UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2002
Commission file number 000-26121
LCNB Corp.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1626393
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2 North Broadway, Lebanon, Ohio 45036
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(513) 932-1414
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock, without par
value, as of October 28, 2002, was 1,775,942 shares.
LCNB Corp.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2002, and December 31, 2001. . . . . . . . . . 1
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2002 and 2001. . . 2
Consolidated Statements of Shareholders' Equity -
Nine Months Ended September 30, 2002 and 2001. . . . . . . . 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001. . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . .5-10
Independent Accountants' Review Report. . . . . . . . . . . .11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 12-25
Item 3. Quantitative and Qualitative Disclosures
about Market Risks . . . . . . . . . . . . . . . . . . . . . . . 25
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 25
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 26
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . 26
Item 3. Defaults by the Company on its Senior Securities . . . . . 26
Item 4. Submission of Matters to a Vote of Security Holders. . . . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 26
Part I - Financial Information
Item 1. Financial Statements
LCNB Corp. and Subsidiaries
Consolidated Balance Sheets
(thousands)
September 30, December 31,
2002 2001
(unaudited) (a)
<s> <c> <c>
ASSETS:
Cash and due from banks $ 17,404 14,286
Federal funds sold 11,300 19,950
------- -------
Total cash and cash equivalents 28,704 34,236
------- -------
Securities available for sale, at
market value 126,054 98,610
Federal Reserve Bank stock and
Federal Home Loan Bank stock, at cost 2,846 2,772
Loans 333,661 327,165
Less-allowance for loan losses 2,000 2,000
------- -------
Net loans 331,661 325,165
------- -------
Premises and equipment, net 11,762 11,628
Accrued income receivable 3,198 3,051
Intangible assets 3,274 3,729
Other assets 1,268 1,244
------- -------
TOTAL ASSETS $508,767 480,435
======= =======
LIABILITIES:
Deposits-
Noninterest-bearing $ 58,998 59,137
Interest-bearing 386,674 355,635
------- -------
Total deposits 445,672 414,772
Long-term debt 6,267 12,306
Accrued interest and other liabilities 5,935 3,850
------- -------
TOTAL LIABILITIES 457,874 430,928
------- -------
SHAREHOLDERS' EQUITY:
Common stock-no par value,
authorized 4,000,000 shares; issued
and outstanding 1,775,942 shares 10,560 10,560
Surplus 10,553 10,553
Retained earnings 29,720 27,714
Treasury shares, at cost,
54,917 and 12,997 shares at September 30, 2002
and December 31, 2001, respectively (2,193) (516)
Accumulated other comprehensive
income, net of taxes 2,253 1,196
------- -------
TOTAL SHAREHOLDERS' EQUITY 50,893 49,507
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $508,767 480,435
======= =======
<FN>
(a) Financial information as of December 31, 2001, has been derived from
the audited, consolidated financial statements of the Registrant.
</FN>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
-1-
LCNB Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands except per share data)
(unaudited)
Three Months Ended Nine months ended
September 30, September 30,
------------------ ----------------
2002 2001 2002 2001
<s> <c> <c> <c> <c>
INTEREST INCOME:
Interest and fees on loans $6,286 6,701 18,713 20,676
Interest on federal funds sold 70 163 258 542
Dividends on Federal Reserve Bank
and Federal Home Loan Bank stock 26 35 94 86
Interest on investment securities-
Taxable 879 632 2,294 1,945
Non-taxable 476 365 1,314 1,106
----- ----- ------ ------
TOTAL INTEREST INCOME 7,737 7,896 22,673 24,355
----- ----- ------ ------
INTEREST EXPENSE:
Interest on deposits 2,584 3,266 7,643 10,867
Interest on short-term borrowings 3 7 10 26
Interest on long-term debt 144 148 503 415
----- ----- ------ ------
TOTAL INTEREST EXPENSE 2,731 3,421 8,156 11,308
----- ----- ------ ------
NET INTEREST INCOME 5,006 4,475 14,517 13,047
PROVISION FOR LOAN LOSSES 122 70 247 180
------ ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,884 4,405 14,270 12,867
----- ----- ------ ------
NON-INTEREST INCOME:
Trust income 255 243 786 648
Service charges and fees 602 573 1,781 1,717
Net gain (loss) on sale of
securities 408 - 429 17
Insurance agency income 308 213 832 905
Other operating income 93 61 193 177
----- ----- ------ ------
TOTAL NON-INTEREST INCOME 1,666 1,090 4,021 3,464
----- ----- ------ ------
NON-INTEREST EXPENSE:
Salaries and wages 1,684 1,536 4,923 4,493
Pension and other employee benefits 390 374 1,275 1,186
Equipment expenses 286 162 601 490
Occupancy expense, net 261 275 774 797
State franchise tax 128 131 400 393
Marketing 107 98 307 271
Intangible amortization 154 129 455 386
Other non-interest expenses 1,465 812 3,161 2,320
----- ----- ------ ------
TOTAL NON-INTEREST EXPENSE 4,475 3,517 11,896 10,336
----- ----- ------ ------
INCOME BEFORE INCOME TAXES 2,075 1,978 6,395 5,995
PROVISION FOR INCOME TAXES 589 575 1,807 1,699
----- ----- ------ ------
NET INCOME $1,486 1,403 4,588 4,296
===== ===== ====== ======
Dividends declared per common share $ 0.50 0.45 1.50 1.35
Basic earnings per common share $ 0.86 0.80 2.66 2.43
Average shares outstanding (000's) 1,721 1,764 1,725 1,771
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
-2-
LCNB Corp. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(thousands)
(unaudited)
Accumulated
Other Total
Common Retained Treasury Comprehensive Shareholders'Comprehensive
Shares Surplus Earnings Shares Income Equity Income
<s> <c> <c> <c> <c> <c> <c> <c>
Balance January 1,2001 $10,560 10,553 24,916 - 281 46,310
Comprehensive Income:
Net income 4,296 4,296 $4,296
Net unrealized gain on
available-for-sale securities
(net of taxes of $787) 1,526 1,526 1,526
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $6) (11) (11) (11)
-----
Total comprehensive income $5,811
=====
Treasury shares purchased (492) (492)
