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, 2002 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, 2002, was 1,775,942 shares.
LCNB Corp. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2002, and December 31, 2001 . . . . . . . . .1 Consolidated Statements of Income - Three Months Ended March 31, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . . .2 Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 2002 and 2001. . . . . . .3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2002 and 2001. . . . . . .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 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 (thousands) <CAPTION> March 31, December 31, 2002 2001 (unaudited) (a) <s> <c> <c> ASSETS: Cash and due from banks $ 15,118 14,286 Federal funds sold 26,200 19,950 ------- ------- Total cash and cash equivalents 41,318 34,236 ------- ------- Securities available for sale, at market value 99,505 98,610 Federal Reserve Bank stock and Federal Home Loan Bank stock, at cost 2,795 2,772 Loans 322,158 327,165 Less-allowance for loan losses 2,000 2,000 ------- ------- Net loans 320,158 325,165 ------- ------- Premises and equipment, net 11,610 11,628 Accrued income receivable 3,141 3,051 Intangible assets 3,580 3,729 Other assets 1,509 1,244 ------- ------- TOTAL ASSETS $483,616 480,435 ======= ======= LIABILITIES: Deposits- Noninterest-bearing $ 55,993 59,137 Interest-bearing 362,000 355,635 ------- ------- Total deposits 417,993 414,772 Long-term debt 12,293 12,306 Accrued interest and other liabilities 5,033 3,850 ------- ------- TOTAL LIABILITIES 435,319 430,928 ------- ------- 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 28,380 27,714 Treasury shares at cost, 54,917 and 12,997 shares at March 31, 2002 and December 31, 2001, respectively (2,193) (516) Accumulated other comprehensive income, net of taxes 997 1,196 ------- ------- TOTAL SHAREHOLDERS' EQUITY 48,297 49,507 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $483,616 480,435 ======= ======= <FN> (a) Financial information as of December 31, 2001, has been derived from the audited, consolidated financial statements of the Registrant. </FN> The accompanying notes to the consolidated 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 March 31, ----------------------- 2002 2001 <s> <c> <c> INTEREST INCOME: Interest and fees on loans $ 6,254 7,095 Interest on federal funds sold 95 127 Dividends on Federal Reserve Bank and Federal Home Loan Bank stock 24 - Interest on investment securities- Taxable 652 663 Non-taxable 407 373 ----- ----- TOTAL INTEREST INCOME 7,432 8,258 ----- ----- INTEREST EXPENSE: Interest on deposits 2,526 3,960 Interest on short-term borrowings 4 11 Interest on long-term debt 185 120 ----- ----- TOTAL INTEREST EXPENSE 2,715 4,091 ----- ----- NET INTEREST INCOME 4,717 4,167 PROVISION FOR LOAN LOSSES 54 57 ----- ----- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,663 4,110 ----- ----- NON-INTEREST INCOME: Trust income 301 208 Service charges and fees 579 561 Net gain on sale of securities 9 18 Insurance agency income 251 393 Other operating income 35 45 ----- ----- TOTAL NON-INTEREST INCOME 1,175 1,225 ----- ----- NON-INTEREST EXPENSE: Salaries and wages 1,615 1,496 Pension and other employee benefits 477 434 Equipment expenses 156 166 Occupancy expense - net 248 256 State franchise tax 141 131 Marketing 83 70 Intangible amortization 149 129 Other non-interest expense 844 742 ----- ----- TOTAL NON-INTEREST EXPENSE 3,713 3,424 ----- ----- INCOME BEFORE INCOME TAXES 2,125 1,911 PROVISION FOR INCOME TAXES 599 554 ----- ----- NET INCOME $ 1,526 1,357 ===== ===== Dividends declared per common share $ .50 .45 Basic earnings per common share $ .88 .76 Average shares outstanding (000's) 1,732 1,776 The accompanying notes to the consolidated financial statements are an integral part of these statements. </TABLE> -2-
<TABLE> LCNB Corp. and Subsidiaries Consolidated Statements of Shareholders' Equity (thousands) (unaudited) <CAPTION> Accumulated Other Total Common Retained Treasury Comprehensive Shareholders' Comprehensive Shares Surplus Earnings Shares Income Equity Income <c> <c> <c> <c> <c> <c> <c> Balance January 1, 2001 $10,560 10,553 24,916 281 46,310 Net income 1,357 1,357 1,357 Net unrealized gain on available-for-sale securities (net of taxes of $381) 740 740 740 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $6) (12) (12) (12) ----- Total comprehensive income $ 2,085 ===== Cash dividends declared- $0.45 per share (799) (799) ------ ------ ------ ------ ------ Balance March 31, 2001 $10,560 10,553 25,474 1,009 47,596 ====== ====== ====== ====== ====== 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 ====== ====== ====== ===== ====== ====== The accompanying notes to the consolidated 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, --------------------- 2002 2001 <s> <c> <c> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,526 1,357 Adjustments to reconcile net income to net cash Provided by operating activities - Depreciation, amortization and accretion 631 503 Provision for loan losses 54 57 Realized gain on sales of securities available for sale (9) (18) Origination of mortgage loans for sale (2,271) (554) Proceeds from sales of mortgage loans 2,287 558 (Increase) decrease in income receivable (90) 71 Increase (decrease) in other liabilities (532) 18 ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,596 1,992 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale 5,942 4,530 Proceeds from maturities of securities available for sale 2,179 2,905 Purchases of securities available for sale (9,476) (15) Net decrease (increase) in loans 4,849 (4,069) Purchases of premises and equipment (192) (504) Proceeds from sale of premises and equipment - 189 ------ ------ NET CASH PROVIDED BY INVESTING ACTIVITIES 3,302 3,036 ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 3,221 13,778 Net change in short-term borrowings 1,513 (706) Principal payments on long-term debt (13) (12) Cash dividends paid (860) (799) Purchases of treasury shares (1,677) - ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 2,184 12,261 ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS 7,082 17,289 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,236 18,262 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $41,318 35,551 ====== ====== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 2,935 4,262 The accompanying notes to the consolidated financial statements are an integral part of these statements. </TABLE> -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, 2002 are not necessarily indicative of the results to be expected for the full year ending December 31, 2002. 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 2001 Form 10-K filed with the Securities and Exchange Commission. 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., the Company's independent certified public accountants, as described in their report on page nine. 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. -5-
LCNB Corp. and Subsidiaries Notes to the Consolidated Financial Statements (Unaudited) (Continued) NOTE 3 - LOANS Major classifications of loans at March 31, 2002 and December 31, 2001 are as follows (thousands): <TABLE> <CAPTION> March 31, December 31, 2002 2001 -------- ----------- <s> <c> <c> Commercial and industrial $ 36,557 40,486 Commercial, secured by real estate 77,697 72,477 Residential real estate 157,618 165,710 Consumer, excluding credit card 43,140 41,006 Agricultural 1,596 2,020 Credit card 2,458 2,658 Other loans 626 112 Lease financing 1,822 2,088 ------- ------- 321,514 326,557 Deferred net origination costs 644 608 ------- ------- 322,158 327,165 Allowance for loan losses (2,000) (2,000) ------- ------- Loans - net $320,158 325,165 ======= ======= </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, 2002 and December 31, 2001 were $24,720,000 and $23,734,000, respectively. Loans sold to the FHLMC during the quarters ended March 31, 2002 and 2001 totaled $2,271,000 and $554,000, respectively. -6-
LCNB Corp. and Subsidiaries Notes to the Consolidated Financial Statements (Unaudited) (Continued) NOTE 3 - LOANS (continued) <TABLE> Changes in the allowance for loan losses were as follows (thousands): <CAPTION> March 31, March 31, 2002 2001 --------- --------- <s> <c> <c> Balance - beginning of year $2,000 2,000 Provision for loan losses 54 57 Charge offs (68) (64) Recoveries 14 7 ----- ----- Balance - end of period $2,000 2,000 ===== ===== </TABLE> There were no nonaccrual loans at March 31, 2002 or December 31, 2001. 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, 2002 and December 31, 2001 were as follows: <TABLE> <CAPTION> March 31, December 31, 2002 2001 --------- --------- (Thousands) <s> <c> <c> Commitments to extend credit $78,627 56,738 Standby letters of credit 6,521 6,410 </TABLE> -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, 2002 and December 31, 2001, outstanding guarantees of $1,631,000 and $1,520,000, 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, 2002 and December 31, 2001 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 - NEW ACCOUNTING PRONOUNCEMENT On January 1, 2002, the Company adopted Statement of Financial Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." 