EXHIBIT 13
LCNB Corp. 2001 Annual Report
Presidents Letter to Shareholders (pages 2-3 of Annual Report):
- ----------------------------------
Dear Shareholders,
As I report to you the results we achieved in 2001, LCNB is celebrating 125
years of providing stability and dependability to our local economy.
From the original 20 brave shareholders in 1877 to the loyal shareholders
of today, the people of LCNB have always made a difference. From the many
generations of dedicated and concerned employees to our customers, we have
truly been partners in achieving growth and prosperity for our region.
I submit to you that Lebanon, Warren County, and indeed our entire region
have benefited greatly because of the financial stability and dependability
provided by the people of LCNB over the past 125 years.
In this years Annual Report, we have highlighted a few examples of the people
and institutions that have been our partners throughout our history. These
partners and thousands like them have joined LCNB over the years to provide
the financial stability and dependability necessary for growth and prosperity.
This Annual Report is dedicated to each individual person and institution that
has contributed to the success of LCNB and thus our region for 125 years.
LCNB was founded in an atmosphere of economic instability and uncertain times.
2001 provided no less in the way of challenges. Again, LCNB provided the
necessary stability and dependability you have come to expect. Im pleased
to report to you the results of our operations for 2001.
Net income for 2001 was a record $6.1 million representing a 1.30% return on
average assets and a 12.50% return on average shareholders equity. Earnings
per share were $3.43, a 16.27% or $0.48 per share increase from 2000. Total
assets increased to a record $480.4 million from $451.0 million one year ago,
an increase of $29.4 million or 6.53%. Total capital or shareholders equity
at December 31, 2001 is a record $49.5 million, having increased 6.90% from
December 31, 2000. Due to these excellent results, the Board of Directors
increased the dividend paid to shareholders for the 16th consecutive year. The
total dividend paid during 2001 was $1.85 per share, up from the $1.80 paid
in 2000. I direct your attention to the graphs included in this report. These
graphs display key statistical information highlighting LCNBs performance
for the last five years.
Additional statistical data and information on our financial performance for
2001 are available in the Management Discussion and Analysis (MD&A) document.
The MD&A is enclosed with the initial mailing of this Annual Report to
shareholders and is also available in the LCNB Corp. Form 10-K report. Our
Form 10-K report, filed annually with the Securities and Exchange Commission,
is available by referring to page 24 of this report giving you options for
obtaining this SEC document.
It was gratifying to see strong deposit growth during 2001. Total deposits of
$414.8 million at December 31, 2001, represents an increase of $20.0 million,
or 5.06%, from December 31, 2000. Much of the growth was in the savings
category, which increased $14.5 million during the year. The only deposit
category that did not increase during 2001 was Money Fund deposits, which
decreased $12.9 million during the year. The decrease was intentional and
relates to a corporate sweep product offered by LCNB, which allows a customer
to transfer excess funds from a checking account into separate non-bank owned
mutual funds. The amount swept into these mutual funds was $26.2 million as of
December 31, 2001.
Our loan totals decreased by $3.3 million during 2001. The decrease can be
attributed to refinancing activity on residential mortgage loans and the sale
of a large majority of fixed rate residential loans originated during 2001.
Approximately $13.4 million of residential real estate loans were sold to
FHLMC during 2001. We began selling the loans after determining that current,
historically low market rates for residential loans were not profitable in
the long run. Offsetting the decline in residential loans was a $17.5 million
increase in the commercial loan portfolio. This continued shift away from long
term, fixed rate mortgage loans reduces our future interest rate risk. Our
asset quality remained high with a very low delinquency rate of .37%.
Several significant events that will help shape the future of LCNB took place
during 2001. After over a year of intense study, our technology team recommended
and our Board approved our conversion to the new Silverlake
Computer System. The Jack Henry Silverlake in-house software will replace our
12-year-old core processing system. It will tie our Branch, internet,
telephone and ATM delivery channels into one state-of-the-art seamless system.
Our customers will benefit and the efficiencies will allow our employees to do
a better job at less cost. To accommodate this new technology and improvements
to our Card Department and our Call Center, a major renovation is taking place
at our Main Office. Combine these items with additional planned conversions to
a new phone system and a new ATM and Debit Card system and 2002 will be an
exciting and busy year. We also opened a new full-service office in Hamilton,
Ohio, extending our reach into Butler County, and established a new electronic
branch in Harveysburg, Ohio.
Dakin, our insurance subsidiary, continued to grow and to position themselves
for the future. During 2001, an adjacent building was purchased and the Dakin
Main Office was significantly expanded. This expansion not only allows for
servicing the growth from one to six offices that has occurred in the past 18
months but will provide the capacity to service future expansion. Dakins
seventh office, in Wilmington, Ohio, will open in the first quarter of 2002.
All that was accomplished in the name of LCNB Corp. in 2001 was only possible
because of the hard work and dedication of our 254 LCNB and Dakin employees.
