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| LCNB.OB > SEC Filings for LCNB.OB > Form 10-Q on 3-Nov-2008 | All Recent SEC Filings |
3-Nov-2008
Quarterly Report
Operations
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.
Acquisition
At the close of business on December 20, 2007, LCNB acquired Sycamore National Bank ("Sycamore") in a stock and cash transaction valued at approximately $9.6 million. Sycamore operated two full-service branches in Cincinnati, Ohio, which became branches of the Bank. As of December 20, 2007, Sycamore had total deposits of $44.4 million and total assets of $48.9 million including total loans, net of the related allowance for loan losses, of $42.8 million.
Under the terms of the affiliation agreement, each share of Sycamore common stock was exchanged for, at the election of each shareholder, $33.75 in cash, 2.444 shares of LCNB common stock, or a combination of cash and shares. A Sycamore shareholder's election to receive cash or stock was subject to allocation procedures that ensured that, in the aggregate, 50% of the shares of Sycamore common stock were exchanged for cash and 50% were exchanged for stock.
The transaction, which was accounted for under the purchase accounting method,
included the recognition of approximately $343,000 of core deposit intangibles
and goodwill, as adjusted during the first half of 2008, of $5,695,000. The
goodwill represents the excess of the purchase price over the fair value of
identifiable net assets, including the core deposit intangible. The core
deposit intangible is being amortized on a straight-line basis over 6 years.
Goodwill is not amortized, but is instead subject to an annual review for
impairment. Sycamore's results of operations are included in the consolidated
financial results of LCNB from the acquisition date.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Results of Operations
LCNB earned $1,794,000 or $0.27 basic and diluted earnings per share for the three months ended September 30, 2008, compared to $1,370,000 or $0.22 basic and diluted earnings per share for the three months ended September 30, 2007. The return on average assets (ROAA) for the third quarter 2008 was 1.09% and the return on average equity (ROAE) was 12.27%, compared with an ROAA of 0.99% and an ROAE of 10.47% for the third quarter of 2007.
LCNB earned $4,936,000 or $0.74 basic and diluted earnings per share during the first nine months of 2008 compared to $4,365,000 or $0.69 basic and diluted earnings per share for the first nine months of 2007. The ROAA and ROAE for the first nine months of 2008 were 1.05% and 11.38%, respectively. The comparable ratios for the first nine months of 2007 were 1.07% and 11.28%, respectively.
The increase in net income for each of the three and nine month periods ended September 30, 2008 compared to 2007 was primarily attributed to an increase in net interest income and non-interest income, partially offset by an increase in non-interest expense. Net interest income during 2008 was significantly influenced by the loans and deposits acquired from Sycamore as well as the positive effect of declining market interest rates. Non-interest expenses during 2008 were influenced by the addition of the two offices acquired through the Sycamore acquisition and the opening of a new office in Oakwood, Ohio in May 2007.
While not immune from the effects of weakening economic conditions, LCNB's earnings reflect continued relatively strong asset quality resulting from responsible underwriting and lending practices. Consequently, net charge-offs for the first nine months of 2008 and 2007 totaled $322,000 and $157,000, respectively. Classified loans (non-accrual, past due 90 days or more and still accruing interest, and restructured loans) totaled $2,864,000 or 0.64% of total loans at September 30, 2008, compared to $2,589,000 or 0.58% of total loans at December 31, 2007. In addition, LCNB does not own any common or preferred stock in the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.
Net Interest Income
Three Months Ended September 30, 2008 vs. 2007.
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 September 30, 2008 and 2007, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Three Months Ended September 30,
2008 2007
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans (1) $ 443,602 $ 7,115 6.36% $ 395,202 $ 6,732 6.76%
Federal funds sold and 24,201 126 2.07% 14,096 176 4.95%
interest-
bearing demand deposits
Interest-bearing deposits 3,913 25 2.53% - - -%
in banks
Federal Reserve Bank 938 - -% 648 - -%
stock
Federal Home Loan Bank 2,063 28 5.38% 1,685 27 6.36%
stock
Investment securities:
Taxable 74,410 784 4.18% 47,491 533 4.45%
Non-taxable (2) 53,130 803 6.00% 44,917 685 6.05%
Total earnings assets 602,257 8,881 5.85% 504,039 8,153 6.42%
Non-earning assets 54,005 45,334
Allowance for loan losses (2,473) (2,055)
Total assets $ 653,789 $ 547,318
Interest-bearing deposits $ 501,341 3,220 2.55% $ 406,559 3,455 3.37%
Short-term borrowings 725 4 2.19% 980 11 4.45%
Long-term debt 5,000 66 5.24% 5,000 66 5.24%
Total interest-bearing 507,066 3,290 2.57% 412,539 3,532 3.40%
liabilities
Demand deposits 83,443 79,510
Other liabilities 5,312 3,367
Capital 57,968 51,902
Total liabilities and $ 653,789 $ 547,318
capital
Net interest rate spread 3.28% 3.02%
(3)
Net interest income and $ 5,591 3.68% $ 4,621 3.64%
net
interest margin on a
taxable-
equivalent basis (4)
Ratio of interest-earning 118.77% 122.18%
assets to
interest-bearing
liabilities
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Includes nonaccrual loans.
Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34%.
The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
The following table presents the changes in taxable-equivalent basis 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 September 30, 2008 as compared to the same period in 2007. 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
September 30, 2008 vs. 2007
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 792 (409) 383
Federal funds sold and interest-bearing
demand deposits 86 (136) (50)
Interest-bearing deposits in banks 25 - 25
Federal Home Loan Bank stock 6 (5) 1
Investment securities:
Taxable 285 (34) 251
Nontaxable 124 (6) 118
Total interest income 1,318 (590) 728
Interest-bearing Liabilities:
Deposits 709 (944) (235)
Short-term borrowings (2) (5) (7)
Total interest expense 707 (949) (242)
Net interest income $ 611 359 970
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Net interest income on a fully tax-equivalent basis for the three months ended September 30, 2008 totaled $5,591,000, an increase of $970,000 from the comparable period in 2007. Total interest income increased $728,000 and total interest expense decreased $242,000.
The increase in total interest income was due to a $98.2 million increase in average earning assets, partially offset by a 57 basis point (one basis point equals 0.01%) decrease in the average rate earned on earning assets. The increase in interest earning assets was primarily due to a $48.4 million increase in average loans, a $10.1 million increase in average federal funds sold and interest-bearing demand deposits, and a $35.1 million increase in average investment securities. Most of the loan growth was in commercial and residential real estate loans, primarily resulting from the Sycamore acquisition. The decrease in the average rate earned on earning assets was primarily due to general decreases in market interest rates.
The decrease in total interest expense was primarily due to an 83 basis point decrease in the average rate paid, partially offset by a $94.5 million increase in average interest-bearing liabilities. The decrease in the average rate paid on interest-bearing liabilities was primarily due to general decreases in market interest rates. The increase in average interest-bearing liabilities was due to average interest-bearing deposits, which increased $94.8 million due to deposits obtained through the Sycamore acquisition and through organic growth in deposits.
Nine Months Ended September 30, 2008 vs. 2007.
The following table presents, for the nine months ended September 30, 2008 and 2007, 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.
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Nine Months Ended September 30,
2008 2007
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans (1) $ 445,882 21,850 6.55% $ 392,038 $ 20,096 6.85%
Federal funds sold and interest- 24,248 428 2.36% 9,338 360 5.15%
bearing demand deposits
Interest-bearing deposits in banks 2,044 38 2.48% - - -%
Federal Reserve Bank stock 850 24 3.77% 648 19 3.92%
Federal Home Loan Bank stock 2,036 82 5.38% 1,901 92 6.47%
Investment securities:
Taxable 55,156 1,806 4.37% 51,468 1,719 4.47%
Non-taxable (2) 48,957 2,211 6.03% 47,216 2,147 6.08%
Total earnings assets 579,173 26,439 6.10% 502,609 24,433 6.50%
Non-earning assets 52,829 44,665
Allowance for loan losses (2,472) (2,056)
Total assets $ 629,530 $ 545,218
Interest-bearing deposits $ 478,511 9,996 2.79% $ 402,835 9,908 3.29%
Short-term borrowings 726 12 2.21% 4,263 172 5.39%
Long-term debt 5,000 197 5.26% 3,718 146 5.25%
Total interest-bearing liabilities 484,237 10,205 2.82% 410,816 10,226 3.33%
Demand deposits 82,472 79,510
Other liabilities 4,882 3,163
Capital 57,939 51,729
Total liabilities and capital $ 629,530 $ 545,218
Net interest rate spread (3) 3.28% 3.17%
Net interest income and net 16,234 3.74% $ 14,207 3.78%
interest margin on a taxable-
equivalent basis (4)
Ratio of interest-earning assets to 119.61% 122.34%
interest-bearing liabilities
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Includes nonaccrual loans.
Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34%.
The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.
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 taxable-equivalent basis 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 nine months ended September 30, 2008 as compared to the
same period in 2007.
