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, 1999
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 26, 1999, was 1,760,000 shares.
LCNB Corp.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999, and December 31, 1998 . . . . . . . . . 1
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1999 and 1998 . . 2
Consolidated Statements of Comprehensive
Income and Changes in Shareholders' Equity -
Year Ended December 31, 1998 and Six Months
Ended June 30, 1999 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . 6-12
Item 3. Quantitative and Qualitative Disclosures
about Market Risks . . . . . . . . . . . . . . . . . . 12
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities and Use of Proceeds . . . . . . . 13
Item 3. Defaults by the Company on its Senior Securities . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 13
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
LCNB Corp. and Subsidiary
Consolidated Balance Sheets
At June 30, 1999, and December 31, 1998
(thousands)
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (a)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 11,502 16,907
Federal funds sold 4,100 3,800
------- -------
Total cash and cash equivalents 15,602 20,707
Interest-bearing deposits in banks 5,492 5,492
Federal Reserve Bank stock 647 647
Securities available for sale, at
market value 114,465 123,040
Loans 273,744 267,057
Less-allowance for loan losses 2,000 2,000
------- -------
Net loans 271,744 265,057
Premises and equipment, net 8,360 8,102
Intangible assets 5,018 5,321
Accrued income receivable 3,300 3,017
Other assets 1,525 776
------- -------
TOTAL ASSETS $426,153 432,159
======= =======
LIABILITIES:
Deposits-
Noninterest-bearing $ 47,213 49,972
Interest-bearing 333,430 337,069
------- -------
Total deposits 380,643 387,041
Accrued interest and other liabilities 3,149 2,919
------- -------
TOTAL LIABILITIES 383,792 389,960
------- -------
SHAREHOLDERS' EQUITY:
Common stock-no par value, authorized
4,000,000 shares; issued and outstanding
1,760,000 shares 10,560 10,560
Surplus 11,000 11,000
Retained earnings 21,675 19,993
Accumulated other comprehensive
(loss) income, net of taxes (874) 646
------- -------
TOTAL SHAREHOLDERS' EQUITY 42,361 42,199
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $426,153 432,159
======= =======
<FN>
(a) Financial information as of December 31, 1998, has been derived from
the audited financial statements of Lebanon Citizens National Bank
filed by the Registrant with the Commission on Form S-4.
</FN>
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<TABLE>
LCNB Corp. and Subsidiary
Consolidated Statements of Income
(In thousands except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $5,571 5,768 11,058 11,497
Interest on federal funds sold 103 185 211 411
Interest on deposits in banks 70 60 139 119
Interest on Federal Reserve stock 19 19 19 19
Interest on investment securities-
Taxable 1,260 1,168 2,540 2,301
Non-taxable 312 164 622 316
----- ----- ------ ------
TOTAL INTEREST INCOME 7,335 7,364 14,589 14,663
----- ----- ------ ------
INTEREST EXPENSE:
Interest on deposits 3,223 3,472 6,457 7,080
Interest on short-term borrowings 12 10 20 24
----- ----- ------ ------
TOTAL INTEREST EXPENSE 3,235 3,482 6,477 7,104
----- ----- ------ ------
NET INTEREST INCOME 4,100 3,882 8,112 7,559
PROVISION FOR LOAN LOSSES 78 22 124 100
------ ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,022 3,860 7,988 7,459
----- ----- ------ ------
NON-INTEREST INCOME:
Trust income 239 191 454 390
Service charges and fees 524 485 1,026 962
Net gain on sale of securities 23 6 23 11
Other operating income 26 25 54 86
----- ----- ------ ------
TOTAL NON-INTEREST INCOME 812 707 1,557 1,449
----- ----- ------ ------
NON-INTEREST EXPENSE:
Salaries and wages 1,226 1,103 2,426 2,216
Pension and other employee benefits 263 228 619 534
Equipment 118 154 238 304
Occupancy, net 222 251 476 480
State franchise tax 155 145 308 288
Marketing 83 137 187 230
Other 848 663 1,694 1,579
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 2,915 2,681 5,948 5,631
----- ----- ------ ------
INCOME BEFORE INCOME TAXES 1,919 1,886 3,597 3,277
PROVISION FOR INCOME TAXES 530 565 1,035 980
----- ----- ------ ------
NET INCOME $1,389 1,321 2,562 2,297
===== ===== ====== ======
Basic earnings per common share $ 0.79 0.75 1.46 1.31
Average shares outstanding (000's) 1,760 1,760 1,760 1,760
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<TABLE>
LCNB Corp. and Subsidiary
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>
Balance January 1, 1998 $10,560 11,000 17,010 86 38,656 <C>
Comprehensive Income:
Net income 5,447 5,447 $5,447
Transition adjustment
for the effect of a change
in accounting principle 473 473 473
Net unrealized gain on
available-for-sale securities
(net of taxes of $124) 241 241 241
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $80) (154) (154) (154)
-----
Total comprehensive income $6,007
=====
Cash dividends declared
($1.40 per share) (2,464) (2,464)
------ ------ ------ ------ ------
Balance December 31, 1998 $10,560 11,000 19,993 646 42,199
Comprehensive Income:
Net income 2,562 2,562 $2,562
Net unrealized loss on
available-for-sale securities
(net of tax benefit of $775) (1,505) (1,505) (1,505)
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $8) (15) (15) (15)
-----
Total comprehensive income $1,042
=====
Cash dividends declared
($.50 per share) (880) (880)
------ ------ ------ ------ ------
Balance June 30, 1999 $10,560 11,000 21,675 (874) 42,361
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to financial
statements are an integral part of these statements.