Our employees honoring the tradition of 125 years, building for the future and
taking care of our customers, one at a time, day in and day out are what makes
our success possible.
I trust you will enjoy this tribute to the past 125 years. I also hope we have
properly conveyed our readiness for and our dedication to the future. We want
to be your partner in the future growth and prosperity of our region. We
recommit ourselves to providing the necessary financial stability and
dependability that will make that future growth and prosperity possible.
-2-
The annual meeting for LCNB Corp. will be April 16th at 10:00 AM at our Main
Office, 2 North Broadway in Lebanon, Ohio. Proxy material will be sent to you
in a separate mailing in mid-March. Please review, sign and return the proxy
upon receipt of that material. We would like to have you attend that meeting
if it is possible. Thank you for your continued support.
Stephen P. Wilson
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Financial Statements and Supplementary Data (pages 15-24 of Annual Report)
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
LCNB Corp. and subsidiaries
Lebanon, Ohio
We have audited the accompanying consolidated balance sheets of LCNB Corp. and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LCNB Corp. and
Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with U.S. generally accepted accounting
principles.
/s/J.D. Cloud & Co. L.L.P.
-----------------------------
Certified Public Accountants
Cincinnati, Ohio
January 11, 2002
-5-
LCNB Corp. and Subsidiaries
Consolidated Balance Sheets
At December 31
($000s)
2001 2000
<s> <c> <c>
ASSETS:
Cash and due from banks $ 14,286 18,262
Federal funds sold 19,950 -
------- -------
Total cash and cash equivalents 34,236 18,262
Securities available for sale, at market value 98,610 82,506
Federal Reserve Bank and Federal Home
Loan Bank stock, at cost 2,772 2,388
Loans, net 325,165 328,439
Premises and equipment, net 11,628 10,502
Accrued income receivable 3,051 3,139
Intangibles 3,729 4,210
Other assets 1,244 1,554
------- -------
TOTAL ASSETS $480,435 451,000
======= =======
LIABILITIES:
Deposits-
Demand $ 59,137 51,697
NOW 47,538 47,085
Money fund deposits 28,426 41,297
Savings 101,694 87,170
IRA 32,736 30,157
Certificates - $100,000 and over 39,126 36,213
Other time certificates 106,115 101,167
------- -------
Total deposits 414,772 394,786
Long-term debt 12,306 6,356
Accrued interest and other liabilities 3,850 3,548
------- -------
TOTAL LIABILITIES 430,928 404,690
------- -------
SHAREHOLDERS' EQUITY:
Common shares-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 27,714 24,916
Treasury shares at cost, 12,997 shares at
December 31, 2001 (516) -
Accumulated other comprehensive income
net of taxes 1,196 281
------- -------
TOTAL SHAREHOLDERS' EQUITY 49,507 46,310
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $480,435 451,000
======= =======
The accompanying notes to financial statements are an integral part of these
statements.
-6-
LCNB Corp. and Subsidiaries
Consolidated Statements of Income
For the years ended December 31
($000s, except per share amounts)
2001 2000 1999
<s> <c> <c> <c>
INTEREST INCOME:
Interest and fees on loans $27,396 26,233 22,743
Interest on federal funds sold 667 459 463
Interest on deposits in banks - 241 281
Interest on Federal Reserve Bank
and Federal Home Loan Bank stock 171 70 39
Interest on investment securities-
Taxable 2,601 3,542 4,914
Non-taxable 1,459 1,606 1,251
------ ------ ------
TOTAL INTEREST INCOME 32,294 32,151 29,691
------ ------ ------
INTEREST EXPENSE:
Interest on deposits-
Money fund and NOW accounts 1,925 2,303 1,912
Savings 2,529 3,217 2,382
IRA 1,673 1,794 1,608
Certificates-$100,000 and over 2,103 2,594 1,916
Other time certificates 5,539 5,693 5,420
------ ------ ------
Total interest on deposits 13,769 15,601 13,238
Interest on short-term borrowings 33 83 43
Interest on long-term debt 570 270 24
------ ------ ------
TOTAL INTEREST EXPENSE 14,372 15,954 13,305
------ ------ ------
NET INTEREST INCOME 17,922 16,197 16,386
PROVISION FOR LOAN LOSSES 237 197 208
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 17,685 16,000 16,178
------ ------ ------
NON-INTEREST INCOME:
Trust income 1,115 1,365 1,160
Service charges and fees 2,327 2,087 2,137
Net gain on sale of securities 17 12 20
Insurance agency income 1,108 811 939
Other operating income 145 125 114
------ ------ ------
TOTAL NON-INTEREST INCOME 4,712 4,400 4,370
------ ------ ------
NON-INTEREST EXPENSE:
Salaries and wages 5,962 5,529 5,392
Pension and other employee benefits 1,577 1,415 1,315
Equipment expenses 664 629 534
Occupancy expense - net 1,043 1,044 954
State franchise tax 509 407 581
Marketing 386 422 423
Intangible amortization 602 581 631
Other non-interest expenses 3,147 3,042 2,820
------ ------ ------
TOTAL NON-INTEREST EXPENSE 13,890 13,069 12,650
------ ------ ------
INCOME BEFORE INCOME TAXES 8,507 7,331 7,898
PROVISION FOR INCOME TAXES 2,440 2,091 2,323
------ ------ ------
NET INCOME $ 6,067 5,240 $ 5,575
====== ====== ======
Basic earnings per common share $ 3.43 2.95 3.14
====== ====== ======
Weighted average shares
outstanding (000's) 1,769 1,776 1,776
====== ====== ======
The accompanying notes to financial statements are an integral part of these
statements.