Cash dividends declared (2,386) (2,386)
------ ------ ------ ------ ------ ------
Balance September 30, 2001 $10,560 10,553 26,826 (492) 1,796 49,243
====== ====== ====== ====== ====== ======
Balance January 1,2002 $10,560 10,553 27,714 (516) 1,196 49,507
Comprehensive Income:
Net income 4,588 4,588 $4,588
Net unrealized gain on
available-for-sale securities
(net of taxes of $690) 1,340 1,340 1,340
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $146) (283) (283) (283)
-----
Total comprehensive income $5,645
=====
Treasury shares purchased (1,677) (1,677)
Cash dividends declared (2,582) (2,582)
------ ------ ------ ------ ------ ------
Balance September 30, 2002 $10,560 10,553 29,720 (2,193) 2,253 50,893
====== ====== ====== ====== ====== ======
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-3-
LCNB Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(thousands)
(unaudited)
Nine months ended
September 30,
------------------
2002 2001
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,588 4,296
Adjustments to reconcile net income to net cash
Depreciation, amortization, and accretion 1,796 1,582
Provision for loan losses 247 180
Deferred income tax benefit (117) (129)
Realized (gain) loss on sales of securities
available for sale (429) (17)
Origination of mortgage loans for sale (6,654) (6,680)
Proceeds from sales of mortgage loans 6,750 6,708
(Increase) decrease in income receivable (147) 140
Increase (decrease) in other liabilities (684) 335
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,350 6,415
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 25,739 8,809
Proceeds from maturities of securities available
for sale 16,580 10,952
Purchases of securities available for sale (68,253) (15,381)
Purchases of Federal Home Loan Bank stock - (252)
Net decrease (increase) in loans (6,864) (6,097)
Purchases of premises and equipment (834) (1,862)
Proceeds from sale of premises and equipment - 188
------ ------
NET CASH USED IN INVESTING ACTIVITIES (33,632) (3,643)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 30,900 11,525
Net change in short-term borrowings 2,148 1,613
Proceeds from long-term debt - 2,000
Principal payments on long-term debt (6,039) (37)
Cash dividends paid (2,582) (2,386)
Purchases of treasury shares (1,677) (492)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,750 12,223
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (5,532) 14,995
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,236 18,262
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $28,704 33,257
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 8,417 11,497
Income taxes paid 1,876 1,928
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
-4-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Substantially all of the assets, liabilities and operations of LCNB Corp.
("LCNB") are attributable to its wholly owned subsidiaries, Lebanon Citizens
National Bank ("Lebanon Citizens") and Dakin Insurance Agency, Inc.
("Dakin"). The accompanying unaudited consolidated financial statements
include the accounts of LCNB, Lebanon Citizens, and Dakin.
The statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and the instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited
consolidated financial statements include all adjustments (consisting of
normal, recurring accruals) considered necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Results of operations for the three and nine months ended September 30, 2002
are not necessarily indicative of the results to be expected for the full year
ending December 31, 2002. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements,
accounting policies and financial notes thereto included in LCNB's 2001
Form 10-K filed with the Securities and Exchange Commission.
Certain reclassifications of 2001's amounts have been made to conform to
current year presentation. Such reclassifications had no effect on net
income.
The financial information presented on pages one through ten of this
Form 10-Q has been subject to a review by J.D. Cloud & Co., L.L.P., LCNB's
independent certified public accountants, as described in their report on
page eleven.
-5-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 2 - ASSET PURCHASE
Effective September 1, 2002, Dakin purchased substantially all of the
insurance renewal rights and client list of an insurance agency located in
Dayton, Ohio. As part of the purchase, Dakin will receive all commission
income received after September 1, 2002, and assignments of agency agreements
that the agency has with insurers with whom Dakin does not already have an
agreement.
In consideration for the assets purchased, Dakin will pay to the seller
ertain percentages of the commissions received over a four-year period from
the agency's customer base. This transaction is expected to have an
immaterial effect on LCNB's consolidated financial statements.
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. LCNB's
capital structure includes no potential for dilution. There are no
outstanding warrants, options or other arrangements that would increase the
number of shares outstanding.
NOTE 4 - INVESTMENTS
LCNB sold $17.7 million of U.S. Agency securities bearing an average coupon
rate of 5.24% during August, 2002, and recorded a gain of $408,000 from the
sales.
-6-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 5 - LOANS
Major classifications of loans at September 30, 2002 and December 31, 2001
are as follows (thousands):
September 30, December 31,
2002 2001
------------ -----------
<s> <c> <c>
Commercial and industrial $ 34,395 $ 40,486
Commercial, secured by real estate 81,326 72,477
Residential real estate 158,843 165,710
Consumer, excluding credit card 51,480 41,006
Agricultural 1,973 2,020
Credit card 2,585 2,658
Other loans 922 112
Lease financing 1,334 2,088
------- -------
332,858 326,557
Deferred net origination costs 803 608
------- -------
333,661 327,165
Allowance for loan losses (2,000) (2,000)
------- -------
Loans - net $331,661 325,165
======= =======
Mortgage loans sold to and serviced for the Federal Home Loan Mortgage
Corporation ("FHLMC") are not included in the accompanying balance sheets.
