EXHIBIT 13
LCNB Corp. 2003 Annual Report
President's Letter to Shareholders (pages 2 - 3 of Annual Report):
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Dear Shareholder,
The theme of this year's Annual Report is "Growth". On this year's cover,
we have featured the last 18 Annual Reports to specifically highlight
dividend growth. 2003 was the 18th consecutive year your Board of Directors
has declared an increased dividend to shareholders. Growth, not only in
dividends but in all areas, has always been the key to LCNB's financial
performance. Growth has been our strength and will continue to be our
challenge going forward. Growth is our "Formula for Success".
All of us anticipated that 2003 was going to be a difficult and challenging
year. It certainly met those expectations, but we are pleased to report on
our significant achievements, including record net income.
As a shareholder, your total return for 2003 was 47.84%. Dividends for the
year totaled $2.125 per share, an increase of 4.94% over 2002. The market
price of your stock increased by 42.90% to $70.75 per share at year-end.
In addition to the cash dividends paid to you, over the last ten years your
stock investment has appreciated an average of 10.51% each year.
Net income for 2003 was a record $6.7 million representing a 1.31% return on
average assets and a 12.64% return on average shareholders equity. Earnings
per share were $3.94 a 3.96% or $0.15 per share increase from 2002. Total
assets increased to a record $523.6 million from $506.7 million one year ago,
an increase of $16.9 million or 3.33%. Total capital, or shareholders
equity, at December 31, 2003 is a record $52.4 million, having increased
1.00% from December 31, 2002. I direct your attention to the graphs
included in this report. These graphs display key statistical information
highlighting LCNB's performance for the last five years.
It was gratifying to see continued strong deposit growth during 2003. Total
deposits of $463.0 million at December 31, 2003, represent an increase of
$20.8 million or 4.71% from December 31, 2002. Loan growth continued to be
negatively affected by refinancing activity on residential mortgage loans and
the sale of a large majority of fixed rate residential loans originated
during 2003. Approximately $35.1 million of residential real estate loans
were sold to Federal Home Loan Mortgage Corporation during 2003. We
continued to sell the loans after determining in recent years that current
historically low market rates for residential loans were not profitable in
the long run. This continued shift away from long-term fixed rate mortgage
loans reduced our future interest rate risk. Offsetting the decline in
residential loans was a $13.9 million increase in the commercial loan
portfolio. We also experienced a $7.9 million decrease in our consumer
loan portfolio. Our asset quality remained high with a low delinquency rate
of 1.45%.
-1-
Another key factor in our "Formula for Success" was the growth we experienced
in non-interest income. The push to grow our line of products and our
delivery channels paid off in 2003. Along with our commercial bank, the
trust department, brokerage unit and insurance subsidiary all experienced
significant growth in both size and revenue. The following financial
highlight shows total assets under management as of December 31, 2002 and
2003 and the individual growth rates for 2003.
Assets Under Management ($000's) 2003 2002 $ Change
- ----------------------- ---- ---- --------
<s> <c> <c> <c>
LCNB Corp. total assets $523,608 506,751 3.33%
Trust and investments 165,499 119,263 38.77%
Mortgage loans serviced 54,802 36,592 49.76%
Business cash management 20,985 16,668 25.90%
Brokerage accounts* 13,612 3,639 274.06%
------- ------- -------
Total assets managed $778,506 682,913 14.00%
======= ======= =======
*at fair market value
In addition to this illustration of assets under management, our Dakin
insurance subsidiary has also experienced outstanding growth. The
measurement for growth in the insurance industry is not assets under
management but premiums written. In the four years Dakin has been part
of LCNB Corp. their premiums written have grown from $4.5 million to $8.5
million. Non-interest income from all sources within the LCNB Corp. family
of products grew by 20.88% in 2003.
Additional statistical data and information on our financial performance for
2003 are available in the Management Discussion and Analysis (MD&A) document.
The MD&A document is enclosed with the initial mailing of this Annual Report
to shareholders and is also available in the LCNB Corp. Annual Report on
Form 10-K. This report is filed annually with the Securities and Exchange
Commission and is available upon request or from the Internet. Refer to
the Table of Contents page of the Annual Report for options to obtain this
SEC document.
In addition to the financial growth we have outlined, growth in our ability
to serve our customers and be more productive in our daily tasks has been
significant as well. Through our investments in technology, facilities and
training we have been able to improve our already outstanding customer
service and provide various delivery options. In the area of facilities,
we completed total renovations of our Mason and Waynesville offices during
2003. These offices were updated to better accommodate our non-traditional
product delivery, to give our customers better access and training on our
various delivery channels and to improve security. Both of these offices
now provide customers a more convenient and modern retail banking setting.
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Toward year-end we also began a major update of facilities at our Main
office. This project will accomplish the total renovation of the second
and third floors in our downtown Lebanon location. This investment marks
a renewed commitment to downtown Lebanon and will provide much needed
additional space to our growing departments, especially our Loan department.
Through this renovation we will also move our training facility for employees
from our Waynesville location into our Main office. In the area of computer
systems, we continued to upgrade equipment and install new software. During
2003 we accomplished several upgrades in our item processing area, installed
Bounce Protection software and brought platform automation on-line. Not only
have these investments prepared us for today, but we are well positioned for
tomorrow.
