UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934 for the fiscal year ended December 31, 2000
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934 for the Transition period from to
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- ----------------- Commission file number 000-26121
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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
------------------------------------------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
--------------------- -----------------------
None None
--------------------- -----------------------
Securities registered pursuant to 12(g) of the Exchange Act:
Common stock, No Par Value
----------------------------
(Title of Class)
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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405) of this chapter is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ( )
The issuer's common shares are not traded on any securities exchange and are
not quoted by a national quotation service. Management is aware of a sale of
the issuer's shares for $37.875 per share on February 14, 2001. Based upon
such price, the aggregate market value of the issuer's shares held by
nonaffiliates was $62,263,803.
As of February 20, 2001, was 1,775,942 common shares were issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement included in the Notice of Annual Meeting of
Shareholders to be held April 17, 2001, dated March 17, 2001, are incorporated
by reference into Part III.
LCNB Corp.
For the year ended December 31, 2001
TABLE OF CONTENTS
Page
PART I.
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . 3-16
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .17
Item 3. Legal proceedings. . . . . . . . . . . . . . . . . . .18
Item 4. Submission of matters to a vote of security holders. .18
Part II.
Item 5. Market for registrant's common equity and
related stockholder matters . . . . . . . . . . . .19-20
Item 6. Selected financial data. . . . . . . . . . . . . . .20-21
Item 7. Management's discussion and analysis . . . . . . . .21-31
Item 7A. Quantitative and qualitative disclosures about
market risk . . . . . . . . . . . . . . . . . . . .31-34
Item 8. Financial statements and supplementary data. . . . . .35
Item 9. Changes in and disagreements with accountants
and accounting and financial disclosures. . . . . . .35
Part III.
Item 10. Directors and executive officers of the registrant . .36
Item 11. Executive compensation. . . . . . . . . . . . . . . . 36
Item 12. Security ownership of certain beneficial owners
and management. . . . . . . . . . . . . . . . . . . .36
Item 13. Certain relationships and related transactions . . . .36
PART IV.
Item 14. Exhibits, financial statements and Reports on 8-K . . 37
Signatures . . . . . . .. . . . . . . . . . . . . . . . . . . . . 38-39
-2-
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. LCNB Corp. disclaims,
however, any intent or obligation to update such forward-looking statements.
ORGANIZATION ACTIVITIES AND ACQUISTION
On May 18, 1999, Lebanon Citizens National Bank ("Lebanon Citizens") held a
special shareholders meeting for the purpose of approving the reorganization of
Lebanon Citizens into a one-bank holding company structure. The reorganization
was approved and consummated immediately following the special meeting.
The reorganization was effected through the merger of Lebanon Citizens with and
into LC Interim National Bank, a wholly owned subsidiary of the new bank
holding company, LCNB Corp. Concurrent with the merger, LC Interim National
Bank changed its name to "Lebanon Citizens National Bank" and is now operated
as the wholly owned bank subsidiary of LCNB Corp. The consideration for the
merger was ten shares of LCNB Corp. common stock for each share of Lebanon
Citizens National Bank common stock held by the shareholders. Following the
merger, all shareholders of Lebanon Citizens maintained the same stock
ownership percentage in the holding company as they had in Lebanon Citizens.
Following the merger, Lebanon Citizens National Bank's business continued
unchanged with the same management and employees.
As part of the reorganization of Lebanon Citizens into a bank holding company
structure, it was necessary to file a registration statement with the
Securities and Exchange Commission. This registration statement also served
the purpose of registering LCNB Corp. as a Securities Exchange Act of 1934
("1934 Act") reporting company. Lebanon Citizens at the end of calendar year
1998, had over 500 shareholders and by law was required to register as a 1934
Act company. By virtue of the reorganization, LCNB Corp. became the
registering company and is now a public company obligated to comply with the
reporting requirements of the 1934 Act.
The Gramm-Leach-Bliley Act (the "Gramm-Leach Act"), known commonly as the
"Financial Services Modernization Act", was signed into law on November 12,
1999 and became effective March 11, 2000. This new act, among other changes,
effectively allows the creation of a new financial services holding company
that can offer a full range of financial products and engage in expanded
approved activities such as insurance and securities services. Pursuant to the
Gramm-Leach Act, LCNB Corp. converted from a bank holding company to a
financial holding company, effective as of April 11, 2000.
-3-
On April 11, 2000 LCNB Corp. acquired Dakin Insurance Agency, Inc. In order to
facilitate the acquisition of Dakin Insurance Agency, Inc., LCNB Corp. formed
Dakin Acquisition Corporation in November 1999, under the laws of the state of
Ohio, as a wholly owned subsidiary of LCNB Corp. On the acquisition date,
Dakin Acquisition Corporation merged with and into Dakin Insurance Agency, Inc.
and Dakin Insurance Agency, Inc. became the surviving corporation (hereinafter
the surviving company is referred to herein as "Dakin"). The Articles of
Incorporation and Regulations of Dakin Acquisition Corporation became the
governing documents of Dakin. At the consummation of the merger, the
individual shareholders of Dakin Insurance Agency, Inc. exchanged all of their
outstanding shares of Dakin Insurance Agency, Inc. for 15,942 shares of LCNB
Corp. common stock. Following the merger, Dakin became a wholly owned
subsidiary of LCNB Corp.
Dakin Insurance Agency, Inc. is a corporation organized under the laws of Ohio
and has been an independent insurance agency in Lebanon, Ohio since 1876. Its
primary office is at 20 East Mulberry Street, Lebanon, Ohio. Dakin Insurance
Agency, Inc. is engaged in selling and servicing personal and commercial
insurance products and annuity products and is regulated by the Ohio Department
of Insurance. Since the acquisition date, Dakin has opened additional offices
in Lebanon Citizens' Columbus Avenue, Waynesville, Springboro, Maineville, and
Goshen offices.
DESCRIPTION OF LCNB CORP'S BUSINESS
General Description
LCNB Corp. is a $451 million locally owned bank holding company headquartered
in Lebanon, Ohio. The predecessor of LCNB Corp., Lebanon Citizens National
Bank, was formed as a national banking association in 1877. On May 18, 1999,
Lebanon Citizens became a wholly owned subsidiary of LCNB Corp.
Lebanon Citizens' main banking office is located in Warren County, Ohio.
Lebanon Citizens has 16 branch offices located in Warren, Butler, Clinton,
Clermont, and Hamilton Counties, Ohio. Lebanon Citizens also operates a loan
production office in Hamilton, Ohio. Lebanon Citizens currently plans to open
a new full-service office at the corner of NW Washington Boulevard and Eden
Park Drive, Hamilton, Ohio during the third quarter, 2001. In addition,
Lebanon Citizens operates 25 automated teller machines (ATMs) in its market
area.
Lebanon Citizens is a full service bank offering a wide range of commercial and
personal banking services including commercial loans, real estate loans,
construction loans, consumer loans, Small Business Administration loans,
Visa and MasterCard credit cards and commercial leases. Other services offered
include safe deposit boxes, night depositories, U.S. savings bonds, travelers'
checks, money orders, cashiers checks, bank-by-mail, automatic teller machines
(ATMs), cash and transaction services, debit cards, wire transfers, electronic
funds transfer, utility bill collections, notary public service, personal
computer based cash management services, 24 hour telephone banking, PC Internet
banking, and other services tailored for both individuals and businesses.
-4-
Lebanon Citizens' residential mortgage lending activities consist primarily of
loans for purchasing personal residences, home equity loans, local lender
loans, or loans for commercial or consumer purposes secured by residential
mortgages. Consumer lending activities consist of traditional forms of
financing for automobile and personal loans plus indirect automobile loans.
Lebanon Citizens' range of deposit services include checking accounts, NOW
accounts, savings accounts, Christmas and vacation savings, money market
accounts, Classic 50 accounts (a Senior Citizen program), individual retirement
accounts, certificates of deposit, and overdraft protection. Deposits of
Lebanon Citizens are insured up to applicable limits by the Bank Insurance
Fund, which is administered by the Federal Deposit Insurance Corporation.