The unpaid principal balances of those loans at September 30, 2002 and
December 31, 2001 were $26,243,000 and $23,734,000, respectively. Loans
sold to the FHLMC during the three and nine months ended September 30, 2002
totaled $3,849,000 and $6,654,000, respectively, and $2,582,000 and $6,680,000
during the three and nine months ended September 30, 2001, respectively.
-7-
LCNB Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 5 - LOANS, continued
Changes in the allowance for loan losses were as follows (thousands):
For the Nine Months Ended
September 30,
2002 2001
--------- ---------
<s> <c> <c>
Balance - beginning of year $2,000 2,000
Provision for loan losses 247 180
Charge offs (275) (214)
Recoveries 28 36
----- -----
Balance - end of period $2,000 2,002
===== =====
There were no nonaccrual loans at September 30, 2002 or December 31, 2001.
NOTE 6 - LONG-TERM DEBT
In August, 2002, LCNB paid off $4.0 million in Federal Home Loan Bank notes
bearing a weighted average interest rate of 7.72%, which were scheduled to
mature in 2004 and 2005, and recorded an expense of $425,000, which is
reflective of the required prepayment penalty, in other non-interest expense.
The weighted average interest rate on the remaining $6.0 million of Federal
Home Loan Bank notes is 4.51%.
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
LCNB is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments included commitments to extend credit. They involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheets. Exposure to credit loss in the event
of nonperformance by the other parties to financial instruments for
commitments to extend credit is represented by the contract amount of those
instruments.
LCNB uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Financial
instruments whose contract amounts represent off-balance-sheet credit risk
at September 30, 2002 and December 31, 2001 were as follows (thousands):
September 30, December 31,
2002 2001
------------ -----------
<s> <c> <c>
Commitments to extend credit $79,152 56,738
Standby letters of credit 6,452 6,410
-8-
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. At September 30,
2002 and December 31, 2001, outstanding guarantees of $1,562,000 and
$1,520,000, respectively, were issued to developers and contractors. These
guarantees generally expire within one year and are fully secured. In
addition, LCNB has an approximate $5 million participation at September 30,
2002 and December 31, 2001 in a letter of credit securing payment of
principal and interest on a bond issue. This letter of credit will expire
July 15, 2005, and is secured by an assignment of rents and the underlying
real property.
LCNB evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary, is based on
management's credit evaluation of the borrower. Collateral held varies, but
may include accounts receivable; inventory; property, plant and equipment;
residential realty; and income-producing commercial properties.
LCNB and its subsidiaries are parties to various claims and proceedings
arising in the normal course of business. Management, after consultation
with legal counsel, believes that the liabilities, if any, arising from such
proceedings and claims will not be material to the consolidated financial
position or results of operations.
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
provides that goodwill shall not be amortized but should be tested for
impairment on an annual basis, using criteria prescribed in the statement.
If the carrying amount of goodwill exceeds its implied fair value, as
recalculated, an impairment loss equal to the excess shall be recognized.
Recognized intangible assets other than goodwill should be amortized over
their useful lives and reviewed for impairment in accordance with SFAS No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets."
The Company's intangible assets at September 30, 2002 were classified as
"intangible assets other than goodwill" and primarily represent the
unamortized intangible related to the Company's 1997 acquisition of three
branch offices from another bank. At September 30, 2002, the carrying amount
of this intangible was $3.2 million, net of accumulated amortization of $2.9
million, and was being amortized on a straight line basis over ten years in
accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions," which was not superseded by SFAS No. 142.
-9-
LCNB Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Continued)
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS (continued)
On October 1, 2002, the Financial Accounting Standards Board issued SFAS No.
147, "Acquisitions of Certain Financial Institutions," which amends certain
provisions of SFAS No. 72, SFAS No. 144, and FASB Interpretation No. 9. SFAS
No. 147 removes acquisitions of financial institutions from the scope of SFAS
No. 72 and requires that such acquisitions be accounted for in accordance
with SFAS No. 141, "Business Combinations." If the acquisition meets the
definition of a business combination, it shall be accounted for by the
purchase method in accordance with the provisions of SFAS No. 141. Any
goodwill that results will be accounted for in accordance with the provisions
of SFAS No. 142. If the acquisition does not meet the definition of a
business combination, the cost of the assets acquired shall be allocated to
the individual assets acquired and liabilities assumed based on their
relative fair values and shall not give rise to goodwill.
In addition, this proposed statement would amend SFAS No. 144 to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship intangible assets
and credit-cardholder intangible assets. Accordingly, those intangible
assets would be subject to the same undiscounted cash flow recoverability
tests and impairment loss recognition and measurement provisions that SFAS
No. 144 requires for long-term tangible assets and other finite-lived
intangible assets that are held and used.
Existing unidentifiable intangible assets, as that term is defined in SFAS
No. 72, previously recognized under the provisions of SFAS No. 72 shall
continue to be amortized (consistent with the existing clarifying provisions
of Emerging Issues Task Force Topic D-100) unless the transaction in which
the intangible asset arose meets the definition of a business combination.
Management does not believe its 1997 branch office acquisition meets the
definition of a business combination and intends to continue amortizing the
intangible over ten years, subject to periodic review for impairment and its
estimated useful life.
-10-
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders
LCNB Corp. and subsidiaries
Lebanon, Ohio
We have reviewed the accompanying consolidated balance sheet of LCNB Corp.
and subsidiaries as of September 30, 2002, the related consolidated statements
of income for each of the three-month and nine-month periods ended September
30, 2002 and 2001, and the related consolidated statements of cash flows and
shareholders' equity for each of the nine-month periods ended September 30,
2002 and 2001. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with U.S. generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements
for them to be in conformity with U.S. generally accepted accounting
principles.