Nine Months Ended
September 30, 2008 vs. 2007
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 2,668 (914) 1,754
Federal funds sold and interest-bearing
demand deposits 342 (274) 68
Interest-bearing deposits in banks 38 - 38
Federal Reserve Bank stock 6 (1) 5
Federal Home Loan Bank stock 6 (16) (10)
Investment securities:
Taxable 121 (34) 87
Nontaxable 79 (15) 64
Total interest income 3,260 (1,254) 2,006
Interest-bearing Liabilities:
Deposits 1,706 (1,618) 88
Short-term borrowings (93) (67) (160)
Long-term debt 51 - 51
Total interest expense 1,664 (1,685) (21)
Net interest income $ 1,596 431 2,027
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Net interest income on a fully tax-equivalent basis for the first nine months of 2008 totaled $16,234,000, a $2,027,000 increase from the first nine months of 2007. Total interest income increased $2,006,000 and total interest expense decreased $21,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
The increase in total interest income was primarily due to a $76.6 million increase in average total earning assets, partially offset by a 40 basis point decrease in the average rate earned on earning assets. The increase in average earning assets was primarily due to a $53.8 million increase in average loans and a $14.9 million increase in average federal funds sold and interest-bearing demand deposits. Most of the loan growth was in commercial and residential real estate loans, primarily resulting from the Sycamore acquisition. The decrease in the average rate earned on earning assets was primarily due to general decreases in market interest rates.
The decrease in total interest expense was due primarily to a 51 basis point decrease in the average rate paid on interest-bearing liabilities, largely offset by a $73.4 million increase in average interest-bearing liabilities. The increase in average interest-bearing liabilities was due to a $75.7 million increase in average interest-bearing deposits due to deposits obtained through the Sycamore acquisition and through organic growth.
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 September 30, 2008 and 2007 was $188,000 and $75,000, respectively, and $322,000 and $158,000 for the nine months ended September 30, 2008 and 2007, respectively. The provision increased in the 2008 periods because of an increase in impaired loans.
Non -Interest Income
Three Months Ended September 30, 2008 vs. 2007.
Non-interest income for the third quarter of 2008 was $86,000 greater than for
the same period in 2007. Service charges and fees increased approximately
$88,000, insurance agency income increased $29,000, and bank owned life
insurance income increased $17,000. These increases were partially offset by a
$29,000 decrease in trust income and a $19,000 decrease in other operating
income. Service charges and fees increased primarily due to increases in
checkcard income and overdraft fees. Checkcard income grew because a greater
number of cards were outstanding, partially due to the Sycamore acquisition, and
because of the increasing popularity of checkcards as a retail payment method.
Overdraft fees increased primarily due to an increase in the number of checking
and NOW accounts outstanding, partially due to the Sycamore acquisition. Trust
income decreased partially due to a decrease in executor fees received during
the third quarter of 2008 as compared to the third quarter 2007 as well as a
general decrease in the fair market value of trust assets serviced, upon which
fees are based.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Nine Months Ended September 30, 2008 vs. 2007.
Non-interest income for the first nine months of 2008 was $210,000 greater than for the same period in 2007. Service charges and fees increased $162,000 primarily due to increases in checkcard income for substantially the same reasons discussed above. In addition, insurance agency income for the first nine months of 2008 was $53,000 greater than the comparable period in 2007 and bank owned life insurance income was $46,000 greater. Partially offsetting these increases was a $56,000 decrease in other operating income, largely due to a $34,000 decrease in gains from loans sold. The decrease in gains from loans sold was largely due to the decreased volume of loans sold, from $2,517,000 in 2007 to $814,000 in 2008. Also contributing to the decrease in other operating income was a $10,000 loss on the sale of real estate acquired through foreclosure recognized during the second quarter 2008.
Non-Interest Expense
Three Months Ended September 30, 2008 vs. 2007.
Total non-interest expense increased $300,000 during the third quarter 2008 as compared to the third quarter 2007 primarily due to a $232,000 increase in salaries and wages, a $65,000 increase in pension and other employee benefits, and a $137,000 increase in other non-interest expense. Salaries and wages and pension and other employee benefits increased primarily due to additional employees and routine salary and wage increases. Other non-interest expense increased primarily due to increases in computer costs, ATM expenses, office supplies expense, outside services, professional fees, and numerous smaller increases in other miscellaneous expense accounts.
These expense increases were partially offset by a $31,000 decrease in equipment expenses and a $107,000 decrease in intangible amortization. Equipment expenses decreased due to a reduction in phone equipment rental as a result of a new contract and due to a reduction in depreciation expense. Intangible amortization decreased primarily due to the amortization in full during the third quarter of 2007 and the third quarter of 2008 of intangible assets related to the purchase of three offices from another bank in 1997. This decrease was partially offset by amortization of the core deposit intangible resulting from the Sycamore acquisition in December 2007.
Nine Months Ended September 30, 2008 vs. 2007.
Total non-interest expense increased $1,198,000 during the first nine months of 2008 as compared to the first nine months of 2007 primarily due to a $629,000 increase in salaries and wages, a $227,000 increase in pension and other employee benefits, an $88,000 increase in occupancy expense, and a $447,000 increase in other non-interest expense. These increases were partially offset by a $179,000 decrease in intangible amortization. The increases and decreases for all items except occupancy expense were for substantially the same reasons discussed above. Occupancy expense increased due to an increase in the number of branch locations, specifically the two offices acquired from Sycamore and a . . .
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