The Trust and Investment Management Division of Lebanon Citizens performs
complete trust administrative functions and offers agency and trust services,
retirement savings products, and mutual funds investment products to
individuals, partnerships, corporations, institutions and municipalities.
Lebanon Citizens is not dependent upon any one significant customer or specific
industry. Business is not seasonal to any material degree.
The address of the main office of Lebanon Citizens is 2 North Broadway,
Lebanon, Ohio 45036; telephone (513) 932-1414. Its primary market area
encompasses portions of Warren, Butler, Clinton, Clermont and Hamilton
Counties.
Competition
Lebanon Citizens faces strong competition both in making loans and attracting
deposits. The deregulation of the banking industry and the wide spread
enactment of state laws that permit multi-bank holding companies as well as the
availability of nationwide interstate banking has created a highly competitive
environment for financial services providers. Lebanon Citizens competes with
other national and state banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment
banking companies and other financial intermediaries operating in its market
and elsewhere, many of whom have substantially greater financial and managerial
resources.
Lebanon Citizens seeks to minimize the competitive effect of other financial
corporations through a community banking approach that emphasizes direct
customer access to Lebanon Citizens' president and other officers in an
environment conducive to friendly, informed and courteous personal services.
Management believes that Lebanon Citizens is well positioned to compete
successfully in its primary market area. Competition among financial
institutions is based upon interest rates offered on deposit accounts, interest
rates charged on loans and other credit and service charges, the quality and
scope of the services rendered, the convenience of the banking facilities and,
in the case of loans to commercial borrowers, relative lending limits.
-5-
Management believes the commitment of Lebanon Citizens to personal service,
innovation, and involvement in the communities and primary market areas it
serves, as well as their commitment to quality community banking service, are
factors that contribute to its competitive advantage.
Supervision and Regulation
LCNB Corp, as a financial holding company, is regulated under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is subject to the supervision
and examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). The Act requires the prior approval of the Federal
Reserve Board for a bank or financial holding company to acquire or hold more
than a 5% voting interest in any bank and restricts interstate banking
activities.
On September 29, 1994, the Act was amended by the Interstate Banking and Branch
Efficiency Act of 1994 which authorizes interstate bank acquisitions anywhere
in the country, effective one year after the date of enactment and interstate
branching by acquisition and consolidation, effective June 1, 1997, in those
states that have not opted out by that date.
The Gramm-Leach Act, which amended the Bank Holding Company Act of 1956 and
other banking related laws, was signed into law on November 12, 1999. The
Gramm-Leach Act repealed certain sections of the Glass-Steagall Act and
substantially eliminated the barriers separating the banking, insurance, and
securities industries. Effective March 11, 2000, qualifying bank holding
companies could elect to become financial holding companies. Financial holding
companies have expanded investment powers, including affiliating with
securities and insurance firms and engaging in other activities that are
"financial in nature or incidental to such financial activity" or
"complementary to a financial activity." The Gramm-Leach Act defines
"financial in nature" to include:
a. securities underwriting, dealing, and market making;
b. sponsoring mutual funds and investment companies;
c. insurance underwriting and agency;
d. merchant banking activities;
e. other activities that the Federal Reserve Board, in consultation
with and subject to the approval of the Treasury Department,
determines are financial in nature.
Financial holding companies may commence the activities listed above or acquire
a company engaged in any of those activities without additional approval from
the Federal Reserve. Notice of the commencement or acquisition must be
provided the Federal Reserve within thirty days of the start of the activity.
Sixty days advance notice is required before the start of any activity that is
"complementary to a financial activity."
A substantial portion of LCNB Corp.'s cash revenues is derived from dividends
paid by Lebanon Citizens. These dividends are subject to various legal and
regulatory restrictions.
-6-
LCNB Corp. and Lebanon Citizens are subject to an extensive array of banking
laws and regulations that are intended primarily for the protection of the
customers and depositors of LCNB Corp.'s subsidiaries rather than holders of
LCNB Corp.'s securities. These laws and regulations govern such areas as
permissible activities, loans and investments, rates of interest that can be
charged on loans and reserves. LCNB Corp. and Lebanon Citizens also are
subject to general U.S. federal laws and regulations and to the laws and
regulations of the State of Ohio. Set forth below are brief descriptions of
selected laws and regulations applicable to LCNB Corp. and Lebanon Citizens.
Lebanon Citizens is subject to the provisions of the National Bank Act.
Lebanon Citizens is subject to primary supervision, regulation and examination
by the Office of the Comptroller of the Currency (OCC). Lebanon Citizens is
also subject to the rules and regulations of the Board of Governors of the
Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC).
Under the Bank Holding Company Act of 1956, as amended, and under Regulations
of the Federal Reserve Board pursuant thereto, a bank or financial holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with the extension of credit.
LCNB Corp. and Lebanon Citizens are also subject to the state banking laws of
Ohio. Ohio adopted nationwide reciprocal interstate banking effective October,
1988. However, banking laws of other states may restrict branching of banks to
other counties within the state and acquisitions or mergers involving banks and
bank holding companies located in other states. Additionally, Dakin Insurance
Agency, Inc. is subject to State of Ohio insurance regulations and rules and
its activities are regulated by The State of Ohio Department of Insurance.
Federal regulators adopted risk-based capital guidelines and leverage standards
for banks and bank holding companies.
The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides
that a holding company and its controlled insured depository institutions are
liable for any loss incurred by the Federal Deposit Insurance Corporation in
connection with the default of any FDIC assisted transaction involving an
affiliated insured bank or savings association.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
covers an expanse of banking regulatory issues. FDICIA deals with the
recapitalization of the Savings Association Insurance Fund, with deposit
insurance reform including requiring the FDIC to establish a risk-based premium
assessment system with a number of other regulatory and supervisory matters.
Lebanon Citizens will be required to make payments for the servicing of
obligations of the Financing Corporation ("FICO") issued in connection with the
resolution of savings and loan associations, so long as such obligations remain
outstanding.
Noncompliance to laws and regulations by bank holding companies and banks can
lead to monetary penalties and/or an increased level of supervision or a
combination of these two items. Management is not aware of any current
instances of noncompliance to laws and regulations and does not anticipate any
problems maintaining compliance on a prospective basis. Recent regulatory
-7-
inspections and examinations of the LCNB Corp and Lebanon Citizens have not
disclosed any significant instances of noncompliance. The minor instances of
noncompliance detected during these inspections and examinations were promptly
corrected by Management and no action was taken by the regulators against the
LCNB Corp. or Lebanon Citizens.
The earnings and growth of LCNB Corp are affected not only by general economic
conditions, but also by the fiscal and monetary policies of the federal
government and its agencies, particularly the Federal Reserve Board. Its
policies influence the amount of bank loans and deposits and the interest rates
charged and paid thereon and thus have an effect on earnings. The nature of
future monetary policies and the effect of such policies on the future business
and earnings of LCNB Corp. and Lebanon Citizens cannot be predicted.
Employees
As of December 31, 2000, LCNB Corp., Lebanon Citizens, and Dakin employed 203
full-time equivalent employees. LCNB Corp. is not a party to any collective
bargaining agreement. Management considers its relationship with its employees
to be very good. Employee benefits programs are considered by Management to be
competitive with benefits programs provided by other financial institutions and
major employers within Lebanon Citizens' market area.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
LCNB Corp. and its subsidiaries do not have any offices located in foreign
countries and they have no foreign assets, liabilities or related income and
expense for the years presented.
STATISTICAL INFORMATION
The following tables present additional statistical information about LCNB
Corp. and its operations and financial condition and should be read in
conjunction with the consolidated financial statements and related notes and
the discussion included in Item 7, Management's Discussion and Analysis and
Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates
and Interest Differential
The following table presents, for the years indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amounts of interest income from average interest earning assets and the
resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities and the resultant rates paid.
