-----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, HbXzpa2AciYssxpJzIxB0DzrwmO2YZn0KZKX7rmGVNf9oDkIpRykcsHFJwugGo1a Z/hAl4H9xDufQq7NiaGttg== 0001012364-03-000002.txt : 20030306 0001012364-03-000002.hdr.sgml : 20030306 20030306134706 ACCESSION NUMBER: 0001012364-03-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030306 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: 1934 Act SEC FILE NUMBER: 000-26121 FILM NUMBER: 03594385 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 10-K 1 lcnb10kt.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, 2002 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 $54.00 per share on February 25, 2003. Based upon such price, the aggregate market value of the issuer's shares held by nonaffiliates was $77,665,770. As of February 27, 2003, 1,720,593 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 15, 2003, dated March 10, 2003, are incorporated by reference into Part III. LCNB Corp. For the year ended December 31, 2002 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 Item 6. Selected financial data. . . . . . . . . . . . . . 19-20 Item 7. Management's discussion and analysis . . . . . . . 21-37 Item 7A. Quantitative and qualitative disclosures about market risk . . . . . . . . . . . . . . . . . . . 38-40 Item 8. Financial statements and supplementary data. . . . . .41 Item 9. Changes in and disagreements with accountants on accounting and financial disclosure. . . . . . . .41 Part III. Item 10. Directors and executive officers of the registrant . .42 Item 11. Executive compensation. . . . . . . . . . . . . . . . 42 Item 12. Security ownership of certain beneficial owners and management. . . . . . . . . . . . . . . . . . . .42 Item 13. Certain relationships and related transactions . . . .42 Item 14. Controls and procedures. . . . . . . . . . . . . . . .42 PART IV. Item 15. Exhibits, financial statements and Reports on 8-K . . 43 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
-2- Item 1. Business 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. DESCRIPTION OF LCNB CORP.'S BUSINESS General Description LCNB Corp. ("LCNB"), an Ohio corporation formed in December, 1998, is a financial holding company headquartered in Lebanon, Ohio. Through its subsidiaries, Lebanon Citizens National Bank ("Lebanon Citizens") and Dakin Insurance Agency, Inc. ("Dakin"), LCNB is engaged in the commercial banking and insurance agency businesses. The predecessor of LCNB, Lebanon Citizens, was formed as a national banking association in 1877. On May 19, 1999, Lebanon Citizens became a wholly owned subsidiary of LCNB. Lebanon Citizens' main office is located in Warren County, Ohio and 17 branch offices are located in Warren, Butler, Clinton, Clermont, and Hamilton Counties, Ohio. In addition, Lebanon Citizens operates 29 automated teller machines ("ATMs") in its market area. Lebanon Citizens is a full service community bank offering a wide range of commercial and personal banking services. Deposit services include checking accounts, NOW accounts, savings accounts, Christmas and vacation savings, money market deposit 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. Loan products offered include commercial loans, commercial and residential real estate loans, construction loans, various types of consumer loans, Small Business Administration loans, Visa and MasterCard credit cards, and commercial leases. Lebanon Citizens' residential mortgage lending activities consist primarily of loans for purchasing or refinancing personal residences, home equity lines of credit, and loans for commercial or consumer purposes secured by residential mortgages. Consumer lending activities include automobile, boat, home improvement and personal loans. Lebanon Citizens also offers indirect automobile financing through various automotive dealers. -3- 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 fund investment products to individuals, partnerships, corporations, institutions and municipalities. Security brokerage services were first offered by Lebanon Citizens in April, 2002 through arrangements with UVEST Investment Services, Inc., a registered broker/dealer. A licensed broker offers a full range of investment services and products, including financial needs analysis, mutual funds, securities trading, annuities, and life insurance. Other services offered include safe deposit boxes, night depositories, U.S. savings bonds, travelers' checks, money orders, cashiers checks, bank-by- mail, 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. 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. Dakin, an Ohio corporation, has been an independent insurance agency in Lebanon, Ohio since 1876. Its primary office is at 24 East Mulberry Street, Lebanon, Ohio 45036; telephone (513) 932-4010. Since being acquired by LCNB on April 11, 2000, Dakin has opened additional offices in Lebanon Citizens' Columbus Avenue, Waynesville, Springboro, Maineville, Goshen, and Wilmington offices. Dakin is engaged in selling and servicing personal and commercial insurance products and annuity products and is regulated by the Ohio Department of Insurance. During 2002, Dakin expanded its offerings in life, health, and long-term care insurance products when it hired an agent specializing in these services. Effective September 1, 2002, Dakin purchased substantially all of the insurance renewal rights and client list of an insurance agency located in Dayton, Ohio. As part of the purchase, Dakin will receive all commission income received after September 1, 2002, and assignments of agency agreements that the agency has with insurers with whom Dakin does not already have an agreement. In consideration for the assets purchased, Dakin will pay to the seller certain percentages of the commissions received over a four-year period from the agency's customer base. -4- 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 larger 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. 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. Dakin competes with numerous other independent and exclusive insurance agencies (an exclusive agent sells for only one insurance company) and with insurance companies that sell direct to individuals and businesses without using agents. Dakin competes by representing high quality insurance companies, providing personalized and responsive service to its clients, and providing convenient office locations. Supervision and Regulation The Sarbanes-Oxley Act of 2002 ("SOA") was signed into law by President George W. Bush on July 30, 2002. The purpose of SOA is to strengthen accounting oversight and corporate accountability by enhancing disclosure requirements, increasing accounting and auditor regulation, creating new federal crimes, and increasing penalties for existing federal crimes. SOA will directly impact publicly traded companies, certified public accountant firms auditing public companies, attorneys who work for public companies or have public companies as clients, brokerage firms, investment bankers, and financial analysts who work for brokerage firms or investment bankers. Key provisions affecting LCNB include: -5- certification of financial reports by chief executive officers ("CEOs") and chief financial officers ("CFOs"), who will be responsible for designing and monitoring internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to the certifying officers by others within the company; accelerated reporting of stock trades on Form 4 by directors and executive officers; disgorgement requirements of incentive pay or stock-based compensation profits received within twelve months of the release of financial statements if the company is later required to restate those financial statements due to material noncompliance with any financial reporting requirement that resulted from misconduct; disclosing in a company's periodic reports if it has adopted a code of ethics for its CFO and principal accounting officer or controller and immediate disclosure of any change in or waiver of this code of ethics; disclosing in a company's periodic reports if at least one member of the audit committee is a "financial expert," as that term is defined by the Securities and Exchange Commission ("SEC"); and new duties and responsibilities for a company's audit committee, including independence requirements, the direct responsibility to appoint the outside auditing firm and to provide oversight of the auditing firm's work, and a requirement to establish procedures for the receipt, retention, and treatment of complaints from a company's employees regarding questionable accounting, internal control, or auditing matters. Some SOA provisions became effective upon enactment; others have delayed implementation or must await rulemaking by the SEC. In addition, the SEC adopted final rules on September 5, 2002, requiring accelerated filing of quarterly and annual reports by a newly defined class of "accelerated filers." After an initial three-year phase-in period, accelerated filers will be required to file their annual reports on Form 10-K no later than 60 days after fiscal year end and their quarterly reports on Form 10-Q no later than 35 days after fiscal quarter ends. Current requirements are 90 days and 45 days, respectively. LCNB 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's subsidiaries rather than holders of LCNB's securities. These laws and regulations govern such areas as permissible activities, loans and investments, and rates of interest that can be charged on loans and reserves. LCNB 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 and Lebanon Citizens. -6- LCNB, 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-Bliley 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-Bliley 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-Bliley 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; and 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." 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. 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. -7- 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. LCNB 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. Noncompliance with 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 with laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis. Recent regulatory inspections and examinations of LCNB 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 regulators against LCNB or Lebanon Citizens. The earnings and growth of LCNB 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 and Lebanon Citizens cannot be predicted. A substantial portion of LCNB's cash revenues is derived from dividends paid by Lebanon Citizens. These dividends are subject to various legal and regulatory restrictions. Employees As of December 31, 2002, LCNB, Lebanon Citizens, and Dakin employed 251 employees. LCNB 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. -8- Availability of Financial Information LCNB files unaudited quarterly financial reports under Form 10-Q and annual financial reports under Form 10-K with the Securities and Exchange Commission ("SEC"). 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 Financial reports and other materials filed by LCNB with the SEC may also be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained from the SEC by calling 1-800-SEC-0330. The SEC also maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding registrants that file reports electronically, as LCNB does. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES LCNB and its subsidiaries do not have any offices located in foreign countries and have no foreign assets, liabilities or related income and expense for the years presented. STATISTICAL INFORMATION The following tables and certain tables appearing in Item 7, Management's Discussion and Analysis, present additional statistical information about LCNB Corp. and its operations and financial condition. They 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 table presenting an average balance sheet, interest income and expense, and the resultant average yield for average interest-earning assets and average interest-bearing liabilities is included in Item 7, Management's Discussion and Analysis. The table analyzing changes in interest income and expense by volume and rate is included in Item 7, Management's Discussion and Analysis. -9- Investment Portfolio The following table presents the carrying values of securities for the years indicated:
At December 31, --------------- 2002 2001 2000 (Dollars in thousands) Securities available for sale: U.S. Treasury notes $ 1,019 2,044 3,018 U.S. Agency notes 47,089 36,328 20,046 U.S. Agency mortgage-back Securities 19,052 9,570 12,164 Corporate notes - - 8,479 Municipal securities 69,018 50,668 38,799 ------- ------ ------ Total securities available for sale 136,178 98,610 82,506 Federal Reserve Bank Stock 647 647 647 Federal Home Loan Bank Stock 2,224 2,125 1,741 ------- ------- ------ Total securities $139,049 101,382 84,894 ======= ======= ======
-10- Contractual maturities of debt securities at December 31, 2002, were as follows. Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
Amortized Market Cost Value Yield --------- ------ ----- (Dollars in thousands) U.S. Treasury notes: Within one year $ 999 1,019 5.83% One to five years - - -% Five to ten years - - -% After ten years - - -% ------- ------- ----- Total U.S Treasury notes $ 999 1,019 5.83% ------- ------- ----- U.S. Agency notes: Within one year $ 2,001 2,010 5.20% One to five years 39,579 40,165 3.38% Five to ten years 4,856 4,914 4.56% After ten years - - -% ------- ------- ----- Total U.S. Agency notes $ 46,436 47,089 3.58% ------- ------- ----- Municipal securities (1): Within one year $ 12,317 12,438 4.72% One to five years 33,994 35,420 5.25% Five to ten years 14,402 14,876 5.80% After ten years 5,892 6,284 7.50% ------- ------- ----- Total Municipal securities $ 66,605 69,018 5.47% ------- ------- ----- U.S. Agency mortgage-backed securities $ 18,742 19,052 4.65% ------- ------- ----- $132,782 136,178 4.70% ======= ======= ===== (1) Yields on tax-exempt obligations are computed on a tax equivalent basis based upon a 34% statutory Federal income tax rate.
