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| LCNB.OB > SEC Filings for LCNB.OB > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-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 $1,837,000 or $0.27 basic and diluted earnings per common share and $4,932,000 or $0.74 basic and diluted earnings per common share for the three and nine-month periods ended September 30, 2009, respectively. Net income available to common shareholders was $1,794,000 or $0.27 basic and diluted earnings per common share and $4,936,000 or $0.74 basic and diluted earnings per common share for the comparable periods in 2008. Affecting net income to common shareholders and earnings per common share for the three and nine month periods was an increase in net interest income, offset by increases in the provision for loan losses and non-interest expense. Negatively affecting net income available to common shareholders during 2009 were preferred stock dividends paid and related discount accretion recorded in connection with the preferred shares and warrant issued under the Capital Purchase Program (the "CPP") on January 9, 2009.
Net interest income grew during the three and nine month periods of 2009 compared to 2008 primarily because of growth in interest earning assets and a general market decline in deposit interest rates. Non-interest expense during the three and nine periods of 2009 was influenced by 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.
Current economic conditions have contributed to an increase in loan delinquencies, but LCNB's loan portfolio continues to benefit from responsible underwriting and lending practices. Net charge-offs for the first nine months of 2009 and 2008 totaled $639,000 and $322,000, respectively. Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $1,781,000 or 0.39% of total loans at September 30, 2009, compared to $3,087,000 or 0.68% of total loans at December 31, 2008. Other real estate owned and other repossessed assets totaled approximately $2,424,000 at September 30, 2009, compared to $89,000 at December 31, 2008. Non-accrual loans and loans past due 90 days or more decreased and other real estate owned increased largely due to the transfer of commercial real estate property into the other real estate owned category.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
LCNB's net income was $2,043,000 for the three months ended September 30, 2009, compared to $1,794,000 for the three months ended September 30, 2008. The return on average assets (ROAA) for the third quarter 2009 was 1.09% and the return on average total equity (ROAE) was 10.46%, compared with an ROAA of 1.09% and an ROAE of 12.27% for the third quarter of 2008. LCNB's net income was $5,446,000 during the first nine months of 2009 compared to $4,936,000 for the first nine months of 2008. The ROAA and ROAE for the first nine months of 2009 were 1.02% and 9.54%, respectively. The comparable ratios for the first nine months of 2008 were 1.05% and 11.38%, respectively. The decrease in ROAE during the 2009 periods is primarily due to the addition of preferred stock to equity on January 9, 2009.
[Remainder of this page intentionally left blank]
LCNB CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Net Interest Income
Three Months Ended September 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 September 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 September 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) $ 457,372 $ 6,884 5.97% $ 443,602 $ 7,115 6.36%
Federal funds sold and interest- 20,014 13 0.26% 24,201 126 2.07%
bearing demand deposits
Interest-bearing deposits in banks - - -% 3,913 25 2.53%
Federal Reserve Bank stock 940 - -% 938 - -%
Federal Home Loan Bank stock 2,091 26 4.93% 2,063 28 5.38%
Investment securities:
Taxable 112,375 1,050 3.71% 74,410 784 4.18%
Non-taxable (2) 86,662 1,205 5.52% 53,130 803 6.00%
Total earnings assets 679,454 9,178 5.36% 602,257 8,881 5.85%
Non-earning assets 64,019 54,005
Allowance for loan losses (2,678) (2,473)
Total assets $ 740,795 $ 653,789
Interest-bearing deposits $ 548,512 2,278 1.65% $ 501,341 3,220 2.55%
Short-term borrowings 599 - -% 725 4 2.19%
Long-term debt 23,929 177 2.93% 5,000 66 5.24%
Total interest-bearing liabilities 573,040 2,455 1.70% 507,066 3,290 2.57%
Demand deposits 84,927 83,443
Other liabilities 5,342 5,312
Capital 77,486 57,968
Total liabilities and capital $ 740,795 $ 653,789
Net interest rate spread (3) 3.66% 3.28%
Net interest income and net interest margin $ 6,723 3.93% $ 5,591 3.68%
on a taxable-equivalent basis (4)
Ratio of interest-earning assets to 118.57% 118.77%
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 September 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
September 30, 2009 vs. 2008
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 216 (447) (231)
Federal funds sold and interest-bearing
demand deposits (19) (94) (113)
Interest-bearing deposits in banks (25) - (25)
Federal Reserve Bank stock - - -
Federal Home Loan Bank stock - (2) (2)
Investment securities:
Taxable 363 (97) 266
Nontaxable 471 (69) 402
Total interest income 1,006 (709) 297
Interest-bearing Liabilities:
Deposits 280 (1,222) (942)
Short-term borrowings (1) (3) (4)
Long-term debt 151 (40) 111
Total interest expense 430 (1,265) (835)
Net interest income $ 576 556 1,132
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Net interest income on a fully tax-equivalent basis for the three months ended September 30, 2009 totaled $6,723,000, an increase of $1,132,000 from the comparable period in 2008. Total interest income increased $297,000 and total interest expense decreased $835,000.
