Item 1. Business
FORWARD LOOKING STATEMENTS
Certain matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties, including regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, and other risks. Actual strategies and results in future time periods may differ materially from those currently expected. Such forward- looking statements represent management's judgment as of the current date. LCNB Corp. disclaims, however, any intent or obligation to update such forward-looking statements.
DESCRIPTION OF LCNB CORP.'S BUSINESS
General Description
LCNB Corp. ("LCNB"), an Ohio corporation formed in December, 1998, is a financial holding company headquartered in Lebanon, Ohio. Through its subsidiaries, Lebanon Citizens National Bank ("Lebanon Citizens") and Dakin Insurance Agency, Inc. ("Dakin"), LCNB is engaged in the commercial banking and insurance agency businesses.
The predecessor of LCNB, Lebanon Citizens, was formed as a national banking association in 1877. On May 19, 1999, Lebanon Citizens became a wholly owned subsidiary of LCNB. Lebanon Citizens' main office is located in Warren County, Ohio and 17 branch offices are located in Warren, Butler, Clinton, Clermont, and Hamilton Counties, Ohio. In addition, Lebanon Citizens operates 29 automated teller machines ("ATMs") in its market area.
Lebanon Citizens is a full service community bank offering a wide range of commercial and personal banking services. Deposit services include checking accounts, NOW accounts, savings accounts, Christmas and vacation savings, money market deposit accounts, Classic 50 accounts (a Senior Citizen program), individual retirement accounts, and certificates of deposit. Deposits of Lebanon Citizens are insured up to applicable limits by the Bank Insurance Fund, which is administered by the Federal Deposit Insurance Corporation.
Loan products offered include commercial loans, commercial and residential real estate loans, construction loans, various types of consumer loans, Small Business Administration loans, Visa and MasterCard credit cards, and commercial leases. Lebanon Citizens' residential mortgage lending activities consist primarily of loans for purchasing or refinancing personal residences, home equity lines of credit, and loans for commercial or consumer purposes secured by residential mortgages. Consumer lending activities include automobile, boat, home improvement and personal loans. Lebanon Citizens also offers indirect automobile financing through various automotive dealers.
The Trust and Investment Management Division of Lebanon Citizens performs complete trust administrative functions and offers agency and trust services, retirement savings products, and mutual fund investment products to individuals, partnerships, corporations, institutions and municipalities.
Security brokerage services were first offered by Lebanon Citizens in April, 2002 through arrangements with UVEST Investment Services, Inc., a registered broker/dealer. A licensed broker offers a full range of investment services and products, including financial needs analysis, mutual funds, securities trading, annuities, and life insurance.
Other services offered include safe deposit boxes, night depositories, U.S. savings bonds, travelers' checks, money orders, cashier's checks, bank-by- mail, ATMs, cash and transaction services, debit cards, wire transfers, electronic funds transfer, utility bill collections, notary public service, personal computer based cash management services, 24 hour telephone banking, PC Internet banking, and other services tailored for both individuals and businesses.
Lebanon Citizens is not dependent upon any one significant customer or specific industry. Business is not seasonal to any material degree.
The address of the main office of Lebanon Citizens is 2 North Broadway, Lebanon, Ohio 45036; telephone (513) 932-1414. Its primary market area encompasses all of Butler and Warren Counties and portions of Clinton, Clermont and Hamilton Counties.
Dakin, an Ohio corporation, has been an independent insurance agency in Lebanon, Ohio since 1876. Its primary office is at 24 East Mulberry Street, Lebanon, Ohio 45036; telephone (513) 932-4010. Since being acquired by LCNB on April 11, 2000, Dakin has opened additional offices in Lebanon Citizens' Columbus Avenue, Waynesville, Springboro, Maineville, Goshen, and Wilmington offices. Dakin is engaged in selling and servicing personal and commercial insurance products and annuity products and is regulated by the Ohio Department of Insurance.
Effective September 1, 2002, Dakin purchased substantially all of the insurance renewal rights and client list of an insurance agency located in Dayton, Ohio. As part of the purchase, Dakin will receive all commission income received after September 1, 2002, and assignments of agency agreements that the agency has with insurers with whom Dakin does not already have an agreement. In consideration for the assets purchased, Dakin will pay to the seller certain percentages of the commissions received from the agency's customer base over a four-year period.
Competition
Lebanon Citizens faces strong competition both in making loans and attracting deposits. The deregulation of the banking industry and the wide spread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking has created a highly competitive environment for financial services providers. Lebanon Citizens competes with other national and state banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries operating in its market and elsewhere, many of whom have substantially larger financial and managerial resources.
Lebanon Citizens seeks to minimize the competitive effect of other financial corporations through a community banking approach that emphasizes direct customer access to Lebanon Citizens' president and other officers in an environment conducive to friendly, informed, and courteous personal services. Management believes that Lebanon Citizens is well positioned to compete successfully in its primary market area. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of the banking facilities, and, in the case of loans to commercial borrowers, relative lending limits.
Management believes the commitment of Lebanon Citizens to personal service, innovation, and involvement in the communities and primary market areas it serves, as well as its commitment to quality community banking service, are factors that contribute to its competitive advantage.
Dakin competes with numerous other independent and exclusive insurance agencies (an exclusive agent sells for only one insurance company) and with insurance companies that sell direct to individuals and businesses without using agents. Dakin competes by representing high quality insurance companies, providing personalized and responsive service to its clients, and providing convenient office locations.
