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LCNB > SEC Filings for LCNB > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for LCNB CORP


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of 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.

Results of Operations
Net income for the three months ended March 31, 2013 was $1,728,000 (total basic and diluted earnings per share of $0.23). This compares to net income of $2,277,000 (total basic and diluted earnings per share of $0.34) for the same three month period in 2012.

On January 11, 2013, First Capital Bancshares, Inc. ("First Capital"), a one-bank holding company located in Chillicothe, Ohio, merged into LCNB. Immediately following this merger, Citizens National Bank ("Citizens"), a wholly-owned subsidiary of First Capital, was merged into LCNB National Bank. The acquisition was accounted for using the acquisition method in accordance with applicable accounting guidance. Accordingly, assets acquired and liabilities assumed were measured at their fair values as of the date of the transaction. The excess of the estimated fair value of LCNB common shares issued and cash paid to First Capital shareholders over the net fair values of the assets acquired and liabilities assumed was recorded as goodwill, which approximated $8.4 million. The results of operations are included in the consolidated income statement from the date of the merger. Expenses for the first quarter 2013 include expenditures totaling about $1,055,000 for costs associated with the merger and converting Citizens' data processing system to LCNB's system.

Net interest income for the first quarter 2013 was $569,000 greater than results for the first quarter 2012 primarily due to the increased volume of average interest earning assets provided by the merger, partially offset by a decrease in the net interest margin.

The provision for loan losses for the first quarter 2013 was $66,000 less than for the same period in 2012. Net loan charge-offs for the first quarter 2013 and 2012 totaled $182,000 and $256,000, respectively. Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $3,353,000 or 0.61% of total loans at March 31, 2013, compared to $2,411,000 or 0.53% of total loans at December 31, 2012. Other real estate owned (which includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed) and other repossessed assets decreased from $2,189,000 at December 31, 2012 to $1,687,000 at March 31, 2013 primarily due to the sale of commercial real estate property during the quarter.

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Non-interest income for the first quarter 2013 was $171,000 greater than the comparable period in 2012 primarily due to increases in service charges and fees on deposit accounts primarily resulting from the merger and gains recognized on the sale of investment securities. The increases were partially offset by a decrease in trust income due to the absence of one-time fees recognized in 2012.

Non-interest expense for the first quarter 2013 was $1,643,000 more than the comparable period in 2012 primarily due the recognition of $1,055,000 in costs related to the merger with Citizens. Salaries and employee benefits, as well as a variety of other expense items, increased significantly due to the increased number of employees and offices resulting from the merger. These expense increases were partially offset by a gain recognized on the sale of other real estate owned property during the quarter.

Net Interest Income
LCNB's primary source of earnings is net interest income, which is the
difference between earnings from loans and other investments and interest paid
on deposits and other liabilities. The following table presents, for the three
months ended March 31, 2013 and 2012, average balances for interest-earning
assets and interest-bearing liabilities, the income or expense related to each
item, and the resultant average yields earned or rates paid.

                                                          Three Months Ended March 31,
                                              2013                                            2012
                              Average         Interest       Average          Average         Interest       Average
                            Outstanding       Earned/         Yield/        Outstanding       Earned/         Yield/
                              Balance           Paid           Rate           Balance           Paid           Rate
                                                             (Dollars in thousands)

Loans (1)                  $     536,518          6,580           4.97 %   $     461,079          6,208           5.42 %
Federal funds sold                 3,115              1           0.13 %               -              -              - %
Interest-bearing demand
deposits                          13,166              7           0.22 %          15,202              6           0.16 %
Federal Reserve Bank
stock                              1,104              -              - %             941              -              - %
Federal Home Loan Bank
stock                              2,743             31           4.58 %           2,091             24           4.62 %
Investment securities:
Taxable                          188,749            834           1.79 %         174,323            887           2.05 %
Non-taxable (2)                   93,033            944           4.12 %          79,742            918           4.63 %
Total interest-earning
assets                           838,428          8,397           4.06 %         733,378          8,043           4.41 %
Non-earning assets                89,527                                          65,168
Allowance for loan
losses                            (3,349 )                                        (2,816 )
Total assets               $     924,606                                   $     795,730

