LCNB CORP - Quarter Report: 2005 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

FORM 10-Q

(Mark One)

(  X  )

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

 (      )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from

  to  

Commission File Number  000-26121

LCNB Corp.

(Exact name of registrant as specified in its charter)

Ohio

 31-1626393

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

2 North Broadway, Lebanon, Ohio   45036

(Address of principal executive offices, including Zip Code)

(513) 932-1414

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X  No   

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   X  No   

The number of shares outstanding of the issuer's common stock, without par value, as of April 25, 2005 was 3,325,249 shares.

LCNB Corp.

INDEX

Page No.

Part I - Financial Information

Item 1.  Financial Statements

Consolidated Balance Sheets -

March 31, 2005, and December 31, 2004

1

Consolidated Statements of Income -

Three Months Ended March 31, 2005 and 2004

2

Consolidated Statements of Comprehensive Income -

Three Months Ended March 31, 2005 and 2004

3

Consolidated Statements of Stockholders' Equity -

Three Months Ended March 31, 2005 and 2004

4

Consolidated Statements of Cash Flows -

Three Months Ended March 31, 2005 and 2004

5

Notes to Consolidated Financial Statements

6-12

Report of Independent Registered Public Accounting Firm

13

Item 2.  Management's Discussion and Analysis of Financial

Condition and Results of Operations

14-23

Item 3.  Quantitative and Qualitative Disclosures about

Market Risks

24

Item 4  Controls and Procedures

25

Part II - Other Information

Item 1  Legal Proceedings

26

Item 2  Changes in Securities and Use of Proceeds

26

Item 3  Defaults by the Company on its Senior Securities

27

Item 4  Submission of Matters to a Vote of Security Holders

27

Item 5  Other Information

27

Item 6  Exhibits and Reports on Form 8-K

27

Signatures

28

LCNB Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

Note 1 - Basis of Presentation

Substantially all of the assets, liabilities and operations of LCNB Corp. ("LCNB") are attributable to its wholly owned subsidiaries, Lebanon Citizens National Bank ("Lebanon Citizens") and Dakin Insurance Agency, Inc. ("Dakin").  The accompanying unaudited consolidated financial statements include the accounts of LCNB, Lebanon Citizens, and Dakin.

The statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, the unaudited consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year ending December 31, 2005.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in LCNB's 2004 Form 10-K filed with the Securities and Exchange Commission.

The Board of Directors of LCNB at the regular meeting of April 13, 2004 declared a stock dividend of one share for each share owned to shareholders of record on April 20, 2004.  The stock dividend was paid on April 30, 2004 and was accounted for as a stock split.  All share and per share information for all periods presented have been retroactively restated to reflect the stock dividend.

The financial information presented on pages one through twelve of this Form 10-Q has been subject to a review by J.D. Cloud & Co. L.L.P., LCNB's independent registered public accounting firm, as described in their report contained herein.

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LCNB Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

(Continued)

Note 2 - Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is adjusted for the dilutive effects of stock options.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options with proceeds used to purchase treasury shares at the average market price for the period.  The computations were as follows for the three months ended March 31, 2005 and 2004 (thousands, except share and per share data):

Note 3 -  Investment Securities

The amortized cost and estimated market value of available-for-sale investment securities at March 31, 2005 and December 31, 2004 are summarized as follows (thousands):

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LCNB Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

(Continued)

Note 3 – Investment Securities (continued)

The decline in fair values is primarily due to increases in market interest rates.  Unrealized losses on securities at March 31, 2005 and December 31, 2004 have not been recognized into income because management has the intent and ability to hold the securities for a period of time sufficient to allow for any anticipated recovery in fair values.  Therefore, no individual declines are deemed to be other than temporary.

