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| LCNB.OB > SEC Filings for LCNB.OB > Form 10-Q on 3-Aug-2009 | All Recent SEC Filings |
3-Aug-2009
Quarterly Report
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 available to common shareholders was $1,624,000 or $0.24 basic
and diluted earnings per common share and $3,095,000 or $0.46 basic and diluted
earnings per common share for the three and six-month periods ended June 30,
2009, respectively. Net income available to common shareholders was $1,698,000
or $0.25 basic and diluted earnings per common share and $3,142,000 or $0.47
basic and diluted earnings per common share for the comparable periods in 2008.
The decline in net income to common shareholders and earnings per common share
were due, in part, to preferred stock dividends paid and related discount
accretion recorded in connection with the preferred shares and warrant issued
under the Captal Purchase Program (the "CPP") on January 9, 2009.
LCNB's net income was $1,840,000 for the three months ended June 30, 2009, compared to $1,698,000 for the three months ended June 30, 2008. The return on average assets (ROAA) for the second quarter, 2009 was 1.03% and the return on average total equity (ROAE) was 9.64%, compared with an ROAA of 1.08% and an ROAE of 11.71% for the second quarter of 2008. LCNB's net income was $3,403,000 during the first six months of 2009 compared to $3,142,000 for the first six months of 2008. The ROAA and ROAE for the first six months of 2009 were 0.98% and 9.07%, respectively. The comparable ratios for the first six months of 2008 were 1.02% and 10.91%, respectively.
The increase in net income for each of the three and six months periods ended June 30, 2009 compared to 2008 was primarily attributed to an increase in net interest income, partially offset by increases in non-interest expense and the provision for loan losses. Net interest income grew during the three and six month periods of 2009 primarily because of growth in interest earning assets and a general market decline in interest rates. Non-interest expenses during 2009 were influenced by standard industry-wide increases in FDIC deposit insurance premiums, an industry-wide special assessment levied by the FDIC, and a pension-related charge recognized by LCNB during the first quarter 2009.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
While not immune from the effects of weakening economic conditions, LCNB's earnings reflect continued strong asset quality resulting from responsible underwriting and lending practices. Consequently, net charge-offs for the first half of 2009 and 2008 totaled $174,000 and $134,000, respectively. Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $4,108,000 or 0.90% of total loans at June 30, 2009, compared to $3,087,000 or 0.68% of total loans at December 31, 2008.
Net Interest Income
Three Months Ended June 30, 2009 vs. 2008.
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 June 30, 2009 and 2008, 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.
Three Months Ended June 30,
2009 2008
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans (1) $ 448,623 $ 6,820 6.10% $ 448,092 $ 7,211 6.45%
Federal funds sold and 24,113 16 0.27% 29,025 151 2.09%
interest-
bearing demand deposits
Interest-bearing deposits - - -% 2,198 13 2.37%
in banks
Federal Reserve Bank stock 940 28 11.95% 890 24 10.82%
Federal Home Loan Bank 2,091 23 4.41% 2,036 28 5.52%
stock
Investment securities:
Taxable 109,623 1,062 3.89% 49,541 554 4.49%
Non-taxable (2) 70,827 1,076 6.09% 48,750 732 6.02%
Total earnings assets 656,217 9,025 5.52% 580,532 8,713 6.02%
Non-earning assets 61,882 50,929
Allowance for loan losses (2,507) (2,477)
Total assets $ 715,592 $ 628,984
Interest-bearing deposits $ 529,517 2,370 1.80% $ 477,268 3,214 2.70%
Short-term borrowings 810 - -% 927 4 1.73%
Long-term debt 19,771 156 3.16% 5,000 66 5.29%
Total interest-bearing 550,098 2,526 1.84% 483,195 3,284 2.73%
liabilities
Demand deposits 84,948 83,084
Other liabilities 3,967 4,500
Capital 76,579 58,205
Total liabilities and $ 715,592 $ 628,984
capital
Net interest rate spread 3.68% 3.29%
(3)
Net interest income and $ 6,499 3.97% $ 5,429 3.75%
net
interest margin on a
taxable-
equivalent basis (4)
Ratio of interest-earning 119.29% 120.14%
assets to
interest-bearing
liabilities
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Includes nonaccrual loans, if any.
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 June 30, 2009 as compared to the same period in 2008. 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
June 30, 2009 vs. 2008
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 9 (400) (391)
Federal funds sold and interest-bearing
demand deposits (22) (113) (135)
Interest-bearing deposits in banks (13) - (13)
Federal Reserve Bank stock 1 3 4
Federal Home Loan Bank stock 1 (6) (5)
Investment securities:
Taxable 591 (83) 508
Nontaxable 335 9 344
Total interest income 902 (590) 312
Interest-bearing Liabilities:
Deposits 323 (1,167) (844)
Short-term borrowings - (4) (4)
Long-term debt 126 (36) 90
Total interest expense 449 (1,207) (758)
Net interest income $ 453 617 1,070
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Net interest income on a fully tax-equivalent basis for the three months ended June 30, 2009 totaled $6,499,000, an increase of $1,070,000 from the comparable period in 2008. Total interest income increased $312,000 and total interest expense decreased $758,000.