<TABLE>
LCNB Corp. and Subsidiary
Consolidated Statements of Cash Flows
(thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30
---------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,562 2,297
Adjustments for non-cash items -
Depreciation and amortization 809 791
Deferred loan origination fees (179) (331)
Provision for loan losses 100 100
Provision for deferred taxes (25) (43)
Realized gains on sales of securities (23) (11)
Origination of mortgage loans for sale (2,324) (5,860)
Proceeds from sales of mortgage loans 2,324 5,860
(Increase) decrease in income receivable (283) (88)
Increase (decrease) in interest payable
and other accrued expenses, net 289 (700)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,250 2,015
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 26,101 2,680
Proceeds from maturities of securities held to
maturity - 18,273
Proceeds from sales of securities available for sale 8,674 296
Purchases of securities available for sale (28,581) (10,507)
Purchases of securities held to maturity - (2,115)
Net (increase) in loans (6,681) (7,166)
Purchases of premises and equipment (590) (332)
Proceeds from sale of premises - 274
------ ------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (1,077) 1,403
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in deposits (6,398) (8,787)
Cash dividends paid (880) (704)
------ ------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (7,278) (9,491)
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (5,105) (6,073)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,707 30,361
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $15,602 24,288
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 6,602 6,772
Income taxes paid 1,345 944
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
LCNB Corp. and Subsidiary
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.
Substantially all of the assets, liabilities and operations of LCNB
Corp., the new consolidated holding company, are attributable to its
wholly-owned subsidiary, Lebanon Citizens. The accompanying unaudited
consolidated financial statements include the accounts of LCNB Corp. and
Lebanon Citizens. The financial information prior to the reorganization
consists of Lebanon Citizens.
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 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,
1999 are not necessarily indicative of the results to be expected for
the full year ending December 31, 1999. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements, accounting policies and financial notes thereto
included in LCNB Corp.'s Form S-4 filed with the Commission.
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 Corp.'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 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
In most instances the standard, once adopted, precludes any held-to-
maturity security from being designated as a hedged item. Lebanon
Citizens adopted SFAS No. 133 in the fourth quarter of 1998. To
provide the flexibility in the future to designate securities as
hedged items the Bank recategorized its held-to-maturity securities as
available for sale. The amortized cost and related unrealized net
gain of the transferred securities was $42,768,000 and $716,000,
respectively, at the date of transfer. This change in accounting
principle had no effect on reported net income. Comprehensive income
for the year ended December 31, 1998 increased $473,000 after income
taxes of $243,000.
LCNB Corp. and
Lebanon Citizens National Bank
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. Prior to that date, the
financial information presented represents the assets, liabilities and
operations of Lebanon Citizens. 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 Corp. earned $1.389 million for the three months ended June 30,
1999 compared to $1.321 million for the three months ended June 30,
1998. Earnings per share were $.79 for the second quarter of 1999, up
5% from the $.75 per share earned in the second quarter of 1998.
Annualized performance ratios included a return on average assets of
1.29% and a return on average equity of 12.92%, compared with the same
ratios for the second quarter of 1998 of 1.28% and 13.24%,
respectively.