Note 4 - Loans

Major classifications of loans at March 31, 2005 and December 31, 2004 are as follows (thousands):

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LCNB Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

(Continued)

Note 4 - Loans (continued)

Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation ("FHLMC") are not included in the accompanying balance sheets.  The unpaid principal balances of those loans at March 31, 2005 and December 31, 2004 were $45,530,000 and $46,345,000, respectively.  Loans sold to the FHLMC during the three months ended March 31, 2005 and 2004 totaled $728,000 and $578,000, respectively.  

Changes in the allowance for loan losses for the three months ended March 31, 2005 and 2004 were as follows (thousands):

Charge-offs for the three months ended March 31, 2005 consisted of consumer loans and checking and NOW account overdrafts.  Charge-offs for the three months ended March 31, 2004 consisted of consumer and credit card loans.  LCNB charges off overdrafts when considered uncollectible, but no later than 60 days from the date first overdrawn.  Prior to 2005, checking and NOW account overdrafts considered uncollectible were netted against service charges and fees in non-interest income.  There were no charge-offs on residential real estate or commercial loans for either period.

Non-accrual, past-due, and restructured loans as of March 31, 2005 and December 31, 2004 were as follows (thousands):

Non-accrual loans at March 31, 2005 consisted of a first and second residential mortgage loan to the same borrower.  Past-due 90 days or more and still accruing at March 31, 2005 consisted of consumer loans.  Consumer loans totaling $104,000 and residential mortgage loans totaling $61,000 comprised the loans classified as past-due 90 days or more and still accruing at December 31, 2004.  The restructured loan at both dates is a commercial loan secured by a combination of mortgages and other collateral.  

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LCNB Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

(Continued)

Note 5 – Other Borrowings

At March 31, 2005 and December 31, 2004, accrued interest and other liabilities included U.S. Treasury demand note borrowings of approximately $910,000 and $1,269,000, respectively.

Note 6 - Commitments and Contingent Liabilities

LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.

LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2005 and December 31, 2004 were as follows (thousands):

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses.  Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  At March 31, 2005 and December 31, 2004, outstanding guarantees of $2,067,000 and $1,983,000, respectively, were issued to developers and contractors.  These guarantees generally are fully secured and have varying maturities.  In addition, LCNB has a participation  in a letter of credit securing payment of principal and interest on a bond issue.  The participation amount at March 31, 2005 and December 31, 2004 was approximately $4.2 million.  The letter of credit will expire on July 15, 2009.  It is secured by an assignment of rents and the underlying real property.

LCNB evaluates each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower.  Collateral held varies, but may include accounts receivable; inventory; property, plant and equipment; residential realty; and income-producing commercial properties.

At March 31, 2005, LCNB is committed under various contracts to expend approximately $230,000 to complete certain building and office renovation projects and computer upgrades.  

Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.

.

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LCNB Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

(Continued)

Note 6 - Commitments and Contingent Liabilities (continued)

LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business.  Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations

Note 7 - Stock Options

LCNB established an Ownership Incentive Plan (the "Plan") during 2002 that allows for stock-based awards to eligible employees.  The awards may be in the form of stock options, share awards, and/or appreciation rights.  The Plan provides for the issuance of up to 100,000 shares.  Stock options for 4,054 shares with an exercise price of $35.315 were granted to key executive officers of LCNB during the first quarter, 2004.  No stock options were granted during the first quarter, 2005.  At March 31, 2005, 9,582 stock options with a weighted average exercise price of $30.05 were outstanding.  The options expire in 2013 and 2014.  No options have been exercised as of March 31, 2005.

Effective January 1, 2005, LCNB adopted the fair value method of accounting for stock options as described in Statement of  Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123 (revised))”.  SFAS No. 123 (revised) generally requires an entity to recognize expense for the grant-date fair value of share-based compensation, where the original SFAS No. 123, Accounting for Stock-Based Compensation, encouraged but did not require an entity to recognize expense for such transactions.  The estimated cost of share-based compensation is to be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period.  Compensation expense recognized in the consolidated statements of income for all stock options granted prior to January 1, 2005 is determined using the modified prospective approach as allowed by SFAS No. 123 (revised).  Total expense related to options included in salaries and wages in the consolidated statements of income for the three months ended March 31, 2005 was $2,000.

