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, 2000
Commission file number 000-26121
LCNB Corp.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1626393
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2 North Broadway, Lebanon, Ohio 45036
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(513) 932-1414
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock, without par
value, as of July 28, 2000, was 1,775,942 shares.
<PAGE>
LCNB Corp.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2000, and December 31, 1999 . . . . . . . . . 1
Consolidated Statements of Income -
Three and Six Months Ended June 30, 2000 and 1999 . . 2
Consolidated Statements of Comprehensive
Income and Changes in Shareholders' Equity -
Year Ended December 31, 1999 and Six Months
Ended June 30, 2000 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 7-13
Item 3. Quantitative and Qualitative Disclosures
about Market Risks . . . . . . . . . . . . . . . . . . . . .13
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities and Use of Proceeds . . . . . . 14
Item 3. Defaults by the Company on its Senior Securities . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 14
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
LCNB Corp. and Subsidiaries
Consolidated Balance Sheets
At June 30, 2000, and December 31, 1999
(thousands)
<CAPTION>
June 30, December 31,
2000 1999
(unaudited) (a)
<S> <C> <C>
ASSETS:
Cash and due from banks $ 18,178 18,840
Federal funds sold 1,200 5,300
------- -------
Total cash and cash equivalents 19,378 24,140
Interest-bearing deposits in banks 5,492 5,492
Federal Reserve Bank stock 647 647
Federal Home Loan Bank stock 427 -
Securities available for sale, at
market value 94,312 104,911
Loans 313,695 287,608
Less-allowance for loan losses 2,000 2,000
------- -------
Net loans 311,695 285,608
Premises and equipment, net 10,017 8,231
Intangible assets 4,453 4,763
Accrued income receivable 3,295 3,363
Other assets 2,223 2,083
------- -------
TOTAL ASSETS $451,939 439,238
======= =======
LIABILITIES:
Deposits-
Noninterest-bearing $ 53,930 49,477
Interest-bearing 342,886 342,092
------- -------
Total deposits 396,816 391,569
Accrued interest and other liabilities 10,963 4,982
------- -------
TOTAL LIABILITIES 407,779 396,551
------- -------
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 24,284 22,872
Accumulated other comprehensive
loss, net of taxes (1,237) (1,298)
------- -------
TOTAL SHAREHOLDERS' EQUITY 44,160 42,687
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $451,939 439,238
======= =======
<FN>
(a) Financial information as of December 31, 1999, 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-
<PAGE>
<TABLE>
LCNB Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands except per share data)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $6,402 5,571 12,581 11,058
Interest on federal funds sold 32 103 102 211
Interest on deposits in banks 74 70 144 139
Interest on Federal Reserve stock 19 19 19 19
Interest on investment securities-
Taxable 898 1,260 1,919 2,540
Non-taxable 420 312 815 622
----- ----- ------ ------
TOTAL INTEREST INCOME 7,845 7,335 15,580 14,589
----- ----- ------ ------
INTEREST EXPENSE:
Interest on deposits 3,723 3,223 7,358 6,457
Interest on borrowings 84 19 108 31
----- ----- ------ ------
TOTAL INTEREST EXPENSE 3,807 3,242 7,466 6,488
----- ----- ------ ------
NET INTEREST INCOME 4,038 4,093 8,114 8,101
PROVISION FOR LOAN LOSSES 48 78 83 124
------ ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,990 4,015 8,031 7,977
----- ----- ------ ------
NON-INTEREST INCOME:
Trust income 285 239 560 454
Service charges and fees 523 524 1,020 1,026
Net gain (loss) on sale of
securities 1 23 (13) 23
Insurance agency commissions 235 218 415 579
Other operating income 32 29 62 60
----- ----- ------ ------
TOTAL NON-INTEREST INCOME 1,076 1,033 2,044 2,142
----- ----- ------ ------
NON-INTEREST EXPENSE:
Salaries and wages 1,425 1,294 2,837 2,788
Pension and other employee benefits 337 301 741 678
Equipment 131 126 262 253
Occupancy, net 274 231 532 492
State franchise tax 117 155 242 308
Marketing 77 86 185 194
Intangible amortization 162 154 325 307
Other 746 709 1,529 1,429
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 3,269 3,056 6,653 6,449
----- ----- ------ ------
INCOME BEFORE INCOME TAXES 1,797 1,992 3,422 3,670
PROVISION FOR INCOME TAXES 505 530 945 1,035
----- ----- ------ ------
NET INCOME $1,292 1,462 2,477 2,635
===== ===== ====== ======
Dividends declared per common share $ .30 .25 .60 .50
Basic earnings per common share $ 0.73 0.82 1.39 1.48
Average shares outstanding (000's) 1,776 1,776 1,776 1,776
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
-2-
<PAGE>
<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, 1999 $10,560 10,553 20,114 646 41,873
Comprehensive Income:
Net income 5,574 5,574 $5,574
Net unrealized loss on
available-for-sale securities
(net of taxes of $995) (1,931) (1,931) (1,931)
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $7) (13) (13) (13)
-----
Total comprehensive income $3,630
=====
Cash dividends declared (2,816) (2,816)
------ ------ ------ ------ ------
Balance December 31, 1999 $10,560 10,553 22,872 (1,298) 42,687
Comprehensive Income:
Net income 2,477 2,477 $2,477
Net unrealized gain on