In the last quarter of 2003 President Bush signed into law legislation titled
"Check 21". This new law will revolutionize how banks do business. Today,
every check that crosses our counters must be physically presented to the
bank it is drawn on to be collected. If we give you $10.00 in cash or credit
for a check drawn on a bank in California we do not get our $10.00 back until
we successfully get that specific piece of paper (check) to California to be
presented for payment. Under "Check 21" we will ultimately be able to
electronically present that check for payment. This is truly a revolution
in banking. Because of our investment in technology over the past several
years we have the electronic images to present. Very few of our competitors
have electronic check images. Today, we provide you electronic images of
your checks and deposits through "Advantage Statement", PC Banking and CD-
ROM. We will be able to use this technology to significantly lower our cost
on the presentment side. The other significant advantage we have going
forward is the next-day availability of funds. To my knowledge, we are the
only bank in our market area that provides customers with next-day
availability on all deposits. With "Check 21", we will have the ability to
achieve next-day availability on the collection (presentment) side as well.
We feel "Check 21", when fully implemented, will provide us with a
competitive advantage through lower cost. We are prepared to take full
advantage of this revolution in banking.
Balance sheet growth, revenue and income growth, technology and facility
growth, this "Formula for Success" was accomplished as a direct result of
the hard work and dedication of our 247 LCNB and Dakin employees. Our
employees, honoring the traditions of the past, building for the future and
taking care of our customers one at a time, day in and day out, are what
make our success possible.
I trust that we have properly conveyed our readiness for and our dedication
to the future. We want to continue to be your partner in the 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.
-3-
The Annual meeting for LCNB Corp. will be April 13, 2004 at 10:00 a.m. at
our Main Office, 2 North Broadway in Lebanon, Ohio. Proxy material is
included with this mailing. Please review, sign and return the proxy in the
envelope provided. We would be pleased to have you attend the meeting in
person. Thank you for your continued support.
Stephen P. Wilson
President & CEO
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Financial Statements and Supplementary Data (Pages 15 through 26
of the 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, 2003 and 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with U.S. generally accepted
accounting principles.
/s/J.D. Cloud & Co. L.L.P.
-----------------------------
Certified Public Accountants
Cincinnati, Ohio
January 16, 2004
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LCNB CORP. AND SUBSDIARIES
CONSOLIDATED BALANCE SHEETS
At December 31,
($000's)
2003 2002
<s> <c> <c>
ASSETS:
Cash and due from banks $ 11,784 13,679
Federal funds sold 22,625 11,925
------- -------
Total cash and cash equivalents 34,409 25,604
Securities available for sale, at market value 150,939 136,178
Federal Reserve Bank and Federal Home
Loan Bank stock, at cost 2,962 2,871
Loans, net 315,683 322,832
Premises and equipment, net 12,009 11,688
Intangibles, net 2,832 3,121
Other assets 4,774 4,457
------- -------
TOTAL ASSETS $523,608 506,751
======= =======
LIABILITIES:
Deposits-
Noninterest-bearing $ 66,159 58,921
Interest-bearing 396,874 383,299
------- -------
Total deposits 463,033 442,220
Long-term debt 4,197 6,253
Accrued interest and other liabilities 3,930 6,348
------- -------
TOTAL LIABILITIES 471,160 454,821
------- -------
SHAREHOLDERS' EQUITY:
Common shares, no par value, authorized
4,000,000 shares; 1,775,942 shares issued 10,560 10,560
Surplus 10,553 10,553
Retained earnings 33,872 30,768
Treasury shares at cost, 88,754 and 54,917
shares at December 31, 2003 and 2002,
respectively (4,356) (2,193)
Accumulated other comprehensive income
net of taxes 1,819 2,242
------- -------
TOTAL SHAREHOLDERS' EQUITY 52,448 51,930
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $523,608 506,751
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
($000's, except per share amounts)
2003 2002 2001
<s> <c> <c> <c>
INTEREST INCOME:
Interest and fees on loans $21,991 24,792 27,266
Dividends on Federal Reserve Bank
and Federal Home Loan Bank stock 129 139 171
Interest on investment securities-
Taxable 3,040 3,068 2,601
Non-taxable 2,100 1,825 1,459
Other short-term investments 177 339 667
------ ------ ------
TOTAL INTEREST INCOME 27,437 30,163 32,164
------ ------ ------
INTEREST EXPENSE:
Interest on deposits 8,395 10,102 13,737
Interest on short-term borrowings 6 13 33
Interest on long-term debt 279 555 570
------ ------ ------
TOTAL INTEREST EXPENSE 8,680 10,670 14,340
------ ------ ------
NET INTEREST INCOME 18,757 19,493 17,824
PROVISION FOR LOAN LOSSES 658 348 237
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,099 19,145 17,587
------ ------ ------
NON-INTEREST INCOME:
Trust income 1,308 1,145 1,115
Service charges and fees 3,126 2,521 2,327
Net gain on sales of securities 9 429 17
Insurance agency income 1,464 1,164 1,108
Gains from sales of mortgage loans 758 235 67
Other operating income 132 129 208
------ ------ ------
TOTAL NON-INTEREST INCOME 6,797 5,623 4,842
------ ------ ------
NON-INTEREST EXPENSE:
Salaries and wages 6,808 6,531 5,962
Pension and other employee benefits 1,737 1,702 1,577
Equipment expenses 1,021 877 664
Occupancy expense - net 1,115 1,029 1,043
State franchise tax 552 529 509
Marketing 385 394 386
Intangible amortization 609 608 602
ATM expense 292 412 349
Other non-interest expense 3,206 3,623 2,830
------ ------ ------
TOTAL NON-INTEREST EXPENSE 15,725 15,705 13,922
------ ------ ------
INCOME BEFORE INCOME TAXES 9,171 9,063 8,507
PROVISION FOR INCOME TAXES 2,434 2,523 2,440
------ ------ ------
NET INCOME $ 6,737 6,540 6,067
====== ====== ======
Earnings per common share:
Basic $ 3.94 3.79 3.43
Diluted $ 3.94 3.79 3.43
Weighted average shares outstanding (000's):
Basic 1,709 1,724 1,769
Diluted 1,709 1,724 1,769
The accompanying notes to consolidated financial statements are an integral
part of these statements.