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LCNB Corp. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the three years ended December 31, 2001
(000s, except per share amounts)
Accumulated
Other Total
Common Retained Treasury Comprehensive Shareholders' Comprehensive
Shares Surplus Earnings Shares Income Equity Income
<c> <c> <c> <c> <c> <c>
Balance January 1, 1999 $10,560 11,016 20,113 646 42,335
Net income 5,575 5,575 $5,575
Treasury shares purchased
and cancelled (463) (463)
Net unrealized loss on
available-for-sale securities
(net of tax benefit 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 3,631
=====
Cash dividends declared-
$1.60 per share (2,816) (2,816)
------ ------ ------ ----- ----- ------
Balance December 31, 1999 10,560 10,553 22,872 (1,298) 42,687
Net income 5,240 5,240 5,240
Net unrealized gain on
available-for-sale securities
(net of taxes of $817) 1,587 1,587 1,587
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
tax benefit of $4) (8) (8) (8)
-----
Total comprehensive income 6,819
======
Cash dividends declared
$1.80 per share (3,196) (3,196)
------ ------ ------ ---- ------ ------
Balance December 31, 2000 10,560 10,553 24,916 281 46,310
Net income 6,067 6,067 6,067
Net unrealized gain on
available-for-sale securities
(net of taxes of $478) 928 928 928
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
tax benefit of $7) (13) (13) (13)
-----
Total comprehensive income $ 6,982
=====
Treasury shares purchased (516) (516)
Cash dividends declared-
$1.85 per share (3,269) (3,269)
------ ------ ------- ---- ------ ------
Balance December 31, 2001 $10,560 10,553 27,714 (516) 1,196 49,507
====== ====== ====== ===== ====== ======
The accompanying notes to financial statements are an integral part of these statements.
-8-
LCNB Corp. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31
($000s)
2001 2000 1999
<s> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,067 5,240 5,575
Adjustments to reconcile net income
to net cash provided by operating activities-
Depreciation, amortization and accretion 2,259 1,997 1,893
Provision for loan losses 237 197 208
Deferred income tax benefit (64) (70) (87)
Realized gains on sales of securities
available for sale (17) (12) (20)
Origination of mortgage loans for sale (13,395) - (2,441)
Proceeds from sales of mortgage loans 13,462 - 2,443
(Increase) decrease in income receivable 88 223 (346)
Increase (decrease) in other liabilities 290 157 (329)
------ ------ ------
TOTAL ADJUSTMENTS 2,860 2,492 1,321
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,927 7,732 6,896
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits
in banks - 5,492 -
Proceeds from sales of securities available
for sale 13,609 5,852 12,776
Proceeds from maturities of securities
available for sale 15,916 28,899 45,603
Purchases of securities available for sale (44,544) (10,224) (43,705)
Purchases of Federal Home Loam Bank stock (252) (1,741) -
Net decrease (increase) in loans 2,599 (43,666) (20,869)
Purchases of premises and equipment (2,215) (3,067) (607)
Proceeds from sales of premises and equipment 187 - -
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES (14,698) (18,455) (6,802)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 19,986 3,216 4,563
Net change in short-term borrowings (406) (1,175) 1,520
Proceeds from long-term debt 6,000 6,000 -
Principal payments on long-term debt (50) - -
Cash dividends paid (3,269) (3,196) (2,816)
Purchases of treasury shares (516) - -
------ ------ ------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 21,745 4,845 3,267
------ ------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 15,974 (5,878) 3,361
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,262 24,140 20,779
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $34,236 18,262 24,140
====== ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $14,585 15,778 13,180
Income taxes 2,562 1,877 2,706
Non-cash transfer of securities from held-to-
maturity to available-for-sale classification
common shares of Dakin - - 42,768
Purchased in exchange for note payable - - 448
The accompanying notes to financial statements are an integral part of these
statements.
-9-
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LCNB Corp. (the Company) was incorporated in December 1998. In the second
quarter of 1999, each shareholder of Lebanon Citizens National Bank (the
Bank) received ten common shares of the Company in exchange for each share
of the Bank. Lebanon Citizens National Bank, as a result of the merger,
became a wholly-owned subsidiary of LCNB Corp. In April 2000, the Company
acquired Dakin Insurance Agency, Inc. (Dakin) as a wholly-owned subsidiary
of LCNB Corp. and accounted for the merger as a pooling of interests.
