0001140361-11-024288.txt : 20110502 0001140361-11-024288.hdr.sgml : 20110502 20110502161833 ACCESSION NUMBER: 0001140361-11-024288 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20110331 FILED AS OF DATE: 20110502 DATE AS OF CHANGE: 20110502 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26121 FILM NUMBER: 11800898 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-Q 1 form10q.htm LCNB CORP 10-Q 3-31-2011 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549
 
FORM 10-Q
 
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended March 31, 2011
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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 incorporation or organization)
(I.R.S. Employer Identification Number)
 
2 North Broadway, Lebanon, Ohio 45036
(Address of principal executive offices, including Zip Code)

(513) 932-1414
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                  x Yes         o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
                                                  o Yes         o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
     Large accelerated filer o                                                                                                           Accelerated filer x
     Non-accelerated filer o (Do not check if a smaller reporting company)                           Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
                                                  o Yes         x No
 
The number of shares outstanding of the issuer’s common stock, without par value, as of May 2, 2011 was 6,689,743 shares.
 


 
 

 
 
LCNB Corp.
 
 
3
   
3
   
3
   
4
   
5
   
6
   
7
   
8
   
33
   
34
   
39
   
40
   
40
   
41
   
41
   
41
   
41
   
41
   
41
   
41
   
42
   
43
 
 
-2-

 
 
LCNB CORP. AND SUBSIDIARIES
(Dollars in thousands)
 
    March 31,
2011
(Unaudited)
    December 31,
2010
 
ASSETS:
               
Cash and due from banks
 
$
14,266
     
10,817
 
Interest-bearing demand deposits
   
17,622
     
 182
 
Total cash and cash equivalents
   
31,888
     
10,999
 
                 
Investment securities:
               
Available-for-sale, at fair value
   
211,852
     
235,882
 
Held-to-maturity, at cost
   
11,497
     
12,141
 
Federal Reserve Bank stock, at cost
   
939
     
939
 
Federal Home Loan Bank stock, at cost
   
2,091
     
2,091
 
Loans, net
   
460,522
     
452,350
 
Premises and equipment, net
   
16,493
     
16,017
 
Goodwill
   
5,915
     
5,915
 
Bank owned life insurance
   
14,388
     
14,242
 
Other assets
   
9,910
     
9,558
 
TOTAL ASSETS
 
$
765,495
     
760,134
 
                 
LIABILITIES:
               
Deposits:
               
Noninterest-bearing
 
$
95,487
     
98,994
 
Interest-bearing
   
559,604
     
539,545
 
Total deposits
   
655,091
     
638,539
 
Short-term borrowings
   
11,402
     
 21,691
 
Long-term debt
   
22,402
     
   23,120
 
Accrued interest and other liabilities
   
5,132
     
6,077
 
TOTAL LIABILITIES
   
694,027
     
689,427
 
                 
SHAREHOLDERS’ EQUITY:
               
Preferred shares - no par value, authorized 1,000,000 shares, none outstanding
   
     
 
Common shares - no par value, authorized 8,000,000 shares, issued 7,445,514 shares at March 31, 2011 and December 31, 2010
   
11,068
     
11,068
 
Surplus
   
15,457
     
15,447
 
Retained earnings
   
55,277
     
54,045
 
Treasury shares at cost, 755,771 shares at March 31, 2011 and December 31, 2010
   
(11,698
   
(11,698
Accumulated other comprehensive income, net of taxes
   
1,364
     
1,845
 
TOTAL SHAREHOLDERS’ EQUITY
   
71,468
     
70,707
 
                 
TOTAL LIABILITES AND SHAREHOLDERS’ EQUITY
 
$
765,495
     
760,134
 
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
-3-

 
LCNB CORP. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
(Unaudited)
 
     
Three Months Ended
 
     
March 31,
 
     
2011
     
2010
 
INTEREST INCOME:
               
Interest and fees on loans
 
$
6,518
     
6,832
 
Interest on investment securities:
               
Taxable
   
876
     
930
 
Non-taxable
   
707
     
808
 
Other investments
   
29
     
32
 
TOTAL INTEREST INCOME
   
8,130
     
8,602
 
                 
INTEREST EXPENSE:
               
Interest on deposits
   
1,584
     
1,976
 
Interest on short-term borrowings
   
10
     
9
 
Interest on long-term debt
   
178
     
177
 
TOTAL INTEREST EXPENSE
   
1,772
     
2,162
 
NET INTEREST INCOME
   
6,358
     
6,440
 
PROVISION FOR LOAN LOSSES
   
664
     
208
 
                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
   
5,694
     
6,232
 
                 
NON-INTEREST INCOME:
               
Trust income
   
483
     
469
 
Service charges and fees on deposit accounts
   
901
     
926
 
Net gain on sales of securities
   
295
     
77
 
Bank owned life insurance income
   
146
     
153
 
Gains from sales of mortgage loans
   
33
     
30
 
Other operating income
   
73
     
98
 
TOTAL NON-INTEREST INCOME
   
1,931
     
1,753
 
                 
NON-INTEREST EXPENSE:
               
Salaries and employee benefits
   
3,052
     
2,768
 
Equipment expenses
   
217
     
204
 
Occupancy expense, net
   
455
     
524
 
State franchise tax
   
196
     
181
 
Marketing
   
115
     
76
 
Intangible amortization
   
14
     
14
 
FDIC premiums
   
280
     
218
 
Other non-interest expense
   
1,472
     
1,222
 
TOTAL NON-INTEREST EXPENSE
   
5,801
     
5,207
 
                 
INCOME BEFORE INCOME TAXES
   
1,824
     
2,778
 
PROVISION FOR INCOME TAXES
   
346
     
637
 
NET INCOME FROM CONTINUING OPERATIONS
   
1,478
     
2,141
 
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
   
824
     
71
 
NET INCOME
 
$
2,302
     
2,212
 
                 
Dividends declared per common share
 
$
0.16
     
0.16
 
                 
Basic and diluted earnings per common share:
               
Continuing operations
 
$
0.22
     
0.32
 
Discontinued operations
   
0.12
     
0.01
 
                 
Weighted average common shares outstanding:
               
Basic
   
6,689,743
     
6,687,232
 
Diluted
   
6,741,767
     
6,729,790
 
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
-4-

 
LCNB CORP. AND SUBSIDIARIES
(In thousands)
(Unaudited)
 
     
Three Months Ended
 
     
March 31,
 
     
2011
     
2010
 
                 
Net Income
 
$
2,302
     
2,212
 
                 
Other comprehensive income:
               
                 
Net unrealized gain (loss) on available-for-sale securities (net of taxes of $230 and $181 for the three months ended March 31, 2011 and 2010, respectively)
   
(447
   
351
 
                 
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $100 and $26 for the three months ended March 31, 2011 and 2010, respectively)
   
(194
   
(51
                 
Change in nonqualified pension plan unrecognized net gain (loss) (net of taxes of $4)
   
8
     
 
                 
Reclassification adjustment for recognition of nonqualified pension plan net (gain) loss (net of taxes of $1)
   
(3
   
 
                 
Nonqualified pension plan curtailment entry (net of taxes of $80)
   
155
     
 
                 
Total comprehensive income
 
$
1,821
     
2,512
 
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
-5-

 
LCNB CORP. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
(Unaudited)
 
    Common
Shares
Outstanding
    Preferred
Stock
    Common
Stock
    Surplus     Retained
Earnings
    Treasury
Shares
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 
                                                                 