We previously audited, in accordance with U.S. generally accepted auditing
standards, the consolidated balance sheet as of December 31, 2001 (presented
herein), and the related consolidated statements of income, shareholders'
equity, and cash flows for the year then ended (not presented herein), and in
our report dated January 11, 2002, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 2001, is fairly stated in all material respects.
/s/ J.D. Cloud & Co. L.L.P.
Cincinnati, Ohio
October 22, 2002
-11-
LCNB Corp. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
Certain matters disclosed herein may be deemed to be forward-looking
statements that involve risks and uncertainties, including regulatory policy
changes, interest rate fluctuations, loan demand, loan delinquencies and
losses, projections regarding results of investment securities and long-term
debt restructuring, and other risks. Actual strategies and results in future
time periods may differ materially from those currently expected. Such
forward-looking statements represent management's judgment as of the current
date. The Company disclaims, however, any intent or obligation to update such
forward-looking statements.
RESULTS OF OPERATIONS
LCNB earned $1,486,000, or $0.86 per share, for the three months ended
September 30, 2002 compared to $1,403,000, or $0.80 per share, for the three
months ended September 30, 2001. The return on average assets (ROAA) was
1.17% and the return on average equity (ROAE) was 11.73% for the third quarter
of 2002, compared with an ROAA of 1.20% and an ROAE of 11.37% for the third
quarter of 2001.
LCNB earned $4,588,000, or $2.66 per share, during the first nine months of
2002 compared to $4,296,000, or $2.43 per share, for the first nine months
of 2001. The ROAA and ROAE for the first nine months of 2002 were 1.25% and
12.30%, respectively. The comparable ratios for the first nine months of 2001
were 1.24% and 11.95%, respectively.
NET INTEREST INCOME
LCNB's primary source of earnings is net interest income, which is the
difference between earnings from loans and other investments and interest paid
on deposits and other liabilities. The following table presents, for the
three and nine months ended September 30, 2002 and 2001, average balances for
interest-earning assets and interest-bearing liabilities, the income or
expense related to each item, and the resultant average yields earned or rates
paid.
-12-
Three Months Ended Nine months ended
September 30, September 30,
------------------ ----------------
2002 2001 2002 2001
(Dollars in thousands)
<s> <c> <c> <c> <c>
Interest-earning Assets:
Average balance (1) $472,993 434,214 460,475 431,276
Interest income (2) 7,990 8,095 23,373 24,954
Average rate 6.70% 7.40% 6.79% 7.74%
Interest-bearing Liabilities:
Average balance 390,743 357,267 381,104 360,124
Interest expense 2,731 3,421 8,156 11,308
Average rate 2.77% 3.80% 2.86% 4.20%
Net interest income 5,259 4,674 15,217 13,646
Net interest margin on a
taxable equivalent basis (3) 4.41% 4.27% 4.42% 4.24%
<FN>
(1) Includes nonaccrual loans, if any.
(2) Income from tax-exempt securities is included in interest income on a
taxable basis. Interest income has been divided by a factor comprised
of the complement of the incremental tax rate of 34%.
(3) The net interest margin is the taxable-equivalent net interest income
divided by average interest-earning assets.
</FN>
THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. 2001. The following table presents
the changes in taxable-equivalent basis interest income and expense for each
major category of interest-earning assets and interest-bearing liabilities and
the amount of change attributable to volume and rate changes for the three
months ended September 30, 2002 as compared to the comparable period in 2001.
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.
-13-
Three Months Ended
September 30,
2002 vs 2001
--------------------------
Increase (decrease) due to:
Volume Rate Total
(In thousands)
<s> <c> <c> <c>
Interest-earning Assets
Loans $ (12) (406) (418)
Federal funds sold (15) (78) (93)
Federal Reserve Bank stock - - -
Federal Home Loan Bank stock 2 (11) (9)
Investment securities
Taxable 299 (52) 247
Nontaxable 264 (96) 168
------ ----- -----
Total interest income 538 (643) (105)
Interest-bearing Liabilities
Deposits 287 (969) (682)
Short-term borrowings 1 (5) (4)
Long-term debt 7 (11) (4)
------ ----- -----
Total interest expense 295 (985) (690)
------ ----- -----
Net interest income $ 243 342 585
====== ===== =====
Net interest income on a fully tax equivalent basis for the three months ended
September 30, 2002 totaled $5,259,000, an increase of $585,000 from the
comparable period in 2001. Total interest income decreased $105,000 and was
more than offset by a decrease in total interest expense of $690,000. The
decreases in both interest income and expense were primarily a result of
decreases in the average rate earned on loans and investments and the average
rate paid for deposits and borrowings. The rate decreases reflect a 475 basis
point (a basis point equals 0.01%) decrease in the intended federal funds
rate, as set by the Federal Reserve Board, during 2001.
The net interest margin (net interest income divided by average total earning
assets) is a measure of the revenue generated by a financial institution's
earning assets, after deducting interest expense. The net interest margin for
the third quarter of 2002 was 4.41%, as compared to 4.27% for the third
quarter, 2001. The net interest margin and net interest income increased due
to rates paid for deposits and other borrowings decreasing more rapidly than
rates earned on loans and other investments.
-14-
The decrease in total interest income was primarily due to a 70 basis point
reduction in the average rate earned on earning assets, from 7.40% for the
third quarter of 2001 to 6.70% for the third quarter of 2002. This decrease
was partially offset by a $38.8 million increase in average total earning
assets. Average investment securities increased $41.3 million, partially
offset by a $2.0 million decrease in average federal funds sold and a $0.6
million decrease in average loans. Average outstanding loans decreased
primarily because of payoffs from loan refinances and sales of new fixed-rate
residential loans to the Federal Home Loan Mortgage Corporation. As a result,
funds generated by deposit growth were invested in investment securities,
which can be readily sold if future loan growth requires the funds.