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" (superseded by SFAS No. 144, which substantially carries over the applicable provisions of SFAS No. 121). The Company's intangible assets at March 31, 2002 are classified as "intangible assets other than goodwill" and primarily represent the unamortized intangible related to the Company's 1997 acquisition of three branch offices from another bank. At March 31, 2002, the carrying amount of this intangible was $3.4 million, net of accumulated amortization of $2.6 million, and is being amortized on a straight line basis over ten years in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions, " which was not superseded by SFAS No. 142. In the second quarter of 2002, the Financial Accounting Standards Board is expected to issue an exposure draft, which could amend certain provisions of SFAS No. 72. If adopted, the amendment may change the current requirement to amortize intangibles originally recorded in accordance with SFAS No. 72. -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, 2002, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three-month periods ended March 31, 2002 and 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, 2001 (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 11, 2002, 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, 2001, is fairly stated in all material respects. /s/ J.D. Cloud & Co. L.L.P. Cincinnati, Ohio April 26, 2002 -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 $1,526,000 for the three months ended March 31, 2002, which was $169,000 or 12.45% greater than the $1,357,000 earned during the three months ended March 31, 2001. Earnings per share were $0.88 for the first quarter of 2002, compared with $0.76 per share earned in the first quarter of 2001. Annualized performance ratios for the 2002 period included a return on average assets of 1.29% and a return on average equity of 12.59%, compared with 1.21% and 11.67%, respectively, for the comparable period in 2001. The increase in earnings is primarily due to a $550,000 increase in net interest income. 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 2002 and 2001, 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-
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, 2002 and 2001 as compared to the comparable periods in 2001 and 2000, respectively. 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. <TABLE> <CAPTION> Three Months Ended March 31, ----------------------- 2002 2001 (Dollars in thousands) <s> <c> <c> Interest-earning Assets: Average balance (1) $448,018 421,968 Interest income (2) 7,648 8,457 Average rate 6.92% 8.13% Interest-bearing Liabilities: Average balance 370,821 355,453 Interest expense 2,715 4,091 Average rate 2.97% 4.67% Net interest income 4,933 4,366 Net interest margin on a taxable equivalent basis (3) 4.47% 4.20% </TABLE> <FN> (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. </FN> -12-
<TABLE> <CAPTION> Three Months Ended March 31, 2002 vs. 2001 -------------------------- Increase (decrease) due to -------------------------- Volume Rate Total (In thousands) <s> <c> <c> <c> Interest Earning Assets Loans $(186) (656) (842) Federal funds sold 98 (130) (32) Deposits in banks - - - Federal Home Loan Bank stock - 24 24 Investment securities Taxable 151 (162) (11) Nontaxable 127 (75) 52 --- ----- ----- Total interest income 190 (999) (809) Interest Bearing Liabilities Deposits 100 (1,534) (1,434) Short-term borrowings 4 (11) (7) Long-term debt 94 (29) 65 --- ----- ----- Total interest expense 198 (1,574) (1,376) --- ----- ----- Net interest income $ (8) 575 567 === ===== ===== </TABLE> Net interest income on a fully tax equivalent basis for the first quarter of 2002 totaled $4,933,000, an increase of $567,000 from the first quarter of 2001. Total interest expense decreased $1,376,000, partially offset by a decrease in total interest income of $809,000. 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 475 basis point (a basis point equals 0.01%) decrease in the intended federal funds rate, as set by the Federal Reserve Board, during 2001. 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 2002 was 4.47%, as compared to 4.20% for the first quarter, 2001. The net interest margin and net interest income increased due to rates paid for deposits and other borrowings decreasing more rapidly than rates earned on loans and other investments. -13-
The decrease in total interest income was primarily due to a 121 basis point decrease in the average rate on earning assets, from 8.13% for the first quarter of 2001 to 6.92% for the first quarter of 2002. This decrease was slightly offset by a $26.0 million increase in average total earning assets. Average federal funds sold, which had an average interest rate of only 1.55% during the first quarter, 2002, increased $14.8 million and average investment securities increased $19.7 million. Average loans decreased $8.9 million primarily because of payoffs from loan refinances and sales of new fixed-rate loans to the Federal Home Loan Mortgage Corporation. The decrease in total interest expense was due to a 170 basis point decrease in the average liability rate, slightly offset by a $15.4 million increase in average interest-bearing liabilities. Average interest-bearing deposits increased $9.0 million and average long-term debt increased $6.0 million. The deposit increase was primarily in the regular savings and prime savings products, reflecting customer preference for highly liquid, short-term investment products during the current rate cycle. The $6.0 million increase in long-term debt reflects additional borrowings from the Federal Home Loan Bank to lock in additional long-term funding at current, historically low, market rates. 