-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nv2wkRZHhOgPUqtn3m3HMcGhVdaXRrdzYpAze0ifKL4AHMmOl6Wj0/IdvMmjAOGX zj4p8QOQQIpsrz1c+3GOWg== 0001012364-01-500013.txt : 20010224 0001012364-01-500013.hdr.sgml : 20010224 ACCESSION NUMBER: 0001012364-01-500013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LCNB CORP CENTRAL INDEX KEY: 0001074902 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 311626393 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26121 FILM NUMBER: 1551181 BUSINESS ADDRESS: STREET 1: 2 NORTH BROADWAY CITY: LEBANON STATE: OH ZIP: 45036 BUSINESS PHONE: 5139321414 MAIL ADDRESS: STREET 1: 2 NORTH BROADWAY CITY: LEBANON STATE: OH ZIP: 45036 EX-21 1 exhibit21.txt EXHIBIT 21 LCNB CORP. SUBSIDIARIES Lebanon Citizens National Bank, a national banking association headquartered in Lebanon, Ohio. Dakin Insurance Agency, Inc., an independent insurance agency headquartered in Lebanon, Ohio. 10-K 2 lcnb_10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) ( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended December 31, 2000 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the Transition period from to --------------- - ----------------- 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 ------------------------------------------------ (Issuer's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: Name of each exchange Title of each class on which registered --------------------- ----------------------- None None --------------------- ----------------------- Securities registered pursuant to 12(g) of the Exchange Act: Common stock, No Par Value ---------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405) of this chapter is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The issuer's common shares are not traded on any securities exchange and are not quoted by a national quotation service. Management is aware of a sale of the issuer's shares for $37.875 per share on February 14, 2001. Based upon such price, the aggregate market value of the issuer's shares held by nonaffiliates was $62,263,803. As of February 20, 2001, was 1,775,942 common shares were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement included in the Notice of Annual Meeting of Shareholders to be held April 17, 2001, dated March 17, 2001, are incorporated by reference into Part III. LCNB Corp. For the year ended December 31, 2001 TABLE OF CONTENTS
Page PART I. Item 1. Business . . . . . . . . . . . . . . . . . . . . . . 3-16 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .17 Item 3. Legal proceedings. . . . . . . . . . . . . . . . . . .18 Item 4. Submission of matters to a vote of security holders. .18 Part II. Item 5. Market for registrant's common equity and related stockholder matters . . . . . . . . . . . .19-20 Item 6. Selected financial data. . . . . . . . . . . . . . .20-21 Item 7. Management's discussion and analysis . . . . . . . .21-31 Item 7A. Quantitative and qualitative disclosures about market risk . . . . . . . . . . . . . . . . . . . .31-34 Item 8. Financial statements and supplementary data. . . . . .35 Item 9. Changes in and disagreements with accountants and accounting and financial disclosures. . . . . . .35 Part III. Item 10. Directors and executive officers of the registrant . .36 Item 11. Executive compensation. . . . . . . . . . . . . . . . 36 Item 12. Security ownership of certain beneficial owners and management. . . . . . . . . . . . . . . . . . . .36 Item 13. Certain relationships and related transactions . . . .36 PART IV. Item 14. Exhibits, financial statements and Reports on 8-K . . 37 Signatures . . . . . . .. . . . . . . . . . . . . . . . . . . . . 38-39
-2- FORWARD LOOKING STATEMENTS Certain matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties, including regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, and other risks. Actual strategies and results in future time periods may differ materially from those currently expected. Such forward-looking statements represent management's judgment as of the current date. LCNB Corp. disclaims, however, any intent or obligation to update such forward-looking statements. ORGANIZATION ACTIVITIES AND ACQUISTION On May 18, 1999, Lebanon Citizens National Bank ("Lebanon Citizens") held a special shareholders meeting for the purpose of approving the reorganization of Lebanon Citizens into a one-bank holding company structure. The reorganization was approved and consummated immediately following the special meeting. The reorganization was effected through the merger of Lebanon Citizens with and into LC Interim National Bank, a wholly owned subsidiary of the new bank holding company, LCNB Corp. Concurrent with the merger, LC Interim National Bank changed its name to "Lebanon Citizens National Bank" and is now operated as the wholly owned bank subsidiary of LCNB Corp. The consideration for the merger was ten shares of LCNB Corp. common stock for each share of Lebanon Citizens National Bank common stock held by the shareholders. Following the merger, all shareholders of Lebanon Citizens maintained the same stock ownership percentage in the holding company as they had in Lebanon Citizens. Following the merger, Lebanon Citizens National Bank's business continued unchanged with the same management and employees. As part of the reorganization of Lebanon Citizens into a bank holding company structure, it was necessary to file a registration statement with the Securities and Exchange Commission. This registration statement also served the purpose of registering LCNB Corp. as a Securities Exchange Act of 1934 ("1934 Act") reporting company. Lebanon Citizens at the end of calendar year 1998, had over 500 shareholders and by law was required to register as a 1934 Act company. By virtue of the reorganization, LCNB Corp. became the registering company and is now a public company obligated to comply with the reporting requirements of the 1934 Act. The Gramm-Leach-Bliley Act (the "Gramm-Leach Act"), known commonly as the "Financial Services Modernization Act", was signed into law on November 12, 1999 and became effective March 11, 2000. This new act, among other changes, effectively allows the creation of a new financial services holding company that can offer a full range of financial products and engage in expanded approved activities such as insurance and securities services. Pursuant to the Gramm-Leach Act, LCNB Corp. converted from a bank holding company to a financial holding company, effective as of April 11, 2000. -3- On April 11, 2000 LCNB Corp. acquired Dakin Insurance Agency, Inc. In order to facilitate the acquisition of Dakin Insurance Agency, Inc., LCNB Corp. formed Dakin Acquisition Corporation in November 1999, under the laws of the state of Ohio, as a wholly owned subsidiary of LCNB Corp. On the acquisition date, Dakin Acquisition Corporation merged with and into Dakin Insurance Agency, Inc. and Dakin Insurance Agency, Inc. became the surviving corporation (hereinafter the surviving company is referred to herein as "Dakin"). The Articles of Incorporation and Regulations of Dakin Acquisition Corporation became the governing documents of Dakin. At the consummation of the merger, the individual shareholders of Dakin Insurance Agency, Inc. exchanged all of their outstanding shares of Dakin Insurance Agency, Inc. for 15,942 shares of LCNB Corp. common stock. Following the merger, Dakin became a wholly owned subsidiary of LCNB Corp. Dakin Insurance Agency, Inc. is a corporation organized under the laws of Ohio and has been an independent insurance agency in Lebanon, Ohio since 1876. Its primary office is at 20 East Mulberry Street, Lebanon, Ohio. Dakin Insurance Agency, Inc. is engaged in selling and servicing personal and commercial insurance products and annuity products and is regulated by the Ohio Department of Insurance. Since the acquisition date, Dakin has opened additional offices in Lebanon Citizens' Columbus Avenue, Waynesville, Springboro, Maineville, and Goshen offices. DESCRIPTION OF LCNB CORP'S BUSINESS General Description LCNB Corp. is a $451 million locally owned bank holding company headquartered in Lebanon, Ohio. The predecessor of LCNB Corp., Lebanon Citizens National Bank, was formed as a national banking association in 1877. On May 18, 1999, Lebanon Citizens became a wholly owned subsidiary of LCNB Corp. Lebanon Citizens' main banking office is located in Warren County, Ohio. Lebanon Citizens has 16 branch offices located in Warren, Butler, Clinton, Clermont, and Hamilton Counties, Ohio. Lebanon Citizens also operates a loan production office in Hamilton, Ohio. Lebanon Citizens currently plans to open a new full-service office at the corner of NW Washington Boulevard and Eden Park Drive, Hamilton, Ohio during the third quarter, 2001. In addition, Lebanon Citizens operates 25 automated teller machines (ATMs) in its market area. Lebanon Citizens is a full service bank offering a wide range of commercial and personal banking services including commercial loans, real estate loans, construction loans, consumer loans, Small Business Administration loans, Visa and MasterCard credit cards and commercial leases. Other services offered include safe deposit boxes, night depositories, U.S. savings bonds, travelers' checks, money orders, cashiers checks, bank-by-mail, automatic teller machines (ATMs), cash and transaction services, debit cards, wire transfers, electronic funds transfer, utility bill collections, notary public service, personal computer based cash management services, 24 hour telephone banking, PC Internet banking, and other services tailored for both individuals and businesses. -4- Lebanon Citizens' residential mortgage lending activities consist primarily of loans for purchasing personal residences, home equity loans, local lender loans, or loans for commercial or consumer purposes secured by residential mortgages. Consumer lending activities consist of traditional forms of financing for automobile and personal loans plus indirect automobile loans. Lebanon Citizens' range of deposit services include checking accounts, NOW accounts, savings accounts, Christmas and vacation savings, money market accounts, Classic 50 accounts (a Senior Citizen program), individual retirement accounts, certificates of deposit, and overdraft protection. Deposits of Lebanon Citizens are insured up to applicable limits by the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The Trust and Investment Management Division of Lebanon Citizens performs complete trust administrative functions and offers agency and trust services, retirement savings products, and mutual funds investment products to individuals, partnerships, corporations, institutions and municipalities. Lebanon Citizens is not dependent upon any one significant customer or specific industry. Business is not seasonal to any material degree. The address of the main office of Lebanon Citizens is 2 North Broadway, Lebanon, Ohio 45036; telephone (513) 932-1414. Its primary market area encompasses portions of Warren, Butler, Clinton, Clermont and Hamilton Counties. Competition Lebanon Citizens faces strong competition both in making loans and attracting deposits. The deregulation of the banking industry and the wide spread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking has created a highly competitive environment for financial services providers. Lebanon Citizens competes with other national and state banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies and other financial intermediaries operating in its market and elsewhere, many of whom have substantially greater financial and managerial resources. Lebanon Citizens seeks to minimize the competitive effect of other financial corporations through a community banking approach that emphasizes direct customer access to Lebanon Citizens' president and other officers in an environment conducive to friendly, informed and courteous personal services. Management believes that Lebanon Citizens is well positioned to compete successfully in its primary market area. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of the banking facilities and, in the case of loans to commercial borrowers, relative lending limits. -5- Management believes the commitment of Lebanon Citizens to personal service, innovation, and involvement in the communities and primary market areas it serves, as well as their commitment to quality community banking service, are factors that contribute to its competitive advantage. Supervision and Regulation LCNB Corp, as a financial holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the "Act"), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Act requires the prior approval of the Federal Reserve Board for a bank or financial holding company to acquire or hold more than a 5% voting interest in any bank and restricts interstate banking activities. On September 29, 1994, the Act was amended by the Interstate Banking and Branch Efficiency Act of 1994 which authorizes interstate bank acquisitions anywhere in the country, effective one year after the date of enactment and interstate branching by acquisition and consolidation, effective June 1, 1997, in those states that have not opted out by that date. The Gramm-Leach Act, which amended the Bank Holding Company Act of 1956 and other banking related laws, was signed into law on November 12, 1999. The Gramm-Leach Act repealed certain sections of the Glass-Steagall Act and substantially eliminated the barriers separating the banking, insurance, and securities industries. Effective March 11, 2000, qualifying bank holding companies could elect to become financial holding companies. Financial holding companies have expanded investment powers, including affiliating with securities and insurance firms and engaging in other activities that are "financial in nature or incidental to such financial activity" or "complementary to a financial activity." The Gramm-Leach Act defines "financial in nature" to include: a. securities underwriting, dealing, and market making; b. sponsoring mutual funds and investment companies; c. insurance underwriting and agency; d. merchant banking activities; e. other activities that the Federal Reserve Board, in consultation with and subject to the approval of the Treasury Department, determines are financial in nature. Financial holding companies may commence the activities listed above or acquire a company engaged in any of those activities without additional approval from the Federal Reserve. Notice of the commencement or acquisition must be provided the Federal Reserve within thirty days of the start of the activity. Sixty days advance notice is required before