-8-
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31,
(000's, 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, 2001 $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
taxes 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
Net income 6,540 6,540 6,540
Net unrealized gain on
available-for-sale securities
(net of taxes of $685) 1,329 1,329 1,329
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 7,586
======
Treasury shares purchased (1,677) (1,677)
Cash dividends declared-
$2.025 per share (3,486) (3,486)
------ ------ ------ ----- ----- ------
Balance December 31, 2002 10,560 10,553 30,768 (2,193) 2,242 51,930
Net income 6,737 6,737 6,737
Net unrealized loss on
available-for-sale securities
(net of tax benefit of $215) (417) (417) (417)
Reclassification adjustment for
net realized gain on sale of
available-for-sale securities
included in net income (net of
taxes of $3) (6) (6) (6)
-----
Total comprehensive income 6,314
=====
Treasury shares purchased (2,163) (2,163)
Cash dividends declared-
$2.125 per share (3,633) (3,633)
------ ------ ------ ----- ----- ------
Balance December 31, 2003 $10,560 10,553 33,872 (4,356) 1,819 52,448
====== ====== ====== ===== ===== ======
The accompanying notes to consolidated financial statements are an integral part of these statements.
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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
($000's)
2003 2002 2001
<s> <c> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,737 6,540 6,067
Adjustments to reconcile net income
to net cash provided by operating activities-
Depreciation, amortization and accretion 3,209 2,548 2,259
Provision for loan losses 658 348 237
Deferred income tax benefit 83 (63) (64)
Federal Home Loan Bank stock dividends (91) (99) (132)
Realized gains on sales of securities
available for sale (9) (429) (17)
Origination of mortgage loans for sale (35,060) (20,852) (13,395)
Proceeds from sales of mortgage loans 35,448 21,087 13,462
(Increase) decrease in income receivable (72) 98 88
(Increase) decrease in other assets (996) (496) (127)
Increase (decrease) in other liabilities 106 (308) 549
------ ------ ------
TOTAL ADJUSTMENTS 3,276 1,834 2,860
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,013 8,374 8,927
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available
for sale 1,775 25,739 13,609
Proceeds from maturities of securities
available for sale 46,959 29,093 15,916
Purchases of securities available for sale (65,429) (91,171) (44,544)
Purchases of Federal Home Loam Bank stock - - (252)
Net decrease in loans 6,283 1,829 2,599
Purchases of premises and equipment (1,394) (1,061) (2,215)
Proceeds from sales of premises and equipment 26 3 189
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES (11,780) (35,568) (14,698)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 20,813 27,449 19,986
Net change in short-term borrowings (2,389) 2,329 (406)
Proceeds from issuance of long-term debt - - 6,000
Principal payments on long-term debt (2,056) (6,053) (50)
Cash dividends paid (3,633) (3,486) (3,269)
Purchases of treasury shares (2,163) (1,677) (516)
------ ------ ------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 10,572 18,562 21,745
------ ------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 8,805 (8,632) 15,974
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 25,604 34,236 18,262
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $34,409 25,604 34,236
====== ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 8,778 10,968 14,585
Income taxes 2,245 2,540 2,562
The accompanying notes to consolidated financial statements are an integral
part of these statements.
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LCNB Corp. (the "Company"), an Ohio corporation formed in December 1998, is
a financial holding company whose principal assets are the ownership of
Lebanon Citizens National Bank (the "Bank") and Dakin Insurance Agency, Inc.
("Dakin"). The Bank was founded in 1877 and provides full banking services,
including trust and brokerage 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 Bank's primary market area.
BASIS OF PRESENTATION-
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant 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-
All of the Company's debt securities are classified as available-for-sale and
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.
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. Generally, loans are placed on
non-accrual status at ninety days past due, unless the loan is well-secured
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and in the process of collection. The accrual of interest on loans is also
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 year's 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 loan's 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-
Statement of Financial Accounting Standards ("SFAS") No. 147, "Acquisitions
of Certain Financial Institutions", was issued on October 1, 2002. The
Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", on
July 20, 2001. SFAS No. 147 amended certain provisions of SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions", and
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets".