The increase in total interest income was due to a $77.2 million increase in average earning assets, partially offset by a 49 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 $71.5 million increase in average investment securities and a $13.8 million increase in the loan portfolio. 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 87 basis point decrease in the average rate paid, partially offset by a $66.0 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 $47.2 million, and average long-term borrowings, which increased $18.9 million due to additional borrowings from the Federal Home Loan Bank of Cincinnati during the first and third quarters of 2009.
Nine Months Ended September 30, 2009 vs. 2008.
The following table presents, for the nine months ended September 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.
Nine Months Ended September 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) $ 452,047 $ 20,580 6.09% $ 445,882 $ 21,850 6.55%
Federal funds sold and interest- 21,107 41 0.26% 24,248 428 2.36%
bearing demand deposits
Interest-bearing deposits in banks - - -% 2,044 38 2.48%
Federal Reserve Bank stock 939 28 3.99% 850 24 3.77%
Federal Home Loan Bank stock 2,091 73 4.67% 2,036 82 5.38%
Investment securities:
Taxable 106,067 3,183 4.01% 55,156 1,806 4.37%
Non-taxable (2) 76,217 3,226 5.66% 48,957 2,211 6.03%
Total earnings assets 658,468 27,131 5.51% 579,173 26,439 6.10%
Non-earning assets 60,313 52,829
Allowance for loan losses (2,555) (2,472)
Total assets $ 716,226 $ 629,530
Interest-bearing deposits $ 531,461 7,269 1.83% $ 478,511 9,996 2.79%
Short-term borrowings 718 - -% 726 12 2.21%
Long-term debt 18,665 440 3.15% 5,000 197 5.26%
Total interest-bearing liabilities 550,844 7,709 1.87% 484,237 10,205 2.82%
Demand deposits 84,672 82,472
Other liabilities 4,413 4,882
Capital 76,297 57,939
Total liabilities and capital $ 716,226 $ 629,530
Net interest rate spread (3) 3.64% 3.28%
Net interest income and net interest margin $ 19,422 3.94% $ 16,234 3.74%
on a taxable-equivalent basis (4)
Ratio of interest-earning assets to 119.54% 119.61%
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 nine months ended September 30, 2009 as compared to the
same period in 2008.
Nine Months Ended
September 30, 2009 vs. 2008
Increase (decrease) due to:
Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ 299 (1,569) (1,270)
Federal funds sold and interest-bearing
demand deposits (49) (338) (387)
Interest-bearing deposits in banks (38) - (38)
Federal Reserve Bank stock 3 1 4
Federal Home Loan Bank stock 2 (11) (9)
Investment securities:
Taxable 1,539 (162) 1,377
Nontaxable 1,162 (147) 1,015
Total interest income 2,918 (2,226) 692
Interest-bearing Liabilities:
Deposits 1,013 (3,740) (2,727)
Short-term borrowings - (12) (12)
Long-term debt 350 (107) 243
Total interest expense 1,363 (3,859) (2,496)
Net interest income $ 1,555 1,633 3,188
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Net interest income on a fully tax-equivalent basis for the first nine months of 2009 totaled $19,422,000, a $3,188,000 increase from the first nine months of 2008. Total interest income increased $692,000 and total interest expense decreased $2,496,000.