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any one issuer that exceeded 10% of LCNB's consolidated shareholders' equity at December 31, 2002. -11- Loan Portfolio The following table summarizes the distribution of the loan portfolio for the years indicated:
At December 31, --------------- 2002 2001 2000 1999 1998 (Dollars in thousands) Commercial and industrial $ 35,198 40,486 36,449 26,347 20,640 Commercial, secured by real estate 80,882 72,477 59,043 56,671 53,907 Residential real estate 151,502 165,710 185,013 162,087 154,111 Consumer, excluding credit card 51,184 41,006 40,860 36,402 32,302 Agricultural 1,314 2,020 2,238 2,343 2,370 Credit card 2,689 2,658 3,049 2,764 2,574 Lease Financing 1,256 2,088 2,219 183 - Other 57 112 863 285 966 ------- ------- ------- ------- ------- Total loans 324,082 326,557 329,734 287,082 266,870 Deferred costs (fees), net 750 608 705 526 187 ------- ------- ------- ------- ------- 324,832 327,165 330,439 287,608 267,057 Allowance for loan losses (2,000) (2,000) (2,000) (2,000) (2,000) ------- ------- ------- ------- ------- Loans, net $322,832 325,165 328,439 285,608 265,057 ======= ======= ======= ======= =======
As of December 31, 2002, there were no concentrations of loans exceeding 10% of total loans that are not already disclosed as a category of loans in the above table. -12- The following tables summarize the commercial and agricultural loan maturities and sensitivities to interest rate changes at December 31, 2002:
(Dollars in thousands) ---------------------- Maturing in one year or less $ 27,990 Maturing after one year, but within five years 9,521 Maturing beyond five years 79,883 ------- Total commercial and agricultural loans $117,394 ======= Loans repricing beyond one year: Fixed rate $ 50,488 Variable rate 38,916 ------- Total $ 89,404 =======
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:
Accruing loans past due 90 days ------------------------------- (Dollars in thousands) 2002 $232 2001 146 2000 111 1999 68 1998 374
The increase at December 31, 2002 was due to installment loans and residential mortgage loans. There were no commercial loans in the "accruing loans past due 90 days or more" category at December 31, 2002 or 2001. -13- There were no nonaccrual or restructured loans at December 31, for each of the years ended 1998 through 2002. Interest income that would have been recorded in each of the years 1998 through 2002 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, 1998 through 2002, the recorded investments in loans for which impairment has been recognized in accordance with SFAS Statement No. 114 was not material. LCNB 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. At December 31, 2002, there were no material additional loans not already disclosed as nonaccrual, restructured, or accruing loans past due 90 days or more where known information about possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms. -14- Summary of Loan Loss 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, ----------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 --------------- --------------- -------------- -------------- ------------- Percent of Percent of Percent of Percent of Percent of loans to loans to loans to loans to loans to Total Total Total Total Total Amount loans Amount loans Amount loans Amount loans Amount loans (Dollars in thousands) Commercial and industrial $ 744 10.86% 647 12.40% 381 11.05% 304 9.17% 286 7.73% Commercial, secured by real estate - 24.96 - 22.19 - 17.91 - 19.74 - 20.21 Residential real estate - 46.75 - 50.75 - 56.11 - 56.45 - 57.75 Consumer 871 15.79 774 12.56 714 12.39 514 12.70 345 12.10 Agricultural - 0.40 - 0.62 - 0.68 - 0.82 - 0.89 Credit card 77 0.83 82 0.81 40 0.93 38 0.96 48 0.96 Lease financing - 0.39 - 0.64 - 0.67 - 0.06 - - Other - 0.02 - 0.03 - 0.26 - 0.10 - 0.36 Unallocated 3 497 865 1,144 1,321 ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ Total $2,000 100.00% 2,000 100.00% 2,000 100.00% 2,000 100.00% 2,000 100.00% ===== ====== ===== ====== ===== ====== ===== ====== ===== ======
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. -15- Deposits 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 in Item 7, Management's Discussion and Analysis. The following table presents the contractual maturity of time deposits of $100,000 or more at December 31, 2002:
(Dollars in thousands) ---------------------- Maturity within 3 months $ 5,969 After 3 but within 6 months 2,070 After 6 but within 12 months 1,760 After 12 months 19,922 ------ $29,721 ======
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 Owned (1) Lebanon, Ohio 45036 2. Auto Bank 26 North Broadway Owned Lebanon, Ohio 45036 3. Columbus Avenue Office 730 Columbus Avenue Owned (2) Lebanon, Ohio 45036 4. Goshen Office 6726 Dick Flynn Blvd. Owned (2) Goshen, Ohio 45122 5. Hamilton Office 794 NW Washington Blvd. Owned Hamilton, Ohio 45013 6. Hunter Office 3878 State Route 122 Owned Franklin, Ohio 45005 7. Loveland Office 615 West Loveland Avenue Owned Loveland, Ohio 45140 8. Maineville Office 7795 South State Route 48 Owned (2) Maineville, Ohio 45039 9. Mason/West Chester Office 1050 Reading Road Owned Mason, Ohio 45040 10. Middletown Office 4441 Marie Drive Owned Middletown, Ohio 45044 11. Okeana Office 6225 Cincinnati-Brookville Road Owned Okeana, Ohio 45053 12. Otterbein Office State Route 741 Leased Lebanon, Ohio 45036 13. Oxford Office 30 West Park Place (1) (3) Oxford, Ohio 45056 14. Rochester/Morrow Office Route 22-3 at 123 Owned Morrow, Ohio 45152 15. South Lebanon Office 209 East Forrest Street Leased South Lebanon, Ohio 45065 16. Springboro/Franklin Office 525 West Central Avenue Owned (2) Springboro, Ohio 45066 17. Waynesville Office 9 North Main Street Owned (2) Waynesville, Ohio 45068 18. Wilmington Office 1243 Rombach Avenue Owned (2) Wilmington, Ohio 45177 (1) Excess space in this office is leased to third parties. (2) A Dakin office is located in this office. (3) Lebanon Citizens owns the Oxford Office building and leases the land.
Dakin owns its main office at 20 & 24 East Mulberry Street, Lebanon, Ohio 45036. Excess space in this office is leased to third parties. Dakin's six other offices are located in Lebanon Citizens' branch offices. -17- Item 3. Legal Proceedings Except for routine litigation incident to their businesses, LCNB 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 information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 10, 2003), relating to "Market Price of Stock and Dividend Data", is incorporated herein by reference. Item 6. Selected Financial Data The following represents selected consolidated financial data of LCNB for the years ended December 31, 1998 through 2002 and are derived from LCNB Corp's consolidated financial statements. Certain reclassifications of income statement amounts for the years 1998 through 2001 have been made to conform to current year presentation. Such reclassifications had no effect on net income. 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. -19-
For the Years Ended December 31, -------------------------------- 2002 2001 2000 1999 1998 (Dollars in thousands, except ratios and data per share) Income Statement Interest Income $ 30,163 $ 32,164 $ 32,151 $ 29,689 $ 29,492 Interest Expense 10,670 14,340 15,922 13,282 14,062 ------- ------- ------- ------- ------- Net Interest Income 19,493 17,824 16,229 16,407 15,430 Loan Loss Provision 348 237 197 208 191 ------- ------- ------- ------- ------- Net Interest Income after Provision 19,145 17,587 16,032 16,199 15,239 Other Operating Income 5,623 4,842 4,400 4,372 4,320 Operating Expenses 15,705 13,922 13,101 12,673 11,673 ------- ------- ------- ------- ------- Income before Income Taxes 9,063 8,507 7,331 7,898 7,886 Provision for Income Taxes 2,523 2,440 2,091 2,323 2,426 ------- ------- ------- ------- ------- Net Income $ 6,540 $ 6,067 $ 5,240 $ 5,575 $ 5,460 ======= ======= ======= ======= ======= Balance Sheet Securities $139,049 $101,382 $ 84,894 $105,558 $123,687 Loans - net 322,832 325,165 328,439 285,608 265,057 Total Assets 506,751 480,435 451,000 439,238 432,364 Total Deposits 442,221 414,772 394,786 391,569 387,006 Long-Term Debt 6,253 12,306 6,356 403 - Total Shareholders' Equity 51,930 49,507 46,310 42,687 42,335 Selected Financial Ratios and Other Data Return on average assets 1.32% 1.30% 1.17% 1.29% 1.30% Return on average equity 13.00% 12.50% 11.84% 13.01% 13.57% Equity-to-assets ratio 10.25% 10.30% 10.27% 9.72% 9.79% Dividend payout ratio 53.43% 53.94% 61.02% 50.96% 45.60% Earnings per share(1) $3.79 3.43 2.95 3.14 3.07 Dividends declared per share(1) $2.025 1.85 1.80 1.60 1.40 (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.
-20- 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. ("LCNB"). It is intended to amplify certain financial information regarding LCNB and should be read in conjunction with the Consolidated Financial Statements and related Notes and the Financial Highlights contained in the 2002 Annual Report to Shareholders. Comparative Financial Information Effective May 18, 1999, Lebanon Citizens National Bank ("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. On April 11, 2000 LCNB 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. As a result of the merger, Dakin became a wholly owned subsidiary of LCNB. 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 disclaims, however, any intent or obligation to update such forward- looking statements. -21- Net Income LCNB earned $6,540,000 in 2002 compared to $6,067,000 in 2001. Earnings per share were $3.79, a 10.50% or $0.36 per share increase from 2001. Performance ratios for 2002 included a return on average assets of 1.32% and a return on average equity of 13.00% compared to ratios of 1.30% and 12.50%, respectively, for 2001. LCNB earned $6,067,000 in 2001 compared to $5,240,000 in 2000. Earnings per share were $3.43, a 16.27% or $0.48 per share increase from 2000. Performance ratios for 2001 included a return on average assets of 1.30% and a return on average equity of 12.50% compared to ratios of 1.17% and 11.84%, respectively, for 2000. Net Interest Income The amount of net interest income earned by LCNB is influenced by the dollar amount ("volume") and mix of interest earning assets and interest bearing liabilities and the rates earned or paid on each. 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 on a fully taxable equivalent basis, and the dollar amounts of interest expense and average interest-bearing liabilities and the resultant rates paid. -22-
Years ended December 31, ------------------------ 2002 2001 2000 ---- ---- ---- Average Interest Average Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate (Dollars in thousands) Loans(1) $327,561 $24,821 7.58% $332,634 $27,309 8.21% $309,658 $26,264 8.48% Federal funds sold 21,551 339 1.57 19,080 667 3.50 7,258 459 6.32 Deposits in banks - - - - - - 4,149 241 5.81 Federal Reserve Bank stock 647 39 6.03 647 39 6.03 647 39 6.03 Federal Home Loan Bank stock 2,165 100 4.62 1,957 132 6.75 418 31 7.42 Investment securities: Taxable 66,577 3,068 4.61 47,394 2,601 5.49 67,100 3,542 5.28 Non-taxable(2) 47,107 2,765 5.87 33,592 2,211 6.58 26,233 2,433 9.27 ------- ------ ------- ------ ------- ------ Total earning assets 465,608 31,132 6.69 435,304 32,959 7.57 415,463 33,009 7.95 Non-earning assets 33,247 33,705 33,707 Allowance for loan losses (2,002) (2,002) (2,002) ------- ------- ------- Total assets $496,853 $467,007 $447,168 ======= ======= ======= Savings deposits $108,768 1,708 1.57 $ 96,440 2,529 2.62 84,156 3,217 3.82 NOW and money fund 84,562 918 1.09 81,204 1,925 2.37 81,215 2,303 2.84 IRA and time certificates 180,990 7,476 4.13 175,098 9,283 5.30 178,842 10,049 5.62 Short-term debt 957 13 1.36 964 33 3.42 1,250 83 6.64 Long-term debt 9,699 555 5.72 8,062 570 7.07 3,855 270 7.00 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities 384,976 10,670 2.77 361,768 14,340 3.96 349,318 15,922 4.56 ------ ------ ------ -23- Years ended December 31, ------------------------ 2002 2001 2000 ---- ---- ---- Average Interest Average Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate (Dollars in thousands) Demand deposits 58,620 53,959 52,059 Other liabilities 2,950 2,723 1,527 Capital 50,307 48,557 44,264 ------- ------- ------- Total liabilities and capital $496,853 $467,007 $447,168 ======= ======= ======= Net interest rate spread(3) 3.92 3.61 3.39 Net interest margin on a taxable equivalent basis(4) 20,462 4.39 $18,619 4.28 $17,087 4.11 ====== ====== ====== Ratio of interest-earning assets to interest-bearing liabilities 120.94% 120.33% 118.94% (1) Includes nonaccrual loans if any. Income from tax-exempt loans is included in interest income on a taxable equivalent basis, using an incremental rate of 34%. (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.