SFAS No. 147 requires that acquisitions of financial institutions be
accounted for in accordance with SFAS No. 141, Business Combinations, if the
acquisition meets the definition of a business combination. 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
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individual assets acquired and liabilities assumed based on their relative
fair values and shall not give rise to goodwill. Existing unidentifiable
intangible assets shall continue to be amortized unless the transaction in
which the intangible asset arose meets the definition of a business
combination. In addition, SFAS No. 147 requires that long-term customer-
relationship intangible assets of financial institutions, such as depositor-
and borrower-relationship intangible assets and credit-cardholder intangible
assets, 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.
The Company's intangible assets at December 31, 2003 primarily represent the
unamortized intangible related to the Company's 1997 acquisition of three
branch offices from another bank. Management does not believe its 1997
branch office acquisition meets the definition of a business combination and
continues to amortize the intangible over ten years, subject to periodic
review for impairment in accordance with SFAS No. 144. At December 31, 2003,
the carrying amount of this intangible was $2.4 million, net of accumulated
amortization of $3.7 million.
Mortgage servicing rights on originated mortgage loans that have been sold
are capitalized by allocating the total cost of the loans between mortgage
servicing rights and the loans based on their relative fair values.
Capitalized mortgage servicing rights are amortized to loan servicing income
in proportion to and over the period of estimated servicing income. Such
assets are periodically evaluated as to the recoverability of their carrying
value.
Annual estimates of intangible amortization expense, including amortization
of the mortgage servicing rights asset, for the years 2004 through 2008 are
$664,000, $647,000, $640,000, $566,000, and $244,000, respectively.
MARKETING EXPENSE-
Marketing costs are expensed as incurred.
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 Company'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.
STOCK OPTIONS-
The Company established an Ownership Incentive Plan (the "Plan") during 2002
that is more fully described in Note 7. The Company accounts for the Plan
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees, and related Interpretations". No
stock-based employee compensation cost is reflected in net income, as all
options granted under the Plan have an exercise price equal to the market
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value of the underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per share for the
year ended December 31, 2003 if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, " Accounting for Stock-
Based Compensation", to stock-based employee compensation ($000's):
<s> <c>
Net income, as reported $6,737
Deduct total stock-based employee compensation
expense estimated using Black-Scholes model,
net of related tax effects 3
-----
Pro-forma net income $6,734
=====
The pro-forma affect of the above adjustment on basic and diluted earnings
per share was not material.
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. Diluted
earnings per share is adjusted for the dilutive effects of stock options.
The diluted average number of common shares outstanding has been increased
for the assumed exercise of stock options with proceeds used to purchase
treasury shares at the average market price for the period.
RECLASSIFICATIONS-
Certain prior period data presented in the financial statements has been
reclassified to conform with the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS-
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities", was issued in April, 2003. It amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities accounted for under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company does not currently hold
any security investments of the types covered by this SFAS and is therefore
not affected by its provisions.
-14-
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", was issued in May, 2003,
and establishes new accounting standards for classification and measurement
of certain financial instruments with characteristics of both assets and
liabilities. Many of the instruments covered by the scope of SFAS No. 150
were previously classified as equity; SFAS No. 150 requires that they be
classified as liabilities or, in certain circumstances, as assets. The
Company does not currently hold any security investments with such
characteristics and SFAS No. 150 therefore has no effect on LCNB Corp.'s
financial statements.
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits", was issued in December, 2003, and replaces
the original SFAS No. 132. SFAS No. 132 (revised 2003) retains the
disclosures required by the original SFAS No. 132 and requires additional
disclosures describing types of plan assets, investment strategy, measurement
dates, plan obligations, cash flows, and components of net periodic benefit
cost recognized during interim periods. Such disclosures are reflected in
Note 6 to these financial statements.
FASB Interpretation No. ("FIN") 46 (revised December 2003), "Consolidation
of Variable Interest Entities", was issued in December, 2003 and replaces the
original FASB Interpretation No. 46, which was issued in January, 2003. The
original FIN 46 required a company to consolidate a variable interest entity,
as defined, in its financial statements if that company is subject to a
majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns, or both.
The original FIN 46 also required disclosures about variable interest
entities that a company is not required to consolidate, but in which it has
a significant variable interest. The revised FIN 46 delayed the effective
date of its provisions from January 31, 2003, as required in the original FIN
46, to December 31, 2003, subject to certain exceptions; expanded the list of
transactions deemed not to be within the scope of the interpretation; and
made other technical changes. The Company is not the beneficiary of any
variable interest entities and FIN 46 therefore has no effect on the
Company's financial statements.
-15-
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale
investment securities at December 31 are summarized as follows ($000's):
2003
-----------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<s> <c> <c> <c> <c>
U.S. Treasury notes $ 2,137 12 - 2,149
U.S. Agency notes 61,397 608 183 61,822
U.S. Agency mortgage-
backed securities 20,951 158 121 20,988
Municipal securities:
Non-taxable 52,441 2,002 34 54,409
Taxable 11,258 357 44 11,571
------- ----- --- -------
$148,184 3,137 382 150,939
======= ===== === =======
2002
-----------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<s> <c> <c> <c> <c>
U.S. Treasury notes $ 999 20 - 1,019
U.S. Agency notes 46,436 653 - 47,089
U.S. Agency mortgage-
backed securities 18,742 310 - 19,052
Municipal securities:
Non-taxable 54,924 2,012 80 56,856
Taxable 11,681 487 6 12,162
------- ----- -- -------
$132,782 3,482 86 136,178
======= ===== == =======
-16-
Contractual maturities of debt securities at December 31, 2003 were as
follows ($000's). Actual maturities may differ from contractual maturities
when issuers have the right to call or prepay obligations.