-8-
Years ended December 31,
------------------------
2000 1999 1998
---- ---- ----
Average Average Interest Average Average Interest Average Average Interest
Outstanding Yield/ Earned/ Outstanding Yield/ Earned/ Outstanding Yield/ Earned/
Balance Rate Paid Balance Rate Paid Balance Rate Paid
(Dollars in thousands)
Loans(1) $309,658 8.48% $26,264 $273,273 8.32% $22,743 $272,512 8.46% $23,047
Federal funds sold 7,258 6.32 459 9,251 5.00 463 14,677 5.42 796
Deposits in banks 4,149 5.81 241 5,486 5.12 281 4,347 6.65 289
Federal Reserve
Bank stock 647 6.03 39 647 6.03 39 647 6.03 39
Federal Home Loan
Bank stock 418 7.42 31 - - - - - -
Investment securities:
Taxable 67,100 5.28 3,542 83,592 5.88 4,914 75,374 6.12 4,612
Non-taxable(2) 26,233 9.27 2,433 29,995 6.32 1,895 21,628 5.71 1,236
------- ------ ------- ------ ------- ------
Total earning assets 415,463 7.95 33,009 402,244 7.54 30,335 389,185 7.71 30,019
Non-earning assets 33,707 32,528 30,570
Allowance for
loan losses (2,002) (2,004) (2,100)
------- ------- -------
Total assets $447,168 $432,768 $417,655
======= ======= =======
Savings deposits $ 84,156 3.82 3,217 $ 79,555 2.99 2,382 64,064 2.76 1,769
NOW and money fund 81,215 2.84 2,203 79,548 2.40 1,912 73,727 2.31 1,706
IRA and time
certificates 178,842 5.64 10,081 178,541 5.01 8,944 192,873 5.47 10,557
Borrowings 5,105 6.91 353 1,366 4.90 67 1,346 3.57 48
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 349,318 4.57 15,954 339,010 3.92 13,305 332,010 4.24 14,080
------ ------ ------
-9-
Demand deposits 52,059 49,076 44,455
Other liabilities 1,527 1,718 1,194
Capital 44,264 42,964 39,996
------- ------- ------
Total liabilities
and capital $447,168 $432,768 $417,655
======= ======= =======
Net interest rate
spread(3) 3.38 3.62 3.47
Net interest margin on
a taxable equivalent
basis(4) 4.11 $17,055 4.23 $17,030 4.10 $15,939
====== ====== ======
Ratio of interest-earning
assets to interest-bearing
liabilities 118.94% 118.65% 117.22%
<FN>
(1) Include nonaccrual loans if any.
(2) Income from tax-exempt 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 spread is the difference between the average rate on total interest-earning
assets and interest-bearing liabilities.
(4) The net interest margin is the taxable-equivalent net interest income divided by average
interest-earning assets.
</FN>
-10-
The following table presents the changes in interest income and expense for
each major category of interest-earning assets and interest-bearing
liability and the amount of change attributable to volume and rate changes
for the years indicated. 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.
For the years ended December 31,
--------------------------------
2000 vs. 1999 1999 vs. 1998
------------- -------------
Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total
(Dollars in thousands)
Interest income
attributable to:
Loans $3,079 442 3,521 66 (370) (304)
Federal funds sold 18 (22) (4) (275) (58) (333)
Deposits in banks (89) 49 (40) 67 (75) (8)
Federal Reserve
Bank stock - - - - - -
Federal Home Loan
Bank stock 31 - 31 - - -
Investment securities:
Taxable (904) (468) (1,372) 488 (186) 302
Non-taxable(1) (197) 735 538 516 143 659
------ ----- ----- ----- --- -----
Total Interest
Income 1,938 736 2,674 862 (546) 316
Interest expense
attributable to:
Savings deposits 144 691 835 456 157 613
NOW and money fund 41 350 391 138 68 206
IRA and time
Certificates 15 1,122 1,137 (757) (856) (1,613)
Borrowings 249 37 286 1 18 19
----- ----- ----- ----- --- -----
Total Interest
Expense 449 2,200 2,649 (162) (613) (775)
----- ----- ----- ----- --- -----
Net Interest Income $1,489 (1,464) 25 1,024 67 1,091
===== ===== ===== ===== === =====
<FN>
(1) Change in interest income from non-taxable investment securities
is computed based on interest income determined on a taxable equivalent
yield basis. Interest income has been divided by a factor comprised of the
complement of the incremental tax rate of 34%.
</FN>
-11-
Investment Portfolio
The following table presents the carrying values of securities for the years
indicated:
At December 31,
---------------
2000 1999 1998
(Dollars in thousands)
Securities available for sale:
U.S. Treasury notes $ 3,018 6,482 28,391
U.S. Agency notes 20,046 29,927 23,190
U.S. Agency mortgage-back
Securities 12,164 15,069 17,406
Corporate notes 8,479 17,058 24,376
Municipal securities 38,799 36,375 29,677
------ ------- -------
Total securities available
for sale 82,506 104,911 123,040
Federal Reserve Bank Stock 647 647 647
Federal Home Loan Bank Stock 1,741 - -
------ ------- -------
Total securities $84,894 105,558 123,687
====== ======= ======
Contractual maturities of debt securities at December 31, 2000, were as
follows. Actual maturities may differ from contractual maturities when
borrowers have the right to call or prepay obligations.
Amortized Market
Cost Value Yield
--------- ------ -----
(Dollars in thousands)
U.S. Treasury notes:
Within one year $ 1,003 1,002 5.51%
One to five years 1,999 2,016 5.71%
Five to ten years - - -%
After ten years - - -%
------ ------ ----
Total U.S Treasury notes $ 3,002 3,018 5.64%
------ ------ ----
U.S. Agency notes:
Within one year $ 3,267 3,263 5.55%
One to five years 14,013 14,003 5.91%
Five to ten years 2,862 2,780 5.82%
After ten years - - -%
------ ------ ----
Total U.S. Agency notes $20,142 20,046 5.84%
------ ------ ----
-12-
Corporate notes:
Within one year $ 4,503 4,505 6.21%
One to five years 4,205 3,974 6.17%
Five to ten years - - -%
After ten years - - -%
------ ------ ----
Total Corporate notes $ 8,708 8,479 6.19%
------ ------ ----
Municipal securities (1):
Within one year $ 2,953 2,967 7.22%
One to five years 15,278 15,419 7.72%
Five to ten years 11,840 11,998 7.42%
After ten years 7,924 8,415 8.76%
------ ------ ----
Total Municipal securities $37,995 38,799 7.81%
------ ------ ----
U.S. Agency mortgage-backed
securities $12,234 12,164 5.90%
------ ------ ----
$82,081 82,506 6.79%
====== ====== ====
<FN>
(1) Yields on tax-exempt obligations are computed on a tax equivalent
basis based upon a 34% statutory Federal income tax rate.
</FN>
Excluding those holdings of the securities portfolio in the U.S. Treasury
securities and U.S. Government Agencies and Corporations, there were no
investments in securities of any one issuer which exceeded 10% of the
consolidated shareholders' equity of LCNB Corp. at December 31, 2000.
Loan Portfolio
The following table summarizes the distribution of the loan portfolio for
the years indicated:
At December 31,
---------------
2000 1999 1998 1997 1996
(Dollars in thousands)
Commercial and industrial $ 36,449 26,347 20,640 13,905 9,847
Commercial, secured by
real estate 59,043 56,671 53,907 51,088 49,094
Residential real estate 185,013 162,087 154,111 165,908 145,725
Consumer, excluding
credit card 40,860 36,402 32,302 35,167 29,855
Agricultural 2,238 2,343 2,370 1,645 1,152
Credit card 3,049 2,764 2,574 2,461 2,130
Other 863 285 966 332 41
Lease Financing 2,219 183 - - -
------- ------- ------- ------- -------
Total loans 329,734 287,082 266,870 270,506 237,844
-13-
Deferred costs (fees), net 705 526 187 (12) (178)
------- ------- ------- ------- -------
330,439 287,608 267,057 270,494 237,666
Allowance for loan losses (2,000) (2,000) (2,000) (2,200) (2,000)
------- ------- ------- ------- -------
Loans, net $328,439 285,608 265,057 268,294 235,666
======= ======= ======= ======= =======
The following tables summarize the commercial and agricultural loan maturities
and sensitivities to interest rate changes at December 31, 2000:
(Dollars in thousands)
----------------------
Maturing in one year or less $42,591
Maturing after one year, but within five years 25,900
Maturing beyond five years 29,239
------
Total commercial and agricultural loans $97,730
======
Loans repricing beyond one year:
Fixed rate $25,832
Variable rate 29,307
------
Total $55,139
======
Risk Elements
The accrual of interest on impaired loans is discontinued when there is a
clear indication that the borrower's cash flow may not be sufficient to meet
payments as they become due. Subsequent cash receipts on non-accrual loans
are recorded as a reduction of principal, and interest income is recorded once
principal recovery is reasonably assured. The current year's accrued interest
on loans placed on non-accrual status is charged against earnings. Previous
years' accrued interest is charged against the allowance for loan losses.