The increase in total interest income was due to a $75.7 million increase in average earning assets, partially offset by a 50 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 an $82.2 million increase in average investment securities. The decrease in the average rate earned on earning assets was primarily due to general decreases in market interest rates.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
The decrease in total interest expense was primarily due to an 89 basis point decrease in the average rate paid, partially offset by a $66.9 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 $52.2 million, and average long-term borrowings, which increased $14.8 million due to additional borrowings from the Federal Home Loan Bank of Cincinnati during the first quarter 2009.
Six Months Ended June 30, 2009 vs. 2008.
The following table presents, for the six months ended June 30, 2009 and 2008,
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.
Six Months Ended June 30,
2009 2008
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans (1) $ 449,340 $ 13,696 6.15% $ 447,003 $ 14,735 6.63%
Federal funds sold and 21,662 28 0.26% 24,270 302 2.50%
interest-
bearing demand deposits
Interest-bearing deposits - - -% 1,099 13 2.38%
in banks
Federal Reserve Bank 939 28 6.01% 806 24 5.99%
stock
Federal Home Loan Bank 2,091 47 4.53% 2,023 54 5.37%
stock
Investment securities:
Taxable 106,737 2,133 4.03% 45,423 1,022 4.52%
Non-taxable (2) 67,032 2,021 6.08% 46,847 1,408 6.04%
Total earnings assets 647,801 17,953 5.59% 567,471 17,558 6.22%
Non-earning assets 58,435 52,115
Allowance for loan losses (2,492) (2,472)
Total assets $ 703,744 $ 617,114
Interest-bearing deposits $ 522,794 4,991 1.93% $ 466,940 6,776 2.92%
Short-term borrowings 779 - -% 726 8 2.22%
Long-term debt 15,990 263 3.32% 5,000 131 5.27%
Total interest-bearing 539,563 5,254 1.96% 472,666 6,915 2.94%
liabilities
Demand deposits 84,567 81,978
Other liabilities 3,921 4,546
Capital 75,693 57,924
Total liabilities and $ 703,744 $ 617,114
capital
Net interest rate spread 3.63% 3.28%
(3)
Net interest income and $ 12,699 3.95% $ 10,643 3.77%
net
interest margin on a
taxable-
equivalent basis (4)
Ratio of interest-earning 120.06% 120.06%
assets to
interest-bearing
liabilities
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Includes nonaccrual loans, if any. Income from tax-exempt loans is included in interest income on a tax-equivalent basis, using an incremental rate of 34%.
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 six months ended June 30, 2009 as compared to the same
period in 2008.
Six Months Ended
June 30, 2009 vs. 2008
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 77 (1,116) (1,039)
Federal funds sold and interest-bearing
demand deposits (29) (245) (274)
Interest-bearing deposits in banks (13) - (13)
Federal Reserve Bank stock 4 - 4
Federal Home Loan Bank stock 2 (9) (7)
Investment securities:
Taxable 1,237 (126) 1,111
Nontaxable 609 4 613
Total interest income 1,887 (1,492) 395
Interest-bearing Liabilities:
Deposits 739 (2,524) (1,785)
Short-term borrowings 1 (9) (8)
Long-term debt 196 (64) 132
Total interest expense 936 (2,597) (1,661)
Net interest income $ 951 1,105 2,056
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Net interest income on a fully tax-equivalent basis for the first half of 2009 totaled $12,699,000, a $2,056,000 increase from the first half of 2008. Total interest income increased $395,000 and total interest expense decreased $1,661,000.
The increase in total interest income was primarily due to an $80.3 million increase in average total earning assets, partially offset by a 63 basis point decrease in the average rate earned on earning assets. The increase in average earning assets was primarily due to an $81.5 million increase in average investment securities. The decrease in the average rate earned on earning assets was primarily due to general decreases in market interest rates.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
The decrease in total interest expense was due primarily to a 98 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a $66.9 million increase in average interest-bearing liabilities. The increase in average interest-bearing liabilities was primarily due to a $55.9 million increase in average interest-bearing deposits and an $11.0 million increase in average long term debt due to additional borrowings from the Federal Home Loan Bank of Cincinnati during the first quarter 2009.
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 June 30, 2009 and 2008 was $208,000 and $51,000, respectively, and $306,000 and $134,000 for the six months ended June 30, 2009 and 2008, respectively. The increase in the provision for loan losses reflects the increase in non-accrual and delinquent loans.
Non -Interest Income
Three Months Ended June 30, 2009 vs. 2008.
Non-interest income for the second quarter of 2009 was $47,000 greater than for the same period in 2008. Gains from sales of mortgage loans increased $194,000, partially offset by a $60,000 decrease in trust income, a $61,000 decrease in service charges and fees, and a $52,000 decrease in insurance agency income.