Supervision and Regulation
The Sarbanes-Oxley Act of 2002 ("SOA") was signed into law by President George W. Bush on July 30, 2002. The purpose of SOA is to strengthen accounting oversight and corporate accountability by enhancing disclosure requirements, increasing accounting and auditor regulation, creating new federal crimes, and increasing penalties for existing federal crimes. SOA directly impacts publicly traded companies, certified public accounting firms auditing public companies, attorneys who work for public companies or have public companies as clients, brokerage firms, investment bankers, and financial analysts who work for brokerage firms or investment bankers. Key provisions affecting LCNB include:
1. Certification of financial reports by chief executive officers ("CEOs") and chief financial officers ("CFOs"), who are responsible for designing and monitoring internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to the certifying officers by others within the company;
2. Inclusion of an internal controls report in annual reports that include management's assessment of the effectiveness of a company's internal controls over financial reporting and a report by the company's auditors attesting to management's assessment of internal controls;
3. Accelerated reporting of stock trades on Form 4 by directors and executive officers;
4. Disgorgement requirements of incentive pay or stock-based compensation profits received within twelve months of the release of financial statements if the company is later required to restate those financial statements due to material noncompliance with any financial reporting requirement that resulted from misconduct;
5. Disclosure in a company's periodic reports if it has adopted a code of ethics for its CFO and principal accounting officer or controller and immediate disclosure of any change in or waiver of this code of ethics;
6. Disclosure in a company's periodic reports if at least one member of the audit committee is a "financial expert," as that term is defined by the Securities and Exchange Commission ("SEC"); and
7. Implementation of new duties and responsibilities for a company's audit committee, including independence requirements, the direct responsibility to appoint the outside auditing firm and to provide oversight of the auditing firm's work, and a requirement to establish procedures for the receipt, retention, and treatment of complaints from a company's employees regarding questionable accounting, internal control, or auditing matters.
Some SOA provisions became effective upon enactment; others have delayed implementation or must await rulemaking by the SEC. In addition, the SEC adopted final rules on September 5, 2002, requiring accelerated filing of quarterly and annual reports by a newly defined class of "accelerated filers." After an initial three-year phase-in period, accelerated filers will be required to file their annual reports on Form 10-K no later than 60 days after fiscal year end and their quarterly reports on Form 10-Q no later than 35 days after fiscal quarter ends. LCNB meets the requirements for accelerated filing.
LCNB and Lebanon Citizens are subject to an extensive array of banking laws and regulations that are intended primarily for the protection of the customers and depositors of LCNB's subsidiaries rather than holders of LCNB's securities. These laws and regulations govern such areas as permissible activities, loans and investments, and rates of interest that can be charged on loans and reserves. LCNB and Lebanon Citizens also are subject to general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio. Set forth below are brief descriptions of selected laws and regulations applicable to LCNB and Lebanon Citizens.
LCNB, as a financial holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the "Act"), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Act requires the prior approval of the Federal Reserve Board for a bank or financial holding company to acquire or hold more than a 5% voting interest in any bank and restricts interstate banking activities.
On September 29, 1994, the Act was amended by the Interstate Banking and Branch Efficiency Act of 1994, which authorizes interstate bank acquisitions anywhere in the country, effective one year after the date of enactment, and interstate branching by acquisition and consolidation, effective June 1, 1997, in those states that have not opted out by that date.
The Gramm-Leach-Bliley Act, which amended the Bank Holding Company Act of 1956 and other banking related laws, was signed into law on November 12, 1999. The Gramm-Leach-Bliley Act repealed certain sections of the Glass- Steagall Act and substantially eliminated the barriers separating the banking, insurance, and securities industries. Effective March 11, 2000, qualifying bank holding companies could elect to become financial holding companies. Financial holding companies have expanded investment powers, including affiliating with securities and insurance firms and engaging in other activities that are "financial in nature or incidental to such financial activity" or "complementary to a financial activity." The Gramm- Leach-Bliley Act defines "financial in nature" to include:
a. securities underwriting, dealing, and market making; b. sponsoring mutual funds and investment companies; c. insurance underwriting and agency; d. merchant banking activities; and e. other activities that the Federal Reserve Board, in consultation with and subject to the approval of the Treasury Department, determines are financial in nature.
Financial holding companies may commence the activities listed above or acquire a company engaged in any of those activities without additional approval from the Federal Reserve. Notice of the commencement or acquisition must be provided the Federal Reserve within thirty days of the start of the activity. Sixty days advance notice is required before the start of any activity that is "complementary to a financial activity."
The Financial Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides that a holding company and its controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of any FDIC assisted transaction involving an affiliated insured bank or savings association.
Lebanon Citizens is subject to the provisions of the National Bank Act. Lebanon Citizens is subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency ("OCC"). Lebanon Citizens is also subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation ("FDIC"). Under the Bank Holding Company Act of 1956, as amended, and under Regulations of the Federal Reserve Board pursuant thereto, a bank or financial holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") Substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and several other federal banking statutes. Among its many reforms, FDICIA:
1. Required regulatory agencies to take "prompt corrective action" with financial institutions that do not meet minimum capital requirements;
2. Established five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized;
3. Imposed significant restrictions on the operations of a financial institution that is not rated well-capitalized or adequately capitalized;
4. Prohibited a depository institution from making any capital distributions, including payments of dividends, or paying any management fee to its holding company if the institution would be undercapitalized as a result;
5. Implemented a risk-based premium system;
6. Required an audit committee to be comprised of independent, outside directors;
7. Required a financial institution with more than $500 million in total assets to issue annual, audited financial statements prepared in conformity with U.S. generally accepted accounting principles; and
8. Required a financial institution with more than $500 million in total assets to document, evaluate, and report on the effectiveness of the entity's internal control system and required an independent public accountant to attest to management's assertions concerning the bank's internal control system.
