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LCNB > SEC Filings for LCNB > Form 10-Q on 6-Aug-2013All Recent SEC Filings

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Form 10-Q for LCNB CORP


6-Aug-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 and six months ended June 30, 2013 was $2,348,000 (total basic and diluted earnings per common share of $0.31 and $0.30, respectively) and $4,076,000 (total basic and diluted earnings per common share of $0.54 and $0.53, respectively), respectively. This compares to net income of $1,987,000 (total basic and diluted earnings per common share of $0.30 and $0.29) and $4,264,000 (total basic and diluted earnings per common share of $0.64 and $0.63) for the same three and six-month periods in 2012. Results for 2013 were significantly affected by the completion of a merger with First Capital Bancshares, Inc. and its subsidiary, Citizens National Bank of Chillicothe, on January 11, 2013.

Net interest income for the three and six-month periods ended June 30, 2013 increased $1,061,000 and $1,630,000, respectively, from the comparative periods in 2012 due primarily to the increased volume of average interest earning assets provided by the merger.

The provision for loan losses for the three and six-month periods ended June 30, 2013 was $49,000 and $115,000 less than the comparable periods in 2012. Net loan charge-offs for the first six months of 2013 and 2012 totaled $202,000 and $285,000, respectively. Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $3,139,000 or 0.56% of total loans at June 30, 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 $1,530,000 at June 30, 2013 primarily due to the sale of commercial real estate property during the first quarter 2013.

Non-interest income for the three and six-month periods in 2013 was $423,000 and $594,000 greater than the comparable periods 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 for the six-month period were partially offset by a decrease in trust income due to the absence of one-time fees recognized in the first quarter 2012.


Table of Contents
LCNB CORP. AND SUBSIDIARIES

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

Non-interest expense for the three and six-month periods ended June 30, 2013 was $994,000 and $2,637,000 greater than the comparable periods in 2012 largely due to the recognition of $271,000 and $1,326,000 in costs related to the merger with Citizens National Bank. 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 during the six month period by a gain recognized on the sale of other real estate owned property during the first quarter 2013.

Net Interest Income

Three Months Ended June 30, 2013 vs. 2012.
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, 2013 and 2012, 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,
                                               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)                  $     550,654          6,816            4.96 %   $     457,443          5,920           5.19 %
Interest-bearing demand            8,193              6            0.29 %          10,650              9           0.34 %
deposits
Federal Reserve Bank               1,428             38           10.67 %             949             28          11.83 %
stock
Federal Home Loan Bank             2,854             30            4.22 %           2,091             22           4.22 %
stock
Investment securities:
Taxable                          205,265            860            1.68 %         200,162            982           1.97 %
Non-taxable (2)                  102,630            992            3.88 %          82,277            924           4.50 %
Total earnings assets            871,024          8,742            4.03 %         753,572          7,885           4.20 %
Non-earning assets                86,196                                           63,315
Allowance for loan                (3,413 )                                         (2,893 )
losses
Total assets               $     953,807                                    $     813,994

Interest-bearing           $     666,348            931            0.56 %   $     579,774          1,117           0.77 %
deposits
Short-term borrowings             13,870              4            0.12 %          12,665              5           0.16 %
Long-term debt                    12,905            110            3.42 %          20,506            150           2.93 %
Total interest-bearing           693,123          1,045            0.60 %         612,945          1,272           0.83 %
liabilities
Demand deposits                  159,329                                          114,235
Other liabilities                  6,314                                            6,816
Capital                           95,041                                           79,998
Total liabilities and      $     953,807                                    $     813,994
capital

Net interest rate spread                                           3.43 %                                          3.37 %
(3)

Net interest income and
net interest margin on a
taxable-equivalent basis
(4)                                               7,697            3.54 %                          6,613           3.52 %

Ratio of
interest-earning assets
to interest-bearing
liabilities                       125.67 %                                         122.94 %

(1) Includes nonaccrual loans, if any.

(2) 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%.