A summary of accruing loans past due 90 days or more at December 31, follows:
Accrued loans past due 90 days
------------------------------
(Dollars in thousands)
2000 $111
1999 68
1998 374
1997 29
1996 182
-14-
There were no nonaccrual loans at December 31, for each of the years ended
1996 through 2000. Interest income that would have been recorded in each of
the years 1996 through 2000 if loans on nonaccrual status at various times
during the respective years had been current and in accordance with their
original terms, was not material. For each of the years ended December 31,
1996 through 2000, the recorded investments in loans for which impairment has
been recognized in accordance with SFAS Statement No.114 was not material.
LCNB Corp. is not committed to lend additional funds to debtors whose loans
have been modified to provide a reduction or deferral of principal or interest
because of deterioration in the financial position of the borrower.
Summary of Loan Experience
The table summarizing the activity relating to the allowance for loan losses
is included in Item 7, Management's Discussion and Analysis.
The following table presents the allocation of the allowance for loan loss.
At December 31,
---------------------------------------------
2000 1999 1998 1997 1996
(Dollars in thousands)
Commercial $ 381 304 286 622 162
Real Estate - - - - -
Consumer 714 514 345 370 316
Credit Card 40 38 48 26 31
Unallocated 865 1,144 1,321 1,182 1,491
----- ----- ----- ----- -----
Total $2,000 2,000 2,000 2,200 2,000
===== ===== ===== ===== =====
This allocation is made for analytical purposes. The total allowance is
available to absorb losses from any category of the portfolio. The allowance
allocated to the commercial and consumer categories has increased over the
five year period due to the increase in outstandings in these loan categories
which, by nature, have greater risk elements.
The following table presents the categories of loans as a percent of total
loans.
At December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
Commercial 11.05% 9.17% 7.73% 5.14% 4.14%
Real Estate 74.02 76.19 77.96 80.22 81.91
Consumer 12.39 12.70 12.10 13.00 12.55
Credit Card 0.93 0.96 0.96 0.91 0.90
Other 1.61 0.98 1.25 0.73 0.50
------ ------ ------ ------ ------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
-15-
The statistical information regarding average amounts and average rates
paid for the deposit categories is included in the "Distribution of Assets,
Liabilities and Shareholders' Equity" table included at the beginning of the
"Statistical Information" section.
The following table presents the contractual maturity of time deposits of
$100,000 or more at December 31, 2000:
(Dollars in thousands)
----------------------
Maturity within 3 months $13,821
After 3 but within 6 months 8,939
After 6 but within 12 months 2,750
After 12 months 10,703
------
$36,213
======
Return of Equity and Assets
The statistical information regarding the return on assets, return on equity,
dividend payout ratio and equity to assets ratio is presented in Item 6,
Selected Financial Data.
-16-
Item 2. Properties
Lebanon Citizens conducts its business from the following offices:
Name of Office Address
-------------- -------
1. Main Office 2 North Broadway
Lebanon, Ohio 45036 Owned (1)
2. Auto Bank 26 North Broadway
Lebanon, Ohio 45036 Owned
3. Columbus Avenue Office 730 Columbus Avenue
Lebanon, Ohio 45036 Owned
4. Goshen Office 6726 Dick Flynn Blvd.
Goshen, Ohio 45122 Owned
5. Hamilton Office 1502 Peck Blvd.
Hamilton, Ohio 45011 Leased
6. Hunter Office 3878 State Route 122
Franklin, Ohio 45005 Owned
7. Loveland Office 615 West Loveland Avenue
Loveland, Ohio 45140 Owned
8. Maineville Office 7795 South State Route 48
Maineville, Ohio 45039 Owned
9. Mason/West Chester Office 1050 Reading Road
Mason, Ohio 45040 Owned
10. Middletown Office 4441 Marie Drive
Middletown, Ohio 45044 Owned
11. Okeana Office 6225 Cincinnati-Brookville Road
Okeana, Ohio 45053 Owned
12. Otterbein Office State Route 741
Lebanon, Ohio 45036 Leased
13. Oxford Office 30 West Park Place
Oxford, Ohio 45056 (1) (2)
14. Rochester/Morrow Office Route 22-3 at 123
Morrow, Ohio 45152 Owned
15. South Lebanon Office 209 East Forrest Street
South Lebanon, Ohio 45065 Leased
16. Springboro/Franklin Office 525 West Central Avenue
Springboro, Ohio 45066 Owned
17. Waynesville Office 9 North Main Street
Waynesville, Ohio 45068 Owned (1)
18. Wilmington Office 1243 Rombach Avenue
Wilmington, Ohio 45177 Owned
<FN>
(1) Excess space in this office is leased to third parties.
(2) Lebanon Citizens owns the Oxford Office building and leases the land.
</FN>
-17-
Item 3. Legal Proceedings
Except for routine litigation incident to their business, LCNB Corp. and its
subsidiaries are not a party to any material pending legal proceedings and
none of their property is the subject of any such proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
-18-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The LCNB Corp. had approximately 585 registered holders of its common stock as
of December 31, 2000. The number of shareholders includes banks and brokers
who act as nominees, each of whom may represent more than one shareholder.
There is currently a limited public trading market for LCNB Corp. common
stock. Trade prices for shares of LCNB Corp. stock (and Lebanon Citizens'
stock preceding the formation of the holding company), reported through
registered securities dealers, are set forth below. Trades have occurred
during the period without the knowledge of LCNB Corp. The trades of which
LCNB Corp. is aware from the market makers in the stock are those outlined.
The prices given are interdealer without retail markups, markdown or
commissions.
2000 High Low
---- ---- ---
First Quarter $70.00 $40.00
Second Quarter 45.00 40.00
Third Quarter 42.00 37.00
Fourth Quarter 40.00 34.00
1999
----
First Quarter $52.00 $47.80
Second Quarter 75.00 51.50
Third Quarter 82.00 70.00
Fourth Quarter 78.00 70.00
1998
----
First Quarter $43.00 $31.50
Second Quarter 43.00 39.00
Third Quarter 53.00 42.50
Fourth Quarter 53.00 50.50
All the amounts have been restated to reflect the ten-for-one stock exchange
in the formation of the holding company on May 18, 1999.
Cash dividends per share declared in 2000 were $.30 in each of March, June,
and September and $.90 in December. Cash dividends per share declared in 1999
were $.25 in each of March, June and September and $.80 in December. Cash
dividends per share declared in 1998 were $.20 in each of March, June and
September and $.80 in December. Cash dividends per share have been restated
for the ten-for-one stock exchange in the formation of the holding company on
May 18, 1999.
-19-
It is expected that LCNB Corp. will continue to pay dividends on a similar
schedule, to the extent permitted by business and other factors beyond
management's control.
LCNB Corp. files unaudited quarterly financial reports under Form 10-Q with
the Securities and Exchange Commission. Copies of these reports may be
obtained in the shareholder information section of Lebanon Citizens' web site,
www.lcnb.com, or by writing to:
Steve P. Foster
Executive Vice President, CFO
LCNB Corp.