-24- The following table presents the changes in interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the 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, -------------------------------- 2002 vs. 2001 2001 vs. 2000 ------------- ------------- Increase (decrease) due to Increase (decrease) due to -------------------------- -------------------------- Volume Rate Total Volume Rate Total (Dollars in thousands) Interest income attributable to: Loans (1) $ (411) (2,077) (2,488) 1,905 (860) 1,045 Federal funds sold 77 (405) (328) 485 (277) 208 Deposits in banks - - - (241) - (241) Federal Reserve Bank stock - - - - - - Federal Home Loan Bank stock 13 (45) (32) 104 (3) 101 Investment securities: Taxable 932 (465) 467 (1,076) 135 (941) Non-taxable(2) 814 (260) 554 585 (807) (222) ----- ----- ----- ----- --- ----- Total interest income 1,425 (3,252) (1,827) 1,762 (1,812) (50) Interest expense attributable to: Savings deposits 292 (1,113) (821) 423 (1,111) (688) NOW and money fund 77 (1,084) (1,007) - (378) (378) IRA and time certificates 303 (2,110) (1,807) (207) (559) (766) Short-term borrowings - (20) (20) (16) (34) (50) Long-term debt 105 (120) (15) 297 3 300 ----- ----- ----- ----- ----- ----- Total interest expense 777 (4,447) (3,670) 497 (2,079) (1,582) ----- ----- ----- ----- ----- ----- Net interest income $ 648 1,195 1,843 1,265 267 1,532 ===== ===== ===== ===== ===== ===== (1) Nonaccrual loans, if any, are included in average loan balances. (2) Change in interest income from non-taxable loans and 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%.
-25- 2002 vs. 2001. Tax equivalent interest income decreased $1,827,000 due to an 88 basis point (a basis point equals 0.01%) decline in the average rate earned on average interest-earning assets, partially offset by a $30.3 million increase in average interest-earning assets. The increase in average interest-earning assets was due to increases in the investment securities portfolio, which grew $32.7 million on an average basis. The average rate earned decreased primarily because of a general market wide decrease in interest rates. During 2001 the Federal Reserve Board decreased the intended federal funds rate by a dramatic 475 basis points and by an additional 50 basis points in November, 2002. Interest expense decreased $3,670,000 because of a 119 basis point decrease in the average rate paid for deposits and borrowings, partially offset by a $23.2 million increase in average interest-bearing liabilities. The decrease in average rates paid was also due to the general decline in market rates discussed above. Much of the increase in average interest-bearing liabilities was in average savings deposits, which increased $12.3 million. Average NOW and money fund deposits increased $3.4 million and IRA and time certificates increased $5.9 million. Management believes that, due to the current declining rate economic environment, investors are showing a preference for highly liquid, short-term instruments. This means much of the recent growth in savings deposits could be quickly withdrawn if interest rates increase. Management is attempting to lock-in a portion of these funds by offering special rates and terms on selected certificate of deposit products. The net interest margin increased from 4.28% during 2001 to 4.39% during 2002 because of the 119 basis point decrease in average rates for interest bearing liabilities, partially offset by the 88 basis point decrease in average rates earned from interest-earning assets. During August, 2002, LCNB paid in full $4.0 million in Federal Home Loan Bank ("FHLB") notes with an average interest rate of 7.72%, which otherwise would have been due in June, 2004 and June, 2005. The prepayment fees on the early payoffs totaled approximately $425,000, which is included in other non- interest expenses in the consolidated statements of income. To negate the financial impact of the prepayment fees, LCNB sold $17.7 million of U.S. Agency securities bearing an average coupon rate of 5.24% during August and recorded a gain of $408,000 from the sales. At approximately the same time as the sales, LCNB purchased securities totaling $19.9 million and bearing an average tax-equivalent coupon rate (some of the securities purchased were tax-exempt municipals) of 4.94%. The transactions described were consummated to improve the projected net interest margin. -26- 2001 vs. 2000. Tax equivalent interest income decreased $50,000 due to a 38 basis point decline in the average rate earned, largely offset by an increase of $19.8 million in average interest-earning assets. The average rate earned decreased primarily because of the general market wide decrease in interest rates. Most of the increase in average interest-earning assets was in the loan portfolio, which grew $23.0 million on an average basis. A significant influence on the average loan balance for 2001 was a $42.8 million increase in loans during 2000. Interest expense decreased $1,582,000 because of a 60 basis point decrease in the average rate paid for deposits and borrowings, partially offset by a $12.5 million increase in average interest-bearing liabilities. The decrease in average rates paid was also due to the general decline in market rates during 2001. Most of the increase in average interest-bearing liabilities was in average savings deposits, which increased $12.3 million, and in average long term debt, which increased $4.2 million. Management borrowed $6.0 million from the Federal Home Loan Bank during 2001 in an attempt to lock-in some long-term funding at current, historically low, market rates. The net interest margin increased from 4.11% during 2000 to 4.28% during 2001 because of the 60 basis point decrease in average rates for interest bearing liabilities, partially offset by the 38 basis point decrease in average rates for interest earning assets. Provisions and Allowance for Loan Losses The provision for loan losses is determined by Management based upon it's evaluation of the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the estimated 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 loan losses include the nature, volume and consistency of the loan portfolio, overall portfolio quality, a review of specific problem loans, and current economic conditions that may affect 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 1998 through 2002. -27-
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (Dollars in thousands) Balance - Beginning of year $2,000 2,000 2,000 2,000 2,200 Loans charged off: Commercial and industrial 36 - - - 227 Commercial, secured by real estate - - - - - Residential real estate 26 - - - 3 Consumer, excluding credit card 273 237 222 252 153 Agricultural - - - - - Credit Card 55 40 33 20 36 Other - - - - - ----- ----- ----- ----- ----- Total loans charged off 390 277 255 272 419 ----- ----- ----- ----- ----- Recoveries: Commercial and industrial 8 - - - - Commercial, secured by real estate - - - - - Residential real estate - - - - - Consumer, excluding credit card 31 38 55 62 26 Agricultural - - - - - Credit Card 3 2 3 2 2 Other - - - - - ----- ----- ----- ----- ----- Total recoveries 42 40 58 64 28 ----- ----- ----- ----- ----- Net charge-offs 348 237 197 208 391 Provision charged to operations 348 237 197 208 191 ----- ----- ----- ----- ----- Balance - End of year $2,000 2,000 2,000 2,000 2,000 ===== ===== ===== ===== ===== Ratio of net charge-offs during the period to average loans outstanding 0.11% 0.07% 0.06% 0.08% 0.14% ==== ==== ==== ==== ==== Ratio of allowance for loan losses to total loans at year-end 0.62% 0.61% 0.61% 0.70% 0.75% ==== ==== ==== ==== ====
The $63,000 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. Generally, it includes a requirement to charge off open-end credit at 180 days delinquency and closed-end credit at 120 days delinquency. -28- Non-Interest Income 2002 vs. 2001. Total non-interest income for 2002 was $781,000 or 16.13% more than for 2001 largely due to the $408,000 gain on securities already discussed. The remaining $373,000 increase was due to a $194,000 increase in service charges and fees and to smaller increases in the other line items. Service charges and fees increased primarily due to increased fee income from non-sufficient-fund ("NSF") checks and to increased check card interchange income. Trust income increased due to fees received for brokerage services, a new service first offered in April, 2002. Insurance agency income increased primarily due to an increase in the volume of new policies written, partially offset by a $119,000 decline in contingency commissions. Contingency commissions are profit-sharing arrangements on property and casualty policies between the originating agency and the underwriter and are generally based on underwriting results and written premium. As such, the amount received each year can vary significantly depending on loss experience. A $168,000 increase in gains from loans sold, from $67,000 during 2001 to $235,000 during 2002, caused the increase in other operating income. The increased loan volume sold during 2002 reflects increased refinancing activity caused by an historical low in market rates for fixed-rate loans. Loans sold during 2002 totaled $20.8 million compared to sales of $13.4 million during 2001. 2001 vs. 2000. Non-interest income increased $442,000, or 10.05%, to $4,842,000 in 2001 from $4,400,000 in 2000. The increase was primarily due to a $240,000 increase in service charges and fees and a $297,000 increase in insurance agency income, partially offset by a $250,000 decrease in trust income. The increase in service charges and fees from 2000 to 2001 was due to pricing adjustments made to NSF fees in December, 2000 and to increased check card income. Check card fees increased primarily because a greater number of cards were outstanding during 2001 than during 2000. The increase in insurance agency income is primarily due to contingency commissions received during the first quarter, 2001. Contingency commissions received during the first quarter, 2001 totaled $189,000, but only $6,000 during the first quarter, 2000. The balance of the increase in 2001 was generated from commissions received on new and renewing policies. Trust fee income decreased in 2001 due to a decrease in the market value of assets under management, on which fees are based. The decline in asset market value was primarily the result of general market conditions. -29- Non-Interest Expense 2002 vs. 2001. Total non-interest expense increased $1,783,000 or 12.81% during 2002 compared with 2001 largely due to a $569,000 or 9.54% increase in salaries and wages and a $793,000 or 28.02% increase in other non-interest expenses. Salaries and wages increased due to normal pay increases and the addition of several new employees. A small increase in the number of staff was necessary because of the opening of a full-service office in Hamilton, Ohio in September, 2001. The increase in other non-interest expenses was primarily due to the $425,000 prepayment fee on Federal Home Loan Bank notes previously discussed and to $263,000 in training and conversion expenses relating to Lebanon Citizen's conversion to a new data processing system, completed in September, 2002. Pension and other employee benefits increased $125,000 or 7.93% due to increased health insurance costs, increased pension expense, and increased Social Security and Medicare matching as a result of increased salaries and wages. Equipment expenses increased $213,000 or 32.08% primarily due to rental costs for a new phone system and increased depreciation on furniture and equipment purchased for new and remodeled offices and the new computer hardware and software obtained for data processing system conversion. ATM expense increased $63,000 primarily due to approximately $57,000 in costs associated with a change in the ATM processor. 