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

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


Table of Contents
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 three months ended June 30, 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
                                                   June 30, 2013 vs. 2012
                                                Increase (decrease) due to:
                                              Volume           Rate       Total
                                                       (In thousands)
         Interest-earning Assets:
         Loans                              $     1,163         (267 )       896
         Interest-bearing demand deposits            (2 )         (1 )        (3 )
         Federal Reserve Bank stock                  13           (3 )        10
         Federal Home Loan Bank stock                 8            -           8
         Investment securities:
         Taxable                                     24         (146 )      (122 )
         Nontaxable                                 208         (140 )        68
         Total interest income                    1,414         (557 )       857

         Interest-bearing Liabilities:
         Deposits                                   151         (337 )      (186 )
         Short-term borrowings                        -           (1 )        (1 )
         Long-term debt                             (62 )         22         (40 )
         Total interest expense                      89         (316 )      (227 )
         Net interest income                $     1,325         (241 )     1,084

Net interest income on a fully tax-equivalent basis for the three months ended June 30, 2013 totaled $7,697,000, an increase of $1,084,000 over the comparable period in 2012. Total interest income increased $857,000 and total interest expense decreased $227,000.

The increase in total interest income was primarily due to a $117.5 million increase in average total earning assets, partially offset by a 17 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.


Table of Contents
LCNB CORP. AND SUBSIDIARIES

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 a 23 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by an $80.2 million increase in average interest-bearing liabilities.
The increase in average interest-bearing liabilities was primarily due to an $86.6 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.

Six Months Ended June 30, 2013 vs. 2012.
The following table presents, for the six months ended June 30, 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.

                                                            Six Months Ended June 30,
                                              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)                  $     543,625         13,396           4.97 %   $     459,261         12,128           5.31 %
Federal funds sold                 1,549              1           0.13 %               -              -              - %
Interest-bearing demand           10,665             14           0.26 %          12,926             15           0.23 %
deposits
Federal Reserve Bank               1,267             38           6.05 %             945             28           5.96 %
stock
Federal Home Loan Bank             2,799             60           4.32 %           2,091             46           4.42 %
stock
Investment securities:
Taxable                          197,053          1,694           1.73 %         187,242          1,869           2.01 %
Non-taxable (2)                   97,858          1,936           3.99 %          81,010          1,842           4.57 %
Total earnings assets            854,816         17,139           4.04 %         743,475         15,928           4.31 %
Non-earning assets                87,614                                          64,242
Allowance for loan                (3,381 )                                        (2,855 )
losses
Total assets               $     939,049                                   $     804,862

Interest-bearing           $     656,205          1,914           0.59 %   $     575,377          2,282           0.80 %
deposits
Short-term borrowings             12,753              7           0.11 %          11,791              8           0.14 %
Long-term debt                    13,149            222           3.40 %          20,775            304           2.94 %
Total interest-bearing           682,107          2,143           0.63 %         607,943          2,594           0.86 %
liabilities
Demand deposits                  156,193                                         110,610
Other liabilities                  6,556                                           6,678
Capital                           94,193                                          79,631
Total liabilities and      $     939,049                                   $     804,862
capital

Net interest rate spread                                          3.41 %                                          3.45 %
(3)

Net interest income and
net   interest margin on
a taxable-equivalent
basis (4)                                        14,996           3.54 %                         13,334           3.61 %

Ratio of
interest-earning assets
to interest-bearing
liabilities                       125.32 %                                        122.29 %

(1) 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%.

(2) 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%.

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

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


Table of Contents
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, 2013 as compared to the same period in 2012.

                                                      Six Months Ended
                                                   June 30, 2013 vs. 2012
                                                Increase (decrease) due to:
                                             Volume           Rate        Total
                                                       (In thousands)
         Interest-earning Assets:
         Loans                              $   2,119           (851 )     1,268
         Federal funds sold                         1              -           1
         Interest-bearing demand deposits          (3 )            2          (1 )
         Federal Reserve Bank stock                10              -          10
         Federal Home Loan Bank stock              15             (1 )        14
         Investment securities:
         Taxable                                   94           (269 )      (175 )
         Nontaxable                               352           (258 )        94
         Total interest income                  2,588         (1,377 )     1,211

         Interest-bearing Liabilities:
         Deposits                                 291           (659 )      (368 )
         Short-term borrowings                      1             (2 )        (1 )
         Long-term debt                          (124 )           42         (82 )
         Total interest expense                   168           (619 )      (451 )
         Net interest income                $   2,420           (758 )     1,662

Net interest income on a fully tax-equivalent basis for the first six months of 2013 totaled $14,996,000, a $1,662,000 increase from the same six month period of 2012. Total interest income increased $1,211,000 and total interest expense decreased $451,000.