For the first six months of 1999 LCNB Corp. earned $2.562 million
compared to $2.297 million for the first six months of 1998. Earnings
per share were $1.46 in 1999, up 11% from the $1.31 per share earned
the same period in 1998. Return on average assets was 1.21% for the
first six months of 1999 and return on average equity was 12.01% for
the same period. The comparable ratios for the first six months of
1998 were 1.12% and 11.66%, respectively.
NET INTEREST INCOME
The table below presents net interest income, average balances and
average rates.
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
NET INTEREST INCOME
(in thousands)
Book basis $ 4,100 3,882 8,112 7,559
Tax equivalent adjustment 131 69 260 134
-------- ------- ------- -------
Fully taxable basis $ 4,231 3,951 8,372 7,693
======== ======= ======= =======
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
AVERAGE BALANCES
(in thousands)
Interest-earning assets $400,118 386,136 398,274 385,461
Interest-bearing liabilities 336,807 328,250 335,366 330,181
------- ------- ------- -------
Earning assets financed by
noninterest-bearing funds $ 63,311 57,886 62,908 55,280
======= ======= ======= =======
AVERAGE RATES
(fully taxable basis)
Yield on interest-earning
assets 7.48% 7.72% 7.52% 7.74%
Cost of interest-bearing
liabilities 3.85 4.25 3.89 4.34
---- ---- ---- ----
Interest rate spread 3.63 3.47 3.63 3.40
Contribution of noninterest-
bearing funds .61 .63 .61 .62
---- ---- ---- ----
Net interest margin 4.24% 4.10% 4.24% 4.02%
==== ==== ==== ====
Net interest income on a fully taxable basis for the second quarter of
1999 totaled $4.231 million, up $280 thousand, or 7.1%, from the second
quarter of 1998. The $280 thousand increase in net interest income was
primarily due to a $13.9 million increase in average earning assets and
a 14 basis point increase in the net interest margin.
Net interest income for the first six months of 1999 totaled $8.372
million; up $679 thousand, or 8.8% from the first six months of 1998.
The $679 thousand increase was primarily due to a $12.8 million increase
in average earning assets and a 22 basis point increase in the net
interest margin.
The net interest margin increased from 4.10% in the second quarter of
1998 to 4.24% in the second quarter of 1999. This 14 basis point
increase was due in part to a 40 basis point decline in the cost of
average interest-bearing liabilities, partially offset by a 24 basis
point decline in the yield on average interest-earning assets. The
decline in the cost of average interest-bearing funds resulted from the
replacement of higher cost time deposits with lower cost savings
deposits. The decline in the yield on average interest-earning assets is
due to lower yields attributable to commercial loans and mortgage loans.
The net interest margin increased from 4.02% in the first six months of
1998 to 4.24% in the first six months of 1999. This 22 basis point
increase resulted from a 45 basis point decline in the cost of interest-
bearing liabilities partially offset by a 22 basis point decline in yield
on interest-earning assets. These trends were attributable to the same
factors as those noted in the quarterly net interest margin comparison
above.
Average interest-earning assets totaled $400.1 million for the second
quarter of 1999, up $13.9 million from the same period in 1998. The
increase was primarily attributable to increases in commercial loans and
securities. Average earning assets for the six month period ended June
30, 1999 remained relatively stable when compared with the comparable
period of 1998. Average interest-bearing liabilities totaled $336.8
million for the second quarter of 1999, up $8.6 million from the same
period in 1998. Average interest-bearing liabilities totaled $335.4
million for the six months ended June 30, 1999, an increase of $5.2
million from the six month period ended June 30, 1998.
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.
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(thousands) (thousands)
Balance, beginning of period $2,000 2,250 2,000 2,200
----- ----- ----- -----
Charge-offs 88 51 140 84
Recoveries 10 7 16 12
----- ----- ----- -----
Net charge-offs 78 44 124 72
----- ----- ----- -----
Provision for loan losses 78 22 124 100
----- ----- ----- -----
Balance, end of period $2,000 2,228 2,000 2,228
====== ====== ====== ======
Of the total charge-offs so far in 1999, $126,000 or 90% is attributable
to consumer loans. For the first six months of 1998, consumer loans
charged off amounted to $59,000 or 70% of total charge-offs. On June 30,
1999, LCNB adopted a new uniform charge-off policy for consumer, credit
card and home mortgage loans as mandated by the Federal Financial
Institution's Examination Council for all banks and thrifts. It includes
a requirement to charge-off open-end credit at 180 days delinquency and
closed-end credit at 120 days delinquency. While this policy change
resulted in an increase in net charge-offs in the second quarter and
first six months of 1999 compared with the comparable period of 1998,
management believes that no significant difference will occur
prospectively in net charge-offs as a result of this policy change.