The increase in total interest income was primarily due to a $79.3 million increase in average total earning assets, partially offset by a 59 basis point decrease in the average rate earned on earning assets. The increase in average earning assets was primarily due to a $78.2 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 due primarily to a 95 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a $66.6 million increase in average interest-bearing liabilities. The increase in average interest-bearing liabilities was primarily due to a $53.0 million increase in average interest-bearing deposits and a $13.7 million increase in average long term debt due to additional borrowings from the Federal Home Loan Bank of Cincinnati during the first and third quarters of 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 September 30, 2009 and 2008 was $664,000 and $188,000, respectively, and $970,000 and $322,000 for the nine months ended September 30, 2009 and 2008, respectively. The increase in the provision for loan losses reflects an increase in non-accrual and delinquent loans, the net charge-off trend, and the current economic conditions.
Non -Interest Income
Three Months Ended September 30, 2009 vs. 2008.
Non-interest income for the third quarter of 2009 was $27,000 less than for the same period in 2008. Service charges and fees decreased $151,000 primarily due to fewer overdraft fees on checking and NOW accounts. This decrease was partially offset by a $60,000 increase in gains on sales of securities and a $44,000 increase in gains from sales of mortgage loans.
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 third quarter 2009 totaled $2,481,000 compared to $81,000 in sales during the third 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 nine months of 2009.
Nine Months Ended September 30, 2009 vs. 2008.
Non-interest income for the first nine months of 2009 was $87,000 greater than for the same period in 2008. Gains from sales of mortgage loans increased $368,000, partially offset by a $237,000 decrease in service charges and fees and a $121,000 decrease in insurance agency income. Loan sales for the first nine months of 2009 totaled $26,033,000, compared to $814,000 of loans sold for the first nine months of 2008. Service charges and fees decreased primarily due to fewer overdraft fees on checking and NOW accounts and insurance agency income decreased due to a $64,000 decrease in contingency commissions and a general decline in commission income due to market factors. Contingency commissions are profit-sharing arrangements on property and casualty policies between the originating agency and the carrier and are generally based on underwriting results and written premiums. As such, the amount received each year can vary significantly depending on loss experience.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (continued)
Non-Interest Expense
Three Months Ended September 30, 2009 vs. 2008.
Total non-interest expense increased $266,000 during the third quarter 2009 as compared to the third quarter 2008 primarily due to a $296,000 increase in FDIC premiums reflecting an industry-wide increase in quarterly premiums. Salaries and wages increased $119,000 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 $98,000 decrease in pension and other employee benefits primarily due to lower pension expense.
Nine Months Ended September 30, 2009 vs. 2008.
Total non-interest expense increased $1,903,000 during the first nine months of 2009 as compared to the first nine months of 2008 primarily due to an $874,000 increase in FDIC premiums and a $722,000 write-off of a pension asset during the first quarter 2009. The increase in FDIC premiums includes an approximate $325,000 expense recognized for an industry-wide special assessment levied by the FDIC as of June 30, 2009. The balance of the increase reflects industry-wide increases in quarterly premiums. 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 $398,000 increase in salaries and wages primarily for the same reasons discussed above, partially offset by a $204,000 decrease in intangible amortization. The decrease in the intangible amortization is 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.
Income Taxes
LCNB's effective tax rates for the nine months ended September 30, 2009 and 2008 were 22.1% 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.
Financial Condition
Total assets at September 30, 2009 were $100.1 million greater than at December . . .
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