2001 vs. 2000. Non-interest expense increased $821,000, or 6.27%, during 2001 as compared to 2000. This increase was primarily due to a $433,000, or 7.83%, increase in salaries and wages and a $162,000, or 11.45%, increase in pension and other employee benefits. Also contributing to the increase was a $102,000, or 25.06% increase in state franchise taxes. Salaries and wages increased as a result of normal salary and wage increases, an increase in the number of employees, and increased commissions paid Dakin's agents because of the increase in the volume of policies written. In addition, a portion of the pay received by LCNB officers and employees is based on corporate earnings. Since earnings during 2001 were greater than during 2000, a higher amount of incentive pay was paid to employees. Pension and other employee benefits increased primarily because of an increase in pension expense recognized. Other benefits, including social security and medicare matching and health care costs, also increased. A bank's state franchise taxes are based on net worth, so the increase in state franchise taxes reflects growth in shareholders' equity. -30- Depreciation on furniture and equipment, which is included in equipment expense, increased $56,000 and depreciation on bank premises, which is included in occupancy expense, increased $46,000. These increases were due to the construction of new offices and facilities. During 2000 LCNB constructed new offices in Goshen and Oxford and extensively remodeled the Columbus Avenue office in Lebanon. An electronic branch (a drive-up, stand- alone ATM) was also constructed on Peck Boulevard in Hamilton. During 2001 a new office was constructed on Washington Boulevard in Hamilton and an electronic branch was constructed in Harveysburg. Income Taxes LCNB's effective tax rates for the years ended December 31, 2002, 2001, and 2000 were 27.84%, 28.68%, and 28.52%, respectively. The difference between the statutory rate of 34.00% and the effective tax rate is primarily due to tax-exempt interest income. Assets Total deposits grew $27.4 million during 2002, fueling a $26.3 million or 5.48% increase in total assets. During the same period, total loans decreased $2.3 million and federal funds sold decreased $8.0 million. The decrease in loans during 2002 can be attributed to refinancing activity on residential mortgage loans because of the general decline in interest rates, combined with the sale to the Federal Home Loan Mortgage Corporation ("FHLMC") of a large majority of the fixed rate residential mortgage loans originated during 2002. Approximately $20.9 million of loans were sold to FHLMC during 2002, while $13.4 million were sold during 2001. Management decided to sell the loans after determining that current, historically low market rates for residential mortgage loans were not profitable in the long run. Since management was not able to invest deposit growth in loan growth during 2002, the funds were invested in the securities portfolio, which grew $37.6 million or 38.10% during 2002, and in the $6.0 million early payoff of FHLB debt previously discussed. All of LCNB's investment securities are classified "available for sale" and can be readily sold if the funds are needed to support loan growth in the future. Premises and equipment additions during 2002 totaled $1,061,000, largely offset by depreciation expense of $999,000. Approximately $367,000 of the additions were for computer hardware and software needed for the data processing system conversion. Hardware and software costs capitalized during 2001 for the system conversion totaled $437,000, bringing the total capitalized expenditures for the computer conversion to $804,000. Another $207,000 of expenditures during 2002 was for a backoffice remodeling project at the main office. -31- Deposits Total deposits of $442.2 million at December 31, 2002, were $27.4 million or 6.62% greater than total deposits at December 31, 2001. Much of the growth was in the savings and NOW account categories, which increased $11.2 and $10.1 million, respectively, during the year. Management believes this reflects investor preference for short-term, highly liquid investments during the current economic cycle. Other deposit categories increased by smaller amounts, except for certificates with balances of $100,000 and over. This category decreased $9.4 million. Liquidity Liquidity is the ability to have funds available at all times to meet the commitments of LCNB. These commitments may include paying dividends to shareholders, funding new loans for borrowers, funding withdrawals by depositors, paying general and administrative expenses, and funding capital expenditures. Sources of liquidity include growth in deposits, principal payments received on loans, proceeds from the sale of loans, the sale or maturation of investment securities, cash generated by operating activities, and the ability to borrow funds. Management closely monitors the level of liquid assets available to meet ongoing funding requirements. It is Management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems during the past year as a result of current liquidity levels. Commitments to extend credit at December 31, 2002, totaled $69.5 million and standby letters of credit totaled $6.9 million and are more fully described in Note 9 to LCNB's Financial Statements. Since many commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. A contract with Jack Henry & Associates for replacement of Lebanon Citizens' check imaging system, including computer hardware and software, is tentatively expected to cost $240,000 during 2003. LCNB has no other material commitments for capital expenditures as of December 31, 2002. The liquidity of LCNB is enhanced by the fact that 90.89% of total deposits at December 31, 2002, were "core" deposits. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000. An additional source of funding is borrowings from the Federal Home Loan Bank ("FHLB"). Total borrowings from the FHLB at December 31, 2002 were $6.0 million. The total remaining borrowing capacity from the FHLB at that date ranges from approximately $38 million to $73 million. Any borrowings in excess of $38 million will require the purchase of additional FHLB stock. -32- Liquid assets include cash, federal funds sold and securities available for sale. Except for investments in the stock of the Federal Reserve Bank and FHLB, all of LCNB's investment portfolio is classified as "available-for- sale" and can be readily sold to meet liquidity needs. At December 31, 2002, LCNB's liquid assets amounted to $161.8 million or 31.93% of total gross assets, up from $132.8 million or 27.65% of total gross assets at December 31, 2001. The primary reason for the increase was growth in securities available for sale. The following table provides information concerning LCNB's contractual obligations at December 31, 2002:
Payments due by period ---------------------------------- More 1 Year 2-3 4-5 than 5 Total or less years years years (Dollars in thousands) Long-term debt obligations $ 6,253 2,056 2,124 2,073 - Operating lease obligations 2,562 268 510 354 1,430 Purchase obligations 240 240 - - - Certificates of deposit: $100,000 and over 29,721 9,799 13,179 6,743 - Other time certificates 111,030 42,685 45,632 22,502 211 -------- ------ ------ ------ ------ Total $149,806 55,048 61,445 31,672 1,641 ======== ====== ====== ====== ======
Capital Resources LCNB and Lebanon Citizens are required by banking regulators to meet certain minimum levels of capital adequacy. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on LCNB's and Lebanon Citizens' financial statements. These minimum levels are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in 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 4.00% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital) to risk- weighted assets must be at least 8.00%. 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 3.00%. A table summarizing the regulatory capital of LCNB and Lebanon Citizens at December 31, 2002 and 2001, is included in Note 12, "Regulatory Matters", of the 2002 Annual Report to Shareholders. -33- 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). On April 17, 2001, LCNB's Board of Directors authorized three separate stock repurchase programs, two phases of which continue. The shares purchased will be held for future corporate purposes. Under the "Market Repurchase Program" LCNB will purchase up to 50,000 shares of its stock through market transactions with a selected stockbroker. Through December 31, 2002, 7,565 shares had been purchased under this program. The "Private Sale Repurchase Program" is available to shareholders who wish to sell large blocks of stock at one time. Because LCNB's stock is not widely traded, a shareholder releasing large blocks may not be able to readily sell all shares through normal procedures. Purchases of blocks will be considered on a case-by-case basis and will be made at prevailing market prices. A total of 46,897 shares had been purchased under this program at December 31, 2002. LCNB established an Ownership Incentive Plan during 2002 that allows for stock-based awards to eligible employees. The awards may be in the form of stock options, share awards, and/or appreciation rights. The plan provides for the issuance of up to 50,000 shares. No awards have been granted as of December 31, 2002. The exercise price for stock options granted shall not be less than the fair market value of the stock on the date of grant. Options vest ratably over a five-year period and the maximum term for each grant will be specified by the Board of Directors, but cannot be greater than ten years from the date of grant. In the event of an optionee's death, incapacity, or retirement, all outstanding options held by that optionee shall immediately vest and be exercisable. -34- Critical Accounting Policies - Allowance for Loan Losses The allowance for loan losses (the "allowance") is established through a provision for loan losses charged to expense. Loans are charged against the allowance 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. Management's evaluation of the adequacy of the allowance takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect borrowers' ability to repay, and prior loan loss experience. Loans are considered impaired when management believes, based on current information and events, it is probable that LCNB will be unable to collect all amounts due according to the contractual terms of the loan agreement. Smaller- balance homogenous loans, including residential mortgage and consumer installment loans, are collectively evaluated for impairment. Larger-balance commercial loans are individually evaluated for impairment. Impaired loans are measured by calculating the present value of expected future cash flows using the loan's effective interest rate or, for collateral-dependent loans, at the fair value of the collateral. A specific allowance is maintained if the estimated value of the loan is less than the carrying amount of the loan. Based on its evaluations, management believes that the allowance for loan losses will be able to absorb estimated losses inherent in the current loan portfolio. -35- Recent Accounting Pronouncements Statement of Financial Standards ("SFAS") No. 147, Acquisitions of Certain Financial Institutions, was issued on October 1, 2002. The Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, on July 20, 2001. SFAS No. 147 amended certain provisions of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 147 requires that acquisitions of financial institutions be accounted for in accordance with SFAS No. 141, Business Combinations, if the acquisition meets the definition of a business combination. Any goodwill that results will be accounted for in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. If the acquisition does not meet the definition of a business combination, the cost of the assets acquired shall be allocated to