The Bank was founded in 1877 and provides full banking services, including
trust services, to customers primarily in the southwestern Ohio area of
Warren, Hamilton, Clermont, Clinton and Butler counties. Dakin is an
independent insurance agency founded in 1876 and offers a wide range of
insurance products for businesses and individuals in the Banks primary
market area.
BASIS OF PRESENTATION-
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions are eliminated
in consolidation.
USE OF ESTIMATES-
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT SECURITIES-
Debt securities which the Company has the intent and ability to hold to
maturity are reported at amortized cost. Debt securities classified as
available for sale and all equity securities are reported at fair value with
unrealized holding gains and losses reported net of income taxes as
Accumulated Other Comprehensive Income, a separate component of shareholders'
equity. Amortization of premiums and accretion of discounts are recognized
as adjustments to interest income using the level yield method. Realized
gains or losses from the sale of securities are computed using the specific
identification method. Currently, the Company and its subsidiaries do not
hold any derivatives or conduct hedging activities.
Federal Home Loan Bank (FHLB) stock is an equity interest in the Federal Home
Loan Bank of Cincinnati. It can be sold only at its par value of $100 per
share and only to the FHLB or to another member institution. In addition, the
equity ownership rights are more limited than would be the case for a
public company, because of the oversight role exercised by the Federal Housing
Finance Board in the process of budgeting and approving dividends.
Federal Reserve Bank stock is similarly restricted in marketability and
value. Both investments are carried at cost, which is their par value.
-10-
LOANS AND ALLOWANCE FOR LOAN LOSSES-
Loans are stated at the principal amount outstanding, net of unearned income,
deferred origination fees and costs, and the allowance for loan losses.
Interest on loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. 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 nonaccrual loans are recorded as a
reduction of principal, and interest income is recorded once principal
recovery is reasonably assured. The current years accrued interest on
loans placed on nonaccrual status is charged against earnings. Previous
years accrued interest is charged against the allowance for loan losses.
Loan origination fees and certain direct loan origination costs are deferred
and the net amount amortized as an adjustment of loan yields. These amounts
are being amortized over the lives of the related loans.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrowers' ability to pay. Loans are considered impaired
when management believes, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Impaired loans are measured by
the present value of expected future cash flows using the loans effective
interest rate. Impaired collateral-dependent loans may be measured based on
collateral value. Smaller-balance homogenous loans, including residential
mortgage and consumer installment loans, are collectively evaluated for
impairment.
PREMISES AND EQUIPMENT-
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on both the straight-line and accelerated methods
over the estimated useful lives of the assets. Costs incurred for
maintenance and repairs are expensed currently.
INTANGIBLE ASSETS-
Intangible assets representing the excess of the costs of acquired operations
over the fair value of net tangible assets acquired are being amortized using
the straight-line method over ten years. The Company periodically reviews
intangible assets for possible impairment.
MARKETING EXPENSE-
Marketing costs are expensed as incurred.
-11-
EMPLOYEE BENEFITS-
The Bank has a noncontributory pension plan covering full-time employees.
The retirement plan cost is made up of several components that reflect
different aspects of the Bank's financial arrangements as well as the cost
of benefits earned by employees. These components are determined using the
projected unit credit actuarial cost method and are based on certain
actuarial assumptions.
INCOME TAXES-
Certain income and expenses are recognized in different periods for financial
reporting than for purposes of computing income taxes currently payable.
Deferred taxes are provided on such temporary differences between the
financial reporting and tax bases of the related assets and liabilities.
STATEMENTS OF CASH FLOWS-
For purposes of reporting cash flows, cash equivalents include all highly
liquid investments with original maturities of three months or less.
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. The Companys
capital structure includes no potential for dilution. There are no warrants,
options or other arrangements that would increase the number of shares
outstanding.
RECENT PRONOUNCEMENTS AND ACCOUNTING CHANGES-
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets, on July 20, 2001.
SFAS No. 141 provides that all business combinations shall be accounted for
using the purchase method of accounting; the use of the pooling-of-interests
method is now prohibited. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001 or to all business
combinations accounted for by the purchase method that are completed after
June 30, 2001. The Company has not been involved in any recent business
combination discussions.
SFAS No. 142 provides that goodwill shall not be amortized but should be
tested for impairment on an annual basis, using criteria prescribed in the
statement. If the carrying amount of goodwill exceeds its implied fair
value, as recalculated, an impairment loss equal to the excess shall be
recognized. Recognized intangible assets other than goodwill should be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (superseded by SFAS No. 144, see
discussion which follows). SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001.