At December 31, 2003, Lebanon Citizens was well capitalized based on FDICIA's guidelines.
LCNB and Lebanon Citizens are also subject to the state banking laws of Ohio. Ohio adopted nationwide reciprocal interstate banking effective October, 1988. However, banking laws of other states may restrict branching of banks to other counties within the state and acquisitions or mergers involving banks and bank holding companies located in other states. Additionally, Dakin Insurance Agency, Inc. is subject to State of Ohio insurance regulations and rules and its activities are regulated by The State of Ohio Department of Insurance.
Noncompliance with laws and regulations by bank holding companies and banks can lead to monetary penalties and/or an increased level of supervision or a combination of these two items. Management is not aware of any current instances of noncompliance with laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis. Recent
regulatory inspections and examinations of LCNB and Lebanon Citizens have not disclosed any significant instances of noncompliance. The minor instances of noncompliance detected during these inspections and examinations were promptly corrected by Management and no action was taken by regulators against LCNB or Lebanon Citizens.
The earnings and growth of LCNB are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board. Its policies influence the amount of bank loans and deposits and the interest rates charged and paid thereon and thus have an effect on earnings. The nature of future monetary policies and the effect of such policies on the future business and earnings of LCNB and Lebanon Citizens cannot be predicted.
A substantial portion of LCNB's cash revenues is derived from dividends paid by Lebanon Citizens. These dividends are subject to various legal and regulatory restrictions. Generally, dividends are limited to the aggregate of current year net income plus the retained net earnings, as defined, of the two most previous prior years. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.
Employees
As of December 31, 2003, LCNB, Lebanon Citizens, and Dakin employed 217 full- time equivalent employees. LCNB is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be very good. Employee benefits programs are considered by Management to be competitive with benefits programs provided by other financial institutions and major employers within Lebanon Citizens' market area.
Availability of Financial Information
LCNB files unaudited quarterly financial reports on Form 10-Q, annual financial reports on Form 10-K, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15 (d) of the Securities Exchange Act of 1934 with the Securities and Exchange Commission ("SEC"). Copies of these reports are available free of charge in the shareholder information section of Lebanon Citizens' web site, www.lcnb.com, as soon as reasonably practicable after they are electronically filed or furnished to the SEC or by writing to:
Steve P. Foster Executive Vice President, CFO LCNB Corp. 2 N. Broadway P.O. Box 59 Lebanon, Ohio 45036
Financial reports and other materials filed by LCNB with the SEC may also be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained from the SEC by calling 1-800-SEC-0330. The SEC also maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding registrants that file reports electronically, as LCNB does.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
LCNB and its subsidiaries do not have any offices located in foreign countries and have no foreign assets, liabilities or related income and expense for the years presented.
STATISTICAL INFORMATION
The following tables and certain tables appearing in Item 7, Management's Discussion and Analysis, present additional statistical information about LCNB Corp. and its operations and financial condition. They should be read in conjunction with the consolidated financial statements and related notes and the discussion included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
The table presenting an average balance sheet, interest income and expense, and the resultant average yield for average interest-earning assets and average interest-bearing liabilities is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
The table analyzing changes in interest income and expense by volume and rate is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Investment Portfolio
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any one issuer that exceeded 10% of LCNB's consolidated shareholders' equity at December 31, 2003.
Loan Portfolio
As of December 31, 2003, there were no concentrations of loans exceeding 10% of total loans that are not already disclosed as a category of loans in the above table.
Risk Elements
The accrual of interest on impaired loans is discontinued when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Generally, loans are placed on non-accrual status at ninety days past due, unless the loan is well-secured and in the process of collection. Subsequent cash receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded once principal recovery is reasonably assured. The current year's accrued interest on loans placed on non-accrual status is charged against earnings. Previous years' accrued interest is charged against the allowance for loan losses.
Approximately $2,030,000 of the increase at December 31, 2003 was due to related commercial loans secured by a combination of mortgage and other liens. These loans are considered well-secured and in the process of collection. After receipt of specified payments in accordance with a negotiated agreement, Lebanon Citizens will re-write the remaining balance of the loans. The increase at December 31, 2002 was due to installment loans and residential mortgage loans. There were no commercial loans in the "accruing loans past due 90 days or more" category at December 31, 2002 or 2001.
Nonaccrual loans at December 31, 2003 totaled $794,000, which included a commercial loan in the amount of $564,000 and a consumer loan in the amount of $146,000. There were no nonaccrual loans at December 31 for each of the years ended 1999 through 2002. Interest income that would have been recorded during 2003 if loans on a nonaccrual status at December 31, 2003 had been current and in accordance with their original terms was approximately $72,000. Interest income that would have been recorded in each of the years 1999 through 2002 for loans on nonaccrual status was not material. There were no restructured loans at December 31, 1999 through 2003. For each of the years ended December 31, 1999 through 2002, the recorded investments in loans for which impairment has been recognized in accordance with SFAS Statement No. 114 was not material. Loans that were considered to be impaired in accordance with SFAS No. 114 totaled $2,824,000 at December 31, 2003, of which $2,740,000 had a related allowance for loan losses of $674,000 and $84,000 did not have a related allowance for loan losses. The average balance of these impaired loans during 2003 was $2,857,000. During 2003, the Company accrued interest income totaling $183,000 on impaired loans classified as past due 90 days or more and still accruing because they are considered well-secured and in the process of collection.
LCNB is not committed to lend additional funds to debtors whose loans have been modified to provide a reduction or deferral of principal or interest because of deterioration in the financial position of the borrower.