the start of any activity that is "complementary to a financial activity." A substantial portion of LCNB Corp.'s cash revenues is derived from dividends paid by Lebanon Citizens. These dividends are subject to various legal and regulatory restrictions. -6- LCNB Corp. and Lebanon Citizens are subject to an extensive array of banking laws and regulations that are intended primarily for the protection of the customers and depositors of LCNB Corp.'s subsidiaries rather than holders of LCNB Corp.'s securities. These laws and regulations govern such areas as permissible activities, loans and investments, rates of interest that can be charged on loans and reserves. LCNB Corp. and Lebanon Citizens also are subject to general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio. Set forth below are brief descriptions of selected laws and regulations applicable to LCNB Corp. and Lebanon Citizens. Lebanon Citizens is subject to the provisions of the National Bank Act. Lebanon Citizens is subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (OCC). Lebanon Citizens is also subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Under the Bank Holding Company Act of 1956, as amended, and under Regulations of the Federal Reserve Board pursuant thereto, a bank or financial holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. LCNB Corp. and Lebanon Citizens are also subject to the state banking laws of Ohio. Ohio adopted nationwide reciprocal interstate banking effective October, 1988. However, banking laws of other states may restrict branching of banks to other counties within the state and acquisitions or mergers involving banks and bank holding companies located in other states. Additionally, Dakin Insurance Agency, Inc. is subject to State of Ohio insurance regulations and rules and its activities are regulated by The State of Ohio Department of Insurance. Federal regulators adopted risk-based capital guidelines and leverage standards for banks and bank holding companies. The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company and its controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of any FDIC assisted transaction involving an affiliated insured bank or savings association. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) covers an expanse of banking regulatory issues. FDICIA deals with the recapitalization of the Savings Association Insurance Fund, with deposit insurance reform including requiring the FDIC to establish a risk-based premium assessment system with a number of other regulatory and supervisory matters. Lebanon Citizens will be required to make payments for the servicing of obligations of the Financing Corporation ("FICO") issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. Noncompliance to laws and regulations by bank holding companies and banks can lead to monetary penalties and/or an increased level of supervision or a combination of these two items. Management is not aware of any current instances of noncompliance to laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis. Recent regulatory -7- inspections and examinations of the LCNB Corp and Lebanon Citizens have not disclosed any significant instances of noncompliance. The minor instances of noncompliance detected during these inspections and examinations were promptly corrected by Management and no action was taken by the regulators against the LCNB Corp. or Lebanon Citizens. The earnings and growth of LCNB Corp are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board. Its policies influence the amount of bank loans and deposits and the interest rates charged and paid thereon and thus have an effect on earnings. The nature of future monetary policies and the effect of such policies on the future business and earnings of LCNB Corp. and Lebanon Citizens cannot be predicted. Employees As of December 31, 2000, LCNB Corp., Lebanon Citizens, and Dakin employed 203 full-time equivalent employees. LCNB Corp. is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be very good. Employee benefits programs are considered by Management to be competitive with benefits programs provided by other financial institutions and major employers within Lebanon Citizens' market area. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES LCNB Corp. and its subsidiaries do not have any offices located in foreign countries and they have no foreign assets, liabilities or related income and expense for the years presented. STATISTICAL INFORMATION The following tables present additional statistical information about LCNB Corp. and its operations and financial condition and should be read in conjunction with the consolidated financial statements and related notes and the discussion included in Item 7, Management's Discussion and Analysis and Item 7A, Quantitative and Qualitative Disclosures about Market Risk. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential The following table presents, for the years indicated, the distribution of average assets, liabilities and shareholders' equity, as well as the total dollar amounts of interest income from average interest earning assets and the resultant yields, and the dollar amounts of interest expense and average interest-bearing liabilities and the resultant rates paid. -8-
Years ended December 31, ------------------------ 2000 1999 1998 ---- ---- ---- Average Average Interest Average Average Interest Average Average Interest Outstanding Yield/ Earned/ Outstanding Yield/ Earned/ Outstanding Yield/ Earned/ Balance Rate Paid Balance Rate Paid Balance Rate Paid (Dollars in thousands) Loans(1) $309,658 8.48% $26,264 $273,273 8.32% $22,743 $272,512 8.46% $23,047 Federal funds sold 7,258 6.32 459 9,251 5.00 463 14,677 5.42 796 Deposits in banks 4,149 5.81 241 5,486 5.12 281 4,347 6.65 289 Federal Reserve Bank stock 647 6.03 39 647 6.03 39 647 6.03 39 Federal Home Loan Bank stock 418 7.42 31 - - - - - - Investment securities: Taxable 67,100 5.28 3,542 83,592 5.88 4,914 75,374 6.12 4,612 Non-taxable(2) 26,233 9.27 2,433 29,995 6.32 1,895 21,628 5.71 1,236 ------- ------ ------- ------ ------- ------ Total earning assets 415,463 7.95 33,009 402,244 7.54 30,335 389,185 7.71 30,019 Non-earning assets 33,707 32,528 30,570 Allowance for loan losses (2,002) (2,004) (2,100) ------- ------- ------- Total assets $447,168 $432,768 $417,655 ======= ======= ======= Savings deposits $ 84,156 3.82 3,217 $ 79,555 2.99 2,382 64,064 2.76 1,769 NOW and money fund 81,215 2.84 2,203 79,548 2.40 1,912 73,727 2.31 1,706 IRA and time certificates 178,842 5.64 10,081 178,541 5.01 8,944 192,873 5.47 10,557 Borrowings 5,105 6.91 353 1,366 4.90 67 1,346 3.57 48 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities 349,318 4.57 15,954 339,010 3.92 13,305 332,010 4.24 14,080 ------ ------ ------ -9- Demand deposits 52,059 49,076 44,455 Other liabilities 1,527 1,718 1,194 Capital 44,264 42,964 39,996 ------- ------- ------ Total liabilities and capital $447,168 $432,768 $417,655 ======= ======= ======= Net interest rate spread(3) 3.38 3.62 3.47 Net interest margin on a taxable equivalent basis(4) 4.11 $17,055 4.23 $17,030 4.10 $15,939 ====== ====== ====== Ratio of interest-earning assets to interest-bearing liabilities 118.94% 118.65% 117.22% (1) Include nonaccrual loans if any. (2) Income from tax-exempt securities is included in interest income on a taxable equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34% (3) The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. (4) The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.
-10- The following table presents the changes in interest income and expense for each major category of interest-earning assets and interest-bearing liability and the amount of change attributable to volume and rate changes for the years indicated. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
For the years ended December 31, -------------------------------- 2000 vs. 1999 1999 vs. 1998 ------------- ------------- Increase (decrease) due to Increase (decrease) due to Volume Rate Total Volume Rate Total (Dollars in thousands) Interest income attributable to: Loans $3,079 442 3,521 66 (370) (304) Federal funds sold 18 (22) (4) (275) (58) (333) Deposits in banks (89) 49 (40) 67 (75) (8) Federal Reserve Bank stock - - - - - - Federal Home Loan Bank stock 31 - 31 - - - Investment securities: Taxable (904) (468) (1,372) 488 (186) 302 Non-taxable(1) (197) 735 538 516 143 659 ------ ----- ----- ----- --- ----- Total Interest Income 1,938 736 2,674 862 (546) 316 Interest expense attributable to: Savings deposits 144 691 835 456 157 613 NOW and money fund 41 350 391 138 68 206 IRA and time Certificates 15 1,122 1,137 (757) (856) (1,613) Borrowings 249 37 286 1 18 19 ----- ----- ----- ----- --- ----- Total Interest Expense 449 2,200 2,649 (162) (613) (775) ----- ----- ----- ----- --- ----- Net Interest Income $1,489 (1,464) 25 1,024 67 1,091 ===== ===== ===== ===== === ===== (1) Change in interest income from non-taxable investment securities is computed based on interest income determined on a taxable equivalent yield basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34%.
-11- Investment Portfolio The following table presents the carrying values of securities for the years indicated:
At December 31, --------------- 2000 1999 1998 (Dollars in thousands) Securities available for sale: U.S. Treasury notes $ 3,018 6,482 28,391 U.S. Agency notes 20,046 29,927 23,190 U.S. Agency mortgage-back Securities 12,164 15,069 17,406 Corporate notes 8,479 17,058 24,376 Municipal securities 38,799 36,375 29,677 ------ ------- ------- Total securities available for sale 82,506 104,911 123,040 Federal Reserve Bank Stock 647 647 647 Federal Home Loan Bank Stock 1,741 - - ------ ------- ------- Total securities $84,894 105,558 123,687 ====== ======= ======
Contractual maturities of debt securities at December 31, 2000, were as follows. Actual maturities may differ from contractual maturities when borrowers have the right to call or prepay obligations.
Amortized Market Cost Value Yield --------- ------ ----- (Dollars in thousands) U.S. Treasury notes: Within one year $ 1,003 1,002 5.51% One to five years 1,999 2,016 5.71% Five to ten years - - -% After ten years - - -% ------ ------ ---- Total U.S Treasury notes $ 3,002 3,018 5.64% ------ ------ ---- U.S. Agency notes: Within one year $ 3,267 3,263 5.55% One to five years 14,013 14,003 5.91% Five to ten years 2,862 2,780 5.82% After ten years - - -% ------ ------ ---- Total U.S. Agency notes $20,142 20,046 5.84% ------ ------ ---- -12- Corporate notes: Within one year $ 4,503 4,505 6.21% One to five years 4,205 3,974 6.17% Five to ten years - - -% After ten years - - -% ------ ------ ---- Total Corporate notes $ 8,708 8,479 6.19% ------ ------ ---- Municipal securities (1): Within one year $ 2,953 2,967 7.22% One to five years 15,278 15,419 7.72% Five to ten years 11,840 11,998 7.42% After ten years 7,924 8,415 8.76% ------ ------ ---- Total Municipal securities $37,995 38,799 7.81% ------ ------ ---- U.S. Agency mortgage-backed securities $12,234 12,164 5.90% ------ ------ ---- $82,081 82,506 6.79% ====== ====== ==== (1) Yields on tax-exempt obligations are computed on a tax equivalent basis based upon a 34% statutory Federal income tax rate.
Excluding those holdings of the securities portfolio in the U.S. Treasury securities and U.S. Government Agencies and Corporations, there were no investments in securities of any one issuer which exceeded 10% of the consolidated shareholders' equity of LCNB Corp. at December 31, 2000. Loan Portfolio The following table summarizes the distribution of the loan portfolio for the years indicated:
At December 31, --------------- 2000 1999 1998 1997 1996 (Dollars in thousands) Commercial and industrial $ 36,449 26,347 20,640 13,905 9,847 Commercial, secured by real estate 59,043 56,671 53,907 51,088 49,094 Residential real estate 185,013 162,087 154,111 165,908 145,725 Consumer, excluding credit card 40,860 36,402 32,302 35,167 29,855 Agricultural 2,238 2,343 2,370 1,645 1,152 Credit card 3,049 2,764 2,574 2,461 2,130 Other 863 285 966 332 41 Lease Financing 2,219 183 - - - ------- ------- ------- ------- ------- Total loans 329,734 287,082 266,870 270,506 237,844 -13- Deferred costs (fees), net 705 526 187 (12) (178) ------- ------- ------- ------- ------- 330,439 287,608 267,057 270,494 237,666 Allowance for loan losses (2,000) (2,000) (2,000) (2,200) (2,000) ------- ------- ------- ------- ------- Loans, net $328,439 285,608 265,057 268,294 235,666 ======= ======= ======= ======= =======
The following tables summarize the commercial and agricultural loan maturities and sensitivities to interest rate changes at December 31, 2000:
(Dollars in thousands) ---------------------- Maturing in one year or less $42,591 Maturing after one year, but within five years 25,900 Maturing beyond five years 29,239 ------ Total commercial and agricultural loans $97,730 ====== Loans repricing beyond one year: Fixed rate $25,832 Variable rate 29,307 ------ Total $55,139 ======
Risk Elements The accrual of interest on impaired loans is discontinued when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Subsequent cash receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded once principal recovery is reasonably assured. The current year's accrued interest on loans placed on non-accrual status is charged against earnings. Previous years' accrued interest is charged against the allowance for loan losses. A summary of accruing loans past due 90 days or more at December 31, follows:
Accrued loans past due 90 days ------------------------------ (Dollars in thousands) 2000 $111 1999 68 1998 374 1997 29 1996 182
-14- There were no nonaccrual loans at December 31, for each of the years ended 1996 through 2000. Interest income that would have been recorded in each of the years 1996 through 2000 if loans on nonaccrual status at various times during the respective years had been current and in accordance with their original terms, was not material. For each of the years ended December 31, 1996 through 2000, the recorded investments in loans for which impairment has been recognized in accordance with SFAS Statement No.114 was not material. LCNB Corp. is not committed to lend additional funds to debtors whose loans have been modified to provide a reduction or deferral of principal or interest because of deterioration in the financial position of the borrower. Summary of Loan Experience The table summarizing the activity relating to the allowance for loan losses is included in Item 7, Management's Discussion and Analysis. The following table presents the allocation of the allowance for loan loss.