2 N. Broadway
P.O. Box 59
Lebanon, Ohio 45036
Item 6. Selected Financial Data
The following represents selected consolidated financial data of LCNB Corp.
for the years ended December 31, 1996 through 2000 and are derived from LCNB
Corp's consolidated financial statements and Lebanon Citizens' unaudited
financial statements and call reports. This data should be read in
conjunction with the consolidated financial statements and the notes thereto
included in Item 8 of this Form 10-K and Management's Discussion and Analysis
and Quantitative and Qualitative Disclosures about Market Risk included in
Items 7 and 7A, respectively, of this Form 10-K, and are qualified in their
entirety thereby and by other detailed information elsewhere in this
Form 10-K.
For the Years Ended December 31,
--------------------------------
2000 1999 1998 1997 1996
(Dollars in thousands,
except ratios and data per share)
Income Statement
Interest Income $ 32,151 $ 29,691 $ 29,599 $ 27,777 $ 25,998
Interest Expense 15,954 13,305 14,080 14,344 13,242
------- ------- ------- ------- -------
Net Interest Income 16,197 16,386 15,519 13,433 12,756
Loan Loss Provision 197 208 191 291 288
------- ------- ------- ------- -------
Net Interest Income
after Provision 16,000 16,178 15,328 13,142 12,468
Other Operating Income 4,400 4,370 4,213 3,694 3,206
Operating Expenses 13,069 12,650 11,655 9,626 8,463
------- ------- ------- ------- -------
Income before
Income Taxes 7,331 7,898 7,886 7,210 7,211
Provision for
Income Taxes 2,091 2,323 2,426 2,178 2,195
------- ------- ------- ------- -------
Net Income $ 5,240 $ 5,575 $ 5,460 $ 5,032 $ 5,016
======= ======= ======= ======= ======
-20-
Balance Sheet
Securities $ 84,894 $105,558 $123,687 $101,188 $ 91,378
Loans - net 328,439 265,608 265,057 268,294 235,666
Total Assets 451,000 439,238 432,364 421,250 369,675
Total Deposits 394,786 391,569 387,006 377,386 330,360
Total Shareholders'
Equity 46,310 42,687 42,335 38,780 35,779
Selected Financial Ratios
and Other Data
Return on average
assets 1.17% 1.29% 1.30% 1.30% 1.41%
Return on average
equity 11.84% 13.01% 13.57% 13.58% 14.76%
Equity-to-assets
ratio 0.10 0.10 0.10 0.09 0.10
Dividend payout
Ratio 0.61 0.51 0.46 0.42 0.34
Earnings per
share(1) 2.95 3.14 3.07 2.83 2.82
Dividends declared
per share(1) 1.80 1.60 1.40 1.20 0.95
<FN>
(1) All per share data have been adjusted to reflect the ten-for-one stock
exchange in 1999 and the pooling of interests accounting method for the Dakin
acquisition in 2000.
</FN>
Item 7. Management's Discussion and Analysis
Introduction
The following is management's discussion and analysis of the financial
condition and results of operations of LCNB Corp. It is intended to amplify
certain financial information regarding LCNB Corp. and should be read in
conjunction with the Consolidated Financial Statements and related Notes,
included in Item 8 of this Form 10-K; and the Statistical Information in Item
1 of this Form 10-K and the Selected Financial Data in Item 6 of this
Form 10-K.
Comparative Financial Information
Effective May 18, 1999, Lebanon Citizens 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 pro
forma basis.
-21-
On April 11, 2000 LCNB Corp. issued 15,942 shares of common stock in exchange
for all outstanding shares of Dakin Insurance Agency, Inc. (Dakin). On that
date, Dakin merged with and into an interim subsidiary of LCNB Corp. As a
result of the merger, Dakin became a wholly owned subsidiary of LCNB Corp.
The merger was accounted for as a pooling-of-interests and, accordingly, all
financial statements presented herein have been restated to include the
financial position and results of operations of Dakin.
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. LCNB Corp.
disclaims, however, any intent or obligation to update such forward-looking
statements.
Net Income
LCNB Corp. earned $5.240 million in 2000 compared to $5.575 million in 1999.
Earnings per share were $2.95, a 6.1% or $.19 per share decline from 1998.
Performance ratios for 2000 included a return on average assets of 1.17% and
a return on average equity of 11.84% compared to ratios of 1.29% and 13.01%,
respectively, for 1999.
LCNB Corp. earned $5.575 million in 1999 compared to $5.460 million in 1998.
Earnings per share were $3.14, up 2.3% or $.07 per share from 1998.
Performance ratios for 1999 included a return on average assets of 1.29% and a
return on average equity of 13.01% compared to ratios of 1.30% and 13.57%,
respectively, for 1998.
Net Interest Income
2000 vs. 1999. Net interest income decreased $189 thousand, or 1.1%, from
1999 to 2000. The net interest margin on a fully taxable equivalent basis
(FTE) decreased from 4.23% in 1999 to 4.11% in 2000. This 12 basis point
(a basis point equals 0.01%) decrease was due in part to a 65 basis point
increase in the cost of average interest-bearing liabilities, partially offset
by a 41 basis point increase in the yield on average interest-earning assets.
The increase in the cost of average interest-bearing liabilities resulted from
a general increase in market rates and a $6 million borrowing from the Federal
Home Loan Bank. The increase in the yield on average interest-earning assets
is due to the same increase in market rates and to a shift of funds from
investment securities to the higher earning loan portfolio. The loan-to-
deposit ratio at December 31, 2000 and 1999 was 83.7% and 73.5%, respectively.
An increase in average interest-earning assets of $13.2 million to $415.5
million in 2000 also contributed to the increase in net interest income. The
increase was primarily attributable to increases in average commercial and
residential real estate loans.
-22-
1999 vs. 1998. Net interest income increased $867 thousand, or 5.6%, from
1998 to 1999. The net interest margin on a fully taxable equivalent basis
(FTE) increased from 4.10% in 1998 to 4.23% in 1999. This 13 basis point
increase was due in part to a 32 basis point decline in the cost of average
interest-bearing liabilities, partially offset by a 17 basis point decline in
the yield on average interest-earning assets. The decline in the cost of
average interest-bearing liabilities 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. An increase in average interest-earning
assets of $13.1 million to $402.2 million in 1999 also contributed to the
increase in net interest income. The increase was primarily attributable to
increases in average commercial and residential real estate loans and
securities.
Provisions 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. In addition to historic charge-off percentages, factors
taken into consideration to determine the adequacy of the allowance for credit
losses include the nature, volume and consistency of the loan portfolio,
overall portfolio quality, review of specific problem loans and current
economic conditions that may affect the borrowers ability to pay. The
following table presents the total loan provision and the other changes in the
allowance for loan losses for the years 1996 through 2000.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Balance - Beginning of year $2,000 2,000 2,200 2,000 1,800
Loans charged off:
Commercial and industrial - - 227 - -
Commercial, secured by real estate - - - - -
Residential real estate - - 3 - -
Consumer, excluding credit card 222 252 153 93 100
Agricultural - - - - -
Credit Card 33 20 36 29 17
Other - - - - -
----- ----- ----- ----- -----
Total loans charged off 255 272 419 122 117
----- ----- ----- ----- -----
-23-
Recoveries:
Commercial and industrial - - - - -
Commercial, secured by real estate - - - - -
Residential real estate - - - - -
Consumer, excluding credit card 55 62 26 25 29
Agricultural - - - - -
Credit Card 3 2 2 6 -
Other - - - - -
------ ----- ----- ----- -----
Total recoveries 58 64 28 31 29
----- ----- ----- ----- -----
Net charge-offs 197 208 391 91 88
Provision charged to operations 197 208 191 291 288
----- ----- ----- ----- -----
Balance - End of year $2,000 2,000 2,000 2,200 2,000
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average loans outstanding .06% .08% .14% .04% .04%
=== === === === ===
The allowance for loan losses of $2.0 million is 0.61% of total loans at
December 31, 2000, compared to $2.0 million or 0.70% of total loans at
December 31, 1999, and $2.0 million or 0.75% of total loans at December 31,
1998. The $63 thousand increase in consumer loans charged off, net of
recoveries, in 1999 over 1998 is attributable, in part, to the adoption of a
new uniform charge-off policy in 1999 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. Management believes that no significant difference will occur
prospectively in net charge-offs as a result of this policy change. The $419
thousand of charge-offs in 1998 includes one commercial loan of $227 thousand.