At December 31, 2003, there were no material additional loans not already disclosed as nonaccrual, restructured, or accruing loans past due 90 days or more where known information about possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms.
Summary of Loan Loss Experience
Deposits
The statistical information regarding average amounts and average rates paid for the deposit categories is included in the "Distribution of Assets, Liabilities and Shareholders' Equity" table included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Return of Equity and Assets
The statistical information regarding the return on assets, return on equity, dividend payout ratio, and equity to assets ratio is presented in Item 6, Selected Financial Data.
Item 2.
Item 2. Properties
Dakin owns its main office at 20 & 24 East Mulberry Street, Lebanon, Ohio 45036. Excess space in this office is leased to third parties. Dakin's six other offices are located in Lebanon Citizens' branch offices.
Item 3.
Item 3. Legal Proceedings
Except for routine litigation incident to their businesses, LCNB and its subsidiaries are not a party to any material pending legal proceedings and none of their property is the subject of any such proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
LCNB had approximately 630 registered holders of its Common Stock as of December 31, 2003. The number of shareholders includes banks and brokers who act as nominees, each of whom may represent more than one shareholder. The Common Stock is currently traded on the Nasdaq Over-The-Counter Bulletin Board service under the symbol "LCNB". Several market-makers facilitate the trading of the shares of Common Stock. Trade prices for shares of LCNB Common Stock, reported through registered securities dealers, are set forth below. Trades have occurred during the periods indicated without the knowledge of LCNB. The trade prices shown below are interdealer without retail markups, markdowns or commissions.
The following table presents cash dividends per share declared and paid in the periods shown:
It is expected that LCNB will continue to pay dividends on a similar schedule, to the extent permitted by business and other factors beyond management's control. 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 net income retained for the previous two years. Prior approval from the Office of the Comptroller of the Currency, the Bank's primary regulator, would be 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.
Item 6.
Item 6. Selected Financial Data
The following represents selected consolidated financial data of LCNB for the years ended December 31, 1999 through 2003 and are derived from LCNB Corp's consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 8 of this Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk included in Items 7 and 7A, respectively, of this Form 10-K, and are qualified in their entirety thereby and by other detailed information elsewhere in this Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following is management's discussion and analysis of financial condition and results of operations of the financial condition and results of operations of LCNB Corp. ("LCNB"). It is intended to amplify certain financial information regarding LCNB and should be read in conjunction with the Consolidated Financial Statements and related Notes and the Financial Highlights contained in the 2003 Annual Report to Shareholders.
Forward Looking Statements
Certain matters disclosed herein may be deemed to be forward-looking statements that involve risks and uncertainties, including regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, and other risks. Actual strategies and results in future time periods may differ materially from those currently expected. Such forward- looking statements represent management's judgment as of the current date. LCNB disclaims, however, any intent or obligation to update such forward- looking statements.
Net Income
LCNB earned $6,737,000 in 2003 compared to $6,540,000 in 2002. Basic and diluted earnings per share were $3.94, a 3.96% or $0.15 per share increase from 2002. Performance ratios for 2003 included a return on average assets of 1.31% and a return on average equity of 12.64% compared to ratios of 1.32% and 13.00%, respectively, for 2002.
LCNB earned $6,540,000 in 2002 compared to $6,067,000 in 2001. Earnings per share were $3.79, a 10.50% or $0.36 per share increase from 2001. Performance ratios for 2002 included a return on average assets of 1.32% and a return on average equity of 13.00% compared to ratios of 1.30% and 12.50%, respectively, for 2001.
Net Interest Income
The amount of net interest income earned by LCNB is influenced by the dollar amount ("volume") and mix of interest earning assets and interest bearing liabilities and the rates earned or paid on each. The following table presents, for the years indicated, the distribution of average assets, liabilities and shareholders' equity, as well as the total dollar amounts of interest income from average interest earning assets and the resultant yields on a fully taxable equivalent basis, and the dollar amounts of interest expense and average interest-bearing liabilities and the resultant rates paid.
The following table presents the changes in interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the years indicated. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
2003 vs. 2002. Tax equivalent interest income decreased $2,597,000 primarily due to an 81 basis point (a basis point equals 0.01%) decline in the average rate earned on average interest-earning assets, partially offset by a $19.3 million increase in average interest-earning assets. The increase in average interest-earning assets was due to increases in the investment securities portfolio, which grew $31.5 million on an average basis. The average rate earned decreased primarily because of continued general market wide decreases in interest rates.
Interest expense decreased $1,990,000 because of a 57 basis point decrease in the average rate paid for deposits and borrowings, partially offset by a $9.9 million increase in average interest-bearing liabilities. The decrease in average rates paid was also due to the general decline in market rates discussed above. The increase in average interest-bearing liabilities was in average savings deposits, which increased $11.1 million, and in average NOW and money fund deposits, which increased $10.7 million. IRA and time certificates decreased $8.0 million and long term borrowings decreased $3.6 million. Management believes that, due to the current declining rate economic environment, investors are showing a preference for highly liquid, short-term instruments. This means much of the growth in savings deposits during the past several years could be quickly withdrawn if interest rates increase. Management is attempting to lock-in a portion of these funds by offering special rates and terms on selected certificate of deposit products.
Average long-term borrowings decreased primarily due to the early payoff in August, 2002 of $4.0 million in Federal Home Loan Bank ("FHLB") notes with an average interest rate of 7.72%, which otherwise would have been due in June, 2004 and June, 2005. The prepayment fees on the early payoffs totaled approximately $425,000, which is included in other non-interest expenses in the 2002 consolidated statements of income.