-12-
The Companys intangible assets at December 31, 2001 are classified as
intangible assets other than goodwill. Approximately $3.6 million of the
intangibles recorded on the consolidated balance sheet at December 31, 2001
represents the remaining unamortized intangible related to the Companys 1997
acquisition of three branch offices from another bank. The intangible is
being amortized over ten years in accordance with SFAS No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, which was not
superseded by SFAS No. 142. During December 2001, the FASB announced it will
undertake a limited-scope project to reconsider part of the guidance in SFAS
No. 72. Issuance of a final statement is not expected until the fourth
quarter of 2002.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, was issued by the FASB on
October 3, 2001 and is effective for fiscal years beginning after December
15, 2001. This statement effectively supersedes SFAS No. 121 and Accounting
Principles Board (APB) Opinion No. 30 and requires that long-lived assets,
including discontinued operations, that are to be disposed of by sale be
measured at the lower of carrying amount or fair value less cost to sell.
The statement also resolves certain implementation issued regarding SFAS
No. 121. This statement is not expected to have a material impact on the
Companys statements of financial condition or results of operations.
NOTE 2 - ACQUISTION
In April 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 of interests method of accounting.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale
investment securities at December 31 are summarized as follows ($000s):
2001
-----------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<s> <c> <c> <c> <c>
U.S. Treasury notes $ 1,996 48 - 2,044
U.S. Agency notes 36,033 388 93 36,328
U.S. Agency mortgage-
backed securities 9,432 139 1 9,570
Municipal securities:
Non-taxable 40,943 1,230 70 42,103
Taxable 8,395 199 29 8,565
------ ----- --- ------
$96,799 2,004 193 98,610
====== ===== === ======
-13-
2000
-----------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<s> <c> <c> <c> <c>
U.S. Treasury notes $ 3,002 17 1 3,018
U.S. Agency notes 20,142 30 126 20,046
U.S. Agency mortgage-
backed securities 12,234 19 89 12,164
Corporate notes 8,708 18 247 8,479
Municipal securities:
Non-taxable 31,692 848 75 32,465
Taxable 6,303 58 27 6,334
------ --- --- ------
$82,081 990 565 82,506
====== === === ======
Contractual maturities of debt securities at December 31, 2001 were as
follows ($000s). Actual maturities may differ from contractual maturities
when borrowers have the right to call or prepay obligations.
Amortized Market
Cost Value
<s> <c> <c>
Due within one year $11,351 11,464
Due from one to five years 51,473 52,196
Due from five to ten years 16,067 16,369
Due after ten years 8,476 9,011
------ ------
87,367 89,040
U.S. Agency mortgage-
backed securities 9,432 9,570
------ ------
$96,799 98,610
====== ======
Gross gains realized on sales of securities available for sale were $46,000,
$31,000, and $26,000 for 2001, 2000 and 1999, respectively. Realized losses
during 2001, 2000 and 1999 amounted to $29,000, $19,000 and $6,000,
respectively.
Investment securities with a market value of $51,785,000 and $56,116,000 at
December 31, 2001 and 2000, respectively, were pledged to secure public
deposits and for other purposes required or permitted by law.
-14-
NOTE 4 - LOANS
Major classifications of loans at December 31 are as follows ($000's):
2001 2000
<s> <c> <c>
Commercial and industrial $ 40,486 36,449
Commercial, secured by real estate 72,477 59,043
Residential real estate 165,710 185,013
Consumer, excluding credit card 41,006 40,860
Agricultural 2,020 2,238
Credit card 2,658 3,049
Other loans 112 863
Lease financing 2,088 2,219
------- -------
326,557 329,734
Deferred net origination costs 608 705
------- -------
327,165 330,439
Allowance for loan losses (2,000) (2,000)
------- -------
Loans-net $325,165 328,439
======= =======
Mortgage loans sold to and serviced for the Federal Home Loan Mortgage
Corporation are not included in the accompanying balance sheets. The unpaid
principal balances of those loans at December 31, 2001, 2000 and 1999 were
$23,734,000, $14,046,000, and $15,379,000 respectively.
Changes in the allowance for loan losses were as follows ($000's):
2001 2000 1999
<s> <c> <c> <c>
BALANCE-BEGINNING OF YEAR $2,000 2,000 2,000
Provision for loan losses 237 197 208
Charge offs (277) (255) (272)
Recoveries 40 58 64
----- ----- -----
BALANCE-END OF YEAR $2,000 2,000 2,000
===== ===== =====
There were no nonaccrual loans at December 31, 2001 or 2000. Interest income
that would have been recorded in 2001, 2000 and 1999 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. At December 31, 2001
and 2000, the recorded investment in loans for which impairment has been
recognized in accordance with SFAS Statement No. 114 was not material.
The Bank 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 a deterioration in the financial position of
the borrower.
-15-
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows ($000's):
2001 2000
<s> <c> <c>
Land $ 2,251 1,876
Buildings 9,830 9,365
Equipment 8,763 7,938
------ ------
Total 20,844 19,179
Less-Accumulated depreciation 9,216 8,677
------ ------
Premises and Equipment-Net $11,628 10,502
====== ======
Depreciation charged to income was $898,000 in 2001, $796,000 in 2000 and
$688,000 in 1999.