The significant decrease in total interest expense was due to a 103 basis
point decrease in the average rate paid, slightly offset by a $33.5 million
increase in average interest-bearing liabilities. Most of the growth was in
average interest-bearing deposits, which increased $33.0 million.
NINE MONTHS ENDED SEPTEMBER 30, 2002 VS. 2001. The following table presents
the changes in taxable-equivalent basis interest income and expense for each
major category of interest-earning assets and interest-bearing liabilities and
the amount of change attributable to volume and rate changes for the nine
months ended September 30, 2002 as compared to the comparable period in 2001.
Nine months ended
September 30,
2002 vs 2001
--------------------------
Increase (decrease) due to:
Volume Rate Total
(In thousands)
<s> <c> <c> <c>
Interest-earning Assets
Loans $ (337) (1,632) (1,969)
Federal funds sold 106 (390) (284)
Federal Reserve Bank stock - - -
Federal Home Loan Bank stock 8 - 8
Investment securities
Taxable 679 (330) 349
Nontaxable 570 (255) 315
------ ----- -----
Total interest income 1,026 (2,607) (1,581)
Interest-bearing Liabilities
Deposits 524 (3,748) (3,224)
Short-term borrowings 2 (18) (16)
Long-term debt 154 (66) 88
------ ----- -----
Total interest expense 680 (3,832) (3,152)
------ ----- -----
Net interest income $ 346 1,225 1,571
====== ===== =====
-15-
Net interest income on a fully tax equivalent basis for the first nine months
of 2002 totaled $15,217,000, an increase of $1,571,000 from the first nine
months of 2001. Total interest income decreased $1,581,000 and was more than
offset by a decrease in total interest expense of $3,152,000.
The decrease in total interest income was primarily due to a 95 basis point
decrease in the average rate earned on earning assets, from 7.74% for the
first nine months of 2001 to 6.79% for the first nine months of 2002. This
decrease was partially offset by a $29.2 million increase in average total
earning assets. Average investment securities increased $30.4 million,
partially offset by a $5.5 million decrease in average loans. Average loans
decreased primarily because of payoffs from loan refinances and sales of new
fixed-rate residential loans to the Federal Home Loan Mortgage Corporation.
The decrease in total interest expense was due to a 134 basis point decrease
in the average rate paid, slightly offset by a $21.0 million increase in
average interest-bearing liabilities. Average interest-bearing deposits
increased $17.7 million and average long-term debt increased $3.2 million.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The total provision for loan losses is determined based upon management's
evaluation as to the amount needed to maintain the allowance for credit losses
at a level considered appropriate in relation to the risk of losses inherent
in the portfolio. The total loan loss provision and the other changes in the
allowance for loan losses are shown below.
Quarter Ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
(In thousands)
<s> <c> <c> <c> <c>
Balance, beginning of period $2,000 2,000 2,000 2,000
----- ----- ----- -----
Charge-offs 129 80 275 214
Recoveries 7 12 28 36
----- ----- ----- -----
Net charge-offs 122 68 247 178
----- ----- ----- -----
Provision for loan losses 122 70 247 180
----- ----- ----- -----
Balance, end of period $2,000 2,002 2,000 2,002
====== ====== ====== ======
-16-
Charge-offs for the first nine months of 2002 and 2001 are attributable to:
Quarter Ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
(In thousands)
<s> <c> <c> <c> <c>
Commercial & industrial $ 25 - 25 -
Residential real estate 26 - 26 -
Consumer 66 77 189 188
Credit card 12 3 35 26
---- --- --- ---
Totals $129 80 275 214
==== === === ===
The following table sets forth information regarding the past due, non-accrual
and renegotiated loans of the Bank at the dates indicated:
September 30, December 31,
2002 2001
------------ -----------
(In thousands)
<s> <c> <c>
Loan accounted for on
non-accrual basis $ - -
Accruing loans which are
past due 90 days or more 278 146
Renegotiated loans - -
--- ---
Total $278 146
=== ===
Accruing loans which are past due 90 days or more at September 30, 2002
consist of installment loans and loans secured by 1-4 family or commercial
real estate. Accruing loans past due 90 days or more at December 31, 2001
consist of installment loans and loans secured by 1-4 family residential
property.
INVESTMENT SECURITIES AND LONG-TERM DEBT RESTRUCTURING
During August, 2002, LCNB paid in full $4.0 million in Federal Home Loan Bank
(FHLB) notes with an average interest rate of 7.72%, which otherwise would
have been due in June, 2004 and June, 2005. The prepayment fees on the early
payoffs totaled approximately $425,000, which is included in other non-
interest expenses in the consolidated statements of income.
-17-
To negate the financial impact of the prepayment fees, LCNB sold $17.7 million
of U.S. Agency securities bearing an average coupon rate of 5.24% during
August and recorded a gain of $408,000 from the sales. At approximately the
same time as the sales, LCNB purchased securities totaling $19.9 million and
bearing an average tax-equivalent coupon rate (some of the securities
purchased were tax-exempt municipals) of 4.94%.
The transactions described were consummated to improve projected net interest
margin.
NON-INTEREST INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. 2001. Total non-interest income for
the third quarter of 2002 was $576,000 or 52.8% greater than for the third
quarter of 2001 primarily due to the $408,000 gain on securities discussed
above. The remaining $168,000 reflected increases in all line items included
in the non-interest income category. Trust income increased due to fees
received from brokerage services, a new service first offered in April, 2002.
Total service charges and fees increased primarily due to fees charged on non-
sufficient fund checks returned. The increase reflects a higher number of
non-sufficient fund checks being returned. Insurance agency income increased
primarily due to an increase in the volume of new policies written. An
increase in gains from loans sold, primarily due to an increased volume of
loans sold during the 2002 period, caused the increase in other operating
income. The loan volume sold reflects increased refinancing activity during
the third quarter, 2002, caused by an historical low in market rates for
fixed-rate loans.