This loan, which had a $455 thousand balance at December 31, 1997, was charged
down and paid off completely in 1998. Management believes the loan
represented a unique credit risk based on the nature of the borrower's
operations, the inventory that partially collateralized the loan, and the
significance of the loan balance outstanding. The loan portfolio at December
31, 2000 does not include any commercial loans with a comparable level of
credit risk.
Non-Interest Income
2000 vs. 1999. Non-interest income increased $30 thousand, or 0.7% to $4.400
million in 2000 from $4.370 million in 1999. The increase was primarily due
to a $205 thousand increase in trust income, partially offset by a $50
thousand decrease in service charges and fees and a $128 thousand decrease
in insurance agency income.
-24-
The trust fee income increased in 1999 due to an increase in estate fee
income, partially offset by a decrease in the market value of assets under
management, on which fees are based.
The decrease in service charges and fees from 1999 to 2000 was due to a $215
thousand reduction in merchant credit card processing fees resulting from the
exiting of the business in the fourth quarter of 1999. Lebanon Citizens
outsourced these services in 1999 due to declining margins and now functions
as a referral conduit for merchant credit card business. This decrease was
partially offset by:
a. $65 thousand increase in VISA check card fee income resulting from
continued growth in both the usage and number of cardholders, and
b. increases in deposit account related fees.
The decrease in insurance agency income is primarily due to a large commission
Dakin recognized during the first quarter of 1999, which did not recur during
2000.
1999 vs. 1998. Non-interest income increased $157 thousand, or 3.7% to $4.370
million in 1999 from $4.213 million in 1998. The increase was attributable
to:
a. a $189 thousand, or 25.2%, increase in insurance agency income,
b. a $78 thousand, or 7.2%, increase in trust income, and
c. a $130 thousand, or 6.5% increase in service charges and fees.
Partially offsetting the above increases was a $214 thousand decline in
security gains during 1999, from $234 thousand in 1998 to $20 thousand in
1999.
The increase in insurance agency income is primarily due to a large commission
recognized by Dakin during the first quarter of 1999.
The trust fee income increased in 1999 due to an increase in estate fee income
as well as an increase in the market value of assets under management.
The increase in service charges and fees from 1998 to 1999 was primarily due
to a $61 thousand increase in ATM fees attributable to five new ATM machines
added in late 1998 and early 1999. Additionally, Lebanon Citizens increased
foreign ATM service fees and surcharge fees in mid-1998 and in 1999 and
continued to experience an increase in the cardholder base resulting from the
Key Bank branch acquisitions in September, 1997. Also contributing to the
increase in service charges was a $59 thousand increase in check card fee
income resulting from continued growth in usage and the base of cardholders.
Credit card fee and interchange income increased $72 thousand as a result of
an increase in the cardholder base and a change in the processing vendor.
These increases in service charges and fees were partially offset by a $72
thousand decrease in credit card merchant processing fees as Lebanon Citizens
has opted to exit this business due to declining margins.
Other operating income decreased by $26 thousand as a result of 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.
-25-
Non-Interest Expense
2000 vs. 1999. Non-interest expense increased $419 thousand, or 3.3%, in 2000
from 1999. This increase was primarily due to:
a. a $237 thousand, or 3.5%, increase in labor costs including pension and
other employee benefits,
b. a $95 thousand, or 17.8%, increase in equipment expenses,
c. a $90 thousand, or 9.4% increase in occupancy expenses, and
d. a $222 thousand, or 7.9%, increase in other non-interest expense.
Labor costs increased as a result of normal increases in salaries and wages
and increases in pension and health insurance costs.
During 2000 LCNB Corp. constructed new offices in Goshen and Oxford and
extensively remodeled the Columbus Avenue office in Lebanon. The increase in
equipment expense is primarily due to depreciation recognized on new furniture
and equipment purchased for the new and remodeled offices. The increase in
occupancy expense reflects increased costs due to the new and remodeled
offices and an increase in rent expense for the leased offices.
The increase in other non-interest expense was due in part to:
a. a $64 thousand increase in ATM expenses resulting from an expansion in
the number of ATMs and an increase in the number of ATM transactions
processed,
b. attorney fees of $46 thousand relating to the acquisition of Dakin
Insurance Agency,
c. a rate increase totaling $35 thousand in Federal Deposit Insurance
Corporation premiums,
d. a $75 thousand increase in telephone expense primarily due to a
telephone system upgrade installed during 2000 and to an increased
number of telephone lines needed to serve new ATMs, and
e. consulting fees totaling $34 thousand paid to a company that is assisting
LCNB Corp. in replacing its computer system, which is anticipated to
occur during the third quarter, 2001.
These increases were partially offset by a $152 thousand decline in merchant
credit card related processing and interchange expenses due to Lebanon
Citizens' exiting of the merchant credit card business in late-1999 and by
certain printing and supply expense control initiatives established during
2000.
1999 vs. 1998. Non-interest expense increased $995 thousand, or 8.5%, in 1999
from 1998. This increase was primarily due to a $733 thousand, or 12.3%,
increase in labor costs including pension and other employee benefits. Labor
costs increased as a result of salary and related pension costs increases.
Equipment and occupancy expenses increased $76 thousand, or 5.4%, primarily as
a result of increased depreciation related to equipment purchases in late 1998
and branch improvements.
-26-
Other non-interest expense increased $188 thousand, or 7.1%. The increase was
due in part to:
a. an $88 thousand increase in computer maintenance charges due in part to
newly purchased imaging equipment becoming operational in 1999,
b. a $67 thousand increase in correspondent bank fees in 1999 as Lebanon
Citizens opted to pay for its item processing charges in fees rather
than through maintenance of higher non-interest bearing deposits with
its upstream correspondent institutions,
c. an increase in other expenses as a result of the public filings required
by the newly formed LCNB Corp. as well as acquisition efforts in the
Dakin Insurance Agency transaction.
These increases were partially offset by declines in merchant credit card
related processing and interchange expenses due to Lebanon Citizens' exiting
of the merchant credit card business in late-1999.
Income Taxes
LCNB Corp.'s effective tax rates for the years ended December 31, 2000, 1999,
and 1998 were 28.5%, 29.4%, and 30.8%, respectively. The effective rates
declined during 2000 and 1999 due to increases in tax-exempt interest income
as a percent of income before income taxes.
Assets
2000 vs. 1999. Total assets increased $11.8 million, or 2.7% from December
31, 1999 to December 31, 2000. This increase was primarily due to a $42.8
million, or 15.0%, increase in loans, partially offset by a $22.4 million, or
21.4% decrease in securities available for sale.
The loan increase from December 31, 1999 to December 31, 2000 resulted
primarily from a $10.1 million increase in commercial and industrial loans,
a $22.9 million increase in residential real estate loans and a $4.5
million increase in consumer loans. The growth in residential real
estate and commercial loans resulted from competitively priced products and
focused officer-calling efforts in the Hamilton and Oxford markets as well as
the Warren County offices. All residential real estate loans originated
during 2000 were kept in Lebanon Citizens' portfolio. This compares to $2.4
million and $11.6 million in loans originated and sold to the Federal Home
Loan Mortgage Corporation (Freddie Mac) during 1999 and 1998, respectively.
Consumer loans increased primarily through concentrated efforts to originate
indirect auto and other loans through dealers.
Securities decreased due to a shifting of assets from the securities portfolio
to the higher yielding loan portfolio. Approximately $5.8 million of
securities were sold in 2000, resulting in a $12 thousand realized gain.
Proceeds were primarily used to fund the continued loan growth.
-27-
Premises and equipment increased $2.3 million, net of $796 thousand in
depreciation expense, from December 31, 2000 to December 31, 1999.