Some of the Banks branches, telephone equipment, and other equipment are
leased under agreements expiring at various dates through 2049. These leases
are accounted for as operating leases. At December 31, 2001, required
minimum annual rentals due in the future on noncancelable leases having terms
in excess of one year aggregated $2,125,000. Minimum annual rentals for each
of the years 2002 through 2006 are $230,000, $186,000, $96,000, $57,000 and
$45,000, respectively. Rental expense for all leased branches and equipment
amounted to $294,000 in 2001, $263,000 in 2000 and $238,000 in 1999.
NOTE 6 - DEPOSIT LIABILITIES
Contractual maturities of certificates of deposit at December 31 were as
follows ($000s):
Certificates All other
over $100,000 Certificates Total
<s> <c> <c> <c>
2002 $24,397 61,076 85,473
2003 4,019 17,446 21,465
2004 6,050 13,926 19,976
2005 3,250 10,622 13,872
2006 1,410 2,756 4,166
Thereafter - 289 289
------ ------- -------
$39,126 106,115 145,241
====== ======= =======
-16-
NOTE 7 - EMPLOYEE BENEFITS
The Bank's noncontributory defined benefit retirement plan covers all regular
full-time employees. The benefits are based on years of service and the
employee's highest average compensation during five consecutive years.
Pension costs are funded based on the Plans actuarial cost method and
are limited to amounts currently deductible for federal income tax purposes.
The components of net periodic pension cost are summarized as follows ($000's):
2001 2000 1999
<s> <c> <c> <c>
Service cost $566 423 378
Interest cost 212 205 182
Expected return on Plan assets (164) (192) (161)
Amortization of unrecognized transition obligation 17 17 17
Recognized net actuarial loss (gain) (52) 55 (13)
--- --- ---
Net periodic pension cost $579 508 403
=== === ===
A summary of the Plans prepaid benefit cost, included in Other Assets on the
balance sheets, and the Plans funded status at December 31 follows ($000s):
2001 2000
<s> <c> <c>
Change in projected benefit obligations
---------------------------------------
Projected benefit obligation at beginning of year $3,854 3,786
Service cost 566 423
Interest cost 212 205
Actuarial (gains) loss 163 (437)
Benefits paid (10) (123)
----- -----
Projected benefit obligation at end of year 4,785 3,854
----- -----
Change in plan assets
---------------------
Fair value of plan assets at beginning of year 4,030 3,466
Actual return on plan assets 164 140
Employer contribution 598 546
Benefits paid (10) (123)
----- -----
Fair value of plan assets at end of year 4,782 4,029
----- -----
Funded status (3) 175
Unrecognized net actuarial loss 840 625
Unrecognized transition obligatio 10 27
----- -----
Prepaid benefit cost $ 847 827
===== =====
-17-
The Plans assets are exclusively certificates of deposit with the Bank. In
determining the actuarial present value of the projected benefit obligation,
the following assumptions were used:
2001 2000
<s> <c> <c>
Assumed discount rate 5.50% 5.50%
Expected long-term rate of return on Plan assets 5.50% 5.50%
Rate of increase in future compensation levels 4.00% 4.00%
The Bank has a benefit plan which permits eligible officers to defer a
portion of their compensation. The deferred compensation balance, which
accrues interest at 8% annually, is distributable in cash after retirement or
termination of employment. The amount of such deferred compensation at
December 31, 2001 and 2000 was $434,000 and $401,000, respectively.
The Bank also has a supplemental income plan which provides a covered
employee an amount based on a percentage of average compensation, payable
annually for ten years upon retirement. The projected benefit obligation
included in other liabilities for this supplemental income plan at
December 31, 2001 and 2000 is $110,000 and $90,000, respectively. The
discount rate used to determine the present value of the obligation was 6.5%
in 2001 and 2000. The service cost associated with this plan in each of the
three years 2001, 2000, and 1999 was approximately $16,000. Interest costs
were not material. Both of these plans are nonqualified and unfunded.
Participation in each plan is limited to a select group of management.
NOTE 8 - LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following at December 31 (000s):
2001 2000
<s> <c> <c>
Federal Home Loan Bank notes $12,000 6,000
Note payable to former shareholder of Dakin 306 356
------ -----
Total $12,306 6,356
====== =====
Maturities of long-term debt in the years ending December 31 are as follows:
<s> <c>
2002 $2,053
2003 2,056
2004 4,060
2005 2,064
2006 2,067
-18-
The Federal Home Loan Bank borrowings consist of six notes with two, three,
four and five-year maturities and have a weighted average interest rate of
6.10%. Interest on the notes is fixed and payable monthly. The notes
are collateralized by a blanket pledge of 1-4 family residential
mortgage loans.
The note payable matures in 2007. Payments are due monthly at a nominal
interest rate of 6%.
At December 31, 2001 and 2000, accrued interest and other liabilities include
U.S. Treasury demand note borrowings of approximately $693,000 and
$1,099,000, respectively.