Amortized Market
Cost Value
<s> <c> <c>
Due within one year $ 14,248 14,451
Due from one to five years 89,582 91,223
Due from five to ten years 17,263 17,691
Due after ten years 6,140 6,586
------- -------
127,233 129,951
U.S. Agency mortgage-
backed securities 20,951 20,988
------- -------
$148,184 150,939
======= =======
Gross gains realized on sales of securities available for sale were $18,000,
$446,000, and $46,000 for 2003, 2002 and 2001, respectively. Gross realized
losses during 2003, 2002 and 2001 amounted to $9,000, $17,000 and $29,000,
respectively.
Investment securities with a market value of $74,130,000 and $42,254,000 at
December 31, 2003 and 2002, respectively, were pledged to secure public
deposits and for other purposes required or permitted by law.
NOTE 3 - LOANS
Major classifications of loans at December 31 are as follows ($000's):
2003 2002
<s> <c> <c>
Commercial and industrial $ 30,519 35,198
Commercial, secured by real estate 99,461 80,882
Residential real estate 139,305 151,502
Consumer, excluding credit card 43,283 51,184
Agricultural 1,192 1,314
Credit card 2,707 2,689
Other loans 212 57
Lease financing 588 1,256
------- -------
317,267 324,082
Deferred net origination costs 566 750
------- -------
317,833 324,832
Allowance for loan losses (2,150) (2,000)
------- -------
Loans-net $315,683 322,832
======= =======
-17-
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, 2003, 2002 and 2001 were
$54,802,000, $36,592,000, and $23,734,000 respectively.
Approximately $370,000 in mortgage servicing rights were capitalized and
$49,000 was amortized to loan servicing income during the year ended
December 31, 2003.
Changes in the allowance for loan losses were as follows ($000's):
2003 2002 2001
<s> <c> <c> <c>
BALANCE-BEGINNING OF YEAR $2,000 2,000 2,000
Provision for loan losses 658 348 237
Charge-offs (560) (390) (277)
Recoveries 52 42 40
----- ----- -----
BALANCE-END OF YEAR $2,150 2,000 2,000
===== ===== =====
Nonaccrual loans at December 31, 2003, totaled $794,000, which included
commercial loans in the amount of $564,000 and a consumer loan in the amount
of $146,000. There were no nonaccrual loans at December 31, 2002. Interest
income that would have been recorded during 2003 if loans on a nonaccrual
status at December 31, 2003 had been current and in accordance with their
original terms was approximately $72,000. Interest income that would have
been recorded in 2002 and 2001 for loans on a nonaccrual status was not
material.
At December 31, 2003 and 2002, loans past due 90 days or more and still
accruing were $2,442,000 and $232,000, respectively. Approximately
$2,030,000 of the increase in loans past due 90 days or more and still
accruing was due to related commercial loans secured by a combination of
mortgage and other liens. These loans are considered well-secured and in
the process of collection. After receipt of specified payments and in
accordance with a negotiated agreement, the Bank intends to re-write the
remaining balance of the loans. 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.
Loans that were considered to be impaired in accordance with SFAS No. 114
totaled $2,824,000 at December 31, 2003, of which $2,740,000 had a related
allowance for loan losses of $674,000 and $84,000 did not have a related
allowance for loan losses. The average balance of these impaired loans
during 2003 was $2,857,000. During 2003, the Company accrued interest income
totaling $183,000 on impaired loans classified as past due 90 days or more
and still accruing because they are considered well-secured and in the
process of collection. At December 31, 2002, the recorded investment in
loans considered to be impaired was not material.
-18-
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows ($000's):
2003 2002
<s> <c> <c>
Land $ 2,244 2,251
Buildings 9,843 9,715
Equipment 8,442 9,813
Construction in progress 408 90
------ ------
Total 20,937 21,869
Less-Accumulated depreciation 8,928 10,181
------ ------
Premises and Equipment-Net $12,009 11,688
====== ======
Depreciation charged to income was $1,040,000 in 2003, $999,000 in 2002, and
$898,000 in 2001.
Some of the Bank's branches, telephone equipment, and other equipment are
leased under agreements expiring at various dates through 2050. These
leases are accounted for as operating leases. At December 31, 2003, required
minimum annual rentals due in the future on noncancelable leases having terms
in excess of one year aggregated $2,355,000. Minimum annual rentals for each
of the years 2004 through 2008 are as follows ($000's):
<s> <c>
2004 $275
2005 267
2006 246
2007 131
2008 30
Rental expense for all leased branches and equipment amounted to $309,000 in
2003, $305,000 in 2002 and $294,000 in 2001.