available-for-sale securities
(net of taxes of $26) 52 52 52
Reclassification adjustment for
net realized loss on sale of
available-for-sale securities
included in net income (net of
tax benefit of $4) 9 9 9
-----
Total comprehensive income $2,538
=====
Cash dividends declared (1,065) (1,065)
------ ------ ------ ------ ------
Balance June 30, 2000 $10,560 10,553 24,284 (1,237) 44,160
====== ====== ====== ====== ======
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
-3-
<PAGE>
<TABLE>
LCNB Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30
------------------
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,477 2,635
Adjustments for non-cash items -
Depreciation and amortization 981 809
Provision for loan losses 83 124
Deferred tax benefit (98) (25)
Realized (gain) loss on sales of securities 13 (23)
Origination of mortgage loans for sale - (2,324)
Proceeds from sales of mortgage loans - 2,324
(Increase) decrease in accrued income receivable 68 (283)
Increase (decrease) in accrued interest and
other accrued expenses, net (300) 175
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,224 3,412
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 12,030 26,101
Proceeds from sales of securities available for sale 3,988 8,674
Purchases of securities available for sale (5,517) (28,581)
Purchases of securities held to maturity (427) -
Net (increase) in loans (26,393) (6,681)
Purchases of premises and equipment (2,131) (565)
------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (18,450) (1,052)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 5,247 (6,481)
Net increase in short-term borrowings 6,282 -
Cash dividends paid (1,065) (880)
------ ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 10,464 (7,361)
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,762) (5,001)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,140 20,785
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $19,378 15,784
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 7,452 6,613
Income taxes paid 1,014 1,345
NON CASH ADJUSTMENTS:
Common shares purchased in exchange for a note payable $ - 448
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
-4-
<PAGE>
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., 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 Corp. are
attributable to its wholly-owned subsidiaries, Lebanon Citizens and its
recently acquired Dakin Insurance Agency, Inc. (see Note 3). The accompanying
unaudited consolidated financial statements include the accounts of LCNB
Corp., Lebanon Citizens and Dakin Insurance Agency, Inc. ("Dakin"). The
financial information prior to the reorganization consists of Lebanon Citizens
and Dakin.
The statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited
consolidated financial statements include all adjustments (consisting of
normal, recurring accruals) considered necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods.
The 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, 2000
are not necessarily indicative of the results to be expected for the full year
ending December 31, 2000. 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 1999
Form 10-K 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.
-5-
<PAGE>
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 3 - ACQUISITION
On April 11, 2000, Dakin was acquired and became a wholly-owned subsidiary of
LCNB Corp. Under the terms of the agreement, Dakin shareholders received
15,942 shares of LCNB Corp. 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 Corp. have been restated to retroactively combine
the financial statements of LCNB Corp. and Dakin as if the acquisition had
occurred at the beginning of the earliest period presented.
<TABLE>
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 Corp. to those items
presented in the accompanying financial statements (thousands, except
earnings per common share):
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Dakin Insurance Agency, Inc.
Revenues prior to acquisition $ - 221 182 584
Revenues since acquisition 238 - 238 -
----- ----- ----- -----
$ 238 221 420 584
===== ===== ===== =====
Net income:
Consolidated LCNB Corp. $1,256 1,389 2,450 2,562
Dakin Insurance Agency, Inc. 36 73 27 73
----- ----- ----- -----
$1,292 1,462 2,477 2,635
===== ===== ===== =====
Earnings per common share:
As previously reported $ - 0.79 - 1.46
As restated - 0.82 - 1.48
</TABLE>
-6-
<PAGE>
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 Corp. 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 Corp. and Dakin as if the acquisition had
occurred at the beginning of the earliest period. Prior to May 18, 1999, the
financial information presented represents the assets, liabilities and
operations of Lebanon Citizens and Dakin. 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 $1.292 million for the three months ended June 30, 2000
compared to $1.462 million for the three months ended June 30, 1999. Earnings
per share were $.73 for the second quarter of 2000, compared with $.82 per
share earned in the second quarter of 1999. Annualized performance ratios
included a return on average assets of 1.19% and a return on average equity
of 11.94%, compared with the same ratios for the second quarter of 1999 of
1.36% and 13.68%, respectively.