The following table sets forth information regarding the past-due,
non-accrual and renegotiated loans of the Bank at the dates indicated:
June 30 December 31
1999 1998
-------- -----------
(thousands)
Loans accounted for on
non-accrual basis $ - -
Accruing loans which are
past due 90 days or more 34 374
Renegotiated loans - -
-- ---
Total $34 374
== ===
The decrease in accruing loans which are past due 90 days or more is due
primarily to the settlement of a large commercial credit in the first
half of 1999 as well as the FFIEC required change in the charge-off
policy mentioned above.
NON-INTEREST INCOME
Non-interest income of $812 thousand increased $105 thousand, or 14.9% in
the second quarter of 1999 compared to the second quarter of 1998. Trust
income of $239 thousand increased $48 thousand, or 25.1%, from the second
quarter of 1998 due to an increase in estate fees, as well as an increase
in the market value of assets under management on which fees are based.
Service charges and fees increased 8.0% due to an increase in ATM fees
resulting from five additional ATM machines, a rate increase in the ATM
transaction fee in the second quarter of 1998, and a larger base of
cardholders and merchant relationships principally resulting from greater
penetration of markets acquired with branch purchases in September 1997.
Non-interest income of $1.557 million in the first six months of 1999
increased $108 thousand, or 7.5%, compared with the first six months in
1998 due primarily to the reasons mentioned in the preceding paragraph.
The decline in Other Operating Income was attributable to a gain recorded
in 1998 on the sale of property in connection with the consolidation of
branches in Waynesville, which did not recur in 1999.
NON-INTEREST EXPENSE
Total non-interest expense increased $234 thousand, or 8.7%, in the
second quarter 1999 compared with the second quarter 1998. The increase
was due in part to labor costs, including pension and other benefits,
relating to salary increases. Other expenses also contributed to this
increase as a result of increased volumes of ATM and credit card
activity, a change in strategy of paying for correspondent banking
analysis charges rather than maintaining higher levels of non-interest
bearing balances, and consulting fees. These increases were partially
offset by lower marketing and equipment costs.
Total non-interest expense increased $317 thousand, or 5.6%, in the six
months ended June 30, 1999 compared with the first six months of 1998.
The increase was primarily due to the same factors as noted above. In
addition, telecommunication costs increased due to branch networking-
related enhancements.
<TABLE>
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.
<CAPTION>
CONDENSED AVERAGE BALANCE SHEETS
(thousands)
2nd Qtr. 1st Qtr. 4th Qtr.
1999 1999 1998
<S> <C> <C> <C>
ASSETS
Interest-earning:
Interest-bearing deposits with banks $ 5,492 5,465 5,378
Federal funds sold 8,737 9,060 14,223
Securities available for sale 118,650 117,599 107,706
Loans 267,239 264,285 269,528
------- ------- -------
Total interest-earning assets 400,118 396,409 396,835
------- ------- -------
Noninterest-earning:
Cash and due from banks 15,331 14,642 15,151
All other assets 17,245 17,211 17,072
Allowance for credit losses (2,006) (2,002) (2,085)
------- ------- -------
Total assets $430,688 426,260 426,973
======= ======= =======
LIABILITIES
Interest bearing:
Interest-bearing deposits $335,712 333,425 335,416
Short-term borrowings 1,095 484 823
------- ------- -------
Total interest-bearing liabilities 336,807 333,909 336,239
Noninterest-bearing:
Noninterest-bearing deposits 49,209 47,460 46,630
All other liabilities 1,558 1,982 2,124
------- ------- -------
Total liabilities 387,574 383,351 384,993
SHAREHOLDERS' EQUITY 43,114 42,909 41,980
------- ------- -------
Total liabilities and shareholders'
equity $430,688 426,260 426,973
======= ======= =======
</TABLE>
Total average assets increased $4.4 million in the second quarter of 1999
from the first quarter and $3.7 million from the fourth quarter of 1998.
The increase from the first quarter is primarily due to growth in the
commercial loan portfolio. The increase from the fourth quarter of 1998
is due to purchases of higher taxable equivalent yielding tax-exempt
securities, partially offset by a reduction in Federal funds sold.