Balance January 1, 2011
    6,689,743     $       11,068       15,447       54,045       (11,698 )     1,845       70,707  
Net income
                                    2,302                       2,302  
Net unrealized gain (loss) on available-for-sale securities, net of taxes
                                                    (447 )     (447 )
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income, net of taxes
                                                    (194 )     (194 )
Change in nonqualified pension plan unrecognized net gain (loss), net of taxes
                                                    8       8  
Reclassification adjustment for recognition of nonqualified pension plan net gain, net of taxes
                                                    (3 )     (3 )
Nonqualified pension plan curtailment entry, net of taxes
                                                    155       155  
Compensation expense relating to stock options
                            10                               10  
Common stock dividends, $0.16 per share
                                    (1,070 )                     (1,070 )
Balance March 31, 2011
    6,689,743             11,068       15,457       55,277       (11,698 )     1,364       71,468  
                                                                 
Balance January 1, 2010
    6,687,232     $       11,068       15,407       48,962       (11,737 )     1,915       65,615  
Net income
                                    2,212                       2,212  
Net unrealized gain (loss) on available-for-sale securities, net of tax
                                                    351       351  
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income, net of taxes
                                                    (51 )     (51 )
Compensation expense relating to stock options
                            9                               9  
Common stock dividends, $0.16 per share
                                    (1,070 )                     (1,070 )
Balance March 31, 2010
    6,687,232     $       11,068       15,416       50,104       (11,737 )     2,215       67,066  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
-6-


LCNB CORP. AND SUBSIDIARIES
(In thousands)
(Unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 2,302       2,212  
Adjustments to reconcile net income to net cash flows from operating activities:
               
Depreciation, amortization and accretion
    685       631  
Provision for loan losses
    664       208  
Curtailment charge for nonqualified defined benefit retirement plan
    191       -  
Increase in cash surrender value of bank owned life insurance
    (146 )     (153 )
Realized gain from sales of securities available-for-sale
    (295 )     (77 )
Realized gain from sales of premises and equipment
    -       (4 )
Realized gain from sale of insurance agency
    (1,503 )     -  
Realized gain from sale of repossessed assets
    (16 )     (10 )
Origination of mortgage loans for sale
    (1,722 )     (1,600 )
Realized gains from sales of mortgage loans
    (33 )     (30 )
Proceeds from sales of mortgage loans
    1,737       1,613  
Compensation expense related to stock options
    10       9  
(Increase) decrease due to changes in assets and liabilities:
               
Accrued income receivable
    (604 )     (149 )
Other assets
    (6 )     (211 )
Other liabilities
    (261 )     28  
NET CASH FLOWS FROM OPERATING ACTIVITIES
    1,003       2,467  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sales of investment securities available-for-sale
    14,518       5,342  
Proceeds from maturities of investment securities:
               
Available-for-sale
    8,520       16,875  
Held-to-maturity
    1,259       516  
Purchases of investment securities:
               
Available-for-sale
    (9 )     (5,324 )
Held-to-maturity
    (615 )     (1,373 )
Net (increase) decrease in loans
    (9,102 )     259  
Proceeds from sale of repossessed assets
    35       61  
Purchases of premises and equipment
    (718 )     (87 )
Proceeds from sales of premises and equipment
    -       4  
Proceeds from sale of insurance agency, net of cash disposed
    1,523       -  
NET CASH FLOWS FROM INVESTING ACTIVITIES
    15,411       16,273  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase in deposits
    16,552       7,000  
Net decrease in short-term borrowings
    (10,289 )     (9,157 )
Proceeds from long-term debt
    5,000       -  
Principal payments on long-term debt
    (5,718 )     (807 )
Cash dividends paid on common stock
    (1,070 )     (1,070 )
NET CASH FLOWS FROM FINANCING ACTIVITIES
    4,475       (4,034 )
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    20,889       14,706  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    10,999       12,626  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 31,888       27,332  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
CASH PAID DURING THE YEAR FOR:
               
Interest
  $ 1,831       2,186  
Income taxes
    620       315  
                 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
               
Transfer from loans to other real estate owned and repossessed assets
    225       125  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
 
-7-

 
LCNB CORP. AND SUBSIDIARIES
(Unaudited)
 
Note 1 - Basis of Presentation
Substantially all of the assets, liabilities and operations of LCNB Corp. (“LCNB”) are attributable to its wholly-owned subsidiary, LCNB National Bank (the “Bank”).  The accompanying unaudited consolidated financial statements include the accounts of LCNB and the Bank.  LCNB completed the sale of its subsidiary, Dakin Insurance Agency, Inc. (“Dakin”) on March 23, 2011.  The financial results of Dakin are included as income from discontinued operations, net of tax, in the accompanying unaudited consolidated financial statements through the date of sale.
 
The unaudited interim consolidated financial statements, which have been reviewed by J.D. Cloud & Co. L.L.P., LCNB’s independent registered public accounting firm, in accordance with standards established by the Public Company Accounting Oversight Board, as indicated by their report included herein and which does not express an opinion on those statements, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.
 
Certain prior period data presented in the financial statements have been reclassified to conform with the current year presentation.
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in LCNB’s 2010 Annual Report on Form 10-K filed with the SEC.
 
 
-8-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 2 -  Investment Securities
The amortized cost and fair value of available-for-sale investment securities at March 31, 2011 and December 31, 2010 are summarized as follows (in thousands):
 
   
March 31, 2011
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
U.S. Treasury notes
  $ 19,634       13       237       19,410  
U.S. Agency notes
    76,371       29       1,225       75,175  
U.S. Agency mortgage-backed securities
    27,155       1,101       67       28,189  
Corporate securities
    1,010       13             1,023  
Municipal securities:
                               
Non-taxable
    65,647       2,611       135       68,123  
Taxable
    18,177       187       363       18,001  
Mutual fund
    1,072             14       1,058  
Trust preferred securities
    549       59       3       605  
Equity securities
    249       25       6       268  
    $ 209,864       4,038       2,050       211,852  
 
   
December 31, 2010
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                         
U.S. Treasury notes
  $ 19,724       16       155       19,585  
U.S. Agency notes
    83,600       107       845       82,862  
U.S. Agency mortgage-backed securities
    31,786       1,364       56       33,094  
Corporate securities
    2,012       13             2,025  
Municipal securities:
                               
Non-taxable
    71,902       2,642       116       74,428  
Taxable
    22,049       302       383       21,968  
Mutual fund
    1,063             10       1,053  
Trust preferred securities
    549       57       2       604  
Equity securities
    249       18       4       263  
    $ 232,934       4,519       1,571       235,882  
 
The fair value of held-to-maturity investment securities, consisting of taxable and non-taxable municipal securities, approximates amortized cost at March 31, 2011 and December 31, 2010.
 
 
-9-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 2 -  Investment Securities (continued)
Substantially all securities in unrealized loss positions at March 31, 2011 have been in a loss position less than twelve months.  Management has determined that the unrealized losses at March 31, 2011 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because the Company does not have the intent to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired.
 
Note 3 - Loans
Major classifications of loans at March 31, 2011 and December 31, 2010 are as follows (in thousands):
 
    March 31,
 
  December 31,  
    2011     2010  
                 
Commercial and industrial
 
$
35,381
     
36,122
 
Commercial, secured by real estate
   
209,952
     
196,136
 
Residential real estate
   
187,905
     
190,277
 
Consumer
   
18,229
     
19,691
 
Agricultural
   
2,260
     
2,966
 
Other loans, including deposit overdrafts
   
9,402
     
9,413
 
     
463,129
     
454,605
 
Deferred net origination costs
   
324
     
386
 
     
463,453
     
454,991
 
Less allowance for loan losses
   
2,931
     
2,641
 
Loans, net
 
$
460,522
     
452,350
 
 
 
-10-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
Non-accrual, past-due, and restructured loans as of March 31, 2011 and December 31, 2010 were as follows (in thousands):
 
    March 31,
2011
    December 31,
2010
 
                 
Non-accrual loans
 
$
3,098
     
3,761
 
Past-due 90 days or more and still accruing
   
572
     
300
 
Restructured loans
   
9,619
     
9,088
 
Total
 
$
13,289
     
13,149
 
Percent to total loans
   
2.87
   
2.89
%
 
Non-accrual loans at March 31, 2011 decreased from the balance at December 31, 2010 primarily due to the receipt of a $594,000 guarantee payment on a Small Business Administration loan.  Restructured loans at March 31, 2011 increased from the balance at December 31, 2010 primarily due to the modification of two commercial real estate loans to the same borrower totaling $626,000.
 
Loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of those loans at March 31, 2011 and December 31, 2010 were $69,627,000 and $70,705,000, respectively.  Loans sold to the Federal Home Loan Mortgage Corporation during the three months ended March 31, 2011 and 2010 totaled $1,722,000 and $1,600,000, respectively.
 
 
-11-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
The allowance for loan losses and recorded investment in loans for the three months ended March 31 were as follows (000’s):
 
   
Commercial
& Industrial
   
Commercial
Real Estate
   
Residential
Real Estate
   
Consumer
   
Agricultural
   
Other
   
Unallocated
   
Total
 
March 31, 2011
                                               
Allowance for loan losses:
                                               
Balance, beginning of year
  $ 305       1,625       459       246             6             2,641  
Provision charged to expenses
    284       200       141       34             5             664  
Losses charged off
    (251 )           (100 )     (91 )           (30 )           (472 )
Recoveries
          30       1       42             25             98  
Balance, end of period
  $ 338       1,855       501       231             6             2,931  
                                                                 
Ending balance:  individually evaluated for impairment
  $ 100       336                                     436  
Ending balance:  collectively evaluated for impairment
    238       1,519       501       231             6             2,495  
                                                                 
Loans:
                                                               
Ending balance
  $ 35,381       209,952       187,905       18,229       2,260       9,402             463,129  
Ending balance:  individually evaluated for impairment
    833       12,026       532                               13,391  
Ending balance:  collectively evaluated for impairment
    34,548       197,926       187,373       18,229       2,260       9,402             449,738  
 
 
-12-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
 
   
Commercial
& Industrial
   
Commercial
Real Estate
   
Residential
Real Estate
   
Consumer
   
Agricultural
   
Other
   
Unallocated
   
Total
 
March 31, 2010
                                               
Allowance for loan losses:
                                               
Balance, beginning of year
  $ 546       1,628       491       313             9       11       2,998  
Provision charged to expenses
    14       102       11       80             12       (11 )     208  
Losses charged off
    (5 )           (18 )     (144 )           (38 )           (205 )
Recoveries
                      33             26             59  
Balance, end of period
  $ 555       1,730       484       282             9             3,060  
                                                                 
Ending balance:  individually evaluated for impairment
  $ 290       654                                     944  
Ending balance:  collectively evaluated for impairment
    265       1,076       484       282             9             2,116  
                                                                 
Loans:
                                                               
Ending balance
  $ 44,092       187,593       191,771       23,792       2,648       9,441             459,337  
Ending balance:  individually evaluated for impairment
    1,242       9,116                                     10,358  
Ending balance:  collectively evaluated for impairment
    42,850       178,477       191,771       23,792       2,648       9,441             448,979  
 
 
-13-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
The Company uses a risk-rating system to quantify loan quality.  A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends.  The categories used are:
 
 
Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.
 
 
Other Assets Especially Mentioned (OAEM) - loans in this category are currently protected but are potentially weak.  These loans constitute a risk but not to the point of justifying a classification of substandard.  The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.
 
 
Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the possibility that the Company will sustain some loss if the deficiencies are not corrected.
 
 
Doubtful – loans classified in this category have all the weaknesses inherent in loans classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
 
-14-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
An analysis of the Company’s loan portfolio by credit quality indicators at March 31, 2011 and December 31, 2010 is as follows (000’s):
 
   
No Grade
   
Pass
   
OAEM
   
Substandard
   
Doubtful
   
Total
 
March 31, 2011
                                   
Commercial & industrial
  $ 1,115       32,376       1,139       751             35,381  
Commercial, secured by real estate
    1,987       192,977       4,853       7,767       2,368       209,952  
Residential real estate
    18,544       165,941       1,390       2,030             187,905  
Consumer
    368       17,768             70       23       18,229  
Agricultural
    311       1,949                         2,260  
Other
    75       9,327                         9,402  
Total
  $ 22,400       420,338       7,382       10,618       2,391       463,129  
                                                 
December 31, 2010
                                               
Commercial & industrial
  $ 1,299       32,421       1,177       1,225             36,122  
Commercial, secured by real estate
    2,053       179,710       4,897       8,574       902       196,136  
Residential real estate
    17,346       170,900       264       1,702       65       190,277  
Consumer
    394       19,144             72       81       19,691  
Agricultural
    247       2,719                         2,966  
Other
    116       9,297                         9,413  
Total
  $ 21,455       414,191       6,338       11,573       1,048       454,605  
 
 
-15-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
A loan portfolio aging analysis at March 31, 2011 and December 31, 2010 is as follows (000’s):
 
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater Than
90 Days
   
Total
Past Due
   
Current
   
Total Loans
Receivable
   
Total Loans Greater Than
90 Days and
Accruing
 
March 31, 2011
                                         
Commercial & industrial
  $ 9                   9       35,372       35,381        
Commercial, secured by real estate
    223       35       2,368       2,626       207,326       209,952        
Residential real estate
    711       60       1,078       1,849       186,056       187,905       549  
Consumer
    95       54       23       172       18,057       18,229       23  
Agricultural
                            2,260       2,260        
Other
    74                   74       9,328       9,402        
Total
  $ 1,112       149       3,469       4,730       458,399       463,129       572  
                                                         
December 31, 2010
                                                       
Commercial & industrial
  $ 138             595       733       35,389       36,122       1  
Commercial, secured by real estate
    753             1,766       2,519       193,617       196,136       114  
Residential real estate
    482       36       698       1,216       189,061       190,277       110  
Consumer
    231       54       76       361       19,330       19,691       75  
Agricultural
                            2,966       2,966        
Other
    5                   5       9,408       9,413        
Total
  $ 1,609       90       3,135       4,834       449,771       454,605       300  
 
 
-16-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
Impaired loans at March 31, 2011 and December 31, 2010 were as follows (000’s):
 
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
March 31, 2011
                             
With no related allowance recorded:
                             
Commercial & industrial
  $ 249       249             424       13  
Commercial real estate
    8,250       8,250             8,276       111  
Residential real estate
    533       533             533        
Total
    9,032       9,032             9,233       124  
                                         
With an allowance recorded:
                                       
Commercial & industrial
    484       584       100       884       8  
Commercial real estate
    3,440       3,776       336       3,827       45  
Residential real estate
                             
Total
    3,924       4,360       436       4,711       53  
                                         
Total:
                                       
Commercial & industrial
    733       833       100       1,308       21  
Commercial real estate
    11,690       12,026       336       12,103       156  
Residential real estate
    533       533             533        
Total
  $ 12,956       13,392       436       13,944       177  
 
 
-17-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 3 – Loans (continued)
 
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
December 31, 2010
                             
With no related allowance recorded:
                             
Commercial & industrial
  $ 594       594             751       9  
Commercial real estate
    8,350       8,350             9,058       372  
Residential real estate
    533       533             534        
Total
    9,477       9,477             10,343       381  
                                         