For the first six months of 2000 LCNB Corp. earned $2.477 million compared to
$2.635 million for the first six months of 1999. Earnings per share were
$1.39 in 2000, representing a 6% decline from the $1.48 per share earned the
same period in 1999. Return on average assets was 1.14% for the first six
months of 2000 and return on average equity was 11.52% for the same period.
The comparable ratios for the first six months of 1999 were 1.24% and 12.43%,
respectively.
NET INTEREST INCOME
The table below presents net interest income, average balances and average
rates.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
NET INTEREST INCOME (in thousands)
Book basis $4,038 4,093 8,114 8,101
Tax equivalent adjustment 143 131 277 260
------ ----- ----- -----
Fully taxable basis $4,181 4,224 8,391 8,361
===== ===== ===== =====
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
AVERAGE BALANCES (in thousands)
Interest-earning assets $408,810 400,118 406,504 398,274
Interest-bearing liabilities 343,362 337,233 340,597 335,794
------- ------- ------- -------
Earning assets financed by
noninterest-bearing funds $ 65,448 62,885 65,907 62,480
======= ======= ======= =======
AVERAGE RATES (fully taxable basis)
Yield on interest-earning assets 7.86% 7.48% 7.84% 7.52%
Cost of interest-bearing liabilities 4.46 3.86 4.40 3.90
---- ---- ---- ----
Interest rate spread 3.40 3.62 3.44 3.62
Contribution of noninterest-bearing
funds .71 .61 .71 .61
---- ---- ---- ----
Net interest margin 4.11% 4.23% 4.15% 4.23%
==== ==== ==== ====
</TABLE>
Net interest income on a fully taxable basis for the second quarter of 2000
totaled $4.181 million, down $43 thousand from the second quarter of 1999.
The $43 thousand decrease in net interest income was primarily due to a
12 basis point decrease in the net interest margin, partially offset by
a $8.7 million increase in average earning assets.
Net interest income for the first six months of 2000 totaled $8.391 million;
up $30 thousand from the first six months of 1999. The $30 thousand increase
was primarily due to an $8.2 million increase in average earning assets
partially offset by an 8 basis point decrease in the net interest margin.
The net interest margin decreased from 4.23% in the second quarter of 1999 to
4.11% in the second quarter of 2000. This 12 basis point decrease was due in
part to a 60 basis point increase in the cost of average interest-bearing
liabilities, partially offset by a 38 basis point increase in the yield on
average interest-earning assets. The increase in the cost of average
interest-bearing funds resulted from a general increase in market interest
rates. The increase in the yield on average interest-earning assets
is due to higher yielding assets, primarily commercial, installment and real
estate loans.
The net interest margin decreased from 4.23% in the first six months of 1999
to 4.15% in the first six months of 2000. This 8 basis point decrease
resulted from a 50 basis point increase in the cost of interest-bearing
liabilities partially offset by a 32 basis point increase 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 $408.8 million for the second quarter
of 2000, up $8.7 million, or 2.2%, from the same period in 1999. The increase
was primarily attributable to increases in commercial, real estate and
installment loan portfolios. Average earning assets for the six-month period
ended June 30, 2000 increased by $8.2 million when compared with the
comparable period of 1999, primarily due to loan growth. Average
interest-bearing liabilities totaled $343.4 million for the second quarter
of 2000, up $6.1 million from the same period in 1999. Average interest-
bearing liabilities totaled $340.6 million for the six months ended
June 30, 2000, an increase of $4.8 million from the six month period ended
June 30, 1999.
-8-
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The total provision for loan losses is determined based upon management's
evaluation as to the amount needed to maintain the allowance for credit losses
at a level considered appropriate in relation to the risk of losses inherent
in the portfolio. The total loan loss provision and the other changes in the
allowance for loan losses are shown below.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(thousands) (thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $2,000 2,000 2,000 2,000
----- ----- ----- -----
Charge-offs 59 88 107 140
Recoveries 11 10 24 16
----- ----- ----- -----
Net charge-offs 48 78 83 124
----- ----- ----- -----
Provision for loan losses 48 78 83 124
----- ----- ----- -----
Balance, end of period $2,000 2,000 2,000 2,000
====== ====== ====== ======
</TABLE>
Of the total charge-offs so far in 2000, all $107,000 is attributable to
consumer loans including $19,000 in credit cards. For the first six months of
1999, consumer loans charged off amounted to $126,000.