-19-
NOTE 5 - DEPOSIT LIABILITIES
Contractual maturities of time deposits at December 31, 2003 were as follows
($000's):
Certificates All other
over $100,000 Certificates Total
<s> <c> <c> <c>
2004 $14,181 62,751 76,932
2005 7,810 28,728 36,538
2006 5,790 15,068 20,858
2007 5,384 19,499 24,883
2008 1,510 6,124 7,634
Thereafter 5,952 3,090 9,042
------ ------- -------
$40,627 135,260 175,887
====== ======= =======
NOTE 6 - EMPLOYEE BENEFITS
The Company'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 Plan's actuarial cost method.
All plan assets are invested in time and other deposits with Lebanon Citizens
National Bank.
The company uses a September 30 measurement date for its retirement plan.
The components of net periodic pension cost are summarized as follows ($000's):
2003 2002 2001
<s> <c> <c> <c>
Service cost $624 629 566
Interest cost 298 262 212
Actual return on Plan assets (233) (248) (164)
Amortization of unrecognized transition obligation - 10 17
Recognized net actuarial loss (gain) (46) 5 (52)
--- --- ---
Net periodic pension cost $643 658 579
=== === ===
-20-
A summary of the Plan's prepaid benefit cost, included in other assets on the
consolidated balance sheets, and the Plan's funded status at December 31
follows ($000's):
2003 2002
<s> <c> <c>
Change in projected benefit obligations
---------------------------------------
Projected benefit obligation at beginning of year $5,733 4,785
Service cost 624 629
Interest cost 298 262
Actuarial loss (336) 80
Benefits paid (587) (23)
----- -----
Projected benefit obligation at end of year 5,732 5,733
----- -----
Change in plan assets
---------------------
Fair value of plan assets at beginning of year 5,678 4,782
Actual return on plan assets 233 248
Employer contribution 618 671
Benefits paid (587) (23)
----- -----
Fair value of plan assets at end of year 5,942 5,678
----- -----
Funded status 210 (55)
Unrecognized net actuarial loss 626 916
----- -----
Prepaid benefit cost $ 836 861
===== =====
Significant actuarial assumptions used for 2003 and 2002 included a discount
rate, an expected long-term rate of return on Plan assets, and an future
compensation rate increase of 5.50%, 5.50%, and 4.00%, respectively. The
expected long-term rate of return on Plan assets was estimated using historic
returns on investments, adjusted for expected long-term interest rates.
The accumulated benefit obligation at December 31, 2003 and 2002 was
$4,901,000 and $4,778,000, respectively.
The Company expects to contribute approximately $650,000 to its retirement
plan in 2004.
-21-
The following estimated future benefit payments, which reflect expected
future service, as appropriate, are expected to be paid ($000's):
<s> <c>
2004 $ 16
2005 23
2006 23
2007 68
2008 120
2009 through 2013 1,521
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
liability at December 31, 2003 and 2002 was $663,000 and $544,000,
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, 2003 and 2002 is $159,000 and $132,000, respectively. The
discount rate used to determine the present value of the obligation was 6.5%
in 2003 and 2002. The service cost associated with this plan in each of the
three years 2003, 2002, and 2001 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 7 - STOCK OPTIONS AND AWARDS
The Company established an Ownership Incentive Plan (the "Plan") during 2002
that allows for stock-based awards to eligible employees, as determined by
the Board of Directors. The awards may be in the form of stock options,
share awards, and/or appreciation rights. The Plan provides for the issuance
of up to 50,000 shares. No awards were granted during 2002. Stock options
for 2,764 shares with an exercise price of $52.375 per share were granted to
key executive officers of the Company during the first quarter, 2003. Such
options vest ratably over a five year period and expire in 2013.
The estimated weighted-average fair value of the options granted in 2003 was
$7.54 per option. The fair value was estimated at the date of grant using
the Black-Scholes option-pricing model and the following assumptions:
<s> <c>
Risk-free interest rate 2.72%
Average dividend yield 4.65%
Volatility factor of the expected market
price of the Company's common stock 25.79%
Average life 4 years
-22-
NOTE 8 - LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following at December 31 ($000's):
2003 2002
<s> <c> <c>
Federal Home Loan Bank notes $4,000 6,000
Note payable to former shareholder of Dakin 197 253
----- -----
Total $4,197 6,253
===== =====
Maturities of long-term debt in the years ending December 31 are as follows
($000's):
<s> <c>
2004 $2,060
2005 64
2006 2,067
2007 6
2008 -
In August 2002, the Company retired $4.0 million in Federal Home Loan Bank
notes bearing a weighted average interest rate of 7.72%. These notes were
scheduled to mature in 2004 and 2005. In connection with this transaction,
the Company recorded an expense of $425,000 in other non-interest expense in
the 2002 consolidated statement of income, which is the required prepayment
penalty.
At December 31, 2003, the Federal Home Loan Bank borrowings consist of two
notes with three and five-year maturities and a weighted average interest
rate of 4.97%. Interest on the notes is fixed and payable monthly. The
notes are secured by $5.0 million of 1-4 family residential mortgage loans.
Additionally, the Company is required to hold minimum levels of FHLB stock,
based on the outstanding borrowings.
The note payable to a former shareholder of Dakin matures in 2007. Payments
are due monthly at a nominal interest rate of 6%.
At December 31, 2003 and 2002, accrued interest and other liabilities include
U.S. Treasury demand note borrowings of approximately $633,000 and
$3,022,000, respectively.