With an allowance recorded:
                                       
Commercial & industrial
    356       476       120       693       29  
Commercial real estate
    2,974       3,150       176       3,403       142  
Residential real estate
                             
Total
  $ 3,330       3,626       296       4,096       171  
                                         
Total:
                                       
Commercial & industrial
  $ 950       1,070       120       1,444       38  
Commercial real estate
    11,324       11,500       176       12,461       514  
Residential real estate
    533       533             534        
Total
  $ 12,807       13,103       296       14,439       552  
 
Non-accrual loans at March 31, 2011 and December 31, 2010 were as follows (000’s):
 
   
March 31,
2011
   
December 31, 2010
 
Commercial and industrial
  $       595  
Commercial, secured by real estate
    2,368       2,377  
Residential real estate
    730       789  
      3,098       3,761  
 
 
-18-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 4 – Other Real Estate Owned
Other real estate owned includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed and are included in “other assets” in the consolidated balance sheets.  Changes in other real estate owned were as follows (000’s):
 
    Three Months Ended
March 31,
 
    2011     2010  
Balance, beginning of year
  $ 2,088       2,424  
Additions
          89  
Balance, end of period
  $ 2,088       2,513  
 
Other real estate owned at March 31, 2011 consisted of two commercial properties and one single-family residential home.  Other real estate owned at March 31, 2010 consisted of two commercial properties and two single-family residential homes.  Additions for the 2010 period consisted of one single family residential home.
 
Note 5 – Borrowings
Funds borrowed from the Federal Home Loan Bank of Cincinnati at March 31, 2011 and December 31, 2010 were as follows (in thousands):
 
   
Current
Interest
Rate
     
March 31,
2011
   
December 31,
2010
 
                   
Fixed Rate Advances, due at maturity:
                 
Advance due February 2011
    2.10 %   $       5,000  
Advance due August 2012
    1.99 %     6,000       6,000  
Advance due January 2015
    2.00 %     5,000        
Advance due March 2017
    5.25 %     5,000       5,000  
                         
Fixed Rate Advances, with monthly principal and interest payments:
                       
Advance due March 2014
    2.45 %     3,073       3,319  
Advance due March 2019
    2.82 %     3,329       3,801  
            $ 22,402       23,120  
 
 
-19-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 5 – Borrowings (continued)
All advances from the Federal Home Loan Bank of Cincinnati are secured by a blanket pledge of LCNB’s 1-4 family first lien mortgage loans in the amount of approximately $146 million and $148 million at March 31, 2011 and December 31, 2010, respectively.  Additionally, LCNB was required to hold minimum levels of FHLB stock, based on the outstanding borrowings.
 
Short-term borrowings at March 31, 2011 and December 31, 2010 are as follows (dollars in thousands):
 
   
March 31, 2011
   
December 31, 2010
 
   
Amount
   
Rate
   
Amount
   
Rate
 
U.S. Treasury demand note
  $ 884       %     1,295       %
Federal funds purchased
          %     7,000       0.50 %
Line of credit
          %     3,026       1.00 %
Repurchase agreements
    10,518       0.30 %     10,370       0.30 %
    $ 11,402       0.28 %     21,691       0.44 %
 
Note 6 - Commitments and Contingent Liabilities
LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments 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.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.
 
LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2011 and December 31, 2010 were as follows (in thousands):
 
    March 31,
2011
    December 31,
2010
 
         
Commitments to extend credit:
               
  Commercial loans
 
$
1,174
     
1,856
 
  Other loans:
               
    Fixed rate
   
833
     
1,200
 
    Adjustable rate
   
437
     
480
 
Unused lines of credit:
               
  Fixed rate
   
1,839
     
1,773
 
  Adjustable rate
   
61,605
     
67,038
 
Unused overdraft protection amounts on demand and NOW accounts
   
10,013
     
10,031
 
Standby letters of credit
   
6,391
     
6,528
 
   
$
82,292
     
88,906
 
 
 
-20-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 6 - Commitments and Contingent Liabilities (continued)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Unused lines of credit include amounts not drawn in line of credit loans.  Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.
 
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  At March 31, 2011 and December 31, 2010, outstanding guarantees of approximately $862,000 and $998,000, respectively, were issued to developers and contractors.  These guarantees generally are fully secured and have varying maturities.  In addition, LCNB has a participation in a letter of credit securing payment of principal and interest on a bond issue.  The participation amount at March 31, 2011 and December 31, 2010 was approximately $5.5 million.  The agreement has a final maturity date of July 15, 2012.
 
LCNB evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.  Collateral held varies, but may include accounts receivable; inventory; property, plant and equipment; residential realty; and income-producing commercial properties.
 
Capital expenditures may include the construction or acquisition of new office buildings, improvements to LCNB’s 25 offices, purchases of furniture and equipment, and additions or improvements to LCNB’s information technology system.  Material commitments for capital expenditures outstanding as of March 31, 2011 totaled approximately $975,000.
 
Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.
 
LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business.  Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.
 
Note 7 – Regulatory Capital
The Bank and LCNB are required by regulators to meet certain minimum levels of capital adequacy. These are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders’ equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in LCNB’s assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.  The capital leverage ratio supplements the risk-based capital guidelines. Banks are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%.
 
 
-21-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 7 – Regulatory Capital (continued)
For various regulatory purposes, financial 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 Bank and LCNB 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 or LCNB’s category.  A summary of the regulatory capital and capital ratios of LCNB follows (dollars in thousands):
 
    At
March 31,
2011
    At
December 31,
2010
 
     
Regulatory Capital:
               
Shareholders’ equity
 
$
71,468
     
70,707
 
Goodwill and other intangibles
   
(6,118
   
(6,413
Accumulated other comprehensive income
   
(1,364
   
(1,845
Tier 1 risk-based capital
   
63,986
     
62,449
 
                 
Eligible allowance for loan losses
   
2,931
     
2,641
 
Total risk-based capital
 
$
66,917
     
65,090
 
                 
Capital ratios:
               
Total risk-based (8% required)
   
14.13
   
13.82
Tier 1 risk-based (4% required)
   
13.52
   
13.26
Leverage (3% required)
   
8.42
   
8.12
 
Note 8 – Employee Benefits
LCNB participates in a noncontributory defined benefit retirement multi-employer plan that covers substantially all regular full-time employees hired before January 1, 2009.
 
Employees of LCNB also participate in a defined contribution retirement plan.  Employees hired on or after January 1, 2009 receive a 50% employer match on their contributions into the 401(k) plan, up to a maximum LCNB contribution of 3% of each individual employee’s annual compensation.  Employees hired before January 1, 2009 who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5% or 7% of annual compensation, depending on the sum of an employee’s age and vesting service, into the 401(k) plan, regardless of the contributions made by the employees.  This contribution is made annually and these employees do not receive any employer matches to their 401(k) contributions.
 
 
-22-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 8 – Employee Benefits (continued)
Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated statements of income for the three-month periods ended March 31, 2011 and 2010 were as follows (in thousands):
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
Qualified noncontributory defined benefit retirement plan
  $ 124       60  
                 
401(k) plan
    75       74  
 
Certain highly compensated employees participate in a nonqualified defined benefit retirement plan.  The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code.
 
The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three months ended March 31, 2011 and 2010 are summarized as follows (in thousands):
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Service cost
  $ 44       43  
Interest cost
    9       8  
Amortization of unrecognized prior service cost
    11       12  
Amortization of unrecognized net gain
    (4 )      
Net periodic pension cost
  $ 60       63  
 
 
-23-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 9 - Stock Based Compensation
LCNB established an Ownership Incentive Plan (the “Plan”) during 2002 that allows for stock-based awards to eligible employees, as determined by the Board of Directors.  The awards may be in the form of stock options, share awards, and/or appreciation rights.  The Plan provides for the issuance of up to 200,000 shares.
 