The following table sets forth information regarding the past-due, non-accrual
and renegotiated loans of the Bank at the dates indicated:
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
-------- -----------
(thousands)
<S> <C> <C>
Loan accounted for on
non-accrual basis $271 -
Accruing loans which are
past due 90 days or more 174 68
Renegotiated loans - -
--- --
Total $445 68
=== ==
</TABLE>
-9-
<PAGE>
The loan accounted for on a non-accrual basis consists of one commercial
loan, which has financially strong guarantors supporting the credit. It
is anticipated the borrowers will pay the loan off in the third quarter
of 2000. The remaining accruing loans past due 90 days or more consist of
commercial, real estate, and consumer credits.
NON-INTEREST INCOME
Non-interest income of $1,076 million increased $43 thousand, or 4.1% in the
second quarter of 2000 compared to the second quarter of 1999. Trust income
of $285 thousand increased $46 thousand, or 19%, from the second quarter of
1999 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. Total service
charges and fees were approximately equal to the second quarter of 1999.
This was due to a $54 thousand reduction in merchant credit card processing
fees resulting from the exiting of the business in the fourth quarter of 1999,
offset by increases in bank card-related fee income and deposit account
related fees. Insurance agency commissions increased $17 thousand, or 9%,
compared to the second quarter of 1999.
Non-interest income of $2,044 million in the first six months of 2000
decreased $98 thousand, or 4.6%, compared with the first six months in 1999.
The decrease is due in part to a large commission earned in the first
quarter of 1999 by Dakin, which did not recur in 2000. Also contributing to
the decrease was a $13 loss on the sale of securities in 2000 compared with
a $23 gain in the comparable six-month period in 1999. Total service charges
netted to a slight decline due to the decline in merchant credit card
processing, partially offset by an increase in deposit account related fees.
The increase in trust income partially offset these decreases.
NON-INTEREST EXPENSE
Total non-interest expense increased $37 thousand, or 5.2%, in the second
quarter 2000 compared with the second quarter 1999. The increase was due in
part to labor costs, including pension and other benefits, relating to salary
increases. Other expenses increased as a result of the public filings
required by the newly formed LCNB Corp. as well as acquisition costs related
to the Dakin merger. Additionally, other expenses increased as a result of
increased volumes of ATM and credit card activity, as well as incremental
telecommunication charges related to upgrading of the branch communication
system. These other expense increases were partially offset by decreases
related to merchant credit card processing. Lower marketing costs and state
franchise taxes partially offset the overall increase in non-interest
expenses.
Total non-interest expense increased $100 thousand, or 7.0%, in the six months
ended June 30, 2000 compared with the first six months of 1999. The increase
was primarily due to the same factors as noted above.
-10-
<PAGE>
FINANCIAL CONDITION
The following table highlights the changes in the balance sheet. The analysis
uses quarterly averages to give a better indication of balance sheet trends.
<TABLE>
<CAPTION>
CONDENSED AVERAGE BALANCE SHEETS
(thousands)
2nd Qtr. 1st Qtr. 4th Qtr.
2000 2000 1999
<S> <C> <C> <C>
ASSETS
Interest-earning:
Interest-bearing deposits with banks $ 5,492 5,492 5,492
Federal funds sold 2,037 5,023 12,647
Securities available for sale 97,086 103,515 106,406
Loans 304,195 290,168 283,647
------- ------- -------
Total interest-earning assets 408,810 404,198 408,192
------- ------- -------
Noninterest-earning:
Cash and due from banks 15,389 15,217 15,655
All other assets 18,037 18,467 17,419
Allowance for credit losses (2,001) (2,002) (2,006)
------- ------- -------
Total assets $440,235 435,880 439,260
======= ======= =======
LIABILITIES
Interest bearing:
Interest-bearing deposits $338,446 338,341 341,935
Other borrowings 4,916 1,447 1,487
------- ------- -------
Total interest-bearing liabilities 343,362 339,788 343,422
Noninterest-bearing:
Noninterest-bearing deposits 52,183 51,339 50,272
All other liabilities 1,169 1,789 1,558
------- ------- -------
Total liabilities 396,714 392,916 395,252
SHAREHOLDERS' EQUITY 43,521 42,964 44,008
------- ------- -------
Total liabilities and shareholders'
equity $440,235 435,880 439,260
======= ======= =======
</TABLE>
-11-
<PAGE>
Total average assets increased $4.4 million in the second quarter of 2000 from
the first quarter and $1.0 million from the fourth quarter of 1999. The
increase from the first quarter is primarily due to growth in real estate
mortgage, commercial and installment loans as LCNB Corp. continues to shift
assets into the higher yielding loan portfolio. The increase from the fourth
quarter of 1999 is due to a $20.5 million, or 7.2%, increase in average loans
partially offset by a reduction in federal funds sold and securities
available for sale. Additionally, Lebanon expended $2.1 million in additions
to premises and equipment in the six months ended June 30, 2000. These
additions primarily related to the construction of two new branches opened in
June 2000, which replaced branches existing in Oxford and Goshen, the
remodeling of the Columbus Avenue branch and a new ATM at the Hamilton
office location.