Average interest-bearing liabilities increased $2.9 million from the first
quarter of 1999 and $.6 million from the fourth quarter of 1998. Average
non-interest bearing deposits increased $1.7 million from the first
quarter of 1999 and $2.6 million from the fourth quarter of 1998.
REGULATORY CAPITAL
Lebanon Citizens is 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 Lebanon Citizens' 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 Lebanon
Citizens follows:
At At
June 30, December 31,
1999 1998
Regulatory Capital:
Shareholders' equity $42,242 42,199
Goodwill and other intangibles (5,018) (5,321)
Net unrealized securities gains 874 (646)
------ ------
Tier 1 risk-based capital 38,098 36,232
Eligible allowance for loan losses 2,000 2,000
------ ------
Total risk-based capital $40,098 38,232
======= ======
Capital Ratios:
Total risk-based 15.3% 15.1%
Tier 1 risk-based 14.6% 14.3%
Leverage 9.0% 8.6%
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, 1999 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, 1999, Lebanon Citizens liquid assets amounted to
$135.6 million or 32% of total gross assets, down from $143.7 million or
33% at December 31, 1998. Secondary sources of liquidity include Lebanon
Citizens' ability to sell loan participations 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. Loans to deposits were 72% and 69%, at June 30, 1999 and December
31, 1998, respectively. Lebanon Citizens experienced no liquidity or
operational problems as a result of the current liquidity levels.
YEAR 2000 COMPLIANCE
As discussed in the "Management Discussion and Analysis of Financial
Condition and Results of Operations" section of LCNB Corp.'s Form S-4, as
amended, Lebanon Citizens initiated a company-wide program in April 1997
to address Year 2000 concerns. Lebanon Citizens adopted the Federal
Financial Institutions Examination Council guidelines. This five-step
approach included the following phases: Awareness, Assessment,
Renovation, Validation and Implementation.
Lebanon Citizens has concluded its fourth phase of the program. All
computer operating systems have been tested with no detected errors. The
readiness of its vendors, major customers and other third parties that do
business with Lebanon Citizens have been reviewed with satisfactory
results. Additionally, all non-information technology systems were
examined and none were found to be date sensitive, and therefore are
compliant. A supplementary contingency plan, as a back up, was developed
in 1999 to address procedures to be followed, potential liquidity needs,
etc. in the event of unforeseen issues or problems. Lebanon Citizens is
currently concentrating on educating its customers.
No material costs were incurred through the first six months of 1999
regarding the Y2K compliance issues and no material costs are expected to
be incurred for the remainder of 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
QUANTITATIVE AND QUALITATIVE DISLCOSURES ABOUT MARKET RISKS
For a discussion of Lebanon Citizens' asset and liability management
policies and gap analysis for the year ended December 31, 1998 see Item
3, Quantitative and Qualitative Disclosures about Market Risks in the
recently filed Form S-4, as amended for the year ended December 31, 1998.
There have been no material changes in Lebanon Citizens' market risks,
which for Lebanon Citizens is primarily interest rate risk.
PART II. OTHER INFORMATION
LCNB Corp. and
Lebanon Citizens National Bank
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 -
LCNB Corp. has not submitted any matters to a vote of
securities holders during the period covered by this report. However,
LCNB Corp.'s wholly-owned subsidiary, Lebanon Citizens
submitted to its shareholders the reorganization of
Lebanon Citizens into a holding company structure at a special meeting of
shareholders duly called and held on May 18, 1999. At the special
meeting, the Lebanon Citizens shareholders authorized the merger of
Lebanon Citizens with and into an interim national bank, a
wholly-owned subsidiary of LCNB Corp., formed for the purpose of facilitating
the reorganization. The votes associated with the proposal were: 41,053
for the proposal, 100 against and zero abstaining. The
reorganization transaction was consummated on May 18, 1999 and as a
result, the shareholders of Lebanon Citizens became the shareholders of
LCNB Corp. and Lebanon Citizens became a wholly-owned subsidiary of LCNB
Corp. Also in connection with the reorganization, LCNB Corp. became a
reporting company pursuant to Section 12(g) of the Securities Exchange
Act of 1934.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
No. Description
27 Financial Data Schedule for
the Six Months Ended
June 30, 1999.
b. LCNB Corp. was not required to file Form 8-K during the quarter
ended June 30, 1999.
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 30, 1999 /s/Steve P. Foster
--------------------
Steve P. Foster
Vice President
and Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT FOR LCNB CORP. ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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