Expenditures for 2000 included approximately $2.4 million for costs associated
with new offices in Goshen and Oxford, extensive remodeling of the Columbus
Avenue office in Lebanon, and a new drive-up ATM located in Hamilton.
Lebanon Citizens owns all but three of its branches. The Otterbein, and South
Lebanon branches, as well as the loan production office in Hamilton, which
opened in December, 1999, are leased under multi-year operating leases. The
current Otterbein lease expires in July, 2005, the South Lebanon lease expires
in July, 2001, and the Hamilton lease expires in 2004. The Otterbein, South
Lebanon and Hamilton leases include renewal options. The Oxford office is
built on leased land. This lease expires in July, 2059 and does not include
renewal options. Lebanon Citizens has a right of first refusal if the land is
sold during the term of the lease. In January, 2001, Lebanon Citizens
purchased land in Hamilton, Ohio on which it intends to build a full-service
office to be opened during the third quarter, 2001.
1999 vs. 1998. Total assets increased $6.9 million, or 1.6% from December 31,
1998 to December 31, 1999. This increase was primarily due to a $20.6
million, or 7.8%, increase in loans, partially offset by an $18.1 million, or
14.7% decrease in securities available for sale.
The loan increase from December 31, 1998 to December 31, 1999 resulted
primarily from a $5.7 million increase in commercial and industrial loans, an
$8.0 million increase in residential real estate loans and a $4.1 million
increase in consumer loans. The increase in residential real estate loans is
primarily due to Management's decision in 1999 to originate fixed rate loans
for portfolio purposes, rather than for sale, due to existing attractive
market rates and shifting interest rate trends in 1999. Lebanon Citizens
originated $2.4 million in loans for immediate sale to Freddie Mac during 1999.
This compares to $11.6 million in loans originated and sold to Freddie Mac in
1998.
Securities decreased as a result of a shifting of assets from the securities
portfolio to the higher yielding loan portfolio. Approximately $12.8 million
of securities were sold in 1999, resulting in a $20 thousand realized gain.
Proceeds were primarily used to fund the continued loan growth.
Premises and equipment increased $98 thousand, net of $688 thousand in
depreciation expense, from December 31, 1998 to December 31, 1999.
Expenditures for 1999 included approximately $350 thousand for costs
associated with a new branch site in Goshen, Ohio, $81 thousand related to a
new ATM purchase and installation and various branch renovations expenditures.
Deposits
2000 vs. 1999. Total deposits of $394.8 million at December 31, 2000
increased $3.2 million, or 0.8%, from December 31, 1999. Demand and NOW
deposits decreased $6.2 million from December 31, 1999 to December 31, 2000
and money fund and savings deposits increased $25.3 million. The increase
-28-
relates to a corporate sweep checking account product offered by Lebanon
Citizens. Excess funds in the checking accounts are automatically swept into
customer-designated, non-bank owned mutual funds. During the third quarter,
Lebanon Citizens introduced a savings product, which is grouped with the money
funds category, which was priced competitively with the mutual funds. Several
large account holders chose the new deposit product, which accounts for most
of the increase in money fund and savings deposits. IRA deposits remained
relatively constant from December 31, 1999 to December 31, 2000. Certificates
greater than $100 thousand decreased by $9.1 million due to management's
decision not to bid on public fund deposits that matured during the final
quarter of 2000. In making this decision, management considered Lebanon
Citizens' liquidity position and the rates that would be required to maintain
the deposits. Other time certificates declined by $7.0 million as Lebanon
Citizens continued to allow its higher cost retail deposit products to run-
off.
1999 vs. 1998. Total deposits of $391.6 million at December 31, 1999
increased $4.6 million, or 1.2%, from December 31, 1998. Demand and NOW
deposits remained relatively constant from December 31, 1998 to December 31,
1999 and money fund and savings deposits increased $4.2 million. Certificates
greater than $100 thousand increased by $8.1 million due to an increase in
demand for time deposits by public institutions having investable funds.
Other time deposits declined by $8.0 million as Lebanon Citizens continued to
allow its higher cost retail deposit products to run-off.
Liquidity
Liquidity is the ability to have funds available at all times to meet the
commitments of LCNB Corp. Asset liquidity is provided by cash and assets
which are readily marketable or pledgeable or which will mature in the
near future. Liquid assets include 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 LCNB Corp. is enhanced by the fact that 87.9% of total deposits
at December 31, 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 December 31, 2000, LCNB Corp.'s liquid assets amounted to $100.8 million or
22.3% of total gross assets, down from $134.5 million or 30.6% of total gross
assets at December 31, 1999. The primary reason for the decrease was a
shifting of funds from securities available-for-sale to the higher yielding
loan portfolio. Loans to deposits increased to 83.7% at December 31, 2000,
from 73.5% at December 31, 1999. Secondary sources of liquidity include
Lebanon Citizens' ability to sell loan participations, purchase federal funds,
and borrow from the Federal Home Loan Bank.
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 Corp. experienced no liquidity or operational problems as a result of the
current liquidity levels.
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Capital Resources
As of December 31, 2000, LCNB Corp. had no material commitments for capital
expenditures. Commitments to extend credit at December 31, 2000, amounted to
$55.0 million and standby letters of credit totaled $5.8 million and are more
fully described in Note 10 to LCNB Corp.'s Financial Statements. Since many
of the commitments to lend may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Scheduled repayments of existing loans and maturities of investment securities
are expected to provide the necessary funds.
LCNB Corp. and Lebanon Citizens are required by banking 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 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
of LCNB Corp. and Lebanon Citizens at December 31 follows:
2000 1999
---------------- ----------------
LCNB Lebanon LCNB Lebanon
Corp. Citizens Corp. Citizens
(Dollars in thousands)
Regulatory Capital:
Shareholders' equity $46,310 41,245 42,987 37,875
Goodwill and other
Intangibles (4,210) (4,157) (4,710) (4,710)
Net unrealized securities
losses (gains) (281) (219) 1,298 1,298
------- ------ ------ ------
Tier 1 risk-based capital 41,819 36,869 39,575 34,463
Eligible allowance for
loan losses 2,000 2,000 2,000 2,000
------ ------ ------ ------
Total risk-based capital $43,819 $38,869 $41,575 $36,463
====== ====== ====== ======
Capital Ratios:
Total risk-based 14.9% 13.3% 15.3% 13.6%
Tier 1 risk-based 14.2% 12.6% 14.6% 12.8%
Tier 1 leverage 9.2% 8.2% 9.1% 7.9%
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The FDIC, the insurer of deposits in financial institutions, has adopted a
risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is required to pay
successively higher premiums depending on its capital levels and its
supervisory rating by its primary regulator. It is management's intention to
maintain sufficient capital to permit Lebanon Citizens to maintain a "well
capitalized" designation (the FDIC's highest rating).
Year 2000 Compliance
LCNB Corp. experienced no difficulties resulting from Y2K in the date
transition at year-end 1999. Lebanon Citizens' testing and preparation for
Y2K included future dates beyond December 31, 1999. Management anticipates no
difficulties from future date changes.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk for LCNB Corp. is primarily interest rate risk. LCNB Corp.
attempts to mitigate this risk through asset/liability management
strategies designed to decrease the vulnerability of its earnings to material
and prolonged changes in interest rates. LCNB Corp. does not use derivatives
such as interest rate swaps, caps or floors to hedge this risk. LCNB Corp.
has not entered into any market risk instruments for trading purposes.
Lebanon Citizens' Asset and Liability Management Committee ("ALCO")
primarily uses Interest Rate Sensitivity Gap Analysis, also known as repricing
mismatch analysis, for measuring and managing interest rate risk.
Interest Rate Sensitivity Gap Analysis
A traditional gap analysis provides a point-in-time measurement of the
relationship between the amounts of interest rate sensitive assets and
liabilities in a given time period. An asset or liability is interest rate
sensitive within a specific time period if it will mature or reprice within
that time period. If liabilities mature or reprice more quickly or to a
greater extent than assets, net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling
interest rates. Conversely, if liabilities mature or reprice more slowly or
to a lesser extent than assets, net interest income would tend to increase
during periods of rising interest rates but decrease during periods of falling
interest rates. ALCO strives to maintain a range for the relationship of rate
sensitive assets to rate sensitive liabilities for gap analysis purposes of
from 75 to 125 percent for the one-year and two- to four-year periods.