-23-
NOTE 9 - INCOME TAXES
The provision for federal income taxes consists of ($000's):
2003 2002 2001
<s> <c> <c> <c>
Income taxes currently payable $2,351 2,586 2,504
Deferred income tax provision (benefit) 83 (63) (64)
----- ----- -----
Provision for income taxes $2,434 2,523 2,440
===== ===== =====
A reconciliation between the statutory income tax rate and the Company's
effective tax rate follows:
2003 2002 2001
<s> <c> <c> <c>
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from-
Tax exempt interest (7.2) (6.1) (5.4)
Other-net (0.2) (0.1) 0.1
---- ---- ----
Effective tax rate 26.6% 27.8% 28.7%
==== ==== ====
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 Company 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):
2003 2002
<s> <c> <c>
Deferred tax assets:
Allowance for loan losses $ 591 522
Amortization of intangibles 263 315
----- -----
854 837
----- -----
Deferred tax liabilities:
Depreciation of premises and equipment (439) (314)
Unrealized gains on securities available-for-sale (937) (1,155)
Deferred loan fees (37) (60)
Pension and deferred compensation (28) (61)
FHLB stock dividends (120) (89)
----- -----
(1,561) (1,679)
----- -----
Net deferred tax asset (liability) $ (707) (842)
===== =====
-24-
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company 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 Company's
exposure to credit loss in 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 Company 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 ($000's):
2003 2002
<s> <c> <c>
Commitments to extend credit $74,828 69,521
Standby letters of credit 6,770 6,938
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
Company to guarantee the performance of a customer to a third party. At
December 31, 2003 and 2002, outstanding guarantees of $1,880,000 and
$2,048,000, respectively, were issued to developers and contractors. These
guarantees generally expire within one year and are fully secured. In
addition, the Company has an approximate $4.9 million participation at
December 31, 2003 and 2002 in a letter of credit securing payment of
principal and interest on a bond issue. This letter of credit will expire
July 15, 2006, and is secured by an assignment of rents and the underlying
real property.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Company
is based on management's credit evaluation of the borrower. Collateral held
varies, but may include deposit accounts, accounts receivable, inventory,
property, plant and equipment, residential realty, and income-producing
commercial properties.
At December 31, 2003, the Company is committed under various contracts to
expend approximately $780,000 to complete certain building renovation
projects and information technology system improvements.
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.
-25-
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company 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, 2003 and 2002, certain executive officers, directors and
associates of such persons were indebted to the Bank directly or as
guarantors in the aggregate amount of $3,340,000 and $3,961,000,respectively.
Loan activity for these officers and directors was as follows ($000's):
2003 2002
<s> <c> <c>
Beginning balance $3,961 3,169
Additions 3,658 2,376
Repayments 4,279 1,584
----- -----
Ending balance 3,340 3,961
===== =====
Deposits from certain executive officers, directors and associates of such
persons held by the Company at December 31, 2003 and 2002 amounted to
$9,624,000 and $7,577,000, respectively.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values of financial instruments as of
December 31, were as follows ($000's):
2003 2002
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<s> <c> <c> <c> <c>
FINANCIAL ASSETS:
Cash and cash equivalents $ 34,409 34,409 25,604 25,604
Federal Reserve Bank and
Federal Home Loan Bank stock 2,962 2,962 2,871 2,871
Securities available-for-sale 150,939 150,939 136,178 136,178
Loans, net 315,683 323,754 322,832 329,447
FINANCIAL LIABILITIES:
Deposits 463,033 466,522 442,220 449,644
Short-term borrowings 633 633 3,022 3,022
Long-term debt 4,197 4,481 6,253 6,545
-26-
The fair value of off-balance-sheet financial instruments at December 31,
2003 and 2002 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.
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.
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 2003 and 2002, the Bank was
required to maintain average reserve balances of $1,911,000 and $1,743,000,
respectively.
The Company (consolidated) and the Bank must meet certain minimum capital
requirements set by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a
material effect on the Company's and Bank's financial statements. 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.
-27-
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 Company and Bank
were categorized as "well-capitalized" under the regulatory framework for
prompt corrective action. Management believes that no conditions or events
have occurred since the last notification that would change the Bank's
category. A summary of the regulatory capital of the Consolidated Company
and Bank at December 31 follows ($000's):
2003 2002
---------------------------------------
Consolidated Consolidated
Company Bank Company Bank
<s> <c> <c> <c> <c>
Regulatory Capital:
Shareholders' equity $52,448 46,320 51,930 44,099
Intangible assets (2,550) (2,475) (3,121) (3,011)
Net unrealized securities
losses (gains) (1,819) (1,752) (2,242) (2,152)
------ ------ ------ ------
Tier 1 risk-based capital 48,079 42,093 46,567 38,936
Eligible allowance for loan losses 2,150 2,150 2,000 2,000
------ ------ ------ ------
Total risk-based capital $50,229 44,243 48,567 40,936
====== ====== ====== ======
Capital Ratios:
Total risk-based 15.58% 13.79% 15.36% 13.03%
Tier 1 risk-based 14.91% 13.12% 14.73% 12.39%
Leverage 9.34% 8.29% 9.21% 7.79%
The principal source of income and funds for LCNB Corp. is dividends paid by
the Bank. The payment of dividends is subject to restriction by regulatory
authorities. For 2004, the restrictions generally limit dividends to the
aggregate of net income for the year 2004 plus the net earnings retained for
2003 and 2002. 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.