Interest-bearing
deposits                   $     645,950            983           0.62 %         570,980          1,165           0.82 %
Short-term borrowings             11,623              3           0.10 %          10,917              3           0.11 %
Long-term debt                    13,396            112           3.39 %          21,044            154           2.94 %
Total interest-bearing
liabilities                      670,969          1,098           0.66 %         602,941          1,322           0.88 %
Demand deposits                  153,026                                         106,985
Other liabilities                  7,276                                           6,541
Capital                           93,335                                          79,263
Total liabilities and
capital                    $     924,606                                   $     795,730

Net interest rate spread
(3)                                                               3.40 %                                          3.53 %

Net interest income and
net interest margin on a
tax-equivalent basis (4)                          7,299           3.53 %                          6,721           3.69 %

Ratio of
interest-earning assets
to interest-bearing
liabilities                       124.96 %                                        121.63 %

(1) Includes nonaccrual loans if any.

(2) Income from tax-exempt securities is included in interest income on a tax-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34%.

(3) The net interest rate spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.

(4) The net interest margin is the tax-equivalent net interest income divided by average interest-earning assets.

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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The following table presents the changes in tax-equivalent interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended March 31, 2013 as compared to the same period in 2012. Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.

                                                     Three Months Ended
                                                          March 31,
                                                        2013 vs. 2012
                                                 Increase (decrease) due to:
                                              Volume           Rate        Total
                                                       (In thousands)
         Interest-earning Assets:
         Loans                              $      957            (585 )      372
         Federal funds sold                          1               -          1
         Interest-bearing demand deposits           (1 )             2          1
         Federal Reserve Bank stock                  -               -          -
         Federal Home Loan Bank stock                7               -          7
         Investment securities:
         Taxable                                    70            (123 )      (53 )
         Nontaxable                                142            (116 )       26
         Total interest income                   1,176            (822 )      354

         Interest-bearing Liabilities:
         Deposits                                  140            (322 )     (182 )
         Short-term borrowings                       -               -          -
         Long-term debt                            (62 )            20        (42 )
         Total interest expense                     78            (302 )     (224 )
         Net interest income                $    1,098            (520 )      578

Net interest income on a tax-equivalent basis for the three months ended March 31, 2013 totaled $7,299,000, an increase of $578,000 from the comparable period in 2012. Total tax-equivalent interest income increased $354,000 and total interest expense declined $224,000.

The increase in total interest income was primarily due to a $105.1 million increase in average total earning assets, partially offset by a 35 basis point (a basis point equals 0.01%) decrease in the average rate earned on earning assets. The increase in average interest earning assets was primarily due to interest-earning assets acquired through the merger with First Capital. The decrease in the average rate earned reflects a general decrease in market rates.

The decrease in total interest expense was primarily due to a 22 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a $68.0 million increase in average interest-bearing liabilities. The increase in average interest-bearing liabilities was primarily due to a $75.0 million increase in average interest-bearing deposits primarily due to the merger, partially offset by a $7.6 million decrease in average long-term debt. Long-term debt decreased because of the payment in full of a $6.0 million Federal Home Loan Bank advance in August 2012. The decrease in the average rate paid on deposits also reflects a general decrease in market rates.

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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Provision and Allowance for Loan Losses
The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. In addition to historic charge-off percentages, factors taken into consideration to determine the adequacy of the allowance for loan losses include the nature, volume, and consistency of the loan portfolio, overall portfolio quality, a review of specific problem loans, and current economic conditions that may affect borrowers' ability to pay. The provision for loan losses for the three months ended March 31, 2013 and 2012 was $149,000 and $215,000, respectively. The decrease in the provision reflects a decrease in net charge-offs coupled with relatively stable regional market conditions.

The fair value of loans acquired through the merger was estimated by discounting at current rates the cash flows expected to be received on Citizens' loan portfolio. Since the estimation of cash flows recognized the probability that LCNB would not be able to collect all contractually required principal and interest payments, Citizens' allowance for loan losses was not carried forward.