Options granted to date vest ratably over a five year period and expire ten years after the date of grant. Stock options outstanding at March 31, 2011 were as follows:
 
    Outstanding Stock Options     Exercisable Stock Options  
Exercise
Price Range
 
Number
   
Weighted
Average
Exercise
Price
   
Weighted Average
Remaining
Contractual
Life (Years)
   
Number
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life (Years)
 
                                                 
$9.00 - $10.99
    29,110     $ 9.00       7.8       11,644     $ 9.00       7.8  
$11.00 - $12.99
    59,799       11.89       8.8       12,511       12.20       7.6  
$13.00 - $14.99
    11,056       13.09       1.8       11,056       13.09       1.8  
$17.00 - $18.99
    24,158       18.16       4.5       22,535       18.18       4.4  
      124,123       12.54       7.1       57,746       14.06       5.3  
 
The following table summarizes stock option activity for the periods indicated:
 
   
2011
   
2010
 
   
 
 
Options
   
Weighted Average Exercise Price
   
 
 
Options
   
Weighted Average Exercise Price
 
Outstanding, January 1
    99,040     $ 12.71       78,242     $ 13.04  
Granted
    25,083       11.85       20,798       11.50  
Exercised
                       
Outstanding, March 31
    124,123       12.54       99,040       12.71  
Exercisable, March 31
    57,746       14.06       41,770       14.78  
 
The aggregate intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) for options outstanding at March 31, 2011 that were “in the money” (market price greater than exercise price) was $83,000.  The aggregate intrinsic value at that date for only the options that were exercisable was $32,000.  The intrinsic value changes based on changes in the market value of LCNB’s stock.
 
 
-24-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 9 - Stock Based Compensation (continued)
The fair value of options granted is estimated at the date of grant using the Black-Scholes option-pricing model.  The following table shows the estimated weighted-average fair value of options granted and the assumptions used in calculating that value for the years indicated:
 
   
2011
   
2010
 
Estimated weighted-average fair value of options granted
  $ 2.09       2.27  
Risk-free interest rate
    2.84 %     3.34 %
Average dividend yield
    4.43 %     4.31 %
Volatility factor of the expected market price of the Company’s common stock
    27.37 %     28.32 %
Average life in years
    6.5       7.0  
 
Total expense related to options included in salaries and wages in the consolidated statements of income for the three months ended March 31, 2011 and 2010 was $10,000 and $9,000, respectively.
 
A total of 2,511 restricted shares were granted to an executive officer in February 2010 and vested in November 2010.  Until they vested, they were restricted from sale, transfer, or assignment in accordance with the terms of the agreement under which they were issued.  At the date of vesting, the shares were issued from treasury stock and, therefore, did not affect the number of securities remaining available for future issuance in the table above.  No restricted shares were granted prior to February 2010 or during the first quarter 2011.
 
 
-25-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 10 - Earnings Per Common Share
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrant, and restricted stock.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options, warrant, and restricted stock with proceeds used to purchase treasury shares at the average market price for the period.  The computations were as follows for the three months ended March 31, 2011 and 2010 (dollars in thousands, except share and per share data):
 
   
For the Three Months
 
   
Ended March 31,
 
   
2011
   
2010
 
             
Net income from continuing operations
  $ 1,478       2,141  
Income from discontinued operations, net of taxes
    824       71  
Net income
  $ 2,302       2,212  
                 
Weighted average number of shares outstanding used in the calculation of basic earnings per common share
    6,689,743       6,687,232  
                 
Add dilutive effect of:
               
Stock options
    3,880       2,207  
Restricted stock
          1,060  
Stock warrant
    48,144       39,291  
      52,024       42,558  
                 
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share
    6,741,767       6,729,790  
                 
Basic earnings per common share:
               
Continuing operations
  $ 0.22       0.32  
Discontinued operations
    0.12       0.01  
Diluted earnings per common share
               
Continuing operations
    0.22       0.32  
Discontinued operations
    0.12       0.01  
 
 
-26-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11- Fair Value of Financial Instruments
The inputs to valuation techniques used to measure fair value are assigned to one of three broad levels:
 
 
Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
 
 
Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets,  quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
 
 
Level 3 - inputs that are unobservable for the asset or liability.
 
The majority of LCNB’s debt securities are classified as available-for-sale. The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income.
 
LCNB utilizes a pricing service for determining the fair values of most of its investment securities.  Fair value for U.S. Treasury notes and corporate securities are determined based on market quotations (level 1).  Fair value for most of the other investment securities is calculated using the discounted cash flow method for each security.  The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2).  Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.  In addition, approximately $1,058,000 is invested in a mutual fund.  LCNB uses the fair value estimate provided by the mutual fund company, which uses market quotations when such quotes are available and good faith judgment when market quotations are not available.  Because LCNB does not know the portion of the mutual fund valued using market quotations and the portion valued using good faith judgment, the entire investment in the mutual fund has been classified as using level 3 inputs.  Additionally, LCNB Corp. owns trust preferred securities in various financial institutions and purchased a small portfolio of stock in non-financial companies during the third quarter 2010.   Market quotations (level 1) are used to determine fair value for these investments.
 
 
-27-


LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11- Fair Value of Financial Instruments (continued)
The following table summarizes the valuation of LCNB’s available-for-sale securities by input levels as of March 31, 2011 and December 31, 2010 (in thousands):
 
     
Fair Value Measurements at Reporting Date Using
 
   
Fair Value Measurements
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
March 31, 2011
                       
Available-for-sale securities:
                       
U.S. Treasury notes
  $ 19,410       19,410              
U.S. Agency notes
    75,175             75,175        
U.S. Agency mortgage-backed securities
    28,189             28,189        
Corporate securities
    1,023       1,023              
Municipal securities:
                               
Non-taxable
    68,123             68,123        
Taxable
    18,001             18,001        
Mutual fund
    1,058                   1,058  
Trust preferred securities
    605       605              
Equity securities
    268       268              
Totals
  $ 211,852       21,306       189,488       1,058  
                                 
December 31, 2010
                               
Available-for-sale securities:
                               
U.S. Treasury notes
  $ 19,585       19,585              
U.S. Agency notes
    82,862             82,862        
U.S. Agency mortgage-backed securities
    33,094             33,094        
Corporate securities
    2,025       2,025              
Municipal securities:
                               
Non-taxable
    74,428             74,428        
Taxable
    21,968             21,968        
Mutual fund
    1,053                   1,053  
Trust preferred securities
    604       604              
Equity securities
    263       263              
Totals
  $ 235,882       22,477       212,352       1,053  
 
 
-28-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11- Fair Value of Financial Instruments (continued)
The following table is a reconciliation of the beginning and ending balances of recurring fair value measurements that use significant unobservable inputs (level 3) for the three months ended March 31, 2011 (in thousands):
 
   
Other
Debt
Securities
 
       
Beginning balance
  $ 1,053  
Purchases
       
Dividends reinvested
    9  
Net change in unrealized gains (losses) included in other comprehensive income
    (4 )
Ending balance
  $ 1,058  
 
Assets that may be recorded at fair value on a nonrecurring basis include impaired loans, other real estate owned, and other repossessed assets.  A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement.  Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance.  When the fair value of the collateral is based on an observable market price or current appraised value, the inputs are considered to be level 2.  When an appraised value is not available and there is not an observable market price, the inputs are considered to be level 3.
 
