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LCNB > SEC Filings for LCNB > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for LCNB CORP


8-Nov-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 nine months ended September 30, 2013 was $2,357,000 (total basic and diluted earnings per common share of $0.31 and $0.30, respectively) and $6,433,000 (total basic and diluted earnings per common share of $0.85 and $0.83, respectively), respectively. This compares to net income of $1,847,000 (total basic and diluted earnings per common share of $0.27) and $6,111,000 (total basic and diluted earnings per common share of $0.91 and $0.90) for the same three and nine-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 nine months ended September 30, 2013 increased $1,241,000 and $2,871,000, 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 nine months ended September 30, 2013 was $258,000 and $373,000 less than the comparable periods in 2012. Net loan charge-offs for the first nine months of 2013 and 2012 totaled $383,000 and $807,000, respectively. Non-accrual loans and loans past due 90 days or more and still accruing interest totaled $2,857,000 or 0.50% of total loans at September 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 $1,561,000 at September 30, 2013 primarily due the sale of commercial real estate property during the first quarter 2013.

Non-interest income for the three-month period in 2013 was $158,000 less than the comparable period in 2012 and $436,000 greater for the nine-month period. The three-month period was less primarily due to decreases in gains from sales of investment securities and mortgage loans, partially offset by increases in service charges and fees on deposit accounts. For the nine-month period, decreased gains from sales of investment securities and mortgage loans were more than offset by increases in service charges and fees on deposit accounts. The increases in service charges and fees were primarily due to a greater number of deposit accounts resulting from the merger.

Non-interest expense for the three and nine months ended September 30, 2013 was $599,000 and $3,236,000 greater than the comparable periods in 2012. 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. The nine-month period ended September 30, 2013 also includes $1,326,000 in costs related to the merger with Citizens National Bank that were recognized during the first and second quarters. These expense increases during the nine-month period were partially offset by a gain recognized on the sale of other real estate owned property during the first quarter 2013.


Table of Contents

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, 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 September 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 September 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)               $    561,345        6,902         4.88 %    $    457,138        5,822         5.05 %
Interest-bearing               4,724            2         0.17 %          10,175            4         0.16 %
demand deposits
Federal Reserve Bank           1,602            -            - %             949            -            - %
stock
Federal Home Loan              2,854           30         4.17 %           2,091           22         4.17 %
Bank stock
Investment
securities:
Taxable                      195,711          862         1.75 %         197,971          941         1.89 %
Non-taxable (2)              100,603          991         3.91 %          85,135          932         4.34 %
Total earnings assets        866,839        8,787         4.02 %         753,459        7,721         4.07 %
Non-earning assets            83,069                                      63,687
Allowance for loan            (3,412 )                                    (2,925 )
losses
Total assets            $    946,496                                $    814,221
Interest-bearing        $    652,371          875         0.53 %    $    579,128        1,050         0.72 %
deposits
Short-term borrowings         24,622           11         0.18 %          14,544            4         0.11 %
Long-term debt                12,564          109         3.44 %          17,561          136         3.07 %
Total                        689,557          995         0.57 %         611,233        1,190         0.77 %
interest-bearing
liabilities
Demand deposits              161,725                                     114,053
Other liabilities              4,166                                       7,369
Capital                       91,048                                      81,566
Total liabilities and   $    946,496                                $    814,221
capital
Net interest rate                                         3.45 %                                      3.30 %
spread (3)
Net interest income
and net interest
margin on a
taxable-equivalent
basis (4)                                   7,792         3.57 %                        6,531         3.44 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                   125.71 %                                    123.27 %

(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 September 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
                                       September 30, 2013 vs. 2012
                                       Increase (decrease) due to:
                                      Volume          Rate      Total
                                             (In thousands)
Interest-earning Assets:
Loans                              $    1,287         (207 )   1,080
Interest-bearing demand deposits           (2 )          -        (2 )
Federal Reserve Bank stock                  -            -         -
Federal Home Loan Bank stock                8            -         8
Investment securities:
Taxable                                   (11 )        (68 )     (79 )
Non-taxable                               158          (99 )      59
Total interest income                   1,440         (374 )   1,066
Interest-bearing Liabilities:
Deposits                                  121         (296 )    (175 )
Short-term borrowings                       4            3         7
Long-term debt                            (42 )         15       (27 )
Total interest expense                     83         (278 )    (195 )
Net interest income                $    1,357          (96 )   1,261

Net interest income on a fully tax-equivalent basis for the three months ended September 30, 2013 totaled $7,792,000, an increase of $1,261,000 over the comparable period in 2012. Total interest income increased $1,066,000 and total interest expense decreased $195,000.

The increase in total interest income was primarily due to a $113.4 million increase in average total earning assets, partially offset by a 5 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, partially offset by the recognition of accretable income resulting from the payoff of certain acquired credit impaired loans.

The decrease in total interest expense was primarily due to a 20 basis point decrease in the average rate paid on interest-bearing liabilities, partially offset by an $78.3 million increase in average interest-bearing liabilities.
The increase in average interest-bearing liabilities was primarily due to an $73.2 million increase in average interest-bearing deposits primarily due to the merger and a $10.1 million increase in average short-term borrowings, partially offset by a $5.0 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.

Nine Months Ended September 30, 2013 vs. 2012.
The following table presents, for the nine months ended September 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.