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, 2002 2001 (thousands) <s> <c> <c> Balance, beginning of period $ 2,000 2,000 Charge-offs 68 64 Recoveries 14 7 ----- ----- Net charge-offs 54 57 ----- ----- Provision for loan losses 54 57 ----- ----- Balance, end of period $ 2,000 2,000 ===== ===== </TABLE> -14-
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, 2002 2001 ------------- ---------- (thousands) <s> <c> <c> Loans accounted for on non-accrual basis $ - - Accruing loans which are past due 90 days or more 177 146 Renegotiated loans - - --- --- Total $177 146 === === </TABLE> NON-INTEREST INCOME Non-interest income decreased $50,000, or 4.1%, during the first quarter of 2002 as compared to the first quarter of 2001. Trust income increased $93,000, or 44.7%, from the first quarter of 2001 primarily due to an increase in the market value of assets managed, upon which most fees are based, an increase in estate executor fees, and an increase in termination fees. Insurance agency commissions decreased $142,000, or 36.1%, compared to the first quarter of 2001 due to the absence of $189,000 in contingency commissions received in 2001, but not in 2002. 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. -15-
NON-INTEREST EXPENSE Total non-interest expense increased $289,000, or 8.4%, during the first quarter, 2002 compared with the first quarter, 2001. Salaries and wages increased $119,000, or 8.0%, primarily due to salary and wage increases and secondarily to the addition of several new employees. A small increase in the number of staff was necessary because of the opening of a full-service office in Hamilton, Ohio in September, 2001. Pension and other employee benefits increased $43,000, or 9.9%, primarily due to increased Social Security and Medicare matching as of result of increased wages and salaries and to increased health insurance costs. Other non-interest expense increased $102,000, or 13.7%, primarily due to: a. a $30,000 increase in computer maintenance costs due to new hardware and software required for a conversion to a new operating system; b. a $40,000 increase in automatic teller machine (ATM) expenses due to increased usage of ATMs, an increase in fees paid the ATM processor, and the cost for a new maintenance contract on ATMs; and c. a $19,000 increase in legal fees primarily for special work done during the first quarter, 2002. -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. <TABLE> <CAPTION> CONDENSED AVERAGE QUARTERLY BALANCE SHEETS (thousands) March 31, December 31, September 30, 2002 2001 2001 <s> <c> <c> <c> ASSETS Interest-earning: Federal funds sold $ 24,911 24,172 19,159 Securities available for sale 100,471 90,746 81,803 Loans 322,636 332,340 333,252 ------- ------- ------- Total interest-earning assets 448,018 447,258 434,214 ------- ------- ------- Noninterest-earning: Cash and due from banks 14,195 13,291 12,094 All other assets 19,562 19,323 19,264 Allowance for credit losses (2,002) (2,001) (2,002) ------- ------- ------- Total assets $479,773 477,871 463,570 ======= ======= ======= LIABILITIES Interest bearing: Interest-bearing deposits $357,373 356,127 347,998 Short-term borrowings 1,148 1,296 955 Long-term debt 12,300 9,226 8,314 ------- ------- ------- Total interest-bearing liabilities 370,821 366,649 357,267 Noninterest-bearing: Noninterest-bearing deposits 57,203 57,953 54,448 All other liabilities 2,594 3,273 2,891 ------- ------- ------- Total liabilities 430,618 427,875 414,606 SHAREHOLDERS' EQUITY 49,155 49,996 48,964 ------- ------- ------- Total liabilities and shareholders' equity $479,773 477,871 463,570 ======= ======= ======= </TABLE> -17-
March 31, 2002 vs. December 31, 2001. Total average interest-earning assets increased $0.8 million when comparing the quarter ended March 31, 2002 to the December 31 quarter. Securities available for sale increased $9.7 million and loans decreased a like amount. The decrease in the loan portfolio was in residential real estate mortgage loans, which decreased $10.4 million on an average basis. The decrease was due to payoffs on loans refinanced combined with the sale of $2.3 million in new fixed-rate mortgage loans during the March 31 quarter. Unable to invest deposit and loan growth in the loan portfolio, management purchased additional investment securities available for sale, which can readily be sold if the funds should be needed for future loan growth. Total