Other real estate owned is adjusted to fair value upon transfer of the loan to foreclosed assets, usually based on an appraisal of the property.  Subsequently, foreclosed assets are carried at the lower of carrying value or fair value.  The inputs for a valuation based on current appraised value are considered to be level 2.
 
 
-29-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11- Fair Value of Financial Instruments (continued)
The table below presents LCNB’s impaired loans, other real estate owned, and repossessed assets measured at fair value on a nonrecurring basis as of March 31, 2011 and December 31, 2010 by the level in the fair value hierarchy within which those measurements fall (in thousands):
 
           Fair Value Measurements at Reporting Date Using  
   
Fair Value
Measurements
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
March 31, 2011
                       
Impaired loans
  $ 4,674             823       3,851  
Other real estate owned
    2,088             2,088        
Repossessed assets
    231                   231  
Totals
  $ 6,993             2, 911       4,082  
                                 
December 31, 2010
                               
Impaired loans
  $ 4,080             1,430       2,650  
Other real estate owned
    2,088             2,088        
Repossessed assets
    26                   26  
Totals
  $ 6,194             3,518       2,676  
 
Carrying amounts and estimated fair values of financial instruments as of March 31, 2011 and December 31, 2010 were as follows (in thousands):
 
   
March 31, 2011
   
December 31, 2010
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
                         
FINANCIAL ASSETS:
                       
Cash and cash equivalents
  $ 31,888       31,888       10,999       10,999  
Investment securities:
                               
Available-for-sale
    211,852       211,852       235,882       235,882  
Held-to-maturity
    11,497       11,497       12,141       12,141  
Federal Reserve Bank stock
    939       939       939       939  
Federal Home Loan Bank stock
    2,091       2,091       2,091       2,091  
Loans, net
    460,522       472,025       452,350       465,053  
                                 
FINANCIAL LIABILITIES:
                               
Deposits
    655,091       658,887       638,539       642,734  
Short-term borrowings
    11,402       11,402       21,691       21,691  
Long-term debt
    22,402       23,438       23,120       24,217  
 
 
-30-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 11- Fair Value of Financial Instruments (continued)
The fair value of off-balance-sheet financial instruments at March 31, 2011 and December 31, 2010 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 LCNB.  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 for securities, excluding Federal Home Loan Bank and Federal Reserve Bank stock, 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 and/or discounted cash flow analyses or other methods.  The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions.
 
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, incorporating assumptions of current and projected prepayment speeds.
 
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
 
Borrowings
The carrying amounts of federal funds purchased, repurchase agreements, and U.S. Treasury demand note borrowings 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 rates.
 
 
-31-

 
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
 
Note 12 – Discontinued Operations
LCNB sold its insurance agency subsidiary on March 23, 2011 and therefore its financial results are reported in the income statements as income from discontinued operations, net of taxes.  Income from discontinued operations for the three months ended March 31, 2011 include the gain recognized from the sale less certain related closing costs, taxes, and a curtailment expense recognized in LCNB’s nonqualified defined benefit retirement plan due to the sale.  The following table summarizes income from discontinued operations for the periods indicated (in thousands):
 
   
For the Three Months
 
   
Ended March 31,
 
   
2011
   
2010
 
             
Dakin Insurance Agency financial results:
           
  Revenue
  $ 381       421  
  Non-interest expenses
    303       313  
  Income from operations before income taxes
    78       108  
Gain from sale of insurance agency
    1,503        
Closing costs related to sale
    (47 )      
Curtailment expense on nonqualified defined benefit retirement plan
    (191 )      
Provision for income taxes
    (519 )     (37 )
Total income from discontinued operations, net of taxes
    824       71  
 
Note 13 – Recent Accounting Pronouncements
Accounting Standards Update No. 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” was issued by the Financial Accounting Standards Board in April 2011.  A loan modification is considered a Troubled Debt Restructuring when the restructuring constitutes a concession by the lender and the debtor is experiencing financial difficulties.  The update provides additional guidance in determining whether a concession has been granted and whether a debtor is experiencing financial difficulty.  The amendments in the update are effective for public entities for the first interim or annual period beginning on or after June 15, 2011 and are to be applied retrospectively to the beginning of the annual period of the adoption.  LCNB management does not anticipate that adoption of this update will have a material effect on its consolidated financial statements.
 
 
-32-

 
 
To the Board of Directors and Shareholders
LCNB Corp. and subsidiaries
Lebanon, Ohio
 
We have reviewed the accompanying consolidated balance sheet of LCNB Corp. and subsidiaries as of March 31, 2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the three-month periods ended March 31, 2011 and 2010.  These interim financial statements are the responsibility of the Company’s management.
 
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of LCNB Corp. and subsidiaries as of December 31, 2010, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated March 1, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2010, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
  /s/ J.D. Cloud & Co. L.L.P.  
 
Cincinnati, Ohio
May 2, 2011
 
 
-33-


LCNB CORP. AND SUBSIDIARIES
 
 
Forward Looking Statements
Certain matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties.  Forward looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words and their derivatives such as “expects,” “anticipates,” “believes,” “estimates,” “plans,” “projects,” or other statements concerning opinions or judgments of LCNB and its management about future events.   Factors that could influence the accuracy of such forward looking statements include, but are not limited to, regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, general economic conditions and other risks.  Such forward-looking statements represent management’s judgment as of the current date. Actual strategies and results in future time periods may differ materially from those currently expected. LCNB disclaims, however, any intent or obligation to update such forward-looking statements.  LCNB intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
 
Results of Operations
LCNB’s net income for the three months ended March 31, 2011 was $2,302,000 or $0.34 total basic and diluted earnings per common share, compared to $2,212,000 or $0.33 total basic and diluted earnings per common share for the three months ended March 31, 2010.  The $90,000 increase in net income was due to a $753,000 increase in income from discontinued operations, net of taxes, which includes the gain recognized on the sale of LCNB’s insurance agency subsidiary during the first quarter 2011.  Partially offsetting the gain on sale were certain related closing costs, taxes, and a curtailment expense recognized in LCNB’s nonqualified defined benefit retirement plan due to the sale.
 
Net income from continuing operations for the first quarter 2011 was $663,000 less than the first quarter of 2010 due primarily to a $456,000 increase in the provision for loan losses and a $594,000 increase in non-interest expense.
 
Net interest income decreased $82,000 during the three month period in 2011 compared to 2010 primarily due to a decrease in the net interest rate margin.
 
Noninterest income for the first quarter 2011 was $178,000 greater than the comparable 2010 period primarily due to increased gains from the sale of investment securities.  Non-interest expense for the three months ended March 31, 2011 increased $594,000 from the comparable period in 2010 largely due to a $145,000 increase in salaries and a $139,000 increase in employee benefits.
 
Net loan charge-offs for the first quarter of 2011 and 2010 totaled $374,000 and $146,000, respectively.  Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $3,670,000 or 0.79% of total loans at March 31, 2011, compared to $4,061,000 or 0.89% of total loans at December 31, 2010.  The decrease is primarily due to the receipt of a guarantee payment on a Small Business Administration loan that had been classified as non-accrual at December 31, 2010.  The provision for loan losses for the three months ended March 31, 2011 increased $456,000 over the comparative period in 2010 due to increased net charge-offs, troubled debt restructurings, and current economic conditions.  Other real estate owned (which includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed) and other repossessed assets totaled approximately $2,319,000 at March 31, 2011, compared to $2,114,000 at December 31, 2010.
 
 
-34-


LCNB CORP. AND SUBSIDIARIES
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
The increase was primarily due to inventory repossessed from a commercial borrower that ceased operations.
 