the individual assets acquired and liabilities assumed based on their relative fair values and shall not give rise to goodwill. Existing unidentifiable intangible assets shall continue to be amortized unless the transaction in which the intangible asset arose meets the definition of a business combination. In addition, SFAS No. 147 requires that long-term customer-relationship intangible assets of financial institutions, such as depositor- and borrower-relationship intangible assets and credit-cardholder intangible assets, be subject to the same undiscounted cash flow recoverability tests and impairment loss recognition and measurement provisions that SFAS No. 144 requires for long-term tangible assets and other finite-lived intangible assets that are held and used. LCNB's intangible assets at December 31, 2002, primarily represent the unamortized intangible asset related to the Company's 1997 acquisition of three branch offices from another bank. Management does not believe its 1997 branch office acquisition meets the definition of a business combination and intends to continue amortizing the intangible over ten years, subject to periodic review for impairment in accordance with SFAS No. 144. At December 31, 2002, the carrying amount of this intangible was $3.1 million, net of accumulated amortization of $2.9 million. FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, was issued on November 25, 2002. The Interpretation elaborates on existing disclosure requirements for most guarantees, including loan guarantees such as financial and performance standby letters of credit routinely issued by financial institutions. At the time a guarantor issues a guarantee, the guarantor must recognize an initial liability for the fair value of the obligations it assumes under the guarantee. Normally, the fair value is assumed to be the fee the guarantor receives for issuing the guarantee. The initial recognition and measurement provisions of the Interpretation apply to guarantees issued or modified after December 31, 2002, regardless of the guarantor's fiscal year-end. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. The provisions of the Interpretation are not expected to have a material effect on LCNB's financial statements. -36- SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, was issued by the FASB on December 31, 2002. This statement amends certain sections of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 recommended, but did not require, companies use a fair value based method of accounting for stock-based employee compensation. Under SFAS No. 123, companies electing to adopt the recommended fair value method were required to apply that method prospectively for new stock option awards. SFAS No. 148 provides two additional transition methods, which allows companies to either immediately recognize stock-based employee compensation cost in the year of adoption relating to all activity since 1994, or restate all periods presented in the financial statements to reflect stock-based employee compensation cost for all periods since 1994. SFAS No. 148 also changed disclosure requirements for stock-based compensation. LCNB adopted an Ownership Incentive Plan during 2002 that allows for stock- based awards to eligible employees, but no awards have been granted as of December 31, 2002. Management believes any effect on the 2003 financial statements will be immaterial. -37- Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk for LCNB is primarily interest rate risk. LCNB 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 does not use derivatives such as interest rate swaps, caps or floors to hedge this risk. LCNB 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. Depending on the interest rate environment, other factors may cause actual results to be outside of this range. The following table reflects LCNB's gap analysis at December 31, 2002. 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 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's earnings are sensitive to the repricing of assets in the first year, the second through the fourth years, and thereafter. The aggregate ratio of rate sensitive assets to rate sensitive liabilities is 101.60% for the first year and 144.93% 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's net interest income to significant risk. -38-
Expected Maturity/Repricing --------------------------- 2003 2004 2005 2006 2007 Thereafter Total Fair Value (Dollars in thousands) ASSETS Loans: (1) Fixed rate $ 26,138 21,488 18,293 15,688 11,277 102,539 195,423 202,038 Average interest rate 8.80% 8.70% 8.56% 8.15% 7.87% 7.74% Variable rate 77,078 23,962 13,350 3,473 8,539 3,007 129,409 129,409 Average interest rate 5.40% 7.10% 6.79% 7.52% 6.53% 7.89% Securities available for sale (2) 15,451 14,233 21,103 31,766 22,689 27,540 132,782 136,178 Average interest rate (3) 6.00% 6.44% 6.02% 5.56% 5.13% 6.92% Federal funds sold 11,925 - - - - - 11,925 11,925 Average interest rate 1.06% - - - - - Total earning assets 130,592 59,683 52,746 50,927 42,505 133,086 469,539 479,550 Average interest rate 5.75% 7.52% 7.10% 6.49% 6.14% 7.57% LIABILTIES NOW and money fund 20,249 3,989 3,989 3,989 3,989 55,467 91,672 91,672 Average interest rate 1.06% 1.05% 1.05% 1.05% 1.05% 1.06% Savings 43,251 2,145 2,145 2,145 2,145 61,070 112,901 112,901 Average interest rate 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% IRA's Fixed rate 5,633 4,669 5,177 3,704 10,549 942 30,674 33,109 Average interest rate 3.61% 4.32% 5.98% 4.66% 4.75% 6.40% Variable rate 4,867 2,434 - - - - 7,301 7,301 Average interest rate 1.64% 1.64% - - - - CD's over $100,000 9,799 9,376 3,803 3,898 2,845 - 29,721 29,827 Average interest rate 3.25% 4.09% 4.54% 4.48% 4.73% - CD's under $100,000 42,685 32,921 12,711 11,426 11,076 211 111,030 115,912 Average interest rate 2.89% 3.80% 4.80% 4.36% 4.78% 6.33% -39- Long term debt 2,056 2,060 64 2,067 6 - 6,253 6,545 Average interest rate 3.68% 4.45% 6.00% 5.55% 6.00% - Total interest-bearing liabilities 128,540 57,594 27,889 27,229 30,610 117,690 389,552 397,267 Average interest rate 2.17% 3.55% 4.20% 3.80% 4.05% 1.36% Period gap $ 2,052 2,089 24,857 23,698 11,895 15,396 Cumulative gap $ 2,052 4,141 28,998 52,696 64,591 79,987 Ratio of rate sensitive assets to rate sensitive liabilities: First twelve months 101.60% Years two through four 144.93% Thereafter 113.08% (1) Excludes adjustments for allowance for loan losses. (2) At amortized cost. (3) Rates for tax-exempt securities are adjusted to a taxable equivalent rate.
-40- Item 8. Financial Statements and Supplementary Data The Financial Statements required by this item are incorporated herein by reference to pages 15 through 24 of the Registrants 2002 LCNB Corp. Annual Report attached to this filing as Exhibit 13. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. - None -41- PART III Portions of the Proxy Statement included in the Notice of Annual Meeting of Shareholders to be held April 15, 2003, dated March 10, 2003, 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 10, 2003), 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 10, 2003), 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 10, 2003), 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 10, 2003), relating to "Certain Relationships and Related Transactions", is incorporated herein by Reference. Item 14. Controls and Procedures The Chief Executive Officer and the Chief Financial Officer have reviewed, as of a date within 90 days of this filing, the disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely and proper manner. Based upon this review, LCNB believes that there are adequate controls and procedures in place. There are no significant changes in the controls or other factors that could affect the controls after the date of evaluation. -42- PART IV Item 15. 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 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 Material Contracts: LCNB Corp. Ownership Incentive Plan (3) 13 Portions of LCNB Corp. 2002 Annual Report (pages 2-3 and 15-24) 21 LCNB Corp. Subsidiaries 99 Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes- Oxley Act of 2002. (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 Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A. (b)Reports on Form 8-K There were no Form 8-Ks filed with the SEC during the fourth quarter of 2002. -43- 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 March 3, 2003 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: /s/Steve P. Foster /s/James B. Miller - --------------------- --------------------- Steve P. Foster James B. Miller Executive Vice President Director And Chief Financial Officer March 3, 2003 March 3, 2003 /s/David S. Beckett /s/Corwin M. Nixon - --------------------- --------------------- David S. Beckett Corwin M. Nixon Director Director March 3, 2003 March 3, 2003 /s/Robert C. Cropper /s/Kathleen Porter Stolle - --------------------- ------------------------- Robert C. Cropper Kathleen Porter Stolle Director Director March 3, 2003 March 3, 2003 /s/William H. Kaufman /s/Howard E. Wilson - --------------------- ---------------------- William H. Kaufman Howard E. Wilson Director Director March 3, 2003 March 3, 2003 /s/George L. Leasure /s/Marvin E. Young - --------------------- ---------------------- George L. Leasure Marvin E. Young Director Director March 3, 2003 March 3, 2003 -44- CERTIFICATIONS In connection with the Annual Report of LCNB Corp. on Form 10-K for the year ending December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen P. Wilson, President and Chief Executive Officer of LCNB Corp., certify, that: (1) I have reviewed this annual report on Form 10-K of LCNB Corp.; (2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; (3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this annual report; (4) LCNB Corp.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, as defined in Exchange Act Rules 13a-14 and 15d-14, for LCNB Corp. and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to LCNB Corp., including its consolidated subsidiaries, is made known to us by others with those entities, particularly during the period in which the annual report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure control and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. (5) LCNB Corp.'s other certifying officer and I have disclosed, based on our most recent evaluation, to LCNB Corp.'s auditors and the audit committee of LCNB Corp.'s board of directors: a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. (6) LCNB Corp.'s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Stephen P. Wilson - ------------------------------------- Stephen P. Wilson President and Chief Executive Officer March 3, 2003 -45- CERTIFICATIONS In connection with the Annual Report of LCNB Corp. on Form 10-K for the period ending December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steve P. Foster, Executive Vice President and Chief Financial Officer of LCNB Corp., certify, that: (1) I have reviewed this annual report on Form 10-K of LCNB Corp.; (2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; (3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this annual report; (4) LCNB Corp.