To negate the financial impact of the prepayment fees, LCNB sold $17.7 million of U.S. Agency securities bearing an average coupon rate of 5.24% during August, 2002 and recorded a gain of $408,000 from the sales. At approximately the same time as the sales, LCNB purchased securities totaling $19.9 million and bearing an average tax-equivalent coupon rate (some of the securities purchased were tax-exempt municipals) of 4.94%.
The transactions described were consummated to minimize the anticipated decline in net interest margin. Another $2.0 million FHLB note with an average interest rate of 3.61% matured in December, 2003.
The net interest margin decreased from 4.39% during 2002 to 4.09% during 2003 because of the 81 basis point decrease in average rates earned from interest- earning assets, partially offset by the 57 basis point decrease in average rates for interest bearing liabilities.
2002 vs. 2001. Tax equivalent interest income decreased $1,827,000 due to an 88 basis point decline in the average rate earned on average interest-earning assets, partially offset by a $30.3 million increase in average interest- earning assets. The increase in average interest-earning assets was due to increases in the investment securities portfolio, which grew $32.7 million on an average basis. The average rate earned decreased primarily because of a general market wide decrease in interest rates. During 2001 the Federal Reserve Board decreased the intended federal funds rate by a dramatic 475 basis points and by an additional 50 basis points in November, 2002.
Interest expense decreased $3,670,000 because of a 119 basis point decrease in the average rate paid for deposits and borrowings, partially offset by a $23.2 million increase in average interest-bearing liabilities. The decrease in average rates paid was also due to the general decline in market rates discussed above. Much of the increase in average interest-bearing liabilities was in average savings deposits, which increased $12.3 million. Average NOW and money fund deposits increased $3.4 million and IRA and time certificates increased $5.9 million.
The net interest margin increased from 4.28% during 2001 to 4.39% during 2002 because of the 119 basis point decrease in average rates for interest bearing liabilities, partially offset by the 88 basis point decrease in average rates earned from interest-earning assets.
Provisions and Allowance for Loan Losses
The provision for loan losses is determined by Management based upon it's evaluation of the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the estimated risk of losses inherent in the portfolio. In addition to historic charge-off percentages, factors taken into consideration to determine the adequacy of the allowance for loan losses include the nature, volume and consistency of the loan portfolio, overall portfolio quality, a review of specific problem loans, and current economic conditions that may affect borrowers ability to pay. The following table presents the total loan provision and the other changes in the allowance for loan losses for the years 1999 through 2003.
Non-Interest Income
2003 vs. 2002. Total non-interest income for 2003 was $1,174,000 or 20.88% more than for 2002. Trust income increased $163,000 due to an increase in the market value of assets under management, on which fees are based, and to fees received for brokerage services, a new service first offered in April, 2002. The market value of trust assets under management grew $46.2 million or 38.77% during 2003, partially due to increased market values and partially due to new clients. During the same period, brokerage accounts managed grew $10.0 million or 274.06%. Service charges and fees increased $605,000 primarily due to the introduction of a new overdraft protection program and to an increase in rates charged for non-sufficient fund checks.
Insurance agency income increased $300,000 primarily due to an increase in the volume of policies written and secondarily to an $83,000 increase in contingency commissions recognized. The increase in policies written was partially due to the purchase on September 1, 2002, of substantially all of the insurance renewal rights and client list of an insurance agency located in Dayton, Ohio. As part of the purchase, Dakin will receive all commission income received after September 1, 2002, and assignments of agency agreements that the agency has with insurers with whom Dakin does not already have an agreement. In consideration for the assets purchased, Dakin will pay to the seller certain percentages of the commissions received from the agency's customer base over a four-year period. Contingency commissions are profit- sharing arrangements on property and casualty policies between the originating agency and the underwriter and are generally based on underwriting results and written premium. As such, the amount received each year can vary significantly depending on loss experience.
Gains from sales of mortgage loans increased $523,000 due to increased activity in the real estate mortgage loan secondary market during 2003 as compared to 2002. Loans sold during 2003 total $35.1 million, compared with $20.9 million for 2002. The increased loan volume sold reflects increased refinancing activity caused by an historical low in market rates for fixed rate loans. Market rates for real estate mortgage loans began increasing during the fourth quarter, 2003 and management does not anticipate refinance activity will be as great in the foreseeable future as it was during 2002 and 2003. The dollar volume of mortgage loan sales are expected to decrease and, consequently, so will the gain recognized from sales.
Offsetting the increases described above was a $420,000 decrease in net gain on sales of securities. Most of the decrease relates to a $408,000 gain recognized in August, 2002 and more fully described in a previous section of this document titled "Net Interest Income, 2003 vs. 2002."
2002 vs. 2001. Total non-interest income for 2002 was $781,000 or 16.13% more than for 2001 largely due to the $408,000 gain on securities mentioned above. The remaining $373,000 increase was due to a $194,000 increase in service charges and fees and to smaller increases in the other line items. Service charges and fees increased primarily due to increased fee income from non-sufficient-fund ("NSF") checks and to increased check card interchange income.
Trust income increased due to fees received for brokerage services, a new service first offered in April, 2002. Insurance agency income increased primarily due to an increase in the volume of new policies written, partially offset by a $119,000 decline in contingency commissions.
Gains from sales of mortgage loans increased $168,000 during 2002 due to an increase in the volume of loans sold. Loans sold during 2002 totaled $20.9 million compared to sales of $13.4 million during 2001.