-28-
NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for LCNB Corp., parent company only, follows
($000's):
Condensed Balance Sheets
December 31,
2003 2002
<s> <c> <c> <c>
Assets:
Cash on deposit with subsidiary $ 74 1,493
Corporate and municipal debt securities 5,757 6,231
Investment in subsidiaries 46,628 44,199
Other assets 40 30
------ ------
Total assets $52,499 51,953
====== ======
Liabilities $ 51 23
Shareholders' equity 52,448 51,930
------ ------
Total liabilities and shareholders'
equity $52,499 51,953
====== ======
Condensed Statements of Income
Year ended December 31,
2003 2002 2001
Income:
Dividends from subsidiary $3,746 5,485 5,676
Interest 216 243 217
Gain on sale of investment securities 3 9 -
----- ----- -----
Total income 3,965 5,737 5,893
Total expense 40 40 45
----- ----- -----
Income before income tax benefit and
equity in undistributed income of
subsidiary 3,925 5,697 5,848
Income tax (expense) benefit (17) (80) 15
Equity in undistributed income
of subsidiary 2,829 923 204
----- ----- -----
Net income $6,737 6,540 6,067
===== ===== =====
-29-
Condensed Statements of Cash Flows
Year ended December 31,
2003 2002 2001
<s> <c> <c> <c>
Cash flows from operating activities:
Net income $ 6,737 6,540 6,067
Adjustments for non-cash items -
Equity in undistributed (income) excess
dividends of subsidiary (2,829) (923) (204)
Other, net 114 105 44
----- ----- -----
Net cash provided by operating activities 4,022 5,722 5,907
----- ----- -----
Cash flows from investing activities:
Purchases of securities available-for-
sale (2,985) (4,224) (2,379)
Proceeds from sales of securities
available-for-sale 1,775 3,992 300
Proceeds from maturities of securities
available-for-sale 1,565 1,075 -
----- ----- -----
Cash flow used in investing activities 355 843 (2,079)
----- ----- -----
Cash flows from financing activities:
Treasury shares purchased (2,163) (1,677) (516)
Cash dividends paid (3,633) (3,486) (3,269)
----- ----- -----
Cash flow used in financing activities (5,796) (5,163) (3,785)
----- ----- -----
Net change in cash (1,419) 1,402 43
Cash at beginning of year 1,493 91 48
----- ----- -----
Cash at end of year $ 74 1,493 91
===== ===== =====
-30-
LCNB CORP. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
($000's)
Three Months Ended
--------------------------------------------
March 31 June 30 Sep. 30 Dec. 31
-------- -------- -------- --------
<s> <c> <c> <c> <c>
2003
- ----
Interest income $7,117 6,914 6,661 6,745
Interest expense 2,324 2,329 2,052 1,975
----- ----- ----- -----
Net interest income 4,793 4,585 4,609 4,770
Provision for loan losses 118 99 204 237
----- ----- ----- -----
Net interest income
after provision 4,675 4,486 4,405 4,533
Net gain on sale of securities - - 3 6
Other non-interest income 1,515 1,640 1,673 1,960
Total non-interest expenses 3,935 3,875 4,037 3,878
----- ----- ----- -----
Income before income taxes 2,255 2,251 2,044 2,621
Provision for income taxes 649 553 518 714
----- ----- ----- -----
Net income $1,606 1,698 1,526 1,907
===== ===== ===== =====
Earnings per common share:
Basic $ 0.93 0.99 0.89 1.13
Diluted 0.93 0.99 0.89 1.13
2002
- ----
Interest income $7,406 7,529 7,737 7,491
Interest expense 2,705 2,721 2,731 2,513
----- ----- ----- -----
Net interest income 4,701 4,808 5,006 4,978
Provision for loan losses 54 71 122 101
----- ----- ----- -----
Net interest income
after provision 4,647 4,737 4,884 4,877
Net gain on sale of securities 9 12 408 -
Other non-interest income 1,192 1,142 1,258 1,602
Total non-interest expenses 3,723 3,696 4,475 3,811
----- ----- ----- -----
Income before income taxes 2,125 2,195 2,075 2,668
Provision for income taxes 599 619 589 716
----- ----- ----- -----
Net income $1,526 1,576 1,486 1,952
===== ===== ===== =====
Earnings per common share:
Basic $ 0.88 0.92 0.86 1.13
Diluted 0.88 0.92 0.86 1.13
-31-
Other non-interest income is greater in the three months ended December 31
of both years primarily due to trust income recognized by the Bank and
contingency income recognized by Dakin. Trust fees are generally charged
annually and are based on a trust's market value, which can vary depending
on economic conditions at the time the fees are charged. Fees are accrued
during the year using management's best estimate and are adjusted to reflect
current conditions during the fourth quarter. Contingency income is received
from insurance underwriters on an annual basis, and the amount received can
vary significantly depending on many factors outside of Dakin's control.
Dakin therefore does not recognize contingency income until the amount to be
received is known, which generally occurs during the fourth quarter. Another
factor contributing to the 2003 increase in other non-interest income during
the fourth quarter was the introduction of a new overdraft protection program
during August, 2003.
-32-