NINE MONTHS ENDED SEPTEMBER 30, 2002 VS. 2001. Total non-interest income
for the first nine months of 2002 was $557,000 or 16.1% more than for the
comparable period in 2001 primarily due to the $408,000 gain on securities
already discussed. The remaining $149,000 increase was due to increases in
every line item except insurance agency income, which decreased $73,000.
Trust income increased due to the new brokerage services and due to an
increase in the fair market value of trust assets, upon which fees are based.
The increases in service charges and fees and other operating income were
caused by substantially the same reasons mentioned in the previous section.
Insurance agency income decreased due to the absence of $189,000 in
contingency commissions received during the first quarter of 2001, but not
in 2002. Contingency commissions are profit-sharing arrangements on property
and casualty policies between the originating agency and the underwriter and
are generally based on underwriting results and written premium. As such, the
amount received each year can vary significantly depending on loss experience.
-18-
NON-INTEREST EXPENSE
THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. 2001. Total non-interest expense
increased $958,000 or 27.2% during the third quarter, 2002 compared with the
third quarter, 2001 partially due to the $425,000 prepayment fee on Federal
Home Loan Bank notes previously discussed. The remaining $554,000 increase
reflects increases in salaries and wages, equipment expenses, and other non-
interest expenses. Salaries and wages increased $148,000 or 9.6% due to
normal pay increases and the addition of several new employees. A small
increase in the number of staff was necessary because of the opening of a
full-service office in Hamilton, Ohio in September, 2001. Equipment expenses
increased $124,000 or 76.5% primarily due to rental costs for a new phone
system and increased depreciation on furniture and equipment purchased for
new and remodeled offices. Other non-interest expenses increased $228,000
or 28.1%, not including the prepayment fee, primarily due to training and
conversion expenses totaling $169,000 for LCNB's conversion to a new data
processing system, completed in September, 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2002 VS. 2001. Total non-interest expense
increased $1,560,000 or 15.09% during the first nine months of 2002 compared
with the first 9 months of 2001 primarily due to the FHLB prepayment fee and
increases in salaries and wages, pension and other employee benefits,
equipment expenses, and other non-interest expenses. Salaries and wages
increased $430,000 or 9.6% and equipment expenses increased $111,000 or 22.7%
for the same reasons mentioned in the previous section. Pension and other
employee benefits increased $89,000 or 7.5% primarily due to increased health
insurance costs and to increased Social Security and Medicare matching as a
result of increased salaries and wages. Other non-interest expenses increased
$841,000 or 36.3% primarily due to the $425,000 FHLB prepayment fee and
training and conversion expenses totaling $184,000 for the year. The
remaining $232,000 increase is primarily due to a $94,000 increase in computer
maintenance costs due to new hardware and software required for the conversion
to a new operating system and to a $52,000 increase in automatic teller
machine (ATM) expenses resulting from increased usage of ATMs, an increase in
fees paid the ATM processor, and the cost of a new ATM maintenance contract.
-19-
FINANCIAL CONDITION
The following table highlights the changes in the balance sheet. The analysis
uses quarterly averages to give a better indication of balance sheet trends.
CONDENSED QUARTERLY AVERAGE BALANCE SHEETS
Sept. 30, June 30, March 31,
2002 2002 2002
(In thousands)
<s> <c> <c> <c>
ASSETS
Interest-earning:
Federal funds sold $ 17,169 22,329 24,911
Investment securities 123,186 111,464 100,471
Loans 332,638 326,345 322,636
------- ------- -------
Total interest-earning assets 472,993 460,138 448,018
Noninterest-earning:
Cash and due from banks 13,619 13,419 14,195
All other assets 19,458 19,590 19,562
Allowance for credit losses (2,001) (2,002) (2,002)
------- ------- -------
Total assets $504,069 491,145 479,773
======= ======= =======
LIABILITIES
Interest-bearing:
Interest-bearing deposits $380,957 369,410 357,373
Short-term borrowings 1,078 514 1,148
Long-term debt 8,708 11,605 12,300
------- ------- -------
Total interest-bearing liabilities 390,743 381,529 370,821
Noninterest-bearing:
Noninterest-bearing deposits 59,415 57,363 57,203
All other liabilities 3,128 2,627 2,594
------- ------- -------
Total liabilities 453,286 441,519 430,618
SHAREHOLDERS' EQUITY 50,783 49,626 49,155
------- ------- -------
Total liabilities and shareholders'
equity $504,069 491,145 479,773
======= ======= =======
-20-
Total average assets increased approximately $12.9 million or 2.6% during the
third quarter, 2002 when compared to the second quarter, 2002. Substantially
all of the growth, approximately $11.7 million, was in investment securities.
Average loans increased $6.3 million. The increase in average loans was
primarily in the installment, Homeline (secured residential line of credit),
and commercial loan portfolios; the real estate loan portfolio decreased $1.6
million on an average basis. The decrease was due to payoffs on loans
refinanced combined with the sale of $3,849,000 in new fixed-rate mortgage
loans during the third quarter. With limited opportunities to invest deposit
growth in the loan portfolio, management purchased additional investment
securities available for sale, which can readily be sold if the funds should
be needed for future loan growth.
Total average interest-bearing liabilities for the third quarter, 2002, were
$9.2 million or 2.4% greater than for the second quarter, 2002. The growth
was in interest-bearing deposits, which increased $11.5 million on an average
basis - $3.6 million of the growth was in highly liquid savings and NOW
account products and $7.9 million was in certificates of deposit and IRA
accounts. The $2.9 million decrease in average long-term debt reflects the
prepayment of $4.0 million in FHLB notes during August, 2002.