average interest-bearing liabilities increased $4.2 million when comparing the March 31 and December 31 quarters. Most of the increase was in long-term debt, which increased $3.1 million on an average basis. The increase in long-term debt reflects $4.0 million in additional Federal Home Loan Bank borrowings with maturities of two and three years obtained during December, 2001. LCNB borrowed the $4.0 million in an attempt to lock in additional longer-term funds at current, historically low, market rates. The $1.2 million growth in average interest-bearing deposits was due to growth in regular savings accounts, which grew $7.7 million on an average basis. This positive growth was partially offset by decreases in prime savings and certificates of deposit greater than $100,000. 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. <TABLE> <CAPTION> March 31, December 31, 2002 2001 ---------- ---------- (thousands) <s> <c> <c> Total consolidated assets from the balance sheet $483,616 480,435 Assets managed by the Trust Department 109,147 109,456 Mortgage loans serviced for others 24,720 23,734 Business cash management 27,619 26,163 ------- ------- Total assets managed $645,102 639,788 ======= ======= </TABLE> 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-
<TABLE> <CAPTION> At At March 31, December 31, 2002 2001 (Dollars in thousands) <s> <c> <c> Regulatory Capital: Shareholders' equity $ 48,297 49,507 Goodwill and other intangibles (3,580) (3,729) Net unrealized securities losses (997) (1,196) ------ ------ Tier 1 risk-based capital 43,720 44,582 Eligible allowance for loan losses 2,000 2,000 ------ ------ Total risk-based capital $ 45,720 46,582 ====== ====== Capital Ratios: Total risk-based 15.06% 15.40% Tier 1 risk-based 14.40% 14.74% Tier 1 leverage 9.23% 9.46% 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% </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 455 shares were purchased from eight 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. Through March 31, 2002, 7,565 shares had been purchased under this program. 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. A total of 46,897 shares had been purchased under this program at March 31, 2002. -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, 2002, LCNB liquid assets amounted to $140.8 million or 29.1% of total gross assets, an increase from $132.8 million or 27.7% at December 31, 2001. Liquidity is also provided by access to core funding sources, primarily core depositors in the bank's primary market area. LCNB does not solicit brokered deposits as a funding source. The liquidity of LCNB is enhanced by the fact that 89.8% of total deposits at March 31, 2002 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. In June, 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 late 2002 through early 2003. Management believes the new system will allow LCNB to enhance operating efficiencies and improve customer service. 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. 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 $129,000 during 2002 and $31,000 during 2003 and will be expensed as incurred. It is anticipated the associated costs will be funded by liquidating short-term assets. -21-
NEW ACCOUNTING PRONOUNCEMENT On January 1, 2002, the Company adopted Statement of Financial Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets. " 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" (superseded by SFAS No. 144, which substantially carries over the applicable provisions of SFAS No. 121). The Company's intangible assets at March 31, 2002 are classified as "intangible assets other than goodwill" and primarily represent the unamortized intangible related to the Company's 1997 acquisition of three branch offices from another bank. At March 31, 2002, the carrying amount of this intangible was $3.4 million, net of accumulated amortization of $2.6 million, and is being amortized on a straight line basis over ten years in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," which was not superseded by SFAS No. 142. In the second quarter of 2002, the Financial Accounting Standards Board is expected to issue an exposure draft, which could amend certain provisions of SFAS No. 72. If adopted, the amendment may change the current requirement to amortize intangibles originally recorded in accordance with SFAS No. 72. 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, 2001 see Item 7A, Quantitative and Qualitative Disclosures about Market Risks, in the recently filed Form 10-K for the year ended December 31, 2001. 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 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, 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 Date: April 29, 2002 /s/Steve P. Foster -------------------- Steve P. Foster Executive Vice President and Chief Financial Officer -24-