Federal Reserve Bank stock 647 - -% 647 - -% Federal Home Loan Bank stock 1,741 - -% - - -% Investment securities Taxable 45,362 663 5.93% 76,867 1,021 5.34% Nontaxable (2) 32,610 565 7.03% 26,000 529 8.18% ------- ----- ------- ----- Total earning assets 421,968 8,457 8.13% 404,198 7,869 7.83% Nonearning assets 35,657 32,905 Allowance for loan losses (2,002) (2,002) ------- ------- Total assets $455,623 $435,101 ======= ======= Interest Bearing Liabilities Deposits $348,345 3,960 4.61% $338,341 3,635 4.32% Short-term borrowings (3) 758 11 5.89% 1,050 18 6.89% Long-term debt 6,350 120 7.66% 398 6 6.06% ------- ----- ------- ----- Total interest bearing liabilities 355,453 4,091 4.67% 339,789 3,659 4.33% ----- ----- Demand deposits 50,565 51,338 Other liabilities 2,430 1,010 Capital 47,175 42,964 ------- ------- Total liabilities and capital $455,623 $435,101 ======= ======= -10-
2001 2000 ------------------------------- -------------------------------- Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate (Dollars in thousands) Net interest rate spread (4) 3.46% 3.50% Net interest margin on a taxable equivalent basis (5) $4,366 4.20% $4,210 4.19% Ratio of interest earning assets to interest bearing liabilities 118.71% 118.96% </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) Short-term borrowings are limited to demand notes issued to the U.S. Treasury in connection with tax remittances. (4) The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. (5) The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets. </FN> -11-
<TABLE> 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, 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. <CAPTION> Three Months Ended March 31, 2001 vs 2000 -------------------------- Increase (decrease) due to: Volume Rate Total (In thousands) <S> <C> <C> <C> Interest Earning Assets Loans $885 38 923 Federal funds sold 63 (6) 57 Deposits in banks (35) (35) (70) Investment securities Taxable (474) 116 (358) Nontaxable 87 (51) 36 --- --- --- Total interest income 526 62 588 Interest Bearing Liabilities Deposits 110 215 325 Short-term borrowings (5) (2) (7) Long-term debt 112 2 114 --- --- --- Total interest expense 217 215 432 --- --- --- Net interest income $309 (153) 156 === === === </TABLE> Net interest income on a fully tax equivalent basis for the first quarter of 2001 totaled $4,366,000, an increase of $156,000 from the first quarter of 2000. Total interest income increased $588,000, partially offset by an increase in total interest expense of $432,000. The increase in total interest income was primarily due to a $17.8 million increase in average total earning assets and to a change in the mix of earning assets. Average taxable investment securities were approximately $31.5 million less during the first quarter of 2001 as compared to the first quarter of 2000. The proceeds from the sales and maturities of the securities were used to fund growth in the loan portfolio. The average loan balance for the first quarter of 2001 was $41.3 million greater than for the comparable period in 2000. -12-
The increase in total interest expense was due to a $15.7 million increase in average interest-bearing liabilities and to a 34 basis point (a basis point equals 0.01%) increase in the average liability rate. Average interest- bearing deposits increased $10.0 million and average long-term debt increased $6.0 million. Three Federal Home Loan Bank advances of $2.0 million each obtained during June, 2000 account for the increase in long-term debt. The increase in the average liability rate was primarily due to a general increase in market rates during the year 2000. 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 was 4.20% and 4.19% for the first quarter of 2001 and 2000, respectively. The margin remained almost the same, despite the $156,000 increase in net interest income, due to the $17.8 million increase in average total earning assets. 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. <TABLE> <CAPTION> Quarter Ended March 31, 2001 2000 (thousands) <S> <C> <C> Balance, beginning of period $ 2,000 2,000 Charge-offs 64 48 Recoveries 7 14 ----- ----- Net charge-offs 57 34 ----- ----- Provision for loan losses 57 34 ----- ----- Balance, end of period $ 2,000 2,000 ===== ===== </TABLE> -13-
The following table sets forth information regarding the past-due, non- accrual and renegotiated loans of LCNB at the dates indicated: <TABLE> <CAPTION> March 31, December 31, 2001 2000 ------------- ---------- (thousands) <S> <C> <C> Loans accounted for on non-accrual basis $ - - Accruing loans which are past due 90 days or more 83 341 Renegotiated loans - - -- --- Total $ 83 341 == === </TABLE> The decrease in accruing loans past due 90 days or more is due to a $272,000 commercial loan with financially strong guarantors, which was paid off during 2000. NON-INTEREST INCOME Non-interest income of $1,225,000 increased $257,000, or 26.5% in the first quarter of 2001 compared to the first quarter of 2000. Trust income of $208,000 decreased $67,000, or 24.4%, from the first quarter of 2000 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. Total service charges and fees were $64,000, or 12.9%, greater during the first quarter of 2001 primarily due to increases in returned check fees and check card fees. 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 first quarter, 2001. Insurance agency commissions increased $213,000, or 118.3%, compared to the first quarter of 2000 primarily due to contingency commissions received. 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 $40,000, or 1.2%, during the first quarter, 2001 compared with the first quarter, 2000. Salaries and wages increased $84,000, or 5.9%, due to normal salary and wage increases and to an increase in the number of employees. LCNB had 13 more average full-time -14-