ASSETS UNDER MANAGEMENT
In addition to assets recorded in its balance sheet, LCNB, as a fiduciary or
custodian, holds assets for customers and investors as a part of its normal
operations. The following table shows balances for the different types of
assets.
September 30, December 31,
2002 2001
------------ -----------
(In thousands)
<s> <c> <c>
Total consolidated assets
recorded on the LCNB Corp.
consolidated balance sheet $508,767 480,435
Trust Department assets,
at fair market value 118,778 109,456
Mortgage loans serviced for others 26,243 23,734
Business cash management,
at fair market value 24,278 26,163
Brokerage accounts,
at fair market value 3,045 -
------- -------
Total assets managed $681,111 639,788
======= =======
-21-
CAPITAL
Lebanon Citizens and LCNB are required by regulators to meet certain
minimum levels of capital adequacy. These are expressed in the form of certain
ratios. Capital is separated into Tier 1 capital (essentially shareholders'
equity less goodwill and other intangibles) and Tier 2 capital (essentially
the allowance for loan losses limited to 1.25% of risk-weighted assets). The
first two ratios, which are based on the degree of credit risk in LCNB's
assets, provide for weighting assets based on assigned risk factors and
include off-balance sheet items such as loan commitments and stand-by letters
of credit. The ratio of Tier 1 capital to risk-weighted assets must be at
least 4.0% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital)
to risk-weighted assets must be at least 8.0%. The capital leverage ratio
supplements the risk-based capital guidelines. Banks are required to maintain
a minimum ratio of Tier 1 capital to adjusted quarterly average total assets
of 3.0%. A summary of the regulatory capital and capital ratios of LCNB
follows:
At At
September 30, December 31,
2002 2001
(Dollars in thousands)
<s> <c> <c>
Regulatory Capital:
Shareholders' equity $50,893 49,507
Goodwill and other intangibles (3,274) (3,729)
Net unrealized securities gains (2,253) (1,196)
------ ------
Tier 1 risk-based capital 45,366 44,582
Eligible allowance for loan losses 2,000 2,000
------ ------
Total risk-based capital $47,366 46,582
======= ======
Capital Ratios:
Total risk-based 14.86% 15.40%
Tier 1 risk-based 14.24% 14.74%
Leverage 9.11% 9.46%
Minimum Required Capital Ratios:
Total risk-based 8.00% 8.00%
Tier 1 risk-based 4.00% 4.00%
Tier 1 leverage 3.00% 3.00%
-22-
On April 17, 2001, LCNB's Board of Directors authorized three separate stock
repurchase programs, two phases of which continue. The shares purchased will
be held for future corporate purposes.
Under the "Market Repurchase Program" LCNB will purchase up to 50,000 shares
of its stock through market transactions with a selected stockbroker. Through
September 30, 2002, 7,565 shares had been purchased under this program.
The "Private Sale Repurchase Program" is available to shareholders who wish
to sell large blocks of stock at one time. Because LCNB's stock is not widely
traded, a shareholder releasing large blocks may not be able to readily sell
all shares through normal procedures. Purchases of blocks will be considered
on a case-by-case basis and will be made at prevailing market prices. A total
of 46,897 shares had been purchased under this program at September 30, 2002.
LIQUIDITY
LCNB depends on dividends from its subsidiaries for the majority of its liquid
assets, including the cash needed to pay dividends to its shareholders.
National banking law limits the amount of dividends Lebanon Citizens may pay
to the sum of retained net income, as defined, for the current year plus
retained net income for the previous two years. Prior approval from the
Office of the Comptroller of the Currency, Lebanon Citizens primary regulator,
would be necessary for Lebanon Citizens to pay dividends in excess of this
amount. In addition, dividend payments may not reduce capital levels below
minimum regulatory guidelines. Management believes Lebanon Citizens will be
able to pay anticipated dividends to LCNB without needing to request approval.
Liquidity is the ability to have funds available at all times to meet the
commitments of LCNB. Asset liquidity is provided by cash and assets which are
readily marketable or pledgeable or which will mature in the near future.
Liquid assets include cash, federal funds sold and securities available for
sale. At September 30, 2002, LCNB liquid assets amounted to $154.8 million or
30.4% of total gross assets, an increase from $132.8 million or 27.7% at
December 31,2001.
Liquidity is also provided by access to core funding sources, primarily core
depositors in the bank's trade area. Approximately 89.6% of total deposits
at September 30, 2002 were "core" deposits. Core deposits, for this purpose,
are defined as total deposits less public funds and certificates of deposit
greater than $100,000. LCNB does not solicit brokered deposits as a funding
source.
-23-
Secondary sources of liquidity include LCNB's ability to sell loan
participations, borrow funds from the Federal Home Loan Bank, and purchase
federal funds. Management closely monitors the level of liquid assets
available to meet ongoing funding needs. It is management's intent to
maintain adequate liquidity so that sufficient funds are readily available
at a reasonable cost. LCNB experienced no liquidity or operational problems
as a result of the current liquidity levels.
In June, 2001, LCNB signed a contract with Jack Henry & Associates for
replacement of LCNB's core processing system, including computer hardware
and software. Management believes the new system will allow LCNB to enhance
operating efficiencies and improve customer service. Conversion from the old
system to the new system took place at the end of August and beginning of
September, 2002. Some conversion processes will not occur until early 2003.
Anticipated software and hardware costs total approximately $1,086,000, which
will be capitalized and charged to depreciation expense over the estimated
lives of the assets, primarily seven years. Costs of converting data files
from the current to the new system and costs of training employees on the new
system totaled approximately $184,000 through September 30, 2002, and were
expensed as incurred. Management estimates that another $75,000 of such costs
will be expensed during the fourth quarter, 2002 and $31,000 will be expensed
during 2003. It is anticipated the associated costs will be funded by
liquidating short-term assets.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
provides that goodwill shall not be amortized but should be tested for
impairment on an annual basis, using criteria prescribed in the statement.