NOTE 9 - INCOME TAXES
The provision for federal income taxes consists of ($000's):
2001 2000 1999
<s> <c> <c> <c>
Income taxes currently payable $2,528 2,161 2,410
----- ----- -----
Deferred income taxes resulting from
temporary differences-
Loan origination fees-net (25) (19) (33)
Pension and deferred compensation (17) (11) (16)
Depreciation and amortization (46) (40) (38)
----- ----- -----
Total deferred income tax benefit (88) (70) (87)
----- ----- -----
Provision for income taxes $2,440 2,091 2,323
===== ===== =====
A reconciliation between the statutory income tax rate and the Bank's
effective tax rate follows:
2001 2000 1999
<s> <c> <c> <c>
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from-
Tax exempt interest (5.4) (6.5) (4.6)
Other-net .1 1.0 -
---- ---- ----
Effective tax rate 28.7% 28.5% 29.4%
==== ==== ====
-19-
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Bank has not
recorded a valuation reserve related to deferred tax assets. Deferred tax
assets and liabilities at December 31 consist of the following ($000's):
2001 2000
<s> <c> <c>
Deferred tax assets:
Allowance for loan losses $ 522 522
Amortization of intangibles 258 202
----- ---
780 724
----- ---
Deferred tax liabilities:
Depreciation of premises and equipment (197) (187)
Unrealized gains on securities available-for-sale (616) (113)
Deferred loan fees (91) (117)
Pension and deferred compensation (109) (125)
----- ---
(1,013) (542)
----- ---
Net deferred tax asset (liability( $ (233) 182
===== ===
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. They
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The Banks exposure
to credit loss n the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contract amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Financial
instruments whose contract amounts represent off-balance-sheet credit risk at
December 31 were as follows (000s):
2001 2000
<s> <c> <c>
Commitments to extend credit $56,738 55,034
Standby letters of credit 6,410 5,768
-20-
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. At
December 31, 2001 and 2000, outstanding guarantees of $1,520,000 and $768,000,
respectively, were issued to developers and contractors. These guarantees
generally expire within one year and are fully secured. In addition, the
Bank has an approximate $5 million participation at December 31, 2001 and
2000 in a letter of credit securing payment of principal and interest on a
bond issue. This letter of credit will expire July 15, 2005, and is secured
by an assignment of rents and the underlying real property.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Bank is based on
management's credit evaluation of the borrower. Collateral held varies, but
may include accounts receivable; inventory; property, plant and equipment;
residential realty; and income-producing commercial properties.
The Company entered into a contract in 2001 to purchase certain computer
hardware and software in 2002, approximating $1.1 million.
The Company and its subsidiaries are parties to various claims and
proceedings arising in the normal course of business. Management, after
consultation with legal counsel, believes that the liabilities, if any,
arising from such proceedings and claims will not be material to the
consolidated financial position or results of operations.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Bank has entered into related party transactions with various directors
and executive officers. Such transactions originate in the normal course of
the Bank's operations as a depository and lending institution and were made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
customers. Management believes these loans do not involve more than a normal
risk of collectibility or present other unfavorable features. At
December 31, 2001 and 2000, certain executive officers, directors and
associates of such persons were indebted to the Bank directly or as
guarantors in the aggregate amount of $3,169,000 and $3,000,000,
respectively. During 2001, $764,000 in new loans were made, repayments
totaled $685,000, and there was a net increase of $90,000 due primarily to
the retirement of two directors and the addition of two new directors in
2000.
-21-
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values of financial instruments as of
December 31, were as follows ($000s):
2001 2000
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<s> <c> <c> <c> <c>
FINANCIAL ASSETS:
Cash and cash equivalents $ 34,236 34,236 18,262 18,262
Federal Reserve Bank and
Federal Home Loan Bank stock 2,772 2,772 2,388 2,388
Securities available-for-sale 98,610 98,610 82,506 82,506
Loans, net 325,165 328,131 328,439 317,299
FINANCIAL LIABILITIES:
Deposits 414,772 418,700 394,786 393,798
Short-term borrowings 693 693 1,099 1,099
Long-term debt 12,306 12,693 6,356 6,652
The fair value of off-balance-sheet financial instruments at December 31,
2001 and 2000 was not material.
Fair values of financial instruments are based on various assumptions,
including the discount rate and estimates of future cash flows. Therefore,
the fair values presented may not represent amounts that could be realized in
actual transactions. In addition, because the required disclosures exclude
certain financial instruments and all nonfinancial instruments, any
aggregation of the fair value amounts presented would not represent the
underlying value of the Bank. The following methods and assumptions were
used to estimate the fair value of certain financial instruments:
Cash and cash equivalents:
The carrying amounts presented are deemed to approximate fair value.
Interest-bearing deposits in banks:
Fair value is estimated for these certificates of deposit by discounting the
future cash flows at current rates.