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures, as defined in Exchange Act Rules 13a-14 and 15d-14, for LCNB Corp. and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to LCNB Corp., including its consolidated subsidiaries, is made known to us by others with those entities, particularly during the period in which the annual report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure control and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. (5) LCNB Corp.'s other certifying officer and I have disclosed, based on our most recent evaluation, to LCNB Corp.'s auditors and the audit committee of LCNB Corp.'s board of directors: a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. (6) LCNB Corp.'s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Steve P. Foster - ---------------------------- Steve P. Foster Executive Vice President and Chief Financial Officer March 3, 2003 -46- EX-13 3 lcnbexh13t.txt EXHIBIT 13 LCNB Corp. 2002 Annual Report President's Letter to Shareholders (pages 2 - 3 of Annual Report): - ---------------------------------- Dear Shareholder, The theme of this year's annual report is "Personal Service Powered by Technology". Through these five words we hope to highlight our major strengths. Strengths that conveniently provide our customers with the financial services they want and need in today's fast paced world. To use a modern day phrase, "you're connected". First and foremost, you are connected to the people of LCNB. People who care, people who answer the phone in person (no 'push one, push two'), people who greet you when you walk into any of our 18 offices. These are the same people who efficiently take care of your transactions, answer your questions, or quickly get you to the right expert within our organization depending on your financial need. While this style of personal service has been the cornerstone of LCNB for 126 years, in today's world this is not enough. Today, "you're connected" must also mean the technologies available to allow you to be connected to your financial institution in a variety of ways from anywhere and at anytime. The competitive advantage we offer is not just great personal service or the very best and latest in technology, but the unique combination of both. When you are unable to come to the bank, we come to you. "You're connected" through our worldwide VISA ATM network; BankLine, our automated telephone banking system; and through LCNB On-Line, our PC banking option. You can even bank with us when you are not actively participating in the transaction with direct deposit, DirectLink ACH origination, payroll services or bill pay. Banking with LCNB today is truly a 24-hours a day, 7 days a week, service connection. We also use the very latest in technology to provide you detailed statements with images of your checks and deposits (Advantage Statement). By mid-year 2003 we will add delivery capabilities that will allow these statements to be sent with images directly to your computer through email. For our business customers we will add a CD ROM option that will not only provide images of checks and deposit slips, but also images of all deposited items whether or not they are drawn on us. During 2002, we continued to invest in people, products and technologies. You responded by continuing to use our services, by expanding your business with us, and by providing us with another great year financially. Net income for 2002 was a record $6.5 million representing a 1.32% return on average assets and a 13.00% return on average shareholders' equity. Earnings per share were $3.79, a 10.50% or $0.36 per share increase from 2001. Total assets increased to a record $506.7 million from $480.4 million one year ago, an increase of $26.3 million or 5.48%. Total capital, or shareholders' equity, at December 31, 2002 is a record $51.9 million having increased 4.89% from December 31, 2001. Due to these excellent results, the Board of Directors increased the dividend paid to shareholders for the 17th consecutive year. The total dividend paid during 2002 was $2.025 per share, up from the $1.85 paid in 2001. 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. -1- It was gratifying to see continued strong deposit growth during 2002. Total deposits of $442.2 million at December 31, 2002, represent an increase of $27.4 million or 6.62% from December 31, 2001. Our loan totals decreased by $2.3 million during 2002. Loan growth continued to be negatively affected by refinancing activity on residential mortgage loans and the sale of a large majority of fixed rate residential loans originated during 2002. Approximately $20.9 million of residential real estate loans were sold to FHLMC during 2002. We began selling the loans after determining that current, historically low market rates for residential loans were not profitable in the long run. Offsetting the decline in residential loans was a $4.3 million increase in the commercial loan portfolio and a $13.8 million increase in consumer lending. This continued shift away from long-term fixed rate mortgage loans reduced our future interest rate risk. Our asset quality remained high with a low delinquency rate of 0.61% and no non-accrual loans at year-end. Additional statistical data and information on our financial performance for 2002 are available in the Management Discussion and Analysis (MD&A) document. The MD&A document is enclosed with the initial mailing of this Annual Report to shareholders and is also available in the LCNB Corp. Form 10-K report. This report, filed annually with the Securities and Exchange Commission, is available upon request or from the Internet. Refer to the inside front cover of this report for options to obtain this SEC document. In keeping with our Powered by Technology theme, 2002 was a very busy year. Our technology committee and various conversion teams successfully took us through five conversions, updating both systems and software. We updated our telecommunications, improving quality and reducing cost. We converted from MAC directly to VISA, eliminating an unnecessary middleman in order to provide you with world class ATM service. Our largest conversion was a change in our core processing system to Jack Henry's "Silverlake". The Silverlake software is the very latest, state-of-the-art, financial product delivery system. We closed out the conversions by updating our "BankLine" automated telephone banking system followed by moving to LCNB On-Line for PC banking and bill pay. Our 2002 investment in technology will pay great dividends for many years to come. The Trust Department, in cooperation with Dakin Insurance, our insurance subsidiary, developed and launched our securities brokerage unit. This new venture is in partnership with Uvest, a national brokerage firm. This new unit adds significantly to the investment products we can offer you, our customer, and solidifies our claim to be a one-stop financial services company. Dakin Insurance continued to grow and to position itself for the future. In September, Dakin purchased substantially all of the insurance renewal rights and client list of an insurance agency in Dayton, Ohio. It has successfully integrated the client base into our Lebanon service center. This purchase increased both commission dollars and the number of insurance companies we represent. The most significant result of this acquisition was to greatly increase our premium volume with a major underwriter. Besides representing various specialty underwriters, we now have the volume and, thus, the clout with three of the regions' primary insurance providers. This allows us to obtain the very best in prices, coverage and service for our customers. All of this was accomplished as a direct result of the hard work and dedication of our 251 LCNB and Dakin employees. Our employees, honoring the traditions of the past, building for the future and taking care of our customers one at a time, day in and day out, are what make our success possible. -2- I trust that we have properly conveyed our readiness for and our dedication to the future. We want to continue to be your partner in the growth and prosperity of our region. We recommit ourselves to providing the necessary financial stability and dependability that will make that future growth and prosperity possible. The Annual Meeting for LCNB Corp. will be April 15, 2003 at 10:00 a.m. at our Main Office, 2 North Broadway in Lebanon, Ohio. Proxy material is included with this mailing. Please review, sign and return the proxy in the envelope provided. We would be pleased to have you attend the meeting in person. Thank you for your continued support. Stephen P. Wilson President & CEO -3- Financial Statements and Supplementary Data (pages 15-24 of Annual Report) - ------------------------------------------- -4- INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders LCNB Corp. and subsidiaries Lebanon, Ohio We have audited the accompanying consolidated balance sheets of LCNB Corp. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with U.S. generally accepted accounting principles. /s/J.D. Cloud & Co. L.L.P. ----------------------------- Certified Public Accountants Cincinnati, Ohio January 24, 2003 -5- LCNB CORP. AND SUBSDIARIES CONSOLIDATED BALANCE SHEETS At December 31 ($000's)
2002 2001 ASSETS: Cash and due from banks $ 13,679 14,286 Federal funds sold 11,925 19,950 ------- ------- Total cash and cash equivalents 25,604 34,236 Securities available for sale, at market value 136,178 98,610 Federal Reserve Bank and Federal Home Loan Bank stock, at cost 2,871 2,772 Loans, net 322,832 325,165 Premises and equipment, net 11,688 11,628 Intangibles 3,121 3,729 Other assets 4,457 4,295 ------- ------- TOTAL ASSETS $506,751 480,435 ======= ======= LIABILITIES: Deposits- Noninterest-bearing $ 58,921 59,137 Interest-bearing 383,299 355,635 ------- ------- Total deposits 442,220 414,772 Long-term debt 6,253 12,306 Accrued interest and other liabilities 6,348 3,850 ------- ------- TOTAL LIABILITIES 454,821 430,928 ------- ------- SHAREHOLDERS' EQUITY: Common shares, no par value, authorized 4,000,000 shares; 1,775,942 shares issued 10,560 10,560 Surplus 10,553 10,553 Retained earnings 30,768 27,714 Treasury shares at cost, 54,917 and 12,997 shares at December 31, 2002 and 2001, respectively (2,193) (516) Accumulated other comprehensive income net of taxes 2,242 1,196 ------- ------- TOTAL SHAREHOLDERS' EQUITY 51,930 49,507 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $506,751 480,435 ======= ======= The accompanying notes to consolidated financial statements are an integral part of these statements.
-6- LCNB CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31 ($000's, except per share amounts)
2002 2001 2000 INTEREST INCOME: Interest and fees on loans $24,792 27,266 26,233 Dividends on Federal Reserve Bank and Federal Home Loan Bank stock 139 171 70 Interest on investment securities- Taxable 3,068 2,601 3,542 Non-taxable 1,825 1,459 1,606 Other short-term investments 339 667 700 ------ ------ ------ TOTAL INTEREST INCOME 30,163 32,164 32,151 ------ ------ ------ INTEREST EXPENSE: Interest on deposits 10,102 13,737 15,569 Interest on short-term borrowings 13 33 83 Interest on long-term borrowings 555 570 270 ------ ------ ------ TOTAL INTEREST EXPENSE 10,670 14,340 15,922 ------ ------ ------ NET INTEREST INCOME 19,493 17,824 16,229 PROVISION FOR LOAN LOSSES 348 237 197 ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,145 17,587 16,032 ------ ------ ------ NON-INTEREST INCOME: Trust income 1,145 1,115 1,365 Service charges and fees 2,521 2,327 2,087 Net gain on sales of securities 429 17 12 Insurance agency income 1,164 1,108 811 Other operating income 364 275 125 ------ ------ ------ TOTAL NON-INTEREST INCOME 5,623 4,842 4,400 ------ ------ ------ NON-INTEREST EXPENSE: Salaries and wages 6,531 5,962 5,529 Pension and other employee benefits 1,702 1,577 1,415 Equipment expenses 877 664 629 Occupancy expense - net 1,029 1,043 1,044 State franchise tax 529 509 407 Marketing 394 386 422 Intangible amortization 608 602 581 ATM expense 412 349 290 Other non-interest expense 3,623 2,830 2,784 ------ ------ ------ TOTAL NON-INTEREST EXPENSE 15,705 13,922 13,101 ------ ------ ------ INCOME BEFORE INCOME TAXES 9,063 8,507 7,331 PROVISION FOR INCOME TAXES 2,523 2,440 2,091 ------ ------ ------ NET INCOME $ 6,540 6,067 $ 5,240 ====== ====== ====== Basic earnings per common share $ 3.79 3.43 2.95 ====== ====== ====== Weighted average shares outstanding (000's) 1,724 1,769 1,776 ====== ====== ====== The accompanying notes to consolidated financial statements are an integral part of these statements.