If the carrying amount of goodwill exceeds its implied fair value, as
recalculated, an impairment loss equal to the excess shall be recognized.
Recognized intangible assets other than goodwill should be amortized over
their useful lives and reviewed for impairment in accordance with SFAS No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets."
The Company's intangible assets at September 30, 2002 were classified as
"intangible assets other than goodwill" and primarily represent the
unamortized intangible related to the Company's 1997 acquisition of three
branch offices from another bank. At September 30, 2002, the carrying amount
of this intangible was $3.2 million, net of accumulated amortization of $2.9
million, and was being amortized on a straight line basis over ten years in
accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions," which was not superseded by SFAS No. 142.
-24-
On October 1, 2002, the Financial Accounting Standards Board issued SFAS No.
147, "Acquisitions of Certain Financial Institutions," which amends certain
provisions of SFAS No. 72, SFAS No. 144, and FASB Interpretation No. 9. SFAS
No. 147 removes acquisitions of financial institutions from the scope of SFAS
No. 72 and requires that such acquisitions be accounted for in accordance
with SFAS No. 141, "Business Combinations." If the acquisition meets the
definition of a business combination, it shall be accounted for by the
purchase method in accordance with the provisions of SFAS No. 141. Any
goodwill that results will be accounted for in accordance with the provisions
of SFAS No. 142. If the acquisition does not meet the definition of a
business combination, the cost of the assets acquired shall be allocated to
the individual assets acquired and liabilities assumed based on their
relative fair values and shall not give rise to goodwill.
In addition, this proposed statement would amend SFAS No. 144 to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship intangible assets
and credit-cardholder intangible assets. Accordingly, those intangible
assets would be subject to the same undiscounted cash flow recoverability
tests and impairment loss recognition and measurement provisions that SFAS
No. 144 requires for long-term tangible assets and other finite-lived
intangible assets that are held and used.
Existing unidentifiable intangible assets, as that term is defined in SFAS
No. 72, previously recognized under the provisions of SFAS No. 72 shall
continue to be amortized (consistent with the existing clarifying provisions
of Emerging Issues Task Force Topic D-100) unless the transaction in which
the intangible asset arose meets the definition of a business combination.
Management does not believe its 1997 branch office acquisition meets the
definition of a business combination and intends to continue amortizing the
intangible over ten years, subject to periodic review for impairment and its
estimated useful life.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
For a discussion of LCNB's asset and liability management policies and gap
analysis for the year ended December 31, 2001 see Item 7A, Quantitative and
Qualitative Disclosures about Market Risks, in the recently filed Form 10-K
for the year ended December 31, 2001. There have been no material changes in
LCNB's market risks, which for LCNB is primarily interest rate risk.
Item 4. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer have reviewed,
as of a date within 90 days of this filing, the disclosure controls and
procedures that ensure that information relating to LCNB required to be
disclosed by LCNB in the reports that it files or submits under the Securities
and Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported in a timely and proper manner. Based upon this review, LCNB believes
that there are adequate controls and procedures in place. There are no
significant changes in the controls or other factors that could affect the
controls after the date of evaluation.
-25-
PART II. OTHER INFORMATION
LCNB Corp. and Subsidiaries
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults by the Company on its Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Title
99 Certification of Chief Executive Officer
and Chief Financial Officer under Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A Form 8-K filed on September 19, 2002, disclosed that LCNB Corp. had not
entered into any discussions with any party relating to the sale, merger, or
consolidation of LCNB Corp. or Lebanon Citizens National Bank.
-26-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LCNB Corp.
Registrant
Date: October 28, 2002 /s/Steve P. Foster
------------------------
Steve P. Foster
Executive Vice President
and Chief Financial Officer
-27-
CERTIFICATIONS
In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the
period ending September 30, 2002, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Stephen P. Wilson, President
and Chief Executive Officer of LCNB Corp., certify, that:
(1) I have reviewed this quarterly report on Form 10-Q of LCNB Corp.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations,
and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
(4) LCNB Corp.'s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as
defined in Exchange Act Rules 13a-14 and 15d-14, for LCNB Corp. and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to LCNB Corp., including its
consolidated subsidiaries, is made known to us by others with
those entities, particularly during the period in which the
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
control and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
(5) LCNB Corp.'s other certifying officer and I have disclosed, based on
our most recent evaluation, to LCNB Corp.'s auditors and the audit
committee of LCNB Corp.'s board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
(6) LCNB Corp.'s other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
/s/ Stephen P. Wilson
Stephen P. Wilson
President and Chief Executive Officer
October 28, 2002
-28-
CERTIFICATIONS
In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the
period ending September 30, 2002, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Steve P. Foster, Executive
Vice President and Chief Financial Officer of LCNB Corp., certify, that:
(1) I have reviewed this quarterly report on Form 10-Q of LCNB Corp.;
(2) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations, and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
(4) LCNB Corp.'s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as
defined in Exchange Act Rules 13a-14 and 15d-14, for LCNB Corp. and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to LCNB Corp., including its
consolidated subsidiaries, is made known to us by others with
those entities, particularly during the period in which the
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
control and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
(5) LCNB Corp.'s other certifying officer and I have disclosed, based on
our most recent evaluation, to LCNB Corp.'s auditors and the audit
committee of LCNB Corp.'s board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
(6) LCNB Corp.'s other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Steve P. Foster
Steve P. Foster
Executive Vice President and
Chief Financial Officer
October 28, 2002
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