Table of Contents

                          LCNB CORP. AND SUBSIDIARIES

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




                                                  Nine Months Ended September 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)               $    549,597       20,298         4.94 %    $    458,548       17,950         5.23 %
Federal funds sold             1,027            1         0.13 %               -            -            -
Interest-bearing               8,663           15         0.23 %          12,002           19         0.21 %
demand deposits
Federal Reserve Bank           1,380           38         3.68 %             946           28         3.95 %
stock
Federal Home Loan              2,817           91         4.32 %           2,091           68         4.34 %
Bank stock
Investment
securities:
Taxable                      196,601        2,556         1.74 %         190,845        2,810         1.97 %
Non-taxable (2)               98,783        2,927         3.96 %          82,395        2,774         4.50 %
Total earnings assets        858,868       25,926         4.04 %         746,827       23,649         4.23 %
Non-earning assets            86,032                                      64,053
Allowance for loan            (3,392 )                                    (2,878 )
losses
Total assets            $    941,508                                $    808,002
Interest-bearing        $    654,913        2,789         0.57 %    $    576,636        3,332         0.77 %
deposits
Short-term borrowings         16,753           18         0.14 %          12,716           12         0.13 %
Long-term debt                12,952          331         3.42 %          19,695          440         2.98 %
Total                        684,618        3,138         0.61 %         609,047        3,784         0.83 %
interest-bearing
liabilities
Demand deposits              158,059                                     111,766
Other liabilities              5,698                                       6,908
Capital                       93,133                                      80,281
Total liabilities and   $    941,508                                $    808,002
capital
Net interest rate                                         3.43 %                                      3.40 %
spread (3)
Net interest income
and net interest
margin on a
taxable-equivalent
basis (4)                                  22,788         3.55 %                       19,865         3.55 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                   125.45 %                                    122.62 %

(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.

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, 2013 as compared to the same period in 2012.


Table of Contents

                          LCNB CORP. AND SUBSIDIARIES

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




                                            Nine Months Ended
                                       September 30, 2013 vs. 2012
                                       Increase (decrease) due to:
                                      Volume          Rate      Total
                                             (In thousands)
Interest-earning Assets:
Loans                              $    3,407       (1,059 )   2,348
Federal funds sold                          1            -         1
Interest-bearing demand deposits           (6 )          2        (4 )
Federal Reserve Bank stock                 12           (2 )      10
Federal Home Loan Bank stock               23            -        23
Investment securities:
Taxable                                    83         (337 )    (254 )
Non-taxable                               510         (357 )     153
Total interest income                   4,030       (1,753 )   2,277
Interest-bearing Liabilities:
Deposits                                  412         (955 )    (543 )
Short-term borrowings                       4            2         6
Long-term debt                           (166 )         57      (109 )
Total interest expense                    250         (896 )    (646 )
Net interest income                $    3,780         (857 )   2,923

Net interest income on a fully tax-equivalent basis for the first nine months of 2013 totaled $22,788,000, a $2,923,000 increase from the same nine-month period of 2012. Total interest income increased $2,277,000 and total interest expense decreased $646,000.

The increase in total interest income was primarily due to a $112.0 million increase in average total earning assets, partially offset by a 19 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, partially offset by the recognition of accretable income resulting from the payoff of certain acquired credit impaired loans.

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 $75.6 million increase in average interest-bearing liabilities. The increase in average interest-bearing liabilities was primarily due to an $78.3 million increase in average interest-bearing deposits primarily due to the merger, partially offset by a $6.7 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 September 30, 2013 and 2012 was $178,000 and $436,000, respectively, and $369,000 and $742,000 for the nine months ended September 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.


Table of Contents

LCNB CORP. AND SUBSIDIARIES

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

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 September 30, 2013 vs. 2012.
Total non-interest income for the third quarter 2013 was $158,000 less than for the third quarter 2012 primarily due to a $369,000 decrease in net gains on sales of investment securities and a $94,000 decrease in net gains from sales of mortgage loans. The decreases reflect declines in the volume of investment securities and loans sold.

These decreases were partially offset by a $151,000 increase in service charges and fees on deposit accounts and a $96,000 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 along with fee adjustments that became effective July 1, 2013.

Nine Months Ended September 30, 2013 vs. 2012.
Non-interest income for the first nine months of 2013 was $436,000 greater than the comparable period in 2012. The increase was largely due to a $416,000 increase in service charges and fees on deposit accounts for substantially the same reasons mentioned above. Net gain on sales of securities decreased $133,000 and net gains from sales of mortgage loans decreased $55,000 for substantially the same reasons mentioned above.

Non-Interest Expense

Three Months Ended September 30, 2013 vs. 2012.
Non-interest expense for the third quarter 2013 was $599,000 greater than for the third quarter 2012 due primarily to a $188,000 increase in salaries and employee benefits and a $220,000 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. Equipment expenses and net occupancy expense increased slightly due to increased costs for the additional offices. FDIC insurance premiums increased due to a higher level of deposit accounts. Other non-interest expense increased due to smaller increases in various accounts.

Nine Months Ended September 30, 2013 vs. 2012.
Non-interest expense for the first nine months of 2013 was $3,236,000 greater than for the same period in 2012 due primarily to a $779,000 increase in salaries and employee benefits, a $119,000 increase in equipment expenses, a $287,000 increase in net occupancy expense, and a $1,897,000 increase in other non-interest expense. Salaries and employee benefits, equipment expenses, and net occupancy expense increased for substantially the same reasons mentioned above. Other non-interest expense for the nine-month period in 2013 included $1,326,000 in costs related to the merger and data system conversion. Increases in intangible amortization expense of $205,000 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 $265,000 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 nine months ended September 30, 2013 and 2012 were 25.0% and 24.9%, 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.


Table of Contents

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 - Acquisition 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 $37.1 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 September 30, 2013 was $12.7 million greater than the balance shown for December 31, 2012 due primarily 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 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 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 and securities available for sale. At September 30, 2013, LCNB's liquid assets amounted to $286.0 million or 30.3% of total assets. This compares to liquid assets totaling $272.0 million or 34.5% . . .

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