Average interest-bearing deposits were relatively equal to the first quarter
of 2000 and decrease $3.5 million from the fourth quarter of 1999. Other
borrowings increased $3.5 million in the second quarter from the first
quarter due to $6 million in borrowings with the Federal Home Loan Bank
in June and an increase in average funds purchased to fund loan growth and
additions to premises and equipment. Average noninterest-bearing deposits
increased $.8 million from the first quarter of 2000 and $1.9 million from the
fourth quarter of 1999.
REGULATORY 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 Corp.'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 Corp.
follows:
<TABLE>
<CAPTION>
At At
June 30, December 31,
2000 1999
<S> <C> <C>
Regulatory Capital:
Shareholders' equity $44,160 42,687
Goodwill and other intangibles (4,453) (4,763)
Net unrealized securities gains 1,237 1,298
------ ------
Tier 1 risk-based capital 40,944 39,222
Eligible allowance for loan losses 2,000 2,000
------ ------
Total risk-based capital $42,944 41,222
======= ======
Capital Ratios:
Total risk-based 15.1% 15.3%
Tier 1 risk-based 14.4 % 14.6%
Leverage 9.5 % 9.1%
</TABLE>
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<PAGE>
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 86% of total
deposits at June 30, 2000 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, 2000, Lebanon Citizens liquid assets amounted to $119 million or
26.4% of total gross assets, down from $135 million or 30.6% at December 31,
1999. Secondary sources of liquidity include Lebanon Citizens' ability to
sell loan participations, borrow funds from the Federal Home Loan Bank and
purchase federal funds. Management closely monitors the level of liquid
assets available to meet ongoing funding needs. It is management's intent to
maintain adequate liquidity so that sufficient funds are readily available at
a reasonable cost. Loans to deposits were 79% and 73%, at June 30, 2000 and
December 31, 1999, respectively. Lebanon Citizens experienced no liquidity or
operational problems as a result of the current liquidity levels.
YEAR 2000 COMPLIANCE
LCNB Corp. experienced no difficulties resulting from Y2K in the date
transition at year-end 1999 nor were any difficulties encountered within
the first six months of 2000. Lebanon Citizens' testing and preparation
for Y2K included future dates beyond December 31, 1999. Management
anticipates no difficulties from future date changes.
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, 1999 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, 1999. There
have been no material changes in Lebanon Citizens' market risks, which for
Lebanon Citizens is primarily interest rate risk.
-13-
<PAGE>
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 -
On April 18, 2000, the Annual Meeting of the shareholders of
LCNB Corp. was held. The following members of the Board of Directors
of LCNB Corp. were elected as Class I directors for terms
expiring at the Annual Meeting in 2003 by the votes indicated:
Director For Against Abstain
-------- ----- ------- -------
Stephen P. Wilson 1,505,725 0 31,460
David S. Beckett 1,499,485 0 37,007
Robert C. Cropper 1,536,885 0 300
The following Class II and III members of the Board of Directors
have terms expiring in 2001 and 2002: Marvin Young, Kathleen
Porter Stolle, Corwin M. Nixon, George L. Leasure, William H.
Kaufman, James B. Miller and Howard E. Wilson.
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <C>
27.1 Financial Data Schedule for
the Six Months Ended
June 30, 2000.
27.2 Restated Financial Data Schedule
for the Six Months Ended June 30,
1999
</TABLE>
b. On April 14, 2000, LCNB Corp. filed a Form 8-K with the
Securities and Exchange Commission reporting the acquisition
of Dakin Insurance Agency, Inc. and the issuance of a press
release by LCNB Corp. announcing its election to become a
financial holding company pursuant to the Gramm-Leach-Bliley Act.
-14-
<PAGE>
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 28, 2000 /s/Steve P. Foster
------------------------
Steve P. Foster
Vice President
and Chief Financial Officer
-15-