Non-Interest Income
Total non-interest income for the first quarter 2013 was $171,000 greater than for the first quarter 2012 primarily due to a $101,000 increase in service charges and fees on deposit accounts and a $207,000 increase in gains from sales of securities. Service charges and fees on deposit accounts increased primarily due to a greater number of deposit accounts resulting from the merger. The results also reflect a continuing downward trend in overdraft fee income and a continuing upward trend in check card fee income. Gains from sales of securities increased due to the sale of $22.8 million in securities in 2013, the fair values of which had benefited from the continuing decline in general market rates. Approximately $29.6 million of securities with relatively lower unrealized gains were sold during the 2012 period. Partially offsetting these increases was a $191,000 decrease in trust income primarily due to the absence of one-time estate fees recognized during the first quarter 2012.

Non-Interest Expense
Non-interest expense for the first quarter 2013 was $1,643,000 greater than for the first quarter 2012 due primarily to a $312,000 increase in salaries and employee benefits and a $1,142,000 increase in other non-interest expense. The increase in salaries and employee benefits primarily reflects the additional staff needed to operate the six additional offices LCNB acquired as a result of the merger. Other non-interest expense for the first quarter 2013 includes $1,055,000 in costs related to the merger and converting Citizens' data processing system to LCNB's system. Partially offsetting the merger related costs in other non-interest expense for the 2013 period was a $274,000 decrease in net costs related to other real estate owned including a gain recognized in 2013 on the sale of commercial real estate property and a decrease in impairment write-downs.

Income Taxes
LCNB's effective tax rates for continuing operations for the three months ended March 31, 2013 and 2012 were 23.0% and 26.1%, respectively. The difference between the statutory rate of 34.0% and the effective tax rate is primarily due to tax-exempt interest income from municipal securities and tax-exempt income from bank owned life insurance.

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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Financial Condition
The carrying values of loans, securities available-for-sale, premises and equipment, and deposits were greatly influenced by the merger. See Note 2 to the Financial Statements for a description of the merger and a summary of the fair values of First Capital's assets and liabilities added to LCNB's consolidated balance sheet.

In addition to the merger, a $27.9 million increase in public fund deposits by local government entities was a secondary reason for the increase in total deposits. Public fund deposits can be relatively volatile due to seasonal tax collections and the financial needs of the local entities.

Common stock in the shareholders' equity section of the consolidated balance sheet at March 31, 2013 was $12.4 million greater than the balance shown for December 31, 2012 due to the merger. LCNB issued 888,811 shares of stock, valued at $12.4 million on the date of the merger, and paid approximately $7.8 million in cash to effect the merger.

Liquidity
LCNB depends on dividends from its subsidiary for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. National banking law limits the amount of dividends the Bank may pay to the sum of retained net income, as defined, for the current year plus retained net income for the previous two years. Prior approval from the Office of the Comptroller of the Currency, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval.

Liquidity is the ability to have funds available at all times to meet the commitments of LCNB. Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash and cash equivalents, interest-bearing deposits in other banks, and securities available for sale. At March 31, 2013, LCNB's liquid assets amounted to $305.9 million or 32.3% of total assets. Liquid assets at December 31, 2012 totaled $272.0 million, or 34.5% of total assets.

Liquidity is also provided by access to core funding sources, primarily core deposits in the bank's market area. Approximately 82.5% of total deposits at March 31, 2013 were core deposits, compared to 83.6% of deposits at December 31, 2012. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit equal to or greater than $100,000. The percentage of core deposits to total deposits decreased because of the growth in public fund deposits discussed above in relation to total growth in deposits.

Secondary sources of liquidity include LCNB's ability to sell loan participations, borrow funds from the Federal Home Loan Bank, purchase federal funds, issue repurchase agreements, or use a line of credit established with another bank.

Management closely monitors the level of liquid assets available to meet ongoing funding needs. It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems as a result of the current liquidity levels.

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

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