-7- LCNB CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, (000's, except per share amounts)
Accumulated Other Total Common Retained Treasury Comprehensive Shareholders' Comprehensive Shares Surplus Earnings Shares Income Equity Income ------ ------- -------- ------ ------ ------ ------ Balance January 1, 2000 $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 taxes of $4) (8) (8) (8) ----- Total comprehensive income 6,819 ===== Cash dividends declared- $1.80 per share (3,196) (3,196) ------ ------ ------ ------ ----- ------ Balance December 31, 2000 10,560 10,553 24,916 281 46,310 Net income 6,067 6,067 6,067 Net unrealized gain on available-for-sale securities (net of taxes of $478) 928 928 928 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $7) (13) (13) (13) ----- Total comprehensive income 6,982 ====== Treasury shares purchased (516) (516) Cash dividends declared- $1.85 per share (3,269) (3,269) ------ ------ ------ ----- ----- ------ Balance December 31, 2001 10,560 10,553 27,714 (516) 1,196 49,507 Net income 6,540 6,540 6,540 Net unrealized gain on available-for-sale securities (net of taxes of $685) 1,329 1,329 1,329 Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $146) (283) (283) (283) ----- Total comprehensive income 7,586 ===== Treasury shares purchased (1,677) (1,677) Cash dividends declared- $2.025 per share (3,486) (3,486) ------ ------ ------- ----- ----- ------ Balance December 31, 2002 $10,560 10,553 30,768 (2,193) 2,242 51,930 ====== ====== ====== ===== ===== ====== The accompanying notes to consolidated 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)
2002 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,540 6,067 5,240 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation, amortization and accretion 2,548 2,259 1,997 Provision for loan losses 348 237 197 Deferred income tax benefit (63) (64) (70) Realized gains on sales of securities available for sale (429) (17) (12) Origination of mortgage loans for sale (20,852) (13,395) - Proceeds from sales of mortgage loans 21,087 13,462 - (Increase) decrease in income receivable 98 88 223 (Increase) decrease in other assets (595) (259) 705 Increase (decrease) in other liabilities (308) 549 (548) ------ ------ ------ TOTAL ADJUSTMENTS 1,834 2,860 2,492 ------ ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 8,374 8,927 7,732 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in interest-bearing deposits in banks - - 5,492 Proceeds from sales of securities available for sale 25,739 13,609 5,852 Proceeds from maturities of securities available for sale 29,093 15,916 28,899 Purchases of securities available for sale (91,171) (44,544) (10,224) Purchases of Federal Home Loam Bank stock - (252) (1,741) Net decrease (increase) in loans 1,829 2,599 (43,666) Purchases of premises and equipment (1,061) (2,215) (3,067) Proceeds from sales of premises and equipment 3 189 - ------ ------ ------ NET CASH USED IN INVESTING ACTIVITIES (35,568) (14,698) (18,455) ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 27,449 19,986 3,216 Net change in short-term borrowings 2,329 (406) (1,175) Proceeds from issuance of long-term debt - 6,000 6,000 Principal payments on long-term debt (6,053) (50) - Cash dividends paid (3,486) (3,269) (3,196) Purchases of treasury shares (1,677) (516) - ------ ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 18,562 21,745 4,845 ------ ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS (8,632) 15,974 (5,878) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 34,236 18,262 24,140 ------ ------ ------ CASH AND CASH EQUIVALENTS AT END OF YEAR $25,604 34,236 18,262 ====== ====== ====== SUPPLEMENTAL CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: Interest $10,968 14,585 15,778 Income taxes 2,540 2,562 1,877 The accompanying notes to consolidated 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. USE OF ESTIMATES- The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT SECURITIES- Debt securities which the Company has the intent and ability to hold to maturity are reported at amortized cost. Debt securities classified as available for sale and all equity securities are reported at fair value with unrealized holding gains and losses reported net of income taxes as Accumulated Other Comprehensive Income, a separate component of shareholders' equity. Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the level yield method. Realized gains or losses from the sale of securities are computed using the specific identification method. Currently, the Company and its subsidiaries do not hold any derivatives or conduct hedging activities. Federal Home Loan Bank (FHLB) stock is an equity interest in the Federal Home Loan Bank of Cincinnati. It can be sold only at its par value of $100 per share and only to the FHLB or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company, because of the oversight role exercised by the Federal Housing Finance Board in the process of budgeting and approving dividends. Federal Reserve Bank stock is similarly restricted in marketability and value. Both investments are carried at cost, which is their par value. -10- LOANS AND ALLOWANCE FOR LOAN LOSSES- Loans are stated at the principal amount outstanding, net of unearned income, deferred origination fees and costs, and the allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. The accrual of interest on 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- Statement of Financial Accounting Standards (SFAS) No. 147, Acquisitions of Certain Financial Institutions, was issued on October 1, 2002. The Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, on July 20, 2001. SFAS No. 147 amended certain provisions of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institution, and SFAS No. 144, Accounting for Impairment or Disposal of Long-Level Assets. SFAS No. 147 requires that acquisitions of financial institutions be accounted for in accordance with SFAS No. 141, Business Combinations, if the acquisition meets the definition of a business combination. Any goodwill that results will be accounted for in accordance with the provisions of SFAS No. 142. If the acquisition does not meet the definition of a business combination, the cost of the assets acquired -11- shall be allocated to the individual assets acquired and liabilities assumed based on their relative fair values and shall not give rise to goodwill. Existing unidentifiable intangible assets shall continue to be amortized unless the transaction in which the intangible asset arose meets the definition of a business combination. In addition, SFAS No. 147 requires that long-term customer-relationship intangible assets of financial institutions, such as depositor- and borrower-relationship intangible assets and credit-cardholder intangible assets, be subject to the same undiscounted cash flow recoverability tests and impairment loss recognition and measurement provisions that SFAS No. 144 requires for long-term tangible assets and other finite-lived intangible assets that are held and used. The Company's intangible assets at December 31, 2002 primarily represent the unamortized intangible related to the Company's 1997 acquisition of three branch offices from another bank. Management does not believe its 1997 branch office acquisition meets the definition of a business combination and intends to continue amortizing the intangible over ten years, subject to periodic review for impairment in accordance with SFAS No. 144. At December 31, 2002, the carrying amount of this intangible was $3.1 million, net of accumulated amortization of $2.9 million. MARKETING EXPENSE- Marketing costs are expensed as incurred. EMPLOYEE BENEFITS- The Bank has a noncontributory pension plan covering full-time employees. The retirement plan cost is made up of several components that reflect different aspects of the Company's financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. 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. There are no warrants, options or other arrangements that would increase the number of shares outstanding. RECLASSIFICATIONS- Certain prior period data presented in the financial statements has been reclassified to conform with the current year presentation. RECENT ACCOUNTING PRONOUNCEMENTS- FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, was issued on November 25, 2002. The Interpretation elaborates on existing -12- disclosure requirements for most guarantees, including loan guarantees such as financial and performance standby letters of credit routinely issued by financial institutions. At the time a guarantor issues a guarantee, the guarantor must recognize an initial liability for the fair value of the obligations it assumes under the guarantee. Normally, the fair value is assumed to be the fee the guarantor receives for issuing the guarantee. The initial recognition and measurement provisions of the Interpretation apply to guarantees issued or modified after December 31, 2002, regardless of the guarantor's fiscal year-end. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. The provisions of the Interpretation are not expected to have a material effect on the Company's financial statements. SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, was issued by the FASB on December 31, 2002. This statement amends certain sections of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 recommended, but did not require, companies use a fair value based method of accounting for stock-based employee compensation. Under SFAS No. 123, companies electing to adopt the recommended fair value method were required to apply that method prospectively for new stock option awards. SFAS No. 148 provides two additional transition methods, which allows companies to either immediately recognize stock-based employee compensation cost in the year of adoption relating to all activity since 1994 or restate all periods presented in the financial statements to reflect stock-based employee compensation cost for all periods since 1994. SFAS No. 148 also changed disclosure requirements for stock-based compensation. The Company adopted an Ownership Incentive Plan during 2002 that allows for stock-based awards to eligible employees, but no awards have been granted as of December 31, 2002. Management believes any effect on the 2003 financial statements will be immaterial. NOTE 2 - INVESTMENT SECURITIES The amortized cost and estimated market value of available-for-sale investment securities at December 31 are summarized as follows ($000's):
2002 ----------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury notes $ 999 20 - 1,019 U.S. Agency notes 46,436 653 - 47,089 U.S. Agency mortgage- backed securities 18,742 310 - 19,052 Municipal securities: Non-taxable 54,924 2,012 80 56,856 Taxable 11,681 487 6 12,162 ------- ----- -- ------- $132,782 3,482 86 136,178 ======= ===== == ======= -13- 2001 ----------------------------------------- Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury notes $ 1,996 48 - 2,044 U.S. Agency notes 36,033 388 93 36,328 U.S. Agency mortgage- backed securities 9,432 139 1 9,570 Municipal securities: Non-taxable 40,943 1,230 70 42,103 Taxable 8,395 199 29 8,565 ------ ----- --- ------ $ 96,799 2,004 193 98,610 ====== ===== === ======
Contractual maturities of debt securities at December 31, 2002 were as follows ($000'). Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
Amortized Market Cost Value Due within one year $ 15,317 15,467 Due from one to five years 73,573 75,585 Due from five to ten years 19,258 19,790 Due after ten years 5,892 6,284 ------- ------- 114,040 117,126 U.S. Agency mortgage- backed securities 18,742 19,052 ------- ------- $132,782 136,178 ======= =======
Gross gains realized on sales of securities available for sale were $446,000, $46,000, and $31,000 for 2002, 2001 and 2000, respectively. Gross realized losses during 2002, 2001 and 2000 amounted to $17,000, $29,000 and $19,000, respectively. Investment securities with a market value of $42,254,000 and $51,785,000 at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. -14- NOTE 3 - LOANS Major classifications of loans at December 31 are as follows ($000's):
2002 2001 Commercial and industrial $ 35,198 40,486 Commercial, secured by real estate 80,882 72,477 Residential real estate 151,502 165,710 Consumer, excluding credit card 51,184 41,006 Agricultural 1,314 2,020 Credit card 2,689 2,658 Other loans 57 112 Lease financing 1,256 2,088 ------- ------- 324,082 326,557 Deferred net origination costs 750 608 ------- ------- 324,832 327,165 Allowance for loan losses (2,000) (2,000) ------- ------- Loans-net $322,832 325,165 ======= =======
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, 2002, 2001 and 2000 were $36,592,000, $23,734,000, and $14,046,000 respectively. Gains from sales of loans recognized in the accompanying income statements in 2002, 2001 and 2000 were $235,000, $67,000 and $-0-, respectively. Changes in the allowance for loan losses were as follows ($000's):
2002 2001 2000 BALANCE-BEGINNING OF YEAR $2,000 2,000 2,000 Provision for loan losses 348 237 197 Charge-offs (390) (277) (255) Recoveries 42 40 58 ----- ----- ----- BALANCE-END OF YEAR $2,000 2,000 2,000 ===== ===== =====
There were no nonaccrual loans at December 31, 2002 or 2001. Interest income that would have been recorded in 2002, 2001 and 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. At December 31, 2002 and 2001, the recorded investment in loans which are considered to be impaired in accordance with SFAS Statement No. 114 was not material. At December 31, 2002 and 2001, loans past due 90 days or more and still accruing were -15- $232,000 and $146,000, respectively. 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 4 - PREMISES AND EQUIPMENT Premises and equipment at December 31 are summarized as follows ($000's):
2002 2001 Land $ 2,251 2,251 Buildings 9,715 9,830 Equipment 9,903 8,763 ------ ------ Total 21,869 20,844 Less-Accumulated depreciation 10,181 9,216 ------ ------ Premises and Equipment-Net $11,688 11,628 ====== ======