At December 31, --------------------------------------------- 2000 1999 1998 1997 1996 (Dollars in thousands) Commercial $ 381 304 286 622 162 Real Estate - - - - - Consumer 714 514 345 370 316 Credit Card 40 38 48 26 31 Unallocated 865 1,144 1,321 1,182 1,491 ----- ----- ----- ----- ----- Total $2,000 2,000 2,000 2,200 2,000 ===== ===== ===== ===== =====
This allocation is made for analytical purposes. The total allowance is available to absorb losses from any category of the portfolio. The allowance allocated to the commercial and consumer categories has increased over the five year period due to the increase in outstandings in these loan categories which, by nature, have greater risk elements. The following table presents the categories of loans as a percent of total loans.
At December 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 Commercial 11.05% 9.17% 7.73% 5.14% 4.14% Real Estate 74.02 76.19 77.96 80.22 81.91 Consumer 12.39 12.70 12.10 13.00 12.55 Credit Card 0.93 0.96 0.96 0.91 0.90 Other 1.61 0.98 1.25 0.73 0.50 ------ ------ ------ ------ ------ Total 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ======
-15- The statistical information regarding average amounts and average rates paid for the deposit categories is included in the "Distribution of Assets, Liabilities and Shareholders' Equity" table included at the beginning of the "Statistical Information" section. The following table presents the contractual maturity of time deposits of $100,000 or more at December 31, 2000:
(Dollars in thousands) ---------------------- Maturity within 3 months $13,821 After 3 but within 6 months 8,939 After 6 but within 12 months 2,750 After 12 months 10,703 ------ $36,213 ======
Return of Equity and Assets The statistical information regarding the return on assets, return on equity, dividend payout ratio and equity to assets ratio is presented in Item 6, Selected Financial Data. -16- Item 2. Properties Lebanon Citizens conducts its business from the following offices:
Name of Office Address -------------- ------- 1. Main Office 2 North Broadway Lebanon, Ohio 45036 Owned (1) 2. Auto Bank 26 North Broadway Lebanon, Ohio 45036 Owned 3. Columbus Avenue Office 730 Columbus Avenue Lebanon, Ohio 45036 Owned 4. Goshen Office 6726 Dick Flynn Blvd. Goshen, Ohio 45122 Owned 5. Hamilton Office 1502 Peck Blvd. Hamilton, Ohio 45011 Leased 6. Hunter Office 3878 State Route 122 Franklin, Ohio 45005 Owned 7. Loveland Office 615 West Loveland Avenue Loveland, Ohio 45140 Owned 8. Maineville Office 7795 South State Route 48 Maineville, Ohio 45039 Owned 9. Mason/West Chester Office 1050 Reading Road Mason, Ohio 45040 Owned 10. Middletown Office 4441 Marie Drive Middletown, Ohio 45044 Owned 11. Okeana Office 6225 Cincinnati-Brookville Road Okeana, Ohio 45053 Owned 12. Otterbein Office State Route 741 Lebanon, Ohio 45036 Leased 13. Oxford Office 30 West Park Place Oxford, Ohio 45056 (1) (2) 14. Rochester/Morrow Office Route 22-3 at 123 Morrow, Ohio 45152 Owned 15. South Lebanon Office 209 East Forrest Street South Lebanon, Ohio 45065 Leased 16. Springboro/Franklin Office 525 West Central Avenue Springboro, Ohio 45066 Owned 17. Waynesville Office 9 North Main Street Waynesville, Ohio 45068 Owned (1) 18. Wilmington Office 1243 Rombach Avenue Wilmington, Ohio 45177 Owned (1) Excess space in this office is leased to third parties. (2) Lebanon Citizens owns the Oxford Office building and leases the land.
-17- Item 3. Legal Proceedings Except for routine litigation incident to their business, LCNB Corp. and its subsidiaries are not a party to any material pending legal proceedings and none of their property is the subject of any such proceedings. Item 4. Submission of Matters to a Vote of Security Holders None -18- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The LCNB Corp. had approximately 585 registered holders of its common stock as of December 31, 2000. The number of shareholders includes banks and brokers who act as nominees, each of whom may represent more than one shareholder. There is currently a limited public trading market for LCNB Corp. common stock. Trade prices for shares of LCNB Corp. stock (and Lebanon Citizens' stock preceding the formation of the holding company), reported through registered securities dealers, are set forth below. Trades have occurred during the period without the knowledge of LCNB Corp. The trades of which LCNB Corp. is aware from the market makers in the stock are those outlined. The prices given are interdealer without retail markups, markdown or commissions.
2000 High Low ---- ---- --- First Quarter $70.00 $40.00 Second Quarter 45.00 40.00 Third Quarter 42.00 37.00 Fourth Quarter 40.00 34.00 1999 ---- First Quarter $52.00 $47.80 Second Quarter 75.00 51.50 Third Quarter 82.00 70.00 Fourth Quarter 78.00 70.00 1998 ---- First Quarter $43.00 $31.50 Second Quarter 43.00 39.00 Third Quarter 53.00 42.50 Fourth Quarter 53.00 50.50
All the amounts have been restated to reflect the ten-for-one stock exchange in the formation of the holding company on May 18, 1999. Cash dividends per share declared in 2000 were $.30 in each of March, June, and September and $.90 in December. Cash dividends per share declared in 1999 were $.25 in each of March, June and September and $.80 in December. Cash dividends per share declared in 1998 were $.20 in each of March, June and September and $.80 in December. Cash dividends per share have been restated for the ten-for-one stock exchange in the formation of the holding company on May 18, 1999. -19- It is expected that LCNB Corp. will continue to pay dividends on a similar schedule, to the extent permitted by business and other factors beyond management's control. LCNB Corp. files unaudited quarterly financial reports under Form 10-Q with the Securities and Exchange Commission. Copies of these reports may be obtained in the shareholder information section of Lebanon Citizens' web site, www.lcnb.com, or by writing to: Steve P. Foster Executive Vice President, CFO LCNB Corp. 2 N. Broadway P.O. Box 59 Lebanon, Ohio 45036 Item 6. Selected Financial Data The following represents selected consolidated financial data of LCNB Corp. for the years ended December 31, 1996 through 2000 and are derived from LCNB Corp's consolidated financial statements and Lebanon Citizens' unaudited financial statements and call reports. This data should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 8 of this Form 10-K and Management's Discussion and Analysis and Quantitative and Qualitative Disclosures about Market Risk included in Items 7 and 7A, respectively, of this Form 10-K, and are qualified in their entirety thereby and by other detailed information elsewhere in this Form 10-K.
For the Years Ended December 31, -------------------------------- 2000 1999 1998 1997 1996 (Dollars in thousands, except ratios and data per share) Income Statement Interest Income $ 32,151 $ 29,691 $ 29,599 $ 27,777 $ 25,998 Interest Expense 15,954 13,305 14,080 14,344 13,242 ------- ------- ------- ------- ------- Net Interest Income 16,197 16,386 15,519 13,433 12,756 Loan Loss Provision 197 208 191 291 288 ------- ------- ------- ------- ------- Net Interest Income after Provision 16,000 16,178 15,328 13,142 12,468 Other Operating Income 4,400 4,370 4,213 3,694 3,206 Operating Expenses 13,069 12,650 11,655 9,626 8,463 ------- ------- ------- ------- ------- Income before Income Taxes 7,331 7,898 7,886 7,210 7,211 Provision for Income Taxes 2,091 2,323 2,426 2,178 2,195 ------- ------- ------- ------- ------- Net Income $ 5,240 $ 5,575 $ 5,460 $ 5,032 $ 5,016 ======= ======= ======= ======= ====== -20- Balance Sheet Securities $ 84,894 $105,558 $123,687 $101,188 $ 91,378 Loans - net 328,439 265,608 265,057 268,294 235,666 Total Assets 451,000 439,238 432,364 421,250 369,675 Total Deposits 394,786 391,569 387,006 377,386 330,360 Total Shareholders' Equity 46,310 42,687 42,335 38,780 35,779 Selected Financial Ratios and Other Data Return on average assets 1.17% 1.29% 1.30% 1.30% 1.41% Return on average equity 11.84% 13.01% 13.57% 13.58% 14.76% Equity-to-assets ratio 0.10 0.10 0.10 0.09 0.10 Dividend payout Ratio 0.61 0.51 0.46 0.42 0.34 Earnings per share(1) 2.95 3.14 3.07 2.83 2.82 Dividends declared per share(1) 1.80 1.60 1.40 1.20 0.95 (1) All per share data have been adjusted to reflect the ten-for-one stock exchange in 1999 and the pooling of interests accounting method for the Dakin acquisition in 2000.
Item 7. Management's Discussion and Analysis Introduction The following is management's discussion and analysis of the financial condition and results of operations of LCNB Corp. It is intended to amplify certain financial information regarding LCNB Corp. and should be read in conjunction with the Consolidated Financial Statements and related Notes, included in Item 8 of this Form 10-K; and the Statistical Information in Item 1 of this Form 10-K and the Selected Financial Data in Item 6 of this Form 10-K. Comparative Financial Information Effective May 18, 1999, Lebanon Citizens was reorganized into a one-bank holding company structure. Prior to that date, the financial information presented represents the assets, liabilities and operations of Lebanon Citizens. Comparative earnings per share information is presented on pro forma basis. -21- On April 11, 2000 LCNB Corp. issued 15,942 shares of common stock in exchange for all outstanding shares of Dakin Insurance Agency, Inc. (Dakin). On that date, Dakin merged with and into an interim subsidiary of LCNB Corp. As a result of the merger, Dakin became a wholly owned subsidiary of LCNB Corp. The merger was accounted for as a pooling-of-interests and, accordingly, all financial statements presented herein have been restated to include the financial position and results of operations of Dakin. Forward Looking Statements Certain matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties, including regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, and other risks. Actual strategies and results in future time periods may differ materially from those currently expected. Such forward-looking statements represent management's judgment as of the current date. LCNB Corp. disclaims, however, any intent or obligation to update such forward-looking statements. Net Income LCNB Corp. earned $5.240 million in 2000 compared to $5.575 million in 1999. Earnings per share were $2.95, a 6.1% or $.19 per share decline from 1998. Performance ratios for 2000 included a return on average assets of 1.17% and a return on average equity of 11.84% compared to ratios of 1.29% and 13.01%, respectively, for 1999. LCNB Corp. earned $5.575 million in 1999 compared to $5.460 million in 1998. Earnings per share were $3.14, up 2.3% or $.07 per share from 1998. Performance ratios for 1999 included a return on average assets of 1.29% and a return on average equity of 13.01% compared to ratios of 1.30% and 13.57%, respectively, for 1998. Net Interest Income 2000 vs. 1999. Net interest income decreased $189 thousand, or 1.1%, from 1999 to 2000. The net interest margin on a fully taxable equivalent basis (FTE) decreased from 4.23% in 1999 to 4.11% in 2000. This 12 basis point (a basis point equals 0.01%) decrease was due in part to a 65 basis point increase in the cost of average interest-bearing liabilities, partially offset by a 41 basis point increase in the yield on average interest-earning assets. The increase in the cost of average interest-bearing liabilities resulted from a general increase in market rates and a $6 million borrowing from the Federal Home Loan Bank. The increase in the yield on average interest-earning assets is due to the same increase in market rates and to a shift of funds from investment securities to the higher earning loan portfolio. The loan-to- deposit ratio at December 31, 2000 and 1999 was 83.7% and 73.5%, respectively. An increase in average interest-earning assets of $13.2 million to $415.5 million in 2000 also contributed to the increase in net interest income. The increase was primarily attributable to increases in average commercial and residential real estate loans. -22- 1999 vs. 1998. Net interest income increased $867 thousand, or 5.6%, from 1998 to 1999. The net interest margin on a fully taxable equivalent basis (FTE) increased from 4.10% in 1998 to 4.23% in 1999. This 13 basis point increase was due in part to a 32 basis point decline in the cost of average interest-bearing liabilities, partially offset by a 17 basis point decline in the yield on average interest-earning assets. The decline in the cost of average interest-bearing liabilities resulted from the replacement of higher cost time deposits with lower cost savings deposits. The decline in the yield on average interest-earning assets is due to lower yields attributable to commercial loans and mortgage loans. An increase in average interest-earning assets of $13.1 million to $402.2 million in 1999 also contributed to the increase in net interest income. The increase was primarily attributable to increases in average commercial and residential real estate loans and securities. Provisions and Allowance for Loan Losses The total provision for loan losses is determined based upon Management's evaluation as to the amount needed to maintain the allowance for credit losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. In addition to historic charge-off percentages, factors taken into consideration to determine the adequacy of the allowance for credit losses include the nature, volume and consistency of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers ability to pay. The following table presents the total loan provision and the other changes in the allowance for loan losses for the years 1996 through 2000.