Investment Securities:
Fair values are based on quoted market prices, if available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans:
Fair value is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposits:
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
-22-
Borrowings:
The carrying amounts of federal funds purchased and U.S. Treasury notes are
deemed to approximate fair value of short-term borrowings. For long-term
debt, fair values are estimated based on the discounted value of expected net
cash flows using current interest rate.
NOTE 13 - REGULATORY MATTERS
The Federal Reserve Act requires depository institutions to maintain cash
reserves with the Federal Reserve Bank. In 2001 and 2000, the Bank was
required to maintain average reserve balances of $4,849,000 and $8,356,000,
respectively.
Banks and holding companies must meet certain minimum capital requirements
set by federal banking agencies. The minimum regulatory capital ratios are
8% for total risk-based, 4% for Tier 1 risk-based, and 4% for leverage. For
various regulatory purposes, institutions are classified into categories
based upon capital adequacy. The highest well-capitalized category
requires capital ratios of at least 10% for total risk-based, 6% for Tier 1
risk-based, and 5% for leverage. As of the most recent notification from
their regulators, the Holding Company and Bank were categorized as well-
capitalized under the regulatory framework for prompt corrective action.
A summary of the regulatory capital of the Holding Company and Bank at
December 31 follows ($000s):
2001 2000
----------------------------------
Holding Holding
Company Bank Company Bank
<s> <c> <c> <c> <c>
Regulatory Capital:
Shareholders equity $49,507 42,165 46,310 41,245
Goodwill and other intangibles (3,729) (3,585) (4,210) (4,157)
Net unrealized securities
losses (gains) (1,196) (1,071) (281) (219)
------ ------ ------ ------
Tier 1 risk-based capital 44,582 37,509 41,819 36,869
Eligible allowance for loan losses 2,000 2,000 2,000 2,000
------ ------ ------ ------
Total risk-based capital $46,582 39,509 43,819 38,869
====== ====== ====== ======
Capital Ratios:
Total risk-based 15.40% 13.24% 14.88% 13.30%
Tier 1 risk-based 14.74% 12.57% 14.20% 12.62%
Tier 1 leverage 9.46% 8.06% 9.22% 8.21%
The principal source of income and funds for LCNB Corp. is dividends paid by
the Bank subsidiary. The payment of dividends is subject to restriction by
regulatory authorities. For 2002, the restrictions generally limit dividends
to the aggregate of net income for the year 2002 plus the retained net
earnings for 2001 and 2000. In addition, dividend payments may not reduce
capital levels below minimum regulatory guidelines. Accordingly, future
dividends may require the prior approval of the Comptroller of the Currency.
-23-
NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for LCNB Corp. parent company only follows
($000s):
Condensed Balance Sheets
December 31
2001 2000
<s> <c> <c> <c>
Assets:
Cash on deposit with subsidiary $ 91 48
Corporate and municipal debt securities 7,141 5,029
Investment in subsidiary 42,195 41,139
Other assets 80 94
------ ------
Total assets $49,507 46,310
====== ======
Liabilities $ - -
Shareholders' equity 49,507 46,310
------ ------
Total liabilities and shareholders'
equity $49,507 46,310
====== ======
Condensed Statements of Income
Year ended December 31
2001 2000 1999
Income:
Dividends from subsidiary $ 5,676 3,197 7,936
Interest 217 202 2
Gain on sale of investment securities - 7 -
------ ----- -----
Total income 5,893 3,406 7,938
------ ----- -----
Total expense 45 40 14
----- ----- -----
Income before income tax benefit and
equity in undistributed income of
subsidiary 5,848 3,366 7,924
Income tax benefit 15 10 3
Equity in undistributed income (excess
dividends) of subsidiary 204 1,864 (2,352)
----- ----- -----
Net income $6,067 5,240 5,575
===== ===== =====
-24-
Condensed Statements of Cash Flows
Year ended December 31
2001 2000 1999
Cash flows from operating activities:
Net income $ 6,067 $5,240 5,575
Adjustments for non-cash items -
Equity in undistributed (income) excess
dividends of subsidiary (204) (1,864) 2,352
Other, net 44 59 (97)
------ ----- -----
Net cash provided by operating activities 5,907 3,435 7,830
------ ----- -----
Cash flows from investing activities:
Capital contribution to subsidiary - (185) -
Purchases of securities available for
Sale (2,379) (2,143) (4,997)
Proceeds from sales of securities
Available for sale 300 773 -
Proceeds from maturities of securities
available for sale - 1,347 -
------ ----- -----
Cash flow used in investing activities (2,079) (208) (4,997)
------ ----- -----
Cash flows from financing activities:
Treasury shares purchased (516) - -
Cash dividends paid (3,269) (3,196) (2,816)
------ ----- -----
Cash flow used in financing activities (3,785) (3,196) (2,816)
Net change in cash 43 31 17
Cash at beginning of year 48 17 -
----- ----- -----
Cash at end of year $ 91 48 17
===== ===== =====
-25-