Depreciation charged to income was $999,000 in 2002, $898,000 in 2001, and $796,000 in 2000. Some of the Bank' branches, telephone equipment, and other equipment are leased under agreements expiring at various dates through 2050. These leases are accounted for as operating leases. At December 31, 2002, required minimum annual rentals due in the future on noncancelable leases having terms in excess of one year aggregated $2,562,000. Minimum annual rentals for each of the years 2003 through 2007 are $268,000, $259,000, $251,000, $230,000 and $124,000, respectively. Rental expense for all leased branches and equipment amounted to $305,000 in 2002, $294,000 in 2001 and $263,000 in 2000. NOTE 5 - DEPOSIT LIABILITIES Contractual maturities of certificates of deposit at December 31, 2002 were as follows ($000's):
Certificates All other over $100,000 Certificates Total 2003 $ 9,799 42,685 52,484 2004 9,376 32,921 42,297 2005 3,803 12,711 16,514 2006 3,898 11,426 15,324 2007 2,845 11,076 13,921 Thereafter - 211 211 ------ ------- ------- $29,721 111,030 140,751 ====== ======= =======
-16- NOTE 6 - EMPLOYEE BENEFITS The Company's noncontributory defined benefit retirement plan covers all regular full-time employees. The benefits are based on years of service and the employee's highest average compensation during five consecutive years. Pension costs are funded based on the Plan's actuarial cost method. The components of net periodic pension cost are summarized as follows ($000's):
2002 2001 2000 Service cost $629 566 423 Interest cost 262 212 205 Actual return on Plan assets (248) (164) (192) Amortization of unrecognized transition obligation 10 17 17 Recognized net actuarial loss (gain) 5 (52) 55 --- --- --- Net periodic pension cost $658 579 508 === === ===
A summary of the Plan's prepaid benefit cost, included in other assets on the consolidated balance sheets, and the Plan's funded status at December 31 follows ($000's):
2002 2001 Change in projected benefit obligations --------------------------------------- Projected benefit obligation at beginning of year $4,785 3,854 Service cost 629 566 Interest cost 262 212 Actuarial loss 80 163 Benefits paid (23) (10) ----- ----- Projected benefit obligation at end of year 5,733 4,785 ----- ----- Change in plan assets --------------------- Fair value of plan assets at beginning of year 4,782 4,030 Actual return on plan assets 248 164 Employer contribution 671 598 Benefits paid (23) (10) ----- ----- Fair value of plan assets at end of year 5,678 4,782 ----- ----- Funded status (55) (3) Unrecognized net actuarial loss 916 840 Unrecognized transition obligation - 10 ----- ----- Prepaid benefit cost $ 861 847 ===== =====
-17- Significant actuarial assumptions used for 2002 and 2001 included a discount rate, an expected long-term rate of return on Plan assets, and an expected future compensation rate increase of 5.50%, 5.50% and 4.00%, respectively. The Bank has a benefit plan which permits eligible officers to defer a portion of their compensation. The deferred compensation balance, which accrues interest at 8% annually, is distributable in cash after retirement or termination of employment. The amount of such deferred compensation at December 31, 2002 and 2001 was $544,000 and $434,000, 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, 2002 and 2001 is $132,000 and $110,000, respectively. The discount rate used to determine the present value of the obligation was 6.5% in 2002 and 2001. The service cost associated with this plan in each of the three years 2002, 2001, and 2000 was approximately $16,000. Interest costs were not material. Both of these plans are nonqualified and unfunded. Participation in each plan is limited to a select group of management. NOTE 7 - LONG-TERM DEBT AND OTHER BORROWINGS Long-term debt consists of the following at December 31 (000's):
2002 2001 Federal Home Loan Bank notes $6,000 12,000 Note payable to former shareholder of Dakin 253 306 ----- ------ Total $6,253 12,306 ===== ======
Maturities of long-term debt in the years ending December 31 are as follows (000's)
2003 $2,056 2004 2,060 2005 64 2006 2,067 2007 6
-18- In August 2002, LCNB retired $4.0 million in Federal Home Loan Bank notes bearing a weighted average interest rate of 7.72%. These notes were scheduled to mature in 2004 and 2005. In connection with this transaction, the Company recorded an expense of $425,000 in other non-interest expense in the 2002 consolidated statement of income, which is the required prepayment penalty. At December 31, 2002, the Federal Home Loan Bank borrowings consist of three notes with two, three, and five-year maturities and have a weighted average interest rate of 4.52%. Interest on the notes is fixed and payable monthly. The notes are collateralized by a blanket pledge of 1-4 family residential mortgage loans. Additionally, the Company is required to hold minimum levels of FHLB stock, based on the outstanding borrowings. The note payable matures in 2007. Payments are due monthly at a nominal interest rate of 6%. At December 31, 2002 and 2001, accrued interest and other liabilities include U.S. Treasury demand note borrowings of approximately $3,022,000 and $693,000, respectively. NOTE 8 - INCOME TAXES The provision for federal income taxes consists of ($000's):
2002 2001 2000 Income taxes currently payable $2,586 2,528 2,161 Deferred income tax benefit (63) (88) (70) ----- ----- ----- Provision for income taxes $2,523 2,440 2,091 ===== ===== =====
A reconciliation between the statutory income tax rate and the Company's effective tax rate follows:
2002 2001 2000 Statutory tax rate 34.0% 34.0% 34.0% Increase (decrease) resulting from- Tax exempt interest (6.1) (5.4) (6.5) Other-net (.1) .1 1.0 ---- ---- ---- Effective tax rate 27.8% 28.7% 28.5% ==== ==== ====
-19- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has not recorded a valuation reserve related to deferred tax assets. Deferred tax assets and liabilities at December 31 consist of the following ($000's):
2002 2001 Deferred tax assets: Allowance for loan losses $ 522 522 Amortization of intangibles 315 258 ----- ----- 837 780 ----- ----- Deferred tax liabilities: Depreciation of premises and equipment (314) (275) Unrealized gains on securities available-for-sale (1,155) (616) Deferred loan fees (60) (91) Pension and deferred compensation (61) (109) FHLB stock dividends (89) (55) ----- ----- (1,679) (1,146) ----- ----- Net deferred tax asset (liability( $ (842) (366) ===== =====
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contract amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent off-balance-sheet credit risk at December 31 were as follows (000's):
2002 2001 Commitments to extend credit $69,521 56,738 Standby letters of credit 6,938 6,410
-20- Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. At December 31, 2002 and 2001, outstanding guarantees of $2,048,000 and $1,520,000, respectively, were issued to developers and contractors. These guarantees generally expire within one year and are fully secured. In addition, the Company has an approximate $5 million participation at December 31, 2002 and 2001 in a letter of credit securing payment of principal and interest on a bond issue. This letter of credit will expire July 15, 2005, and is secured by an assignment of rents and the underlying real property. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the borrower. Collateral held varies, but may include 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 10 - RELATED PARTY TRANSACTIONS The Company has entered into related party transactions with various directors and executive officers. Such transactions originate in the normal course of the Bank's operations as a depository and lending institution and were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated customers. Management believes these loans do not involve more than a normal risk of collectibility or present other unfavorable features. At December 31, 2002 and 2001, certain executive officers, directors and associates of such persons were indebted to the Bank directly or as guarantors in the aggregate amount of $3,961,000 and $3,169,000, respectively. During 2002, $2,376,000 in new loans were made and repayments totaled $1,584,000. Deposits from certain executive officers, directors and associates of such persons held by the Company at December 31, 2002 and 2001 amounted to $7,577,000 and $6,340,000, -21- NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts and estimated fair values of financial instruments as of December 31, were as follows ($000's):
2002 2001 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value FINANCIAL ASSETS: Cash and cash equivalents $ 25,604 25,604 34,236 34,236 Federal Reserve Bank and Federal Home Loan Bank stock 2,871 2,871 2,772 2,772 Securities available-for-sale 136,178 136,178 98,610 98,610 Loans, net 322,832 329,447 325,165 328,131 FINANCIAL LIABILITIES: Deposits 442,221 449,644 414,772 418,700 Short-term borrowings 3,022 3,022 693 693 Long-term debt 6,253 6,545 12,306 12,693
The fair value of off-balance-sheet financial instruments at December 31, 2002 and 2001 was not material. Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions. In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of the Bank. The following methods and assumptions were used to estimate the fair value of certain financial instruments: Cash and cash equivalents: The carrying amounts presented are deemed to approximate fair value. Investment Securities: Fair values are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. -22- Borrowings: The carrying amounts of federal funds purchased and U.S. Treasury notes are deemed to approximate fair value of short-term borrowings. For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rate. NOTE 12 - REGULATORY MATTERS The Federal Reserve Act requires depository institutions to maintain cash reserves with the Federal Reserve Bank. In 2002 and 2001, the Bank was required to maintain average reserve balances of $1,743,000 and $4,849,000, respectively. The Company (consolidated) and the Bank must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's and Bank's financial statements. The minimum regulatory capital ratios are 8% for total risk-based, 4% for Tier 1 risk-based, and 4% for leverage. For various regulatory purposes, institutions are classified into categories based upon capital adequacy. The highest "well-capitalized" category requires capital ratios of at least 10% for total risk-based, 6% for Tier 1 risk-based, and 5% for leverage. As of the most recent notification from their regulators, the Company and Bank were categorized as "well-capitalized" under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since the last notification that would change the Bank's category. A summary of the regulatory capital of the Consolidated Company and Bank at December 31 follows ($000's):
2002 2001 ---------------------------------- Consolidated Consolidated Company Bank Company Bank Regulatory Capital: Shareholders' equity $51,930 44,099 49,507 42,165 Goodwill and other intangibles (3,121) (3,011) (3,729) (3,585) Net unrealized securities losses (gains) (2,242) (2,152) (1,196) (1,071) ------ ------ ------ ------ Tier 1 risk-based capital 46,567 38,936 44,582 37,509 Eligible allowance for loan losses 2,000 2,000 2,000 2,000 ------ ------ ------ ------ Total risk-based capital $48,567 40,936 46,582 39,509 ====== ====== ====== ====== Capital Ratios: Total risk-based 15.36% 13.03% 15.40% 13.24% Tier 1 risk-based 14.73% 12.39% 14.74% 12.57% Leverage 9.21% 7.79% 9.46% 8.06%
The principal source of income and funds for LCNB Corp. is dividends paid by the Bank. The payment of dividends is subject to restriction by regulatory authorities. For 2003, the restrictions generally limit dividends to the aggregate of net income for the year 2003 plus the retained net earnings for 2002 and 2001. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Accordingly, future dividends may require the prior approval of the Comptroller of the Currency. -23- NOTE 13 - PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for LCNB Corp. parent company only follows ($000's):
Condensed Balance Sheets December 31 2002 2001 Assets: Cash on deposit with subsidiary $ 1,493 91 Corporate and municipal debt securities 6,231 7,141 Investment in subsidiary 44,199 42,195 Other assets 30 80 ------ ------ Total assets $51,953 49,507 ====== ====== Liabilities $ 23 - Shareholders' equity 51,930 49,507 ------ ------ Total liabilities and shareholders' equity $51,953 49,507 ====== ====== Condensed Statements of Income Year ended December 31 2002 2001 2000 Income: Dividends from subsidiary $ 5,485 5,676 3,197 Interest 243 217 202 Gain on sale of investment securities 9 - 7 ------ ----- ----- Total income 5,737 5,893 3,406 Total expense 40 45 40 ----- ----- ----- Income before income tax benefit and equity in undistributed income of subsidiary 5,697 5,848 3,366 Income tax (expense) benefit (80) 15 10 Equity in undistributed income of subsidiary 923 204 1,864 ----- ----- ----- Net income $6,540 6,067 5,240 ===== ===== ===== -24- Condensed Statements of Cash Flows Year ended December 31 2002 2001 2000 Cash flows from operating activities: Net income $ 6,540 $6,067 5,240 Adjustments for non-cash items - Equity in undistributed (income) excess dividends of subsidiary (923) (204) (1,864) Other, net 105 44 59 ----- ----- ----- Net cash provided by operating activities 5,722 5,907 3,435 ----- ----- ----- Cash flows from investing activities: Capital contribution to subsidiary - - (185) Purchases of securities available-for- sale (4,224) (2,379) (2,143) Proceeds from sales of securities available-for-sale 3,992 300 773 Proceeds from maturities of securities available-for-sale 1,075 - 1,347 ----- ----- ----- Cash flow used in investing activities 843 (2,079) (208) ----- ----- ----- Cash flows from financing activities: Treasury shares purchased (1,677) (516) - Cash dividends paid (3,486) (3,269) (3,196) ----- ----- ----- Cash flow used in financing activities (5,163) (3,785) (3,196) ----- ----- ----- Net change in cash 1,402 43 31 Cash at beginning of year 91 48 17 ----- ----- ----- Cash at end of year $1,493 91 48 ===== ===== =====
-25- EX-21 4 lcnbexh21t.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. EX-99 5 lcnbexh99t.txt Exhibit 99 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of LCNB Corp. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Stephen P. Wilson, Chief Executive Officer, and Steve P. Foster, Chief Financial Officer, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Stephen P. Wilson /s/ Steve P. Foster - ----------------------- ----------------------- Stephen P. Wilson Steve P. Foster Chief Executive Officer Chief Financial Officer Date: March 3, 2003 -----END PRIVACY-ENHANCED MESSAGE-----