Non-Interest Expense
2003 vs. 2002. Total non-interest expense increased $20,000 or 0.13% during 2003 compared with 2002. Contributing to the increase were (a) a $277,000 or 4.24% increase in salaries and wages, (b) a $144,000 or 16.42% increase in equipment expenses, and (c) an $86,000 or 8.36% increase in occupancy expense. Offsetting the increases were a $120,000 or 29.13% decrease in ATM expense and a $417,000 or 11.51% decrease in other non- interest expenses.
Salaries and wages increased due to normal pay increases. Equipment expenses increased primarily due to rental costs for a new phone system installed during 2002 and to depreciation charges on new furniture purchased during 2003 and computer hardware and software purchased as part of the conversion to a new data processing system that occurred during September, 2002.
ATM expense decreased primarily due to a change in the ATM transaction processor. The decrease in other non-interest expenses was primarily due to the absence during 2003 of a $425,000 prepayment fee on Federal Home Loan Bank notes recognized during 2002 and previously discussed in the section titled "Net Interest Income, 2003 vs. 2002" and of a $263,000 charge for training and conversion expenses related to Lebanon Citizen's conversion to a new data processing system in September, 2002.
2002 vs. 2001. Total non-interest expense increased $1,783,000 or 12.81% during 2002 compared with 2001 largely due to a $569,000 or 9.54% increase in salaries and wages and a $793,000 or 28.02% increase in other non-interest expenses. Salaries and wages increased due to normal pay increases and the addition of several new employees. A small increase in the number of staff was necessary because of the opening of a full-service office in Hamilton, Ohio in September, 2001.
The increase in other non-interest expenses was primarily due to a $425,000 prepayment fee on Federal Home Loan Bank notes and to $263,000 in training and conversion expenses, both discussed above.
Pension and other employee benefits increased $125,000 or 7.93% due to increased health insurance costs, increased pension expense, and increased Social Security and Medicare matching as a result of increased salaries and wages. Equipment expenses increased $213,000 or 32.08% primarily due to rental costs for a new phone system and increased depreciation on furniture and equipment purchased for new and remodeled offices and the new computer hardware and software obtained for the data processing system conversion. ATM expense increased $63,000 primarily due to approximately $57,000 in costs associated with a change in the ATM processor.
Income Taxes
LCNB's effective tax rates for the years ended December 31, 2003, 2002, and 2001 were 26.54%, 27.84%, and 28.68%, respectively. The difference between the statutory rate of 34.00% and the effective tax rate is primarily due to tax-exempt interest income.
Assets
Total deposits grew $20.8 million during 2003, fueling a $16.9 million or 3.33% increase in total assets. During the same period, total loans decreased $7.0 million.
The decrease in loans during 2003 can be attributed to refinancing activity on residential mortgage loans because of the general decline in interest rates, combined with the sale to the Federal Home Loan Mortgage Corporation ("FHLMC") of a large majority of the fixed rate residential mortgage loans originated during 2003. Approximately $35.1 million of loans were sold to FHLMC during 2003, while $20.9 million were sold during 2002. LCNB continues to sell the loans after management determined in recent years that current, historically low market rates for residential mortgage loans were not profitable in the long run.
Since management was not able to invest deposit growth in loan growth during 2003, the funds were invested in the securities portfolio, which grew $14.8 million or 10.84% during 2003, and in federal funds sold, which increased $10.7 million or 89.73% during 2003. All of LCNB's investment securities are classified "available for sale" and can be readily sold if the funds are needed to support loan growth in the future.
Premises and equipment additions during 2003 totaled $1,394,000, largely offset by depreciation expense of $1,040,000.
Deposits
Total deposits of $463.0 million at December 31, 2003, were $20.8 million or 4.71% greater than total deposits at December 31, 2002. The growth was in the savings, money fund, checking, and NOW account categories, which increased $23.6 million during the year. Approximately $15.5 million of this increase was due to a new trust account that was obtained near year end. The funds were temporarily deposited in a liquid account at Lebanon Citizens until the trust department could invest them in other instruments. Time deposits decreased $2.8 million during 2003. Management believes this reflects investor preference for short-term, highly liquid investments during the current economic cycle.
Liquidity
Liquidity is the ability to have funds available at all times to meet the commitments of LCNB. These commitments may include paying dividends to shareholders, funding new loans for borrowers, funding withdrawals by depositors, paying general and administrative expenses, and funding capital expenditures. Sources of liquidity include growth in deposits, principal payments received on loans, proceeds from the sale of loans, the sale or maturation of investment securities, cash generated by operating activities, and the ability to borrow funds. Management closely monitors the level of liquid assets available to meet ongoing funding requirements. It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems during the past year as a result of current liquidity levels.
Commitments to extend credit at December 31, 2003, totaled $74.8 million and standby letters of credit totaled $6.8 million and are more fully described in Note 10 to LCNB's Financial Statements. Since many commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Capital expenditures include improvements made to LCNB's eighteen offices and it's information technology system. At year end, 2003, the Main Office's second and third floors were in the midst of a major renovation project and improvements made to the Waynesville office had just been completed. Costs outstanding or required to complete these two projects total an estimated $750,000. Information technology system improvements in process at year end will require about an additional $30,000 to complete. LCNB has no other material commitments for capital expenditures outstanding as of December 31, 2003.
The liquidity of LCNB is enhanced by the fact that 89.92% of total deposits at December 31, 2003, were "core" deposits. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000.
An additional source of funding is borrowings from the Federal Home Loan Bank ("FHLB"). Total borrowings from the FHLB at December 31, 2002 were $4.0 million. The total remaining borrowing capacity from the FHLB at that date was approximately $74 million.