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in thousands) Balance - Beginning of year $2,000 2,000 2,200 2,000 1,800 Loans charged off: Commercial and industrial - - 227 - - Commercial, secured by real estate - - - - - Residential real estate - - 3 - - Consumer, excluding credit card 222 252 153 93 100 Agricultural - - - - - Credit Card 33 20 36 29 17 Other - - - - - ----- ----- ----- ----- ----- Total loans charged off 255 272 419 122 117 ----- ----- ----- ----- ----- -23- Recoveries: Commercial and industrial - - - - - Commercial, secured by real estate - - - - - Residential real estate - - - - - Consumer, excluding credit card 55 62 26 25 29 Agricultural - - - - - Credit Card 3 2 2 6 - Other - - - - - ------ ----- ----- ----- ----- Total recoveries 58 64 28 31 29 ----- ----- ----- ----- ----- Net charge-offs 197 208 391 91 88 Provision charged to operations 197 208 191 291 288 ----- ----- ----- ----- ----- Balance - End of year $2,000 2,000 2,000 2,200 2,000 ===== ===== ===== ===== ===== Ratio of net charge-offs during the period to average loans outstanding .06% .08% .14% .04% .04% === === === === ===
The allowance for loan losses of $2.0 million is 0.61% of total loans at December 31, 2000, compared to $2.0 million or 0.70% of total loans at December 31, 1999, and $2.0 million or 0.75% of total loans at December 31, 1998. The $63 thousand increase in consumer loans charged off, net of recoveries, in 1999 over 1998 is attributable, in part, to the adoption of a new uniform charge-off policy in 1999 for consumer, credit card, and home mortgage loans as mandated by the Federal Financial Institution's Examination Council for all banks and thrifts. It includes a requirement to charge off open-end credit at 180 days delinquency and closed-end credit at 120 days delinquency. Management believes that no significant difference will occur prospectively in net charge-offs as a result of this policy change. The $419 thousand of charge-offs in 1998 includes one commercial loan of $227 thousand. This loan, which had a $455 thousand balance at December 31, 1997, was charged down and paid off completely in 1998. Management believes the loan represented a unique credit risk based on the nature of the borrower's operations, the inventory that partially collateralized the loan, and the significance of the loan balance outstanding. The loan portfolio at December 31, 2000 does not include any commercial loans with a comparable level of credit risk. Non-Interest Income 2000 vs. 1999. Non-interest income increased $30 thousand, or 0.7% to $4.400 million in 2000 from $4.370 million in 1999. The increase was primarily due to a $205 thousand increase in trust income, partially offset by a $50 thousand decrease in service charges and fees and a $128 thousand decrease in insurance agency income. -24- The trust fee income increased in 1999 due to an increase in estate fee income, partially offset by a decrease in the market value of assets under management, on which fees are based. The decrease in service charges and fees from 1999 to 2000 was due to a $215 thousand reduction in merchant credit card processing fees resulting from the exiting of the business in the fourth quarter of 1999. Lebanon Citizens outsourced these services in 1999 due to declining margins and now functions as a referral conduit for merchant credit card business. This decrease was partially offset by: a. $65 thousand increase in VISA check card fee income resulting from continued growth in both the usage and number of cardholders, and b. increases in deposit account related fees. The decrease in insurance agency income is primarily due to a large commission Dakin recognized during the first quarter of 1999, which did not recur during 2000. 1999 vs. 1998. Non-interest income increased $157 thousand, or 3.7% to $4.370 million in 1999 from $4.213 million in 1998. The increase was attributable to: a. a $189 thousand, or 25.2%, increase in insurance agency income, b. a $78 thousand, or 7.2%, increase in trust income, and c. a $130 thousand, or 6.5% increase in service charges and fees. Partially offsetting the above increases was a $214 thousand decline in security gains during 1999, from $234 thousand in 1998 to $20 thousand in 1999. The increase in insurance agency income is primarily due to a large commission recognized by Dakin during the first quarter of 1999. The trust fee income increased in 1999 due to an increase in estate fee income as well as an increase in the market value of assets under management. The increase in service charges and fees from 1998 to 1999 was primarily due to a $61 thousand increase in ATM fees attributable to five new ATM machines added in late 1998 and early 1999. Additionally, Lebanon Citizens increased foreign ATM service fees and surcharge fees in mid-1998 and in 1999 and continued to experience an increase in the cardholder base resulting from the Key Bank branch acquisitions in September, 1997. Also contributing to the increase in service charges was a $59 thousand increase in check card fee income resulting from continued growth in usage and the base of cardholders. Credit card fee and interchange income increased $72 thousand as a result of an increase in the cardholder base and a change in the processing vendor. These increases in service charges and fees were partially offset by a $72 thousand decrease in credit card merchant processing fees as Lebanon Citizens has opted to exit this business due to declining margins. Other operating income decreased by $26 thousand as a result of a gain recorded in 1998 on the sale of property in connection with the consolidation of branches in Waynesville, which did not recur in 1999. -25- Non-Interest Expense 2000 vs. 1999. Non-interest expense increased $419 thousand, or 3.3%, in 2000 from 1999. This increase was primarily due to: a. a $237 thousand, or 3.5%, increase in labor costs including pension and other employee benefits, b. a $95 thousand, or 17.8%, increase in equipment expenses, c. a $90 thousand, or 9.4% increase in occupancy expenses, and d. a $222 thousand, or 7.9%, increase in other non-interest expense. Labor costs increased as a result of normal increases in salaries and wages and increases in pension and health insurance costs. During 2000 LCNB Corp. constructed new offices in Goshen and Oxford and extensively remodeled the Columbus Avenue office in Lebanon. The increase in equipment expense is primarily due to depreciation recognized on new furniture and equipment purchased for the new and remodeled offices. The increase in occupancy expense reflects increased costs due to the new and remodeled offices and an increase in rent expense for the leased offices. The increase in other non-interest expense was due in part to: a. a $64 thousand increase in ATM expenses resulting from an expansion in the number of ATMs and an increase in the number of ATM transactions processed, b. attorney fees of $46 thousand relating to the acquisition of Dakin Insurance Agency, c. a rate increase totaling $35 thousand in Federal Deposit Insurance Corporation premiums, d. a $75 thousand increase in telephone expense primarily due to a telephone system upgrade installed during 2000 and to an increased number of telephone lines needed to serve new ATMs, and e. consulting fees totaling $34 thousand paid to a company that is assisting LCNB Corp. in replacing its computer system, which is anticipated to occur during the third quarter, 2001. These increases were partially offset by a $152 thousand decline in merchant credit card related processing and interchange expenses due to Lebanon Citizens' exiting of the merchant credit card business in late-1999 and by certain printing and supply expense control initiatives established during 2000. 1999 vs. 1998. Non-interest expense increased $995 thousand, or 8.5%, in 1999 from 1998. This increase was primarily due to a $733 thousand, or 12.3%, increase in labor costs including pension and other employee benefits. Labor costs increased as a result of salary and related pension costs increases. Equipment and occupancy expenses increased $76 thousand, or 5.4%, primarily as a result of increased depreciation related to equipment purchases in late 1998 and branch improvements. -26- Other non-interest expense increased $188 thousand, or 7.1%. The increase was due in part to: a. an $88 thousand increase in computer maintenance charges due in part to newly purchased imaging equipment becoming operational in 1999, b. a $67 thousand increase in correspondent bank fees in 1999 as Lebanon Citizens opted to pay for its item processing charges in fees rather than through maintenance of higher non-interest bearing deposits with its upstream correspondent institutions, c. an increase in other expenses as a result of the public filings required by the newly formed LCNB Corp. as well as acquisition efforts in the Dakin Insurance Agency transaction. These increases were partially offset by declines in merchant credit card related processing and interchange expenses due to Lebanon Citizens' exiting of the merchant credit card business in late-1999. Income Taxes LCNB Corp.'s effective tax rates for the years ended December 31, 2000, 1999, and 1998 were 28.5%, 29.4%, and 30.8%, respectively. The effective rates declined during 2000 and 1999 due to increases in tax-exempt interest income as a percent of income before income taxes. Assets 2000 vs. 1999. Total assets increased $11.8 million, or 2.7% from December 31, 1999 to December 31, 2000. This increase was primarily due to a $42.8 million, or 15.0%, increase in loans, partially offset by a $22.4 million, or 21.4% decrease in securities available for sale. The loan increase from December 31, 1999 to December 31, 2000 resulted primarily from a $10.1 million increase in commercial and industrial loans, a $22.9 million increase in residential real estate loans and a $4.5 million increase in consumer loans. The growth in residential real estate and commercial loans resulted from competitively priced products and focused officer-calling efforts in the Hamilton and Oxford markets as well as the Warren County offices. All residential real estate loans originated during 2000 were kept in Lebanon Citizens' portfolio. This compares to $2.4 million and $11.6 million in loans originated and sold to the Federal Home Loan Mortgage Corporation (Freddie Mac) during 1999 and 1998, respectively. Consumer loans increased primarily through concentrated efforts to originate indirect auto and other loans through dealers. Securities decreased due to a shifting of assets from the securities portfolio to the higher yielding loan portfolio. Approximately $5.8 million of securities were sold in 2000, resulting in a $12 thousand realized gain. Proceeds were primarily used to fund the continued loan growth. -27- Premises and equipment increased $2.3 million, net of $796 thousand in depreciation expense, from December 31, 2000 to December 31, 1999. Expenditures for 2000 included approximately $2.4 million for costs associated with new offices in Goshen and Oxford, extensive remodeling of the Columbus Avenue office in Lebanon, and a new drive-up ATM located in Hamilton. Lebanon Citizens owns all but three of its branches. The Otterbein, and South Lebanon branches, as well as the loan production office in Hamilton, which opened in December, 1999, are leased under multi-year operating leases. The current Otterbein lease expires in July, 2005, the South Lebanon lease expires in July, 2001, and the Hamilton lease expires in 2004. The Otterbein, South Lebanon and Hamilton leases include renewal options. The Oxford office is built on leased land. This lease expires in July, 2059 and does not include renewal options. Lebanon Citizens has a right of first refusal if the land is sold during the term of the lease. In January, 2001, Lebanon Citizens purchased land in Hamilton, Ohio on which it intends to build a full-service office to be opened during the third quarter, 2001. 