Net Interest Income
LCNB’s primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the three months ended March 31, 2011 and 2010, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resultant average yields earned or rates paid.
 
    Three Months Ended March 31,  
   
2011
    2010  
   
Average
Outstanding
Balance
   
Interest
Earned/
Paid
   
Average
Yield/
Rate
   
Average
Outstanding
Balance
   
Interest
Earned/
Paid
   
Average
Yield/
Rate
 
    (Dollars in thousands)  
                                                 
Loans (1)
  $ 457,385       6,518       5.78 %   $ 458,503     $ 6,832       6.04 %
Interest-bearing demand deposits
    10,730       5       0.19 %     10,105       8       0.32 %
Federal Reserve Bank stock
    939       -       - %     940       -       - %
Federal Home Loan Bank stock
    2,091       24       4.65 %     2,091       24       4.65 %
Investment securities:
                                               
Taxable
    150,346       876       2.36 %     118,537       930       3.18 %
Non-taxable (2)
    82,810       1,071       5.25 %     86,068       1,224       5.77 %
Total interest-earning assets
    704,301       8,494       4.89 %     676,244       9,018       5.41 %
Non-earning assets
    65,988                       70,885                  
Allowance for loan losses
    (2,613 )                     (3,003 )                
Total assets
  $ 767,676                     $ 744,126                  
                                                 
Interest-bearing deposits
  $ 556,186       1,584       1.16 %     547,394       1,976       1.46 %
Short-term borrowings
    12,836       10       0.32 %     8,000       9       0.46 %
Long-term debt
    25,485       178       2.83 %     24,574       177       2.92 %
Total interest-bearing liabilities
    594,507       1,772       1.21 %     579,968       2,162       1.51 %
Demand deposits
    96,866                       91,687                  
Other liabilities
    5,333                       5,356                  
Capital
    70,970                       67,115                  
Total liabilities and capital
  $ 767,676                     $ 744,126                  
                                                 
Net interest rate spread (3)
                    3.68 %                     3.90 %
                                                 
Net interest income and net interest margin on a tax-equivalent basis (4)
            6,722       3.87 %           $ 6,856       4.11 %
                                                 
Ratio of interest-earning assets to interest-bearing liabilities
    118.47 %                     116.60 %                
 
(1)
Includes nonaccrual loans if any.
(2)
Income from tax-exempt securities is included in interest income on a tax-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 rate spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)
The net interest margin is the tax-equivalent net interest income divided by average interest-earning assets.
 
 
-35-

 
LCNB CORP. AND SUBSIDIARIES
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
The following table presents the changes in tax-equivalent interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended March 31, 2011 as compared to the same period in 2010.  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.
 
    Three Months Ended
March 31,
2011 vs. 2010
 
    Increase (decrease) due to:  
   
Volume
   
Rate
   
Total
 
    (In thousands)  
Interest-earning Assets:
                 
Loans
  $ (17 )     (297 )     (314 )
Interest-bearing demand deposits
          (3 )     (3 )
Investment securities:
                       
Taxable
    217       (271 )     (54 )
Nontaxable
    (45 )     (108 )     (153 )
Total interest income
    155       (679 )     (524 )
                         
Interest-bearing Liabilities:
                       
Deposits
    31       (423 )     (392 )
Short-term borrowings
    4       (3 )     1  
Long-term debt
    6       (5 )     1  
Total interest expense
    41       (431 )     (390 )
Net interest income
  $ 114       (248 )     (134 )
 
Net interest income on a tax-equivalent basis for the three months ended March 31, 2011 totaled $6,722,000, a decrease of $134,000 from the comparable period in 2010.  Total tax-equivalent interest income decreased $524,000, partially offset by a $390,000 decrease in total interest expense.
 
The decrease in total interest income was primarily due to a 52 basis point (a basis point equals 0.01%) decrease in the average rate earned on earning assets, partially offset by a $28.1 million increase in average total earning assets.  The increase in average interest earning assets was primarily due to a $28.6 million increase in average investment securities.  The decrease in the average rate earned reflects a general decrease in market rates.
 
The decrease in total interest expense was primarily due to a 30 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a $14.5 million increase in average interest-bearing liabilities.  The increase in average interest-bearing liabilities was primarily due to an $8.8 million increase in average interest-bearing deposits and a $4.8 million increase in average short-term borrowings.  The decrease in the average rate paid also reflects a general decrease in market rates.
 
 
-36-

 
LCNB CORP. AND SUBSIDIARIES
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Provision and Allowance for Loan Losses
The total provision for loan losses is determined based upon management’s evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio.  In addition to historic charge-off percentages, factors taken into consideration to determine the adequacy of the allowance for 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 provision for loan losses for the three months ended March 31, 2011 and 2010 was $664,000 and $208,000, respectively.  The increase in the provision reflects increases in net charge-offs, additional troubled debt restructurings, and current economic conditions.
 
Non-Interest Income
Total non-interest income for the first quarter 2011 was $178,000 greater than for the first quarter 2010 primarily due to a $218,000 increase in gains from sales of securities.
 
Non-Interest Expense
Non-interest expense for the first quarter 2011 was $594,000 greater than for the first quarter 2010 due primarily to a $145,000 increase in salaries and a $139,000 increase in employee benefits.  FDIC insurance premiums increased $62,000 primarily due to a higher level of deposits on which the premiums are charged.  Other non-interest expense increased $250,000 primarily due to a $75,000 loss recognized on a standby letter of credit, a $51,000 increase in holding costs related to other real estate owned, $52,000 in environmental remediation costs for the lot on which LCNB’s new Lebanon Drive-Up facility is being constructed, and other smaller miscellaneous increases.
 
Income Taxes
LCNB’s effective tax rates for continuing operations for the three months ended March 31, 2011 and 2010 were 19.0% and 22.9%, respectively.  The difference between the statutory rate of 34.0% and the effective tax rate is primarily due to tax-exempt interest income from municipal securities and tax-exempt income from bank owned life insurance.
 
Financial Condition
Total assets at March 31, 2011 were $5.4 million greater than at December 31, 2010.  The increase in total assets is primarily due to a $20.9 million increase in cash and cash equivalents and an $8.2 million increase in net loans.  These increases were partially offset by a $24.7 million decrease in investment securities.  Proceeds received from maturities, calls, and sales of investment securities were not replaced with new securities to enhance the liquidity position for anticipated future needs.
 
The increase in net loans was composed of an $8.5 million increase in gross loans, partially offset by a $290,000 increase in the allowance for loan losses.  Commercial real estate loans increased $13.8 million, partially offset by decreases in other loan categories.  Consumer loans decreased $1.5 million due to weak demand for new loans and residential real estate loans decreased $2.4 million largely because the majority of loans originated during the first quarter were sold to the Federal Home Loan Mortgage Corporation.  Residential mortgage loan sales for the first quarter 2011 totaled $1.7 million
 
 
-37-

 
LCNB CORP. AND SUBSIDIARIES
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Total deposits were $16.6 million greater at March 31, 2011 than at December 31, 2010, primarily due to a $14.0 million increase in public fund deposits by local government entities.  Public fund deposits can be relatively volatile due to seasonal tax collections and the financial needs of the local entities.  LCNB believes that much of the increase during the first quarter was due to seasonal property and other tax receipts.  The remaining deposit growth resulted from increases in NOW, money fund deposit, and savings account product balances, while time deposits decreased by $3.5 million during this time period.  The deposit growth was used to reduce short-term borrowings, which decreased $10.3 million between March 31, 2011 and December 31, 2010.
 