Gains from sales of mortgage loans increased due to a higher volume of sales to the Federal Home Loan Mortgage Corporation during the 2009 period. Loan sales during the second quarter 2009 totaled $13,518,000 compared to $90,000 in sales during the second quarter 2008. The increase in the amount of mortgage loans sold is primarily due to an increase in the number of loans being refinanced, reflecting a general decline in market interest rates for residential mortgage loans during the first half of 2009.
Trust income decreased primarily due to market related decreases in the fair
value of trust assets serviced, upon which fees are based. Total trust assets
at June 30, 2008 were $187.8 million compared to $177.5 million at June 30,
2009. Service charges and fees decreased primarily due to a lower volume of
overdraft fees received, partially offset by an increase in checkcard income.
Checkcard income grew because of the increasing popularity of checkcards as a
retail payment method.
Six Months Ended June 30, 2009 vs. 2008.
Non-interest income for the first half of 2009 was $114,000 greater than for the
same period in 2008. Gains from sales of mortgage loans increased $324,000,
partially offset by a $64,000 decrease in trust income, an $86,000 decrease in
service charges and fees, and a $102,000 decrease in insurance agency income.
Loan sales for the first half of 2009 totaled $23,552,000, compared to $733,000
of loans sold for the first half of 2008. Trust income, service charges and
fees, and insurance agency income decreased for substantially the same reasons
discussed above.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Non-Interest Expense
Three Months Ended June 30, 2009 vs. 2008.
Total non-interest expense increased $765,000 during the second quarter, 2009 as compared to the second quarter 2008 primarily due to a $569,000 increase in FDIC premiums. This increase includes an approximate $325,000 expense recognized for an industry-wide special assessment levied by the FDIC and industry-wide increases in quarterly premiums. The remainder of the increase in total non-interest expense is due to a $142,000 increase in salaries and wages, a $30,000 increase in pension and other employee benefits, and a $145,000 increase in other non-interest expense. Salaries and wages and pension and other employee benefits increased primarily due to additional employees, partially due to the opening of the Centerville office in September 2008, and annual salary and wage increases.
These expense increases were partially offset by a $94,000 decrease in intangible amortization, primarily due to the amortization in full during 2008 of an intangible asset related to the purchase of three offices from another bank in 1997.
Six Months Ended June 30, 2009 vs. 2008.
Total non-interest expense increased $1,637,000 during the first half of 2009 as compared to the first half of 2008 primarily due to a $578,000 increase in FDIC premiums and a $722,000 write-off of a pension asset during the first quarter 2009. The write-off of the pension asset is related to the redesign during the first quarter 2009 of LCNB's retirement program. The plans were redesigned to provide competitive benefits to employees and provide more predictable and lower retirement plan costs over the long term. Because of the redesign, pension plan related balance sheet accounts were adjusted resulting in an approximate $3.0 million after tax increase in other comprehensive income, which is a component of shareholders' equity, and the $722,000 charge to non-interest expense.
The remainder of the increase in total non-interest expense is due to a $279,000 increase in salaries and wages, a $74,000 increase in pension and other employee benefits, and a $100,000 increase in other non-interest expense. These increases were partially offset by a $188,000 decrease in intangible amortization. These increases and decreases, including the FDIC premiums increase, were for substantially the same reasons discussed above.
Income Taxes
LCNB's effective tax rates for the six months ended June 30, 2009 and 2008 were 22.0% and 25.4%, 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 earnings from bank owned life insurance.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Financial Condition
Total assets at June 30, 2009 were $66.5 million greater than at December 31, 2008. The growth in total assets were primarily funded by a $37.4 million increase in total deposits, a $14.7 million increase in long-term debt, and $13.4 million received from the sale of preferred stock to the U.S. Treasury Department under the CPP.
Net loans at June 30, 2009 were $608,000 greater than at December 31, 2008.
Commercial and industrial loans were $3,425,000 greater at June 30, 2009 and
commercial real estate loans were $3,856,000 greater. During the same period,
residential real estate loans decreased $2,425,000 and consumer loans decreased
$4,163,000. Residential real estate loans decreased primarily because new loans
originated were sold to FHLMC. New residential real estate loans sold during
the first half 2009 totaled $23,552,000. Consumer loans decreased primarily due
to weak demand.
The investment securities portfolio at June 30, 2009 was $55.2 million greater than at December 31, 2008. Most of the growth was in U. S. Agency mortgage-backed securities, which increased $23.6 million and municipal securities, which increased $25.4 million.
The $14.7 million increase in long-term debt is due to new borrowings from the Federal Home Loan Bank of Cincinnati during the first quarter 2009. Of the $37.4 million increase in total deposits, approximately $14.6 million was due to increases in public fund deposits by local governmental entities. LCNB has also been receiving a higher than normal increase in deposits due, in part, to the volatility of current economic conditions. . . .
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