1999 vs. 1998. Total assets increased $6.9 million, or 1.6% from December 31, 1998 to December 31, 1999. This increase was primarily due to a $20.6 million, or 7.8%, increase in loans, partially offset by an $18.1 million, or 14.7% decrease in securities available for sale. The loan increase from December 31, 1998 to December 31, 1999 resulted primarily from a $5.7 million increase in commercial and industrial loans, an $8.0 million increase in residential real estate loans and a $4.1 million increase in consumer loans. The increase in residential real estate loans is primarily due to Management's decision in 1999 to originate fixed rate loans for portfolio purposes, rather than for sale, due to existing attractive market rates and shifting interest rate trends in 1999. Lebanon Citizens originated $2.4 million in loans for immediate sale to Freddie Mac during 1999. This compares to $11.6 million in loans originated and sold to Freddie Mac in 1998. Securities decreased as a result of a shifting of assets from the securities portfolio to the higher yielding loan portfolio. Approximately $12.8 million of securities were sold in 1999, resulting in a $20 thousand realized gain. Proceeds were primarily used to fund the continued loan growth. Premises and equipment increased $98 thousand, net of $688 thousand in depreciation expense, from December 31, 1998 to December 31, 1999. Expenditures for 1999 included approximately $350 thousand for costs associated with a new branch site in Goshen, Ohio, $81 thousand related to a new ATM purchase and installation and various branch renovations expenditures. Deposits 2000 vs. 1999. Total deposits of $394.8 million at December 31, 2000 increased $3.2 million, or 0.8%, from December 31, 1999. Demand and NOW deposits decreased $6.2 million from December 31, 1999 to December 31, 2000 and money fund and savings deposits increased $25.3 million. The increase -28- relates to a corporate sweep checking account product offered by Lebanon Citizens. Excess funds in the checking accounts are automatically swept into customer-designated, non-bank owned mutual funds. During the third quarter, Lebanon Citizens introduced a savings product, which is grouped with the money funds category, which was priced competitively with the mutual funds. Several large account holders chose the new deposit product, which accounts for most of the increase in money fund and savings deposits. IRA deposits remained relatively constant from December 31, 1999 to December 31, 2000. Certificates greater than $100 thousand decreased by $9.1 million due to management's decision not to bid on public fund deposits that matured during the final quarter of 2000. In making this decision, management considered Lebanon Citizens' liquidity position and the rates that would be required to maintain the deposits. Other time certificates declined by $7.0 million as Lebanon Citizens continued to allow its higher cost retail deposit products to run- off. 1999 vs. 1998. Total deposits of $391.6 million at December 31, 1999 increased $4.6 million, or 1.2%, from December 31, 1998. Demand and NOW deposits remained relatively constant from December 31, 1998 to December 31, 1999 and money fund and savings deposits increased $4.2 million. Certificates greater than $100 thousand increased by $8.1 million due to an increase in demand for time deposits by public institutions having investable funds. Other time deposits declined by $8.0 million as Lebanon Citizens continued to allow its higher cost retail deposit products to run-off. Liquidity Liquidity is the ability to have funds available at all times to meet the commitments of LCNB Corp. Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash and deposits in banks, federal funds sold and securities available for sale. Liquidity is also provided by access to core funding sources, primarily core depositors in the bank's trade area. Lebanon Citizens does not solicit brokered deposits as a funding source. The liquidity of LCNB Corp. is enhanced by the fact that 87.9% of total deposits at December 31, 2000 were "core" deposits. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000. At December 31, 2000, LCNB Corp.'s liquid assets amounted to $100.8 million or 22.3% of total gross assets, down from $134.5 million or 30.6% of total gross assets at December 31, 1999. The primary reason for the decrease was a shifting of funds from securities available-for-sale to the higher yielding loan portfolio. Loans to deposits increased to 83.7% at December 31, 2000, from 73.5% at December 31, 1999. Secondary sources of liquidity include Lebanon Citizens' ability to sell loan participations, purchase federal funds, and borrow from the Federal Home Loan Bank. Management closely monitors the level of liquid assets available to meet ongoing funding needs. It is Management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB Corp. experienced no liquidity or operational problems as a result of the current liquidity levels. -29- Capital Resources As of December 31, 2000, LCNB Corp. had no material commitments for capital expenditures. Commitments to extend credit at December 31, 2000, amounted to $55.0 million and standby letters of credit totaled $5.8 million and are more fully described in Note 10 to LCNB Corp.'s Financial Statements. Since many of the commitments to lend may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Scheduled repayments of existing loans and maturities of investment securities are expected to provide the necessary funds. LCNB Corp. and Lebanon Citizens are required by banking regulators to meet certain minimum levels of capital adequacy. These are expressed in the form of certain ratios. Capital is separated into Tier I capital (essentially shareholders' equity less goodwill and other intangibles) and Tier II capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in Lebanon Citizens' assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%. The capital leverage ratio supplements the risk-based capital guidelines. Banks are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%. A summary of the regulatory capital of LCNB Corp. and Lebanon Citizens at December 31 follows:
2000 1999 ---------------- ---------------- LCNB Lebanon LCNB Lebanon Corp. Citizens Corp. Citizens (Dollars in thousands) Regulatory Capital: Shareholders' equity $46,310 41,245 42,987 37,875 Goodwill and other Intangibles (4,210) (4,157) (4,710) (4,710) Net unrealized securities losses (gains) (281) (219) 1,298 1,298 ------- ------ ------ ------ Tier 1 risk-based capital 41,819 36,869 39,575 34,463 Eligible allowance for loan losses 2,000 2,000 2,000 2,000 ------ ------ ------ ------ Total risk-based capital $43,819 $38,869 $41,575 $36,463 ====== ====== ====== ====== Capital Ratios: Total risk-based 14.9% 13.3% 15.3% 13.6% Tier 1 risk-based 14.2% 12.6% 14.6% 12.8% Tier 1 leverage 9.2% 8.2% 9.1% 7.9%
-30- The FDIC, the insurer of deposits in financial institutions, has adopted a risk-based insurance premium system based in part on an institution's capital adequacy. Under this system, a depository institution is required to pay successively higher premiums depending on its capital levels and its supervisory rating by its primary regulator. It is management's intention to maintain sufficient capital to permit Lebanon Citizens to maintain a "well capitalized" designation (the FDIC's highest rating). Year 2000 Compliance LCNB Corp. experienced no difficulties resulting from Y2K in the date transition at year-end 1999. Lebanon Citizens' testing and preparation for Y2K included future dates beyond December 31, 1999. Management anticipates no difficulties from future date changes. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk for LCNB Corp. is primarily interest rate risk. LCNB Corp. attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. LCNB Corp. does not use derivatives such as interest rate swaps, caps or floors to hedge this risk. LCNB Corp. has not entered into any market risk instruments for trading purposes. Lebanon Citizens' Asset and Liability Management Committee ("ALCO") primarily uses Interest Rate Sensitivity Gap Analysis, also known as repricing mismatch analysis, for measuring and managing interest rate risk. Interest Rate Sensitivity Gap Analysis A traditional gap analysis provides a point-in-time measurement of the relationship between the amounts of interest rate sensitive assets and liabilities in a given time period. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If liabilities mature or reprice more quickly or to a greater extent than assets, net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates. Conversely, if liabilities mature or reprice more slowly or to a lesser extent than assets, net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. ALCO strives to maintain a range for the relationship of rate sensitive assets to rate sensitive liabilities for gap analysis purposes of from 75 to 125 percent for the one-year and two- to four-year periods. The following table reflects LCNB Corp.'s gap analysis at December 31, 2000. The amounts reported in the table are the principal cash flows of rate sensitive assets and liabilities by expected maturity or repricing timeframe. Also presented is the related weighted average interest rate. Fixed rate real estate mortgage loans and mortgage-backed securities are allocated to the -31- various maturity/repricing periods based on contractual maturities adjusted for expected prepayments under the current market interest rate environment. Deposit liabilities without contractual maturities such as NOW and savings accounts are allocated to the various repricing periods based on an analysis of forecasted account run-off that takes into consideration the relatively stable nature of these core deposits. The gap analysis indicates that LCNB Corp.'s earnings are sensitive to the repricing of liabilities in the first year, sensitive to repricing of assets in the second through the fourth year, and asset sensitive thereafter. The aggregate ratio of rate sensitive assets to rate sensitive liabilities is 66.6% for the first year and 112.1% for years two through four. With the current relatively low market interest rate environment, management believes the ratios for the one year and two to four year time frames do not expose LCNB Corp.'s net interest income to significant risk. -32-
Expected Maturity/Repricing --------------------------- 2001 2002 2003 2004 2005 Thereafter Total Fair Value (Dollars in thousands) ASSETS Loans: (1) Fixed rate $ 29,697 17,734 16,204 14,167 11,868 114,954 204,624 191,484 Average interest rate 9.56% 9.36% 9.22% 9.04% 9.55% 8.25% Variable rate 65,002 11,681 17,403 19,477 5,818 6,434 125,815 125,815 Average interest rate 9.28% 7.67% 8.04% 7.28% 8.13% 7.86% Securities available for sale (2) 11,722 11,815 10,687 7,730 7,241 32,886 82,081 82,506 Average interest rate (3) 6.22% 5.93% 5.95% 6.32% 6.70% 6.68% Total earning assets 106,421 41,230 44,294 41,374 24,927 154,274 412,520 399,805 Average interest rate 8.71% 7.90% 7.97% 7.70% 8.39% 7.90% LIABILTIES NOW and money fund 26,770 11,002 11,002 11,002 11,002 17,604 88,382 87,503 Average interest rate 4.20% 1.92% 1.92% 1.92% 1.92% 4.90% Savings 27,233 7,530 7,530 7,530 7,530 29,817 87,170 87,170 Average interest rate 4.05% 4.05% 4.05% 4.05% 4.05% 4.05% IRA's Fixed rate 6,660 6,033 1,343 1,139 3,399 1,039 19,613 19,673 Average interest rate 5.61% 6.10% 5.69% 6.19% 6.74% 6.62% Variable rate 6,989 3,555 - - - - 10,544 10,544 Average interest rate 6.18% 6.17% - - - - CD's over $100,000 25,510 8,518 1,212 468 405 100 36,213 35,841 -33- Average interest rate 6.11% 6.14% 5.79% 6.06% 6.98% 5.97% CD's under $100,000 66,556 26,760 3,185 1,197 3,143 326 101,167 100,969 Average interest rate 5.50% 6.07% 5.70% 5.70% 6.42% 6.36% Long term debt 50 2,053 56 2,060 2,064 73 6,356 6,652 Average interest rate 6.00% 7.55% 6.00% 7.66% 7.67% 6.00% Total interest-bearing Liabilities 159,768 65,451 24,328 23,396 27,543 48,959 349,445 348,417 Average interest rate 5.17% 5.20% 3.48% 3.59% 4.11% 4.43% Period gap $(53,347) (24,221) 19,966 17,978 (2,616) 105,315 Cumulative gap $(53,347) (77,568) (57,602) (39,624) (42,240) 63,075 Ratio of rate sensitive assets to rate sensitive liabilities: First twelve months 66.61% Years two through four 112.13% Thereafter 315.11% (1) Excludes adjustments for deferred net origination costs and allowance for loan losses. (2) At amortized cost. (3) Rates for tax-exempt securities are adjusted to a taxable equivalent rate.