Liquidity
LCNB depends on dividends from its subsidiaries for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders.  National banking law limits the amount of dividends the Bank may pay to the sum of retained net income, as defined, for the current year plus retained net income for the previous two years.  Prior approval from the Office of the Comptroller of the Currency, the Bank’s primary regulator, is necessary for the Bank to pay dividends in excess of this amount.  In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval.
 
Liquidity is the ability to have funds available at all times to meet the commitments of LCNB.  Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash and cash equivalents, interest-bearing deposits in other banks, and securities available for sale.  At March 31, 2011, LCNB’s liquid assets amounted to $243.7 million or 31.8% of total assets, a slight decrease from $246.9 million or 32.5% of total assets at December 31, 2010.
 
Liquidity is also provided by access to core funding sources, primarily core deposits in the bank’s market area.  Approximately 80.3% of total deposits at March 31, 2011 were core deposits, compared to 81.8% of deposits at December 31, 2010.  Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit equal to or greater than $100,000.
 
Secondary sources of liquidity include LCNB’s ability to sell loan participations, borrow funds from the Federal Home Loan Bank, purchase federal funds, issue repurchase agreements, or use a line of credit established with another bank.
 
Management closely monitors the level of liquid assets available to meet ongoing funding needs.  It is management’s intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost.  LCNB experienced no liquidity or operational problems as a result of the current liquidity levels.
 
 
-38-

 
LCNB CORP. AND SUBSIDIARIES
 
 
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.
 
The Bank’s Asset and Liability Management Committee (“ALCO”) primarily uses a combination of Interest Rate Sensitivity Analysis (“IRSA”) and Economic Value of Equity (“EVE”) analysis for measuring and managing interest rate risk.  IRSA is used to estimate the effect on net interest income during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, and 300 basis points.  Management considers the results of the down-200 and 300 basis points scenarios to not be meaningful in the current interest rate environment.  The base projection uses a current interest rate scenario.  As shown below, the March 31, 2011 IRSA indicates that an increase in interest rates would have a positive effect on net interest income (“NII”), and a decrease in rates would have a negative effect on NII. The changes in NII for all rate assumptions are within LCNB’s acceptable ranges.
 
Rate Shock Scenario in
Basis Points
   Amount     $ Change in
NII
    % Change in
 NII
 
    (Dollars in thousands)  
Up 300
  $ 26,373       747       2.92 %
Up 200
    26,095       469       1.83 %
Up 100
    25,809       183       0.71 %
Base
    25,626             %
Down 100
    25,514       (112 )     -0.44 %
 
IRSA shows the effect on NII during a one-year period only.  A long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks.  The EVE analysis at March 31, 2011 is shown below.  It shows a negative effect on the EVE for increases in interest rates and a positive effect for decreases in interest rates.  The changes in EVE are within LCNB’s acceptable ranges.
 
Rate Shock Scenario in
Basis Points
  Amount     $ Change in
 EVE
    % Change in
EVE 
 
    (Dollars in thousands)  
Up 300
  $ 70,125       (18,389 )     -20.78 %
Up 200
    75,807       (12,707 )     -14.36 %
Up 100
    81,859       (6,655 )     -7.52 %
Base
    88,514             %
Down 100
    95,059       6,545       7.39 %
 
 
-39-

 
LCNB CORP. AND SUBSIDIARIES
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risks (continued)
 
The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results.  Assumptions used, including the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future net interest income or equity.  Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.
 
 
a)  Disclosure controls and procedures.  The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB’s 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 within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Based upon this evaluation, these officers have concluded, that as of March 31, 2011, LCNB’s disclosure controls and procedures were effective.
 
b)  Changes in internal control over financial reporting.  During the period covered by this report, there were no changes in LCNB’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB’s internal control over financial reporting.
 
 
Not applicable; the registrant is an accelerated filer.
 
 
-40-

 
LCNB CORP. AND SUBSIDIARIES
 
 
 
Not Applicable
 
 
No material changes
 
 
During the period of this report, LCNB did not sell any of its securities that were not registered under the Securities Act.
 
During the period covered by this report, LCNB did not purchase any shares of its equity securities.
 
 
Not Applicable
 
 
 
Not Applicable
 
 
-41-

 
LCNB CORP. AND SUBSIDIARIES
 
 
Exhibit No.
 
Exhibit Description
 
3.1
 
Amended and Restated Articles of Incorporation of LCNB Corp., as amended – incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, Exhibit 3.1.
       
 
3.2
 
Code of Regulations of LCNB Corp. – incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).
       
 
4.1
 
Warrant to Purchase Shares of Common Stock of the Registrant, dated January 9, 2009 – incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 9, 2009, Exhibit 4.1.
       
 
4.2
 
Letter Agreement, dated as of January 9, 2009 between the Registrant and the U.S. Department of the Treasury, which includes the Securities Purchase Agreement – Standard Terms – incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 9, 2009, Exhibit 10.1.
       
 
4.3
 
Substitute Warrant to Purchase Shares of Common Stock of the Registrant, dated January 9, 2009 - incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, Exhibit 4.3.
       
 
4.4
 
Repurchase Letter Agreement, dated as of October 21, 2009 between the Registrant and the U.S. Department of the Treasury – incorporated by reference to the Registrant’s Current Report on Form 8-K filed on October 21, 2009, Exhibit 10.1.
       
   
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
       
   
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
       
   
Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
-42-

 
 
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.   
       
May 2, 2011
 
/s/ Stephen P. Wilson  
    Stephen P. Wilson, CEO &  
    Chairman of the Board of Directors  
 
May 2, 2011
 
/s/ Robert C. Haines, II  
    Robert C. Haines, II, Executive Vice President  
    and Chief Financial Officer  
 
-43-

EX-31.1 2 ex31_1.htm EXHIBIT 31.1 ex31_1.htm

Exhibit 31.1
 
CERTIFICATIONS
 
In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the period ending March 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen P. Wilson, Chief Executive Officer and Chairman of the Board of Directors of LCNB Corp., certify that:
 
 
1)
I have reviewed this quarterly report on Form 10-Q of LCNB Corp.;
 
 
2)
Based on my knowledge, this 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 report;
 
 
3)
Based on my knowledge, the financial statements, and other financial information included in this 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 report;
 
 
4)
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
5)
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/s/ Stephen P. Wilson
 
Stephen P. Wilson
Chief Executive Officer and Chairman of the Board of Directors
May 2, 2011
 
 
 

EX-31.2 3 ex31_2.htm EXHIBIT 31.2 ex31_2.htm

Exhibit 31.2
 
CERTIFICATIONS
 
In connection with the Quarterly Report of LCNB Corp. on Form 10-Q for the period ending March 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert C. Haines, II, Executive Vice President and Chief Financial Officer of LCNB Corp., certify that:
 
 
1)
I have reviewed this quarterly report on Form 10-Q of LCNB Corp.;
 
 
2)
Based on my knowledge, this 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 report;
 
 
3)
Based on my knowledge, the financial statements, and other financial information included in this 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 report;
 
 
4)
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
5)
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
/s/ Robert C. Haines, II
 
Robert C. Haines, II
 
Executive Vice President and Chief Financial Officer
May 2, 2011
 
 
 

EX-32 4 ex32.htm EXHIBIT 32 Unassociated Document

Exhibit 32
 
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 Quarterly Report of LCNB Corp. (the "Company") on Form 10-Q for the period ending March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Stephen P. Wilson, Chief Executive Officer and Chairman of the Board of Directors, and Robert C. Haines, II, Executive Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §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/ Robert C. Haines, II
Stephen P. Wilson
Chief Executive Officer and
Chairman of the Board of Directors
 
Robert C. Haines, II
Executive Vice President and Chief Financial Officer
 
Date:  May 2, 2011
 
-48-