Liquid assets include cash, federal funds sold and securities available for sale. Except for investments in the stock of the Federal Reserve Bank and FHLB, all of LCNB's investment portfolio is classified as "available-for- sale" and can be readily sold to meet liquidity needs. At December 31, 2003, LCNB's liquid assets amounted to $185.3 million or 35.40% of total gross assets, up from $161.8 million or 31.93% of total gross assets at December 31, 2002. The primary reason for the increase was growth in securities available for sale and growth in federal funds sold.
The following table provides information concerning LCNB's contractual obligations at December 31, 2003:
The following table provides information concerning LCNB's commercial commitments at December 31, 2003:
Capital Resources
LCNB and Lebanon Citizens are required by banking regulators to meet certain minimum levels of capital adequacy. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on LCNB's and Lebanon Citizens' financial statements. These minimum levels are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in Lebanon Citizens' assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.00% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital) to risk- weighted assets must be at least 8.00%. The capital leverage ratio supplements the risk-based capital guidelines. Banks are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.00%. A table summarizing the regulatory capital of LCNB and Lebanon Citizens at December 31, 2003 and 2002, is included in Note 13, "Regulatory Matters", of the 2003 Annual Report to Shareholders.
The FDIC, the insurer of deposits in financial institutions, has adopted a risk-based insurance premium system based in part on an institution's capital adequacy. Under this system, a depository institution is required to pay successively higher premiums depending on its capital levels and its supervisory rating by its primary regulator. It is management's intention to maintain sufficient capital to permit Lebanon Citizens to maintain a "well capitalized" designation (the FDIC's highest rating).
On April 17, 2001, LCNB's Board of Directors authorized three separate stock repurchase programs, two phases of which continue. The shares purchased will be held for future corporate purposes.
Under the "Market Repurchase Program" LCNB will purchase up to 50,000 shares of its stock through market transactions with a selected stockbroker. Through December 31, 2003, 16,077 shares had been purchased under this program.
The "Private Sale Repurchase Program" is available to shareholders who wish to sell large blocks of stock at one time. Because LCNB's stock is not widely traded, a shareholder releasing large blocks may not be able to readily sell all shares through normal procedures. Purchases of blocks will be considered on a case-by-case basis and will be made at prevailing market prices. A total of 72,222 shares had been purchased under this program at December 31, 2003.
LCNB established an Ownership Incentive Plan during 2002 that allows for stock-based awards to eligible employees. The awards may be in the form of stock options, share awards, and/or appreciation rights. The plan provides for the issuance of up to 50,000 shares. No awards were granted during 2002. Stock options for 2,764 shares were granted to key executive officers of LCNB during the first quarter, 2003.
The exercise price for stock options granted shall not be less than the fair market value of the stock on the date of grant. Options vest ratably over a five-year period and the maximum term for each grant will be specified by the Board of Directors, but cannot be greater than ten years from the date of grant. In the event of an optionee's death, incapacity, or retirement, all outstanding options held by that optionee shall immediately vest and be exercisable.
Critical Accounting Policies
Allowance for Loan Losses. The allowance for loan losses (the "allowance") is established through a provision for loan losses charged to expense. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. Management's evaluation of the adequacy of the allowance takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect borrowers' ability to repay, and prior loan loss experience.
Loans are considered impaired when management believes, based on current information and events, it is probable that LCNB will be unable to collect all amounts due according to the contractual terms of the loan agreement. Smaller- balance homogenous loans, including residential mortgage and consumer installment loans, are collectively evaluated for impairment. Larger-balance commercial loans are individually evaluated for impairment. Impaired loans are measured by calculating the present value of expected future cash flows using the loan's effective interest rate or, for collateral-dependent loans, at the fair value of the collateral. A specific allowance is maintained if the estimated value of the loan is less than the carrying amount of the loan.
Based on its evaluations, management believes that the allowance for loan losses will be able to absorb estimated losses inherent in the current loan portfolio.
Accounting for Intangibles. Approximately $2.4 million of LCNB's intangible assets at December 31, 2003, represent the unamortized intangible related to LCNB's 1997 acquisition of three branch offices from another bank. Management does not believe this acquisition meets the definition of a business combination, as described in SFAS No. 147, "Acquisitions of Certain Financial Institutions," and is amortizing the intangible over ten years, subject to periodic review for impairment in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets."
Another $321,000 of LCNB's intangible assets at December 31, 2003 are comprised of mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC"). The rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.
Recent Accounting Pronouncements
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", was issued in April, 2003. It amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". LCNB does not currently hold any security investments of the types covered by this SFAS and is therefore not affected by its provisions.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", was issued in May, 2003, and establishes new accounting standards for classification and measurement of certain financial instruments with characteristics of both assets and liabilities. Many of the instruments covered by the scope of SFAS No. 150 were previously classified as equity; SFAS No. 150 requires that they be classified as liabilities or, in certain circumstances, as assets. LCNB does not currently hold any security investments with such characteristics and SFAS No. 150 therefore has no effect on LCNB Corp.'s financial statements.
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits", was issued in December, 2003, and replaces the original SFAS No. 132. SFAS No. 132 (revised 2003) retains the disclosures required by the original SFAS No. 132 and requires additional disclosures describing types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. Such disclosures are reflected in Note 6 to these financial statements.