The increase in total interest income was primarily due to a $111.3 million increase in average total earning assets, partially offset by a 27 basis point 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.


Table of Contents
LCNB CORP. AND SUBSIDIARIES

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 a 23 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by a $74.2 million increase in average interest-bearing liabilities. The increase in average interest-bearing liabilities was primarily due to an $80.8 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 previously described payment in full of a Federal Home Loan Bank advance in August 2012. The decrease in the average rate paid on interest-bearing liabilities reflects a general decrease in market rates.

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, 2013 and 2012 was $42,000 and $91,000, respectively, and $191,000 and $306,000 for the six months ended June 30, 2013 and 2012, respectively. The decrease in the provision reflects stabilization in the credit quality of the loan portfolio in part due to 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

Three Months Ended June 30, 2013 vs. 2012.
Total non-interest income for the second quarter 2013 was $423,000 greater than for the second quarter 2012 primarily due to a $164,000 increase in service charges and fees on deposit accounts and a $136,000 increase in trust income.
Service charges and fees on deposit accounts increased primarily due to a greater number of deposit accounts resulting from the merger. Trust income increased primarily due to an increase in the fair value of trust assets and brokerage accounts managed.

Six Months Ended June 30, 2013 vs. 2012.
Non-interest income for the first six months of 2013 was $594,000 greater than the comparable period in 2012. The increase was largely due to a $265,000 increase in service charges and fees on deposit accounts and to a $236,000 increase in net gain on sales of securities. Service charges and fees on deposit accounts increased for substantially the same reasons mentioned above.
Net gain on sales of securities increased due to a higher volume of sales and to favorable pricing.


Table of Contents
LCNB CORP. AND SUBSIDIARIES

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

Non-Interest Expense

Three Months Ended June 30, 2013 vs. 2012.
Non-interest expense for the second quarter 2013 was $994,000 greater than for the second quarter 2012 due primarily to a $279,000 increase in salaries and employee benefits, a $128,000 increase in net occupancy expense, and a $535,000 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. The increase in net occupancy expense also reflects increased maintenance costs for the additional offices. Other non-interest expense for the second quarter 2013 includes an additional $271,000 in costs related to the merger and conversion of Citizens' data processing system to LCNB's system.

Six Months Ended June 30, 2013 vs. 2012.
Non-interest expense for the first six months of 2013 was $2,637,000 greater than for the same period in 2012 due primarily to a $591,000 increase in salaries and employee benefits, a $227,000 increase in net occupancy expense, and a $1,677,000 increase in other non-interest expense. Salaries and employee benefits and net occupancy expense increased for substantially the same reasons mentioned above. Other non-interest expense for the first half of 2013 includes $1,326,000 in costs related to the merger and data system conversion. Increases in intangible amortization expense of $133,000 and other expenses associated with the operations of the newly acquired branches also contributed to the overall increase in other non-interest expense in 2013. Partially offsetting these increased costs was a $293,000 decrease in net costs related to other real estate owned, including a gain recognized in the first quarter 2013 on the sale of commercial real estate property and a decrease in impairment write-downs and other holding costs.

Income Taxes
LCNB's effective tax rates for the six months ended June 30, 2013 and 2012 were 24.8% 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
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 $20.4 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 June 30, 2013 was $12.5 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.


Table of Contents
LCNB CORP. AND SUBSIDIARIES

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

Liquidity
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 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 Corp. without needing to request approval. The Bank is not aware of any reasons why it would not receive such approval.

Liquidity is the ability to have funds available at all times to meet the . . .

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