Prior to January 1, 2005, LCNB accounted for stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related Interpretations.  Under APB No. 25, no stock-based employee compensation cost was reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.  If LCNB had applied the fair value recognition provisions of SFAS 123 (revised) for the three months ended March 31, 2004, the pro-forma effect  on net income and basic and diluted earnings per share would not have been material.

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LCNB Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

(Continued)

Note 8 – Employee Benefits

LCNB has a noncontributory defined benefit retirement plan that covers all regular full-time employees.  The components of net periodic pension cost for the three months ended March 31, 2005 and 2004, are summarized as follows (thousands):

LCNB previously disclosed in its consolidated financial statements for the year ended December 31, 2004, that it expected to contribute $650,000 to its pension plan in 2005.  As of March 31, 2005, no contributions have been made.

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REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

LCNB Corp. and subsidiaries

Lebanon, Ohio

We have reviewed the accompanying consolidated balance sheet of LCNB Corp. and subsidiaries as of March 31, 2005, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three-month periods ended March 31, 2005 and 2004.  These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of LCNB Corp. and subsidiaries as of December 31, 2004 (presented herein), and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated February 14, 2005, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, is fairly stated in all material respects.

/s/ J.D. Cloud & Co. L.L.P.                                      

Cincinnati, Ohio

April 14, 2005

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LCNB Corp. and Subsidiaries

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, including regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, and other risks.  Actual strategies and results in future time periods may differ materially from those currently expected.  Such forward-looking statements represent management's judgment as of the current date.  LCNB disclaims, however, any intent or obligation to update such forward-looking statements.

Results of Operations

LCNB earned $1,406,000, or $0.42 per share, for the three months ended March 31, 2005 compared to $1,662,000, or $0.49 per share, for the three months ended March 31, 2004.  The return on average assets (ROAA) was 1.09% and the return on average equity (ROAE) was 10.83% for the first quarter of 2005, compared with an ROAA of 1.32% and an ROAE of 12.61% for the first quarter of 2004.

LCNB's earnings for the first three months of 2004 included $530,000, or $350,000 on an after-tax basis, in gains from sales of investment securities totaling $11.4 million and credit card receivables totaling approximately $2.5 million.  The proceeds from the sale of investment securities were primarily used to purchase securities with a slightly longer maturity and higher average interest rates than the ones sold.  LCNB management decided to exit the credit card market and sell its receivables to MBNA America because of the high administrative costs of servicing a small credit card portfolio.  LCNB is continuing to offer credit card products through a marketing agreement with MBNA America.

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, 2005 and 2004, 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.

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LCNB Corp. and Subsidiaries

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

Operations (continued)

(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 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 taxable-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, 2005 as compared to the comparable period in 2004.  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.

Net interest income on a fully tax-equivalent basis for the three months ended March 31,  2005 totaled $4,827,000, an increase of $75,000 from the comparable period in 2004.  Total interest income increased $188,000 and was largely offset by an increase in total interest expense of $113,000.  

The increase in total interest income was primarily due to a $3.0 million increase in average interest earning assets, from $477.0 million for the three months ended March 31, 2004 to $480.0 million for the same period in 2005.  A secondary factor was 13 basis point (a basis point equals 0.01%) increase in the average rate earned on earning assets, from 5.62% for the first quarter of 2004 to 5.75% for the first quarter of 2005.  The increase in average interest earning assets was due to a $20.4 million increase in average loans, largely offset by a combined decrease of $18.1 million in average taxable and nontaxable investment securities.  Most of the loan growth was in the real estate mortgage and commercial loan portfolios.  The decrease in investment securities was partially due to a reallocation of $10.0 million of investment securities to bank owned life insurance during the fourth quarter, 2004.      