FASB Interpretation No. ("FIN") 46 (revised December 2003), "Consolidation of Variable Interest Entities", was issued in December, 2003 and replaces the original FASB Interpretation No. 46, which was issued in January, 2003. The original FIN 46 required a company to consolidate a variable interest entity, as defined, in its financial statements if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. The original FIN 46 also required disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The revised FIN 46 delayed the effective date of its provisions from January 31, 2003, as required in the original FIN 46, to December 31, 2003, subject to certain exceptions; expanded the list of transactions deemed not to be within the scope of the interpretation; and made other technical changes. LCNB is not the beneficiary of any variable interest entities and FIN 46 therefore has no effect on LCNB's financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk for LCNB is primarily interest rate risk. LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. LCNB does not use derivatives such as interest rate swaps, caps or floors to hedge this risk. LCNB has not entered into any market risk instruments for trading purposes. Lebanon Citizens' Asset and Liability Management Committee ("ALCO") primarily uses Interest Rate Sensitivity Gap Analysis, also known as repricing mismatch analysis, for measuring and managing interest rate risk.
Interest Rate Sensitivity Gap Analysis
A traditional gap analysis provides a point-in-time measurement of the relationship between the amounts of interest rate sensitive assets and liabilities in a given time period. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If liabilities mature or reprice more quickly or to a greater extent than assets, net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates. Conversely, if liabilities mature or reprice more slowly or to a lesser extent than assets, net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. ALCO strives to maintain a range for the relationship of rate sensitive assets to rate sensitive liabilities for gap analysis purposes of from 75 to 125 percent for the one-year and two- to four-year periods. Depending on the interest rate environment, other factors may cause actual results to be outside of this range.
The following table reflects LCNB's gap analysis at December 31, 2003. The amounts reported in the table are the principal cash flows of rate sensitive assets and liabilities by expected maturity or repricing timeframe. Also presented is the related weighted average interest rate. Fixed rate real estate mortgage loans and mortgage-backed securities are allocated to the various maturity/repricing periods based on contractual maturities adjusted for expected prepayments under the current market interest rate environment. Deposit liabilities without contractual maturities such as NOW and savings accounts are allocated to the various repricing periods based on an analysis of forecasted account run-off that takes into consideration the relatively stable nature of these core deposits. The gap analysis indicates that LCNB's earnings are sensitive to the repricing of assets in the first year and the second through the fourth years. The aggregate ratio of rate sensitive assets to rate sensitive liabilities is 114.07% for the first year and 161.63% for years two through four. With the current relatively low market interest rate environment, management believes the ratios for the one year and two to four year time frames do not expose LCNB's net interest income to significant risk.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data required by this item are incorporated herein by reference to pages 6 through 32 of the Registrants 2003 LCNB Corp. Annual Report attached to this filing as Exhibit 13.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures - None
Item 9A.
Item 9A. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer of LCNB have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2003. Based on that evaluation, LCNB's Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2003, LCNB's disclosure controls and procedures are effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e). There have been no significant changes (including corrective actions with regard to significant deficiencies and material weaknesses) in LCNB's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation.
PART III
Portions of the Proxy Statement included in the Notice of Annual Meeting of Shareholders to be held April 13, 2004, dated March 12, 2004, are incorporated by reference into Part III.
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 12, 2004), relating to "Directors and Executive Officers of the Registrant", is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 12, 2004), relating to "Compensation of Directors and Executive Officers", is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 12, 2004), relating to "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 12, 2004), relating to "Certain Relationships and Related Transactions", is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
The information contained in the Notice of Annual Meeting of Shareholders and Proxy Statement (dated March 12, 2004), relating to "Principal Accounting Fees and Services", is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on 8-K
(a)1. Financial Statements
INDEPENDENT AUDITOR'S REPORT FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
2. Financial Statement Schedules - None
3. Exhibits required by Item 601 Regulation S-K.
(a)Exhibit No. Exhibit Description ---------- ------------------- 3.1 Articles of Incorporation of LCNB Corp.(1) 3.2 Code of Regulations of LCNB Corp.(2) 10 Material Contracts: LCNB Corp. Ownership Incentive Plan (3) 11 Computation of Consolidated Earnings Per Common Share 13 Portions of LCNB Corp. 2003 Annual Report (pages 2-3 and 15-24) 14.1 LCNB Corp. Code of Business Conduct and Ethics 14.2 LCNB Corp. Code of Ethics for Senior Financial Officers 21 LCNB Corp. Subsidiaries 23 Consent of Independent Accountants 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32 Section 1350 Certifications
(1) Incorporated by reference to Registrant's 1999 Form 10-K, Exhibit 3.1. (2) Incorporated by reference to Registrant's Registration Statement on Form S-4, Exhibit 3.2, Registration No. 333-70913. (3) Incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A.
(b)Reports on Form 8-K
LCNB filed a report on Form 8-K on October 15, 2003 to announce earnings for the six months ended September 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LCNB Corp. (Registrant)
/s/Stephen P. Wilson ---------------------------- President and Chairman of the Board of Directors February 27, 2004
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
/s/Stephen P. Wilson /s/George L. Leasure - --------------------- --------------------- Stephen P. Wilson George L. Leasure President and Chairman Director (Principal Executive Officer) February 27, 2004 February 27, 2004
/s/Steve P. Foster /s/James B. Miller - --------------------- --------------------- Steve P. Foster James B. Miller Executive Vice President Director and Chief Financial Officer February 27, 2004 (Principal Financial and Accounting Officer) February 27, 2004
/s/David S. Beckett /s/Kathleen Porter Stolle - --------------------- --------------------- David S. Beckett Kathleen Porter Stolle Director Director February 27, 2004 February 27, 2004
/s/Robert C. Cropper /s/Howard E. Wilson - --------------------- --------------------- Robert C. Cropper Howard E. Wilson Director Director February 27, 2004 February 27, 2004
/s/William H. Kaufman /s/Marvin E. Young - --------------------- --------------------- William H. Kaufman Marvin E. Young Director Director February 27, 2004 				 February 27, 2004