-34- Item 8. Financial Statements and Supplementary Data The Financial Statements required by this item are incorporated herein by reference to pages 15 through 23 of the Registrants 2000 LCNB Corp. Annual Report attached to this filing as Exhibit 13. Item 9. Changes in and Disagreements with Accountants and Accounting and Financial Disclosures. None -35- PART III Portions of the Proxy Statement included in the Notice of Annual Meeting of Shareholders to be held April 17, 2001, dated March 17, 2001, are incorporated by reference into Part III. Item 10. Directors and Executive Officers of the Registrant The information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 17, 2001), relating to "Directors and Executive Officers of the Registrant", is incorporated herein by reference. Item 11. Executive Compensation The information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 17, 2001), relating to "Compensation of Directors and Executive Officers", is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 17, 2001), relating to "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 17, 2001), relating to "Certain Relationships and Related Transactions", is incorporated herein by Reference. -36- PART IV Item 14. Exhibits, Financial Statements and Reports on 8-K 1. Financial Statements INDEPENDENT AUDITOR'S REPORT FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Financial Statement Schedules None 3. Exhibits required by Item 601 Regulation S-K. (a)Exhibit No. Exhibit Description ---------- ------------------- 3.1 Articles of Incorporation of LCNB Corp.(1) 3.2 Code of Regulations of LCNB Corp.(2) 10 Agreement of Merger and Plan of Reorganization by and among Dakin Insurance Agency, Inc., Shareholders of Dakin Insurance Agency, Inc., LCNB Corp. and Dakin Acquisition Corporation, dated December 30, 1999. (3) 13 Portions of LCNB Corp. 2000 Annual Report (pages 2-3 and 15-24) 21 LCNB Corp. Subsidiaries (1) Incorporated by reference to Registrant's 1999 Form 10-K, Exhibit 3.1. (2) Incorporated by reference to Registrant's Registration Statement on Form S-4, Exhibit 3.2, Registration No. 333-70913. (3) Incorporated by reference to Registrant's 1999 Form 10-K, Exhibit 10. (b)Reports on Form 8-K There were no Form 8-Ks filed with the SEC in the fourth quarter of 2000. -37- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LCNB Corp. (Registrant) /s/Stephen P. Wilson ---------------------------- President and Chairman of the Board of Directors Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: Executive Vice President /s/Steve P. Foster and Chief Financial Officer February 20, 2001 - --------------------- Steve P. Foster /s/David S. Beckett Director February 20, 2001 - --------------------- David S. Beckett /s/Robert C. Cropper Director February 20, 2001 - --------------------- Robert C. Cropper /s/William H. Kaufman Director February 20, 2001 - --------------------- William H. Kaufman /s/George L. Leasure Director February 20, 2001 - --------------------- George L. Leasure /s/James B. Miller Director February 20, 2001 - --------------------- James B. Miller /s/Corwin M. Nixon Director February 20, 2001 - --------------------- Corwin M. Nixon -38- /s/Kathleen Porter Stolle Director February 20, 2001 - ------------------------- Kathleen Porter Stolle /s/Howard E. Wilson Director February 20, 2001 - ---------------------- Howard E. Wilson /s/Marvin E. Young Director February 20, 2001 - ---------------------- Marvin E. Young -39- EX-13 3 exhibit13c.txt EXHIBIT 13 LCNB Corp. 2000 Annual Report President's Letter to Shareholders (pages 2-3 of Annual Report): - ---------------------------------- Dear Shareholders, The title of this year's Annual Report is "Built for the Future", a theme that emphasizes how well LCNB Corp. is positioned to meet the challenges and opportunities that will face the financial services industry in this new century. In my letter I will cover our financial performance for the year 2000, our dynamic market area, our diverse and competitive product mix, the multiple delivery channels we have developed to deliver those products, the strength of the service culture that is our tradition and mainstay, and my thoughts on the future prospects for our financial holding company. Our form 10-K report filed annually with the Securities and Exchange Commission is available and contains additional information and details. Page 24 of this report gives you several options for obtaining the SEC report. This was the fifteenth consecutive year that the Board of Directors approved an increase in the dividend rate. The dividend rate increased by 12.5% to $1.80 per share in 2000 from $1.60 per share in 1999. Net income for 2000 was $5.24 million representing a 1.2% return on average assets and an 11.84% return on average shareholders' equity. Total assets increased to $451 million from $439 million one year ago. Total capital or shareholders equity at December 31, 2000 is $46.31 million having increased 8.5% from December 31, 1999. 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. Our ability to reinvest customer deposits back into the communities we serve in the form of loans remains the key to our earnings success. In 2000, we were able to increase our loan totals by $42.8 million or 15%. The most important accomplishment through all of this loan growth has been our ability to maintain credit quality. We ended 2000 with an exceptionally low delinquency rate of .23% and no non-performing loans. On the deposit side, we experienced only a 1% growth in a highly competitive and tight market. This lack of deposit growth forced us to use other more expensive sources of funds to fuel our loan growth, which had a negative effect on earnings. We were able to significantly shift our deposit mix, letting higher cost certificate of deposits run off, reducing that category by $16.1 million, while increasing core deposits by $14.7 million. We now have 87.9% of our total deposits in "core deposits", a fact that will serve us well as we go forward. At year-end our loan to deposit ratio had increased to 83.7% from 73.5% at December 31, 1999. We remain well positioned for future growth with liquid assets at $100.8 million or 22.4% of total assets at year-end. Shifting back to our "Built for the Future" theme, it is important to understand the market we serve and where we have built our offices. While extremely competitive, our market area is one of the most dynamic in the world, serving an area in southwest Ohio, with a primary service area stretching from the Indiana border to the eastern border of Clinton County. The core of our market area consists of the two counties that divide Cincinnati from Dayton. Warren and Butler Counties are consistently among the fastest growing counties in Ohio, attesting to the fact that Cincinnati and Dayton are growing together into one major metropolitan area. We serve this core area with 15 of our 18 offices and 23 of our 26 ATM locations. We have received Regulatory approval to establish a new full-service banking office and it will also be located in this core area in the City of Hamilton. No less important to our future growth are single offices in Clinton, Clermont and Hamilton Counties. Our market area is prosperous and will allow for the growth and expansion we will need for many years to come. As a financial holding company, we have built an impressive and complete line of financial products. We offer these products through three very specialized areas to provide both the competence and personal service our customers need and desire. First, is the complete line of traditional bank products offered through our bank subsidiary, Lebanon Citizens National Bank. These include loan and deposit products, and support products like safe deposit boxes, lockbox service, sweep accounts, ACH origination, credit cards, debit cards and cash management services. The second area is our trust and investment department providing complete trust and administrative functions, agency accounts, escrow services, mutual funds and retirement savings products to individuals, partnerships, corporations, institutions and municipalities. The third area is our insurance subsidiary, Dakin Insurance Agency, Inc., providing a complete array of insurance products including property and casualty insurance, life and health products and annuities. We truly have become a one-stop financial services provider. On the delivery side, we have used a combination of brick and mortar offices and technology to build a delivery system for our products that is second- to-none. Strategically placed offices, supplemented by several 24-hour a day, 7-day a week delivery channels, make our products conveniently available to all individuals and businesses in our defined market area. Telephone banking (Bankline), PC/Internet Banking (LCNB.com), electronic banking (Direct Link) and our ATM network (MAC), which is connected worldwide with debit and credit cards, supplement our eighteen bank branches and six insurance offices. Given all that we have constructed for the future, nothing is more important than the service culture that has been built over the past 24 years at both Lebanon Citizens National Bank and Dakin Insurance. I know I write and talk about it often, but our service culture is the most important asset we have and the biggest key to our future success. Everyone today talks about sales culture and developing a more intense sales culture will be important to us. But, we are building our sales culture on the foundation of our -2- service culture. We must maintain, nurture and expand our service culture and the sales will come. It is the 237 people that make up the LCNB family, taking care of our customers and each other that will cause us to grow and prosper. LCNB Corp. is truly "Built for the Future". We believe that our dynamic market area, our diverse and competitive products, our convenient delivery channels and our tradition of service will enhance future financial performances. We are positioned for a good year in 2001 with targeted net income return on average assets and asset growth exceeding this year's performance. The annual meeting for LCNB Corp. will be April 17th at 10:00 a.m. at our main banking office, 2 North Broadway in Lebanon, Ohio. Proxy material will be sent to you in a separate mailing in mid-March. Please review, sign and return the proxy upon receipt of that material. We would like to have you attend that meeting if it is possible. Thank you for your continued support. Stephen P. Wilson -3- Financial Statements and Supplementary Data (pages 15-24 of Annual Report) - ------------------------------------------- -4- INDEPENDENT AUDITORS' REPORT To the Shareholders LCNB Corp. and Subsidiaries Lebanon, Ohio We have audited the accompanying consolidated balance sheets of LCNB Corp. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income and changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with U.S. generally accepted accounting principles. /s/J.D. Cloud & Co. L.L.P. ----------------------------- Certified Public Accountants Cincinnati, Ohio January 13, 2001 -5- LCNB Corp. and Subsidiaries Consolidated Balance Sheets At December 31, 2000 (thousands)
2000 1999 ASSETS: Cash and due from banks $ 18,262 18,840 Federal funds sold - 5,300 ------- ------- Total cash and cash equivalents 18,262 24,140 Interest-bearing deposits in banks - 5,492 Securities available for sale, at market value 82,506 104,911 Federal Reserve Bank stock 647 647 Federal Home Loan Bank stock 1,741 - Loans, net 328,439 285,608 Premises and equipment, net 10,502 8,231 Accrued income receivable 3,139 3,363 Intangibles 4,210 4,763 Other assets 1,554 2,083 ------- ------- TOTAL ASSETS $451,000 439,238 ======= ======= LIABILITIES: Deposits- Demand $ 51,697 49,477 NOW 47,085 55,512 Money fund deposits 41,297 21,926 Savings 87,170 81,191 IRA 30,157 29,983 Certificates - $100,000 and over 36,213 45,357 Other time certificates 101,167 108,123 ------- ------- Total deposits 394,786 391,569 Long-term debt 6,356 403 Accrued interest and other liabilities 3,548 4,579 ------- ------- TOTAL LIABILITIES 404,690 396,551 ------- ------- SHAREHOLDERS' EQUITY: Common shares-no par value, authorized 4,000,000 shares; issued and outstanding 1,775,942 shares 10,560 10,560 Surplus 10,553 10,553 Retained earnings 24,916 22,872 Accumulated other comprehensive income net of taxes 281 (1,298) ------- ------- TOTAL SHAREHOLDERS' EQUITY 46,310 42,687 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $451,000 439,238 ======= ======= The accompanying notes to financial statements are an integral part of these statements. -6-
LCNB Corp. and Subsidiaries Consolidated Statements of Income For the years ended December 31 ($000s, except per share amounts)
2000 1999 1998 INTEREST INCOME: Interest and fees on loans $26,233 22,743 23,047 Interest on federal funds sold 459 463 796 Interest on deposits in banks 241 281 289 Interest on Federal Reserve Bank and Federal Home Loan Bank stock 70 39 39 Interest on investment securities- Taxable 3,542 4,914 4,612 Non-taxable 1,606 1,251 816 ------ ------ ------ TOTAL INTEREST INCOME 32,151 29,691 29,599 ------ ------ ------ INTEREST EXPENSE: Interest on deposits- Money fund and NOW accounts 2,303 1,912 1,706 Savings 3,217 2,382 1,769 IRA 1,794 1,608 1,737 Certificates - $100,000 and over 2,594 1,916 1,871 Other time certificates 5,693 5,420 6,949 ------ ------ ------ Total interest on deposits 15,601 13,238 14,032 Interest on short-term borrowings 83 43 48 Interest on long-term debt 270 24 - ------ ------ ------ TOTAL INTEREST EXPENSE 15,954 13,305 14,080 ------ ------ ------ NET INTEREST INCOME 16,197 16,386 15,519 PROVISION FOR LOAN LOSSES 197 208 191 ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,000 16,178 15,328 ------ ------ ------ NON-INTEREST INCOME: Trust income 1,365 1,160 1,082 Service charges and fees 2,087 2,137 2,007 Net gain on sale of securities 12 20 234 Insurance agency income 811 939 750 Other operating income 125 114 140 ------ ------ ------ TOTAL NON-INTEREST INCOME 4,400 4,370 4,213 ------ ------ ------ NON-INTEREST EXPENSE: Salaries and wages 5,529 5,392 4,882 Pension and other employee benefits 1,415 1,315 1,092 Equipment expenses 629 534 508 Occupancy expense - net 1,044 954 904 State franchise tax 407 581 578 Marketing 422 423 441 Intangible amortization 581 631 618 Other non-interest expenses 3,042 2,820 2,632 ------ ------ ------ TOTAL NON-INTEREST EXPENSE 13,069 12,650 11,655 ------ ------ ------ INCOME BEFORE INCOME TAXES 7,331 7,898 7,886 PROVISION FOR INCOME TAXES 2,091 2,323 2,426 ------ ------ ------ NET INCOME $ 5,240 $ 5,575 $ 5,460 ====== ====== ====== Basic earnings per common share $ 2.95 3.14 3.07 ====== ====== ====== Weighted average shares outstanding (000's) 1,776 1,776 1,776 ====== ====== ====== The accompanying notes to financial statements are an integral part of these statements. -7-