equivalent employees during the first quarter, 2001 than during the first quarter, 2000. Pension and other employee benefits increase $30,000, or 7.4%, primarily due to increased pension expense and health insurance costs. Equipment expense increased $35,000, or 26.7%, 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 expenses decreased $38,000, or 35.2%, due to timing of major promotional campaigns. The first quarter, 2000 costs included a loan campaign while the first quarter, 2001 did not have any major promotions. Management expects that total marketing expenses for 2001 will be similar to total costs during 2000. Other non-interest expense decreased $41,000, or 5.2%, 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. 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 QUARTERLY BALANCE SHEETS (thousands) March 31, December 31, September 30, 2001 2000 2000 <S> <C> <C> <C> ASSETS Interest-earning: Interest-bearing deposits with banks $ - 147 5,492 Federal funds sold 10,107 11,683 10,207 Securities available for sale 80,360 86,523 90,598 Loans 331,501 326,887 317,113 ------- ------- ------- Total interest-earning assets 421,968 425,240 423,410 ------- ------- ------- Noninterest-earning: Cash and due from banks 16,255 15,680 14,842 All other assets 19,402 18,649 19,313 Allowance for credit losses (2,002) (2,003) (2,002) ------- ------- ------- Total assets $455,623 457,566 455,563 ======= ======= ======= LIABILITIES Interest bearing: Interest-bearing deposits $348,345 349,479 350,456 Short-term borrowings 758 663 728 Long-term debt 6,350 6,325 6,301 ------- ------- ------- Total interest-bearing liabilities 355,453 356,467 357,485 -15-
CONDENSED AVERAGE QUARTERLY BALANCE SHEETS (thousands) March 31, December 31, September 30, 2001 2000 2000 Noninterest-bearing: Noninterest-bearing deposits 50,565 53,007 51,703 All other liabilities 2,430 2,183 1,737 ------- ------- ------- Total liabilities 408,448 411,657 410,925 SHAREHOLDERS' EQUITY 47,175 45,909 44,638 ------- ------- ------- Total liabilities and shareholders' equity $455,623 457,566 455,563 ======= ======= ======= </TABLE> Total average assets decreased $1.9 million in the first quarter of 2001 when compared to the fourth quarter of 2000, but was approximately level with total average assets for the third quarter, 2000. During the three quarters shown, LCNB did not renew the interest-bearing deposits with banks as they matured and used the proceeds to fund loan growth. Most of the loan growth occurred in the commercial loan and real estate mortgage loan categories. Likewise, securities available for sale continued to decrease, as the proceeds from maturities, calls, and some sales were used to fund loan growth. LCNB continues to shift assets from lower yielding security investments into the higher yielding loan portfolio. On the liability side, interest-bearing deposits continued a gradual decline during the quarters shown partially due to management's decision not to bid on public fund deposits that matured during the fourth quarter, 2000. The lower rate transaction accounts, such as NOW accounts and savings accounts, have generally declined during the periods indicated while the premium rate transaction accounts, such as the money fund investment accounts and prime savings, have increased. Average other time deposits declined when comparing the fourth and third quarters of 2000, but grew slightly during the first quarter, 2001. The following table shows the average balances for different types of interest-bearing deposits for the three quarters (thousands): <TABLE> <CAPTION> 2001 2000 2000 <S> <C> <C> <C> NOW accounts and premier checking $ 44,153 46,895 47,978 Money fund investment accounts 43,230 42,298 33,372 Savings accounts 29,218 30,661 31,395 Prime savings 60,777 55,640 51,939 IRA accounts 30,442 30,390 30,312 Certificates greater than $100,000 37,842 41,429 50,225 Other time certificates 102,683 102,166 105,235 ------- ------- ------- $348,345 349,479 350,456 ======= ======= ======= </TABLE> -16-
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 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 (thousands): <TABLE> <CAPTION> At At March 31, December 31, 2001 2000 <S> <C> <C> Regulatory Capital: Shareholders' equity $ 47,596 46,310 Goodwill and other intangibles (4,087) (4,210) Net unrealized securities losses (1,009) (281) ------ ------ Tier 1 risk-based capital 42,500 41,819 Eligible allowance for loan losses 2,000 2,000 ------ ------ Total risk-based capital $ 44,500 43,819 ====== ====== Capital Ratios: Total risk-based 14.93% 14.88% Tier 1 risk-based 14.26% 14.20% Leverage 9.41% 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. The purchase price is $40 per share, which is the fair market value per share on April 12, 2001, plus an additional $5.50 premium. All expenses for this program will be paid by LCNB. Letters were mailed to eligible shareholders on April 20, 2001, and the offer expires on June 4, 2001. By minimizing the number of shareholders with 100 or fewer shares, LCNB expects to reduce various expenses associated with servicing small shareholder accounts. -17-
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. LIQUIDITY 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 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 primary market area. LCNB does not solicit brokered deposits as a funding source. The liquidity of LCNB is enhanced by the fact that 88.0% of total deposits at March 31, 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. Total loans to deposits were 82% and 84%, at March 31, 2001 and December 31, 2000, respectively. At March 31, 2001, LCNB liquid assets amounted to $111.7 million or 24.0% of total gross assets, an increase from $100.8 million or 22.3% at December 31, 2000. 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 the current liquidity levels. 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, 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. -18-
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 None b. The Company was not required to file Form 8-K for the quarter ended March 31, 2001. -19-
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: April 30, 2001 /s/Steve P. Foster -------------------- Steve P. Foster Executive Vice President and Chief Financial Officer -20-