The following table reflects LCNB Corp.'s gap analysis at December 31, 2000.
The amounts reported in the table are the principal cash flows of rate
sensitive assets and liabilities by expected maturity or repricing timeframe.
Also presented is the related weighted average interest rate. Fixed rate real
estate mortgage loans and mortgage-backed securities are allocated to the
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various maturity/repricing periods based on contractual maturities adjusted
for expected prepayments under the current market interest rate environment.
Deposit liabilities without contractual maturities such as NOW and savings
accounts are allocated to the various repricing periods based on an analysis
of forecasted account run-off that takes into consideration the relatively
stable nature of these core deposits. The gap analysis indicates that
LCNB Corp.'s earnings are sensitive to the repricing of liabilities in
the first year, sensitive to repricing of assets in the second through the
fourth year, and asset sensitive thereafter. The aggregate ratio of rate
sensitive assets to rate sensitive liabilities is 66.6% for the first year
and 112.1% for years two through four. With the current relatively low
market interest rate environment, management believes the ratios for the one
year and two to four year time frames do not expose LCNB Corp.'s net interest
income to significant risk.
-32-
Expected Maturity/Repricing
---------------------------
2001 2002 2003 2004 2005 Thereafter Total Fair Value
(Dollars in thousands)
ASSETS
Loans: (1)
Fixed rate $ 29,697 17,734 16,204 14,167 11,868 114,954 204,624 191,484
Average interest
rate 9.56% 9.36% 9.22% 9.04% 9.55% 8.25%
Variable rate 65,002 11,681 17,403 19,477 5,818 6,434 125,815 125,815
Average interest
rate 9.28% 7.67% 8.04% 7.28% 8.13% 7.86%
Securities available
for sale (2) 11,722 11,815 10,687 7,730 7,241 32,886 82,081 82,506
Average interest
rate (3) 6.22% 5.93% 5.95% 6.32% 6.70% 6.68%
Total earning assets 106,421 41,230 44,294 41,374 24,927 154,274 412,520 399,805
Average interest
rate 8.71% 7.90% 7.97% 7.70% 8.39% 7.90%
LIABILTIES
NOW and money fund 26,770 11,002 11,002 11,002 11,002 17,604 88,382 87,503
Average interest
rate 4.20% 1.92% 1.92% 1.92% 1.92% 4.90%
Savings 27,233 7,530 7,530 7,530 7,530 29,817 87,170 87,170
Average interest
rate 4.05% 4.05% 4.05% 4.05% 4.05% 4.05%
IRA's
Fixed rate 6,660 6,033 1,343 1,139 3,399 1,039 19,613 19,673
Average interest
rate 5.61% 6.10% 5.69% 6.19% 6.74% 6.62%
Variable rate 6,989 3,555 - - - - 10,544 10,544
Average interest
rate 6.18% 6.17% - - - -
CD's over $100,000 25,510 8,518 1,212 468 405 100 36,213 35,841
-33-
Average interest
rate 6.11% 6.14% 5.79% 6.06% 6.98% 5.97%
CD's under $100,000 66,556 26,760 3,185 1,197 3,143 326 101,167 100,969
Average interest
rate 5.50% 6.07% 5.70% 5.70% 6.42% 6.36%
Long term debt 50 2,053 56 2,060 2,064 73 6,356 6,652
Average interest
rate 6.00% 7.55% 6.00% 7.66% 7.67% 6.00%
Total interest-bearing
Liabilities 159,768 65,451 24,328 23,396 27,543 48,959 349,445 348,417
Average interest
rate 5.17% 5.20% 3.48% 3.59% 4.11% 4.43%
Period gap $(53,347) (24,221) 19,966 17,978 (2,616) 105,315
Cumulative gap $(53,347) (77,568) (57,602) (39,624) (42,240) 63,075
Ratio of rate sensitive assets to rate sensitive liabilities:
First twelve months 66.61%
Years two through four 112.13%
Thereafter 315.11%
<FN>
(1) Excludes adjustments for deferred net origination costs and allowance for loan losses.
(2) At amortized cost.
(3) Rates for tax-exempt securities are adjusted to a taxable equivalent rate.
</FN>
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Item 8. Financial Statements and Supplementary Data
The Financial Statements required by this item are incorporated herein by
reference to pages 15 through 23 of the Registrants 2000 LCNB Corp. Annual
Report attached to this filing as Exhibit 13.
Item 9. Changes in and Disagreements with Accountants and Accounting and
Financial Disclosures.
None
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PART III
Portions of the Proxy Statement included in the Notice of Annual Meeting
of Shareholders to be held April 17, 2001, dated March 17, 2001, are
incorporated by reference into Part III.
Item 10. Directors and Executive Officers of the Registrant
The information contained in the Notice of Annual Meeting of Shareholders
and Proxy Statement (dated March 17, 2001), relating to "Directors and
Executive Officers of the Registrant", is incorporated herein by reference.
Item 11. Executive Compensation
The information contained in the Notice of Annual Meeting of Shareholders
and Proxy Statement (dated March 17, 2001), relating to "Compensation of
Directors and Executive Officers", is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Notice of Annual Meeting of Shareholders
and Proxy Statement (dated March 17, 2001), relating to "Section 16(a)
Beneficial Ownership Reporting Compliance" is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information contained in the Notice of Annual Meeting of Shareholders
and Proxy Statement (dated March 17, 2001), relating to "Certain
Relationships and Related Transactions", is incorporated herein by
Reference.
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PART IV
Item 14. Exhibits, Financial Statements and Reports on 8-K
1. Financial Statements
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
and Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Exhibits required by Item 601 Regulation S-K.
(a)Exhibit No. Exhibit Description
---------- -------------------
3.1 Articles of Incorporation of LCNB Corp.(1)
3.2 Code of Regulations of LCNB Corp.(2)
10 Agreement of Merger and Plan of Reorganization by
and among Dakin Insurance Agency, Inc., Shareholders
of Dakin Insurance Agency, Inc., LCNB Corp. and Dakin
Acquisition Corporation, dated December 30, 1999. (3)
13 Portions of LCNB Corp. 2000 Annual Report (pages 2-3
and 15-24)
21 LCNB Corp. Subsidiaries
(1) Incorporated by reference to Registrant's 1999 Form 10-K,
Exhibit 3.1.
(2) Incorporated by reference to Registrant's Registration
Statement on Form S-4, Exhibit 3.2, Registration
No. 333-70913.
(3) Incorporated by reference to Registrant's 1999 Form 10-K,
Exhibit 10.
(b)Reports on Form 8-K
There were no Form 8-Ks filed with the SEC in the fourth quarter
of 2000.
-37-
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)
/s/Stephen P. Wilson
----------------------------
President and Chairman of
the Board of Directors
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities and on
the dates indicated:
Executive Vice President
/s/Steve P. Foster and Chief Financial Officer February 20, 2001
- ---------------------
Steve P. Foster
/s/David S. Beckett Director February 20, 2001
- ---------------------
David S. Beckett
/s/Robert C. Cropper Director February 20, 2001
- ---------------------
Robert C. Cropper
/s/William H. Kaufman Director February 20, 2001
- ---------------------
William H. Kaufman
/s/George L. Leasure Director February 20, 2001
- ---------------------
George L. Leasure
/s/James B. Miller Director February 20, 2001
- ---------------------
James B. Miller
/s/Corwin M. Nixon Director February 20, 2001
- ---------------------
Corwin M. Nixon
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/s/Kathleen Porter Stolle Director February 20, 2001
- -------------------------
Kathleen Porter Stolle
/s/Howard E. Wilson Director February 20, 2001
- ----------------------
Howard E. Wilson
/s/Marvin E. Young Director February 20, 2001
- ----------------------
Marvin E. Young
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