LCNB Corp. and Subsidiaries Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity For the three years ended December 31, 2000 (000's, except per share amounts)
Accumulated Other Total Common Retained Comprehensive Shareholders' Comprehensive Shares Surplus Earnings Income Equity Income Balance January 1, 1998 $10,560 11,016 17,118 86 38,780 Net income 5,460 5,460 $5,460 Transition adjustments for the effect of a change in accounting principle 473 473 473 Net unrealized gain on available-for-sale securities (net of taxes of $124) 241 241 241 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $80) (154) (154) (154) ----- Total comprehensive income 6,020 ===== Cash dividends declared- $1.40 per share (2,465) (2,465) ------ ------ ------ --- ------ Balance December 31, 1998 $10,560 11,016 20,113 646 42,335 Net income 5,575 5,575 5,575 Treasury shares purchased (463) (463) Net unrealized loss on available-for-sale securities (net of taxes of $995) (1,931) (1,931) (1,931) Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of tax benefit of $7) (13) (13) (13) ----- Total comprehensive income 3,631 ===== Cash dividends declared $1.60 per share (2,816) (2,816) ------- ------ ------ ----- ------ Balance December 31, 1999 10,560 10,553 22,872 (1,298) 42,687 Net income 5,240 5,240 5,240 Net unrealized gain on available-for-sale securities (net of taxes of $817) 1,587 1,587 1,587 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of tax benefit of $4) (8) (8) (8) ----- Total comprehensive income $6,819 ===== Cash dividends declared $1.80 per share (3,196) (3,196) ------- ------ ------ ----- ------ Balance December 31, 2000 $10,560 10,553 24,916 281 46,310 ====== ====== ====== ====== ====== The accompanying notes to financial statements are an integral part of these statements. -8-
LCNB Corp. and Subsidiaries Consolidated Statements of Cash Flows For the years ended December 31 (000's)
2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,240 5,575 5,460 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation, amortization and accretion 1,997 1,893 1,429 Provision for loan losses 197 208 191 Deferred income tax benefit (70) (87) (51) Realized gains on securities available for sale (12) (20) (234) Origination of mortgage loans for sale - (2,441) (11,600) Proceeds from sales of mortgage loans - 2,443 11,707 (Increase) decrease in income receivable 223 (346) (54) Increase (decrease) in interest payable 176 125 (110) Increase (decrease) in accrued expenses, net (19) (454) 78 ------ ------ ------ TOTAL ADJUSTMENTS 2,492 1,321 1,356 ------ ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 7,732 6,896 6,816 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in interest-bearing deposits in banks 5,492 - (1,492) Proceeds from sales of securities available for sale 5,852 12,776 8,315 Proceeds from maturities of securities available for sale 28,899 45,603 10,201 Proceeds from maturities of securities held to maturity - - 32,010 Purchases of securities available for sale (10,224) (43,705) (67,634) Purchases of FHLB stock (1,741) - - Purchases of securities held to maturity - - (4,474) Net decrease (increase) in loans (43,666) (20,869) 3,086 Purchases of premises and equipment (3,067) (607) (1,363) Proceeds from certain asset sales - - 274 ------ ------ ------ NET CASH USED IN INVESTING ACTIVITIES (18,455) (6,802) (21,077) ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 3,216 4,563 9,655 Net increase (decrease) in short-term borrowings (1,175) 1,520 (2,553) Advances of long-term debt 6,000 - - Cash dividends paid (3,196) (2,816) (2,465) ------ ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 4,845 3,267 4,637 ------ ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS (5,878) 3,361 (9,624) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,140 20,779 30,403 ------ ------ ------ CASH AND CASH EQUIVALENTS AT END OF YEAR $18,262 24,140 20,779 ====== ====== ====== SUPPLEMENTAL CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: Interest $15,778 13,180 14,190 Income taxes 1,877 2,706 2,245 NON-CASH TRANSFER OF SECURITIES FROM HELD-TO- MATURITY TO AVAILABLE-FOR-SALE CLASSIFICATION - 42,768 - COMMON SHARES OF DAKIN PURCHASED IN EXCHANGE FOR NOTE PAYABLE - 448 - The accompanying notes to financial statements are an integral part of these statements. -9- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES LCNB Corp. (the Company) was incorporated in December 1998. In the second quarter of 1999, each shareholder of Lebanon Citizens National Bank (the Bank) received ten common shares of the Company in exchange for each share of the Bank. Lebanon Citizens National Bank, as a result of the merger, became a wholly-owned subsidiary of LCNB Corp. In April 2000, the Company acquired Dakin Insurance Agency, Inc. (Dakin) as a wholly-owned subsidiary of LCNB Corp. and accounted for the merger as a pooling of interests. The Bank was founded in 1877 and provides full banking services, including trust services, to customers primarily in the southwestern Ohio area of Warren, Hamilton, Clermont, Clinton and Butler counties. Dakin is an independent insurance agency founded in 1876 and offers a wide range of insurance products for businesses and individuals in the Bank's primary market area. BASIS OF PRESENTATION- The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. All comparative financial statements and share and per share information have been restated to give effect to the ten-for-one exchange in the formation of the holding company and the pooling of interest accounting related to the Dakin acquisition. USE OF ESTIMATES- The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT SECURITIES- Debt securities which the Company has the intent and ability to hold to maturity are reported at amortized cost. Debt securities classified as available for sale and all equity securities are reported at fair value with unrealized holding gains and losses reported net of income taxes as Accumulated Other Comprehensive Income, a separate component of shareholders' equity. Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the level yield method. Realized gains or losses from the sale of securities are computed using the specific identification method. Currently, the Company and its subsidiaries do not hold any derivatives or conduct hedging activities. Federal Home Loan Bank (FHLB) stock is an equity interest in the Federal Home Loan Bank of Cincinnati. It can be sold only at its par value of $100 per share and only to the FHLB or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company, because of the oversight role exercised by the Federal Housing Finance Board in the process of budgeting and approving dividends. Federal -10- Reserve Bank stock is similarly restricted in marketability and value. Although catagorized as securities available for sale, 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. The accrual of interest on impaired loans is discontinued when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Subsequent cash receipts on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded once principal recovery is reasonably assured. The current 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- Intangible assets representing the excess of the costs of acquired operations over the fair value of net tangible assets acquired are being amortized using the straight-line method over fifteen years. The Company periodically reviews intangible assets for possible impairment. -11- 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 Bank's financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. INCOME TAXES- Certain income and expenses are recognized in different periods for financial reporting than for purposes of computing income taxes currently payable. Deferred taxes are provided on such temporary differences between the financial reporting and tax bases of the related assets and liabilities. STATEMENTS OF CASH FLOWS- For purposes of reporting cash flows, cash equivalents include all highly liquid investments with original maturities of three months or less. EARNINGS PER SHARE- Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. The Company's capital structure includes no potential for dilution. There are no warrants, options or other arrangements that would increase the number of shares outstanding. RECENT PRONOUNCEMENTS AND ACCOUNTING CHANGES- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". In most instances the standard, once adopted, precludes any held-to-maturity security from being designated as a hedged item. The Bank adopted SFAS No. 133 in the fourth quarter of 1998. To provide the flexibility in the future to designate securities as hedged items, the Bank recategorized its held-to-maturity securities as available for sale. The amortized cost and related unrealized net gain of the transferred securities was $42,768,000 and $716,000, respectively, at the date of transfer. This change in accounting principle had no effect on reported net income. Comprehensive income increased $473,000 after income taxes of $243,000. NOTE 2 - ACQUISTION In April 2000, Dakin was acquired and became a wholly-owned subsidiary of LCNB Corp. Under the terms of the agreement, Dakin shareholders received 15,942 shares of LCNB Corp. common stock in a private offering. The transaction qualifies as a tax-free reorganization and has been accounted for using the pooling of interests method of accounting. Accordingly, the consolidated financial statements of LCNB Corp. have been restated to retroactively combine the financial statements of LCNB Corp. and Dakin as if the acquisition had occurred at the beginning of the earliest period presented. -12-
The following table presents the revenues of Dakin included as a component of non-interest income, the net income of Dakin, and a reconciliation of the net income and earnings per common share previously reported by LCNB Corp. to those items presented in the accompanying financial statements (thousands, except earnings per common share):
2000 1999 1998 Dakin Insurance Agency, Inc. Revenues prior to acquisition $ 182 951 758 Revenues since acquisition 635 - - ----- ----- ----- $ 817 951 758 ===== ===== ===== Net income: Consolidated LCNB Corp. $5,204 5,548 5,447 Dakin Insurance Agency, Inc. prior to acquisition 36 27 13 ----- ----- ----- $ 5,240 5,575 5,460 ===== ===== ===== Earnings per common share: As previously reported $3.15 3.09 As restated 3.14 3.07 NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale investment securities at December 31 are summarized as follows ($000's):
2000 ----------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury notes $ 3,002 17 1 3,018 U.S. Agency notes 20,142 30 126 20,046 U.S. Agency mortgage- backed securities 12,234 19 89 12,164 Corporate notes 8,708 18 247 8,479 Municipal securities: Non-taxable 31,692 848 75 32,465 Taxable 6,303 58 27 6,334 ------ --- --- ------ $82,081 990 565 82,506 ====== === === ====== -13- 1999 ----------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury notes $ 6,511 7 36 6,482 U.S. Agency notes 30,750 - 823 29,927 U.S. Agency mortgage- backed securities 15,486 2 419 15,069 Corporate notes 17,179 41 162 17,058 Municipal securities: Non-taxable 32,593 117 518 32,192 Taxable 4,361 - 178 4,183 ------- --- ----- ------- $106,880 167 2,136 104,911 ======= === ===== =======
Contractual maturities of debt securities at December 31, 2000 were as follows ($000's). Actual maturities may differ from contractual maturities when borrowers have the right to call or prepay obligations.
Amortized Market Cost Value Due within one year $11,726 11,737 Due from one to five years 35,495 35,412 Due from five to ten years 14,702 14,778 Due after ten years 7,924 8,415 ------ ------ 69,847 70,342 U.S. Agency mortgage- backed securities 12,234 12,164 ------ ------ $82,081 82,506 ====== ====== Gross gains realized on sales of securities available for sale were $31,000, $26,000 and $234,000 for 2000, 1999 and 1998 respectively. Realized losses during 2000 and 1999 amounted to $19,000 and $6,000 respectively. There were no realized losses during 1998. Investment securities with a carrying value of $56,116,000 and $82,897,000 at December 31, 2000 and 1999, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. -14- NOTE 4 - LOANS
Major classifications of loans at December 31 are as follows ($000's):
2000 1999 Commercial and industrial $ 36,449 26,347 Commercial, secured by real estate 59,043 56,671 Residential real estate 185,013 162,087 Consumer, excluding credit card 40,860 36,402 Agricultural 2,238 2,343 Credit card 3,049 2,764 Other loans 863 285 Lease financing 2,219 183 ------- ------ 329,734 287,082 Deferred net origination costs 705 526 ------- ------- 330,439 287,608 Allowance for loan losses (2,000) (2,000) ------- ------- Loans-net $328,439 285,608 ======= ======= 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, 2000, 1999 and 1998 were $14,046,000, $15,379,000, and $14,747,000 respectively.
Changes in the allowance for loan losses were as follows ($000's):
2000 1999 1998 BALANCE-BEGINNING OF YEAR $2,000 2,000 2,200 Provision for loan losses 197 208 191 Charge offs (255) (272) (418) Recoveries 58 64 27 ----- ----- ----- BALANCE-END OF YEAR $2,000 2,000 2,000 ===== ===== ===== There were no nonaccrual loans at December 31, 2000 or 1999. Interest income that would have been recorded in 2000, 1999 and 1998 if loans on nonaccrual status at various times during the respective years had been current and in accordance with their original terms, was not material. At December 31, 2000 and 1999, the recorded investment in loans for which impairment has been -15- recognized in accordance with SFAS Statement No. 114 was not material. The Bank is not committed to lend additional funds to debtors whose loans have been modified to provide a reduction or deferral of principal or interest because of a deterioration in the financial position of the borrower. NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows ($000's):
2000 1999 Land $ 1,876 1,870 Buildings 9,365 7,477 Equipment 7,938 6,726 ------ ------ Total 19,179 16,073 Less-Accumulated depreciation 8,677 7,842 ------ ------ Premises and Equipment-Net $10,502 8,231 Depreciation charged to income was $796,000 in 2000, $688,000 in 1999 and $636,000 in 1998. Some of the Bank's branches and equipment are leased under agreements expiring at various dates through 2049. These leases are accounted for as operating leases. At December 31, 2000, required minimum annual rentals due in the future on noncancelable leases having terms in excess of one year aggregated $1,447,000. Minimum annual rentals for each of the years 2000 through 2004 are approximately $60,000. Rental expense for all leased branches and equipment amounted to $119,000 in 2000, $101,000 in 1999 and $115,000 in 1998. NOTE 6 - DEPOSIT LIABILITIES
Contractual maturities of certificates of deposit at December 31, 2000 were as follows ($000's):
Certificates All other over $100,000 Certificates Total Year ending December 31 2001 $25,510 66,621 92,131 2002 8,518 26,696 35,214 2003 1,212 3,185 4,397 2004 468 1,196 1,664 2005 405 3,143 3,548 Thereafter 100 326 426 ------ ------- ------- $36,213 101,167 137,380 ====== ======= ======= -16- NOTE 7 - EMPLOYEE BENEFITS The Bank's noncontributory defined benefit retirement plan covers all regular full-time employees. The benefits are based on years of service and the employee's highest average compensation during five consecutive years. Pension costs are funded based on the Plan's actuarial cost method and are limited to amounts currently deductible for federal income tax purposes.
The components of net periodic pension cost are summarized as follows ($000's):
2000 1999 1998 Service cost $423 378 279 Interest cost 205 182 157 Expected return on Plan assets (192) (161) (140) Amortization of unrecognized transition obligation 17 17 17 Recognized net actuarial loss (gain) 55 (13) 43 --- --- --- Net periodic pension cost $508 403 356 === === ===
A summary of the Plan's prepaid benefit cost, included in Other Assets on the balance sheets, and the Plan's funded status at December 31 follows ($000's):
2000 1999 Change in projected benefit obligations --------------------------------------- Projected benefit obligation at beginning of year $3,786 3,308 Service cost 423 378 Interest cost 205 182 Actuarial gains (437) (79) Benefits paid (123) (3) ----- ----- Projected benefit obligation at end of year 3,854 3,786 ----- ----- Change in plan assets --------------------- Fair value of plan assets at beginning of year 3,466 2,880 Actual return on plan assets 140 133 Employer contribution 546 456 Benefits paid (123) (3) ----- ----- Fair value of plan assets at end of year 4,029 3,466 ----- ----- -17- Funded status 175 (320) Unrecognized net actuarial loss 625 1,064 Unrecognized transition obligation 27 44 ----- ----- Prepaid benefit cost $ 827 788 ===== =====
The Plan's assets are exclusively certificates of deposit with the Bank. In determining the actuarial present value of the projected benefit obligation, the following assumptions were used:
2000 1999 Assumed discount rate 5.50% 5.50% Expected long-term rate of return on Plan assets 5.50% 5.50% Rate of increase in future compensation levels 4.00% 4.00% The Bank has a benefit plan which permits eligible officers to defer a portion of their compensation. The deferred compensation, with accrued interest, is distributable in cash after retirement or termination of employment. The amount of such deferred compensation at December 31, 2000 and 1999, was $401,000 and $324,000, 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, 2000 and 1999, is $90,000 and $70,000, respectively. The discount rate used to determine the present value of the obligation was 6.5% in 2000 and 1999. The service cost associated with this plan in each of the three years 2000, 1999 and 1998 was approximately $16,000. Interest costs were not material. Both of these plans are nonqualified and unfunded. Participation in each plan is limited to a select group of management. NOTE 8 - LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following at December 31 (thousands):
2000 1999 Federal Home Loan Bank notes $6,000 - Note payable to former shareholder of Dakin 356 403 ----- --- Total $6,356 403 ===== === -18-
Maturities of long-term debt in the years ending December 31 are as follows:
2001 $ 50 2002 2,053 2003 56 2004 2,060 2005 2,064 The Federal Home Loan Bank borrowings consist of three notes with two, four and five-year maturities and have a weighted average interest rate of 7%. Interest on the notes is fixed and payable monthly. The notes are collateralized by a blanket pledge of 1-4 family residential mortgage loans. The note payable matures in 2006. Payments are due monthly at a nominal interest rate of 6%. At December 31, 2000 and 1999, accrued interest and other liabilities include U.S. Treasury demand note borrowings of approximately $1,099,000 and $2,274,000, respectively. NOTE 9 - INCOME TAXES
The provision for federal income taxes consists of ($000's):
2000 1999 1998 Income taxes currently payable $2,161 2,410 2,477 ----- ----- ----- Deferred income taxes resulting from temporary differences- Provision for loan losses - - 68 Loan origination fees-net (19) (33) (73) Pension and deferred compensation (11) (16) 12 Depreciation and amortization (40) (38) (58) ----- ----- ----- Total deferred income tax benefit (70) (87) (51) ----- ----- ----- Provision for income taxes $2,091 2,323 2,426 ===== ===== ===== -19-
A reconciliation between the statutory income tax rate and the Bank's effective tax rate follows:
2000 1999 1998 Statutory tax rate 34.0% 34.0 34.0 Increase (decrease) resulting from- Tax exempt interest (6.5) (4.6) (2.9) Other-net 1.0 - ( .3) ---- ---- ---- Effective tax rate 28.5% 29.4 30.8 ==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Bank has not recorded a valuation reserve related to deferred tax assets. Deferred tax assets and liabilities at December 31 consist of the following ($000's):
2000 1999 Deferred tax assets: Allowance for loan losses $ 522 522 Unrealized losses on securities available for sale - 669 Amortization of intangibles 202 153 --- ----- 724 1,344 --- ----- Deferred tax liabilities: Depreciation of premises and equipment (187) (175) Unrealized gains on securities available for sale (113) - Deferred loan fees (117) (161) Pension and deferred compensation (125) (137) --- ----- (542) (473) --- ----- Net deferred tax $182 871 === ===== NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. They involve, to varying degrees, elements of credit and interest rate risk in excess of the -20- amount recognized in the balance sheets. The Bank'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 Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent off-balance-sheet credit risk at December 31 were as follows (thousands):
2000 1999 Commitments to extend credit $55,034 52,198 Standby letters of credit 5,768 5,783 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. At December 31, 2000 and 1999, outstanding guarantees of $768,000 and $783,000, respectively, were issued to developers and contractors. These guarantees generally expire within one year and are fully secured. In addition, the Bank is a participant for the amount of $5 million in a letter of credit securing payment of principal and interest on a bond issue. This letter of credit will expire July 15, 2005, and is secured by an assignment of rents and the underlying real property. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable; inventory; property, plant and equipment; residential realty; and income-producing commercial properties. The Company and its subsidiaries are parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations. NOTE 11 - RELATED PARTY TRANSACTIONS The Bank has entered into related party transactions with various directors and executive officers. Such transactions originate in the normal course of the Bank's operations as a depository and lending institution. At December 31, 2000 and 1999, certain executive officers, directors and associates of such persons were indebted to the Bank directly or as guarantors in the aggregate -21- amount of $3,000,000 and $3,576,000, respectively. During 2000, $180,000 in new loans were made; repayments totaled $756,000. 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):
2000 1999 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value FINANCIAL ASSETS: Cash and cash equivalents $ 18,262 18,262 24,140 24,140 Interest-bearing deposits in banks - - 5,492 5,492 Federal Reserve Bank stock 647 647 647 647 Federal Home Loan Bank stock 1,741 1,741 - - Securities available for sale 82,506 82,506 104,911 104,911 Loans, net 328,439 317,299 285,608 278,149 FINANCIAL LIABILITIES: Deposits $394,786 393,798 391,569 390,221 Short-term borrowings 1,099 1,099 2,274 2,274 Long-term debt 6,356 6,652 403 403 The fair value of off-balance-sheet financial instruments at December 31, 2000 and 1999 was not material. Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions. In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of the Bank. The following methods and assumptions were used to estimate the fair value of certain financial instruments: Cash and cash equivalents: The carrying amounts presented are deemed to approximate fair value. Interest-bearing deposits in banks: Fair value is estimated for these certificates of deposit by discounting the future cash flows at current rates. Investment Securities: Fair values are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. -22- 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 2000 and 1999, the Bank was required to maintain average reserve balances of $8,356,000 and $8,018,000, respectively.
Banks and holding companies must meet certain minimum capital requirements set by federal banking agencies. The minimum regulatory capital ratios are 8% for total risk-based, 4% for Tier 1 risk-based, and 4% for leverage. For various regulatory purposes, institutions are classified into categories based upon capital adequacy. The highest "well-capitalized" category requires capital ratios of at least 10% for total risk-based, 6% for Tier 1 risk-based, and 5% for leverage. As of the most recent notification from their regulators, the Holding Company and Bank were categorized as "well- capitalized" under the regulatory framework for prompt corrective action. A summary of the regulatory capital of the Holding Company and Bank at December 31 follows ($000's):
2000 1999 ---------------------------------- Holding Holding Company Bank Company Bank Regulatory Capital: Shareholders' equity $46,310 41,245 42,987 37,875 Goodwill and other intangibles (4,210) (4,157) (4,710) (4,710) Net unrealized securities losses (gains) (281) (219) 1,298 1,298 ------ ------ ------ ------ Tier 1 risk-based capital 41,819 36,869 39,575 34,463 -23- Eligible allowance for loan losses 2,000 2,000 2,000 2,000 ------ ------ ------ ------ Total risk-based capital $43,819 38,869 41,575 36,463 ====== ====== ====== ====== Capital Ratios: Total risk-based 14.88% 13.30 15.3 13.6 Tier 1 risk-based 14.20% 12.62 14.6 12.8 Tier 1 leverage 9.22% 8.21 9.1 7.9 The principal source of income and funds for LCNB Corp. is dividends paid by the Bank subsidiary. The payment of dividends is subject to restriction by regulatory authorities. For 2000, the restrictions generally limit dividends to the aggregate of net income for the year 2000 plus the retained net earnings for 2000 and 1999. 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. NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for LCNB Corp. (parent company only) follows ($000's):
Condensed Balance Sheets Year ended December 31 2000 1999 Assets: Cash on deposit with subsidiary $ 48 17 Corporate and municipal debt securities 5,029 4,969 Investment in subsidiary 41,139 37,575 Other assets 94 126 ------ ------ Total assets $46,310 42,687 ====== ====== Liabilities $ - - Shareholders' equity 46,310 42,687 ------ ------ Total liabilities and shareholders' equity $46,310 42,687 ====== ====== -24- Condensed Statements of Income Year ended December 31 Income: Dividends from subsidiary $ 3,197 7,936 Interest 202 2 Gain on sale of investment securities 7 - ----- ----- Total income 3,406 7,938 ----- ----- Expenses: Amortization of organization costs 20 13 Other expense 20 1 ----- ----- Total expense 40 14 ----- ----- Income before income tax benefit and equity in undistributed income of subsidiary 3,366 7,924 Income tax benefit 10 3 Equity in undistributed income (excess dividends) of subsidiary 1,864 (2,352) ----- ----- Net income $5,240 5,575 ===== ===== Condensed Statements of Cash Flows Year ended December 31 2000 1999 Cash flows from operating activities: Net income $5,240 5,575 Adjustments for non-cash items - Equity in undistributed (income) excess dividends of subsidiary (1,864) 2,352 Organization costs - (105) Other, net 59 8 ----- ----- Net cash provided by operating activities 3,435 7,830 ----- ----- Cash flows from investing activities: Capital contribution to subsidiary (185) - Purchases of securities available for sale (2,143) (4,997) Proceeds from sales of securities available for sale 773 - Proceeds from maturities of securities available for sale 1,347 - ----- ----- Cash flow used in investing activities (208) (4,997) ----- ----- -25- Cash flows from financing activities: Cash dividends paid (3,196) (2,816) ----- ----- Net change in cash 31 17 Cash at beginning of year 17 - ----- ----- Cash at end of year $ 48 17 ===== ===== -26-
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