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LCNB Corp. and Subsidiaries

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

Operations (continued)

The increase in total interest expense was primarily due to an 8 basis point increase in the average rate paid and secondarily to an $8.6 million increase in average interest-bearing liabilities.  Average interest-bearing deposits increased $10.6 million, while average long-term debt decreased $2.1 million.  Most of the increase in average interest-bearing deposits was in certificate of deposit accounts equal to or greater than $100,000, NOW accounts, and IRA accounts.  The decrease in long-term debt was due to the maturation of a $2.0 million Federal Home Loan Bank advance in December, 2004.

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 credit losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio.  The total loan loss provision and the other changes in the allowance for loan losses are shown below.  

Charge-offs for the three months ended March 31, 2005 consisted of consumer loans.  Charge-offs for the three months ended March 31, 2004 consisted of consumer and credit card loans.  There were no charge-offs on residential real estate or commercial loans for either period.

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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 sets forth information regarding non-accrual, past due, and restructured loans of LCNB at the dates indicated:

Charge-offs for the three months ended March 31, 2005 consisted of consumer loans and checking and NOW account overdrafts.  Charge-offs for the three months ended March 31, 2004 consisted of consumer and credit card loans.  LCNB charges off overdrafts when considered uncollectible, but no later than 60 days from the date first overdrawn.  Prior to 2005, checking and NOW account overdrafts considered uncollectible were netted against service charges and fees in non-interest income.  There were no charge-offs on residential real estate or commercial loans for either period.

Non -Interest Income

Total non-interest income for the first quarter of 2005 was $463,000 less than for the first quarter of 2004 primarily due to $530,000 in gains recognized during the first quarter, 2004 from the sales of investment securities and credit card receivables (previously discussed in the “Results of Operations” section).  The remaining $67,000 increase is primarily due to income from bank owned life insurance and an increase in service charges and fees.  LCNB did not hold bank owned life insurance during the first quarter, 2004.  These increases were partially offset by decreases in trust income, insurance agency income, and gains from sales of mortgage loans.  Trust income was less, despite a $14.1 million increase in trust assets under management when comparing March 31, 2005 with March 31, 2004, because of the absence of certain non-recurring executor and account termination fees recognized during the first quarter, 2004.  Insurance agency commissions were less primarily due to the absence of contingency commissions in 2005.  Contingency commissions are profit-sharing arrangements on property and casualty policies between the originating agency and the underwriter and are generally based on underwriting results and written premium.  As such, the amount received each year can vary significantly depending on loss experience.  

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LCNB Corp. and Subsidiaries

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

Operations (continued)

Non-Interest Expense

Total non-interest expense increased $45,000 or 1.1% during the first quarter, 2005 compared with the first quarter, 2004 primarily due to increases in salaries and wages and equipment and occupancy expenses.  Salaries and wages increased due to normal wage increases and to additional staffing required by the openings of the Fairfield branch office during the fourth quarter, 2004 and the Lebanon High School Warrior Office (“Warrior Office”) during the first quarter, 2005.  Equipment expense increased due to increased phone equipment rental costs caused by additional equipment and upgrades, primarily for the Fairfield and Warrior Offices, and to increased maintenance contract costs.  Increased expenditures for building related maintenance and repairs and additional rent expense for the Fairfield office contributed to the increase in occupancy expenses.    

Income Taxes

LCNB’s effective tax rates for the three months ended March 31, 2005 and 2004 were 24.6% and 27.9%, respectively.  The difference between the statutory rate of 34.0% and the effective tax rate is primarily due to tax-exempt interest income and, for the 2005 period, tax-exempt income from bank owned life insurance.

Financial Condition

Loans at March 31, 2005 were approximately $4.0 million greater than at December 31, 2004.  Most of the growth occurred in the residential real estate loan and commercial loan portfolios.  Growth in the home equity loan portfolio also contributed to the increase.  

Interest-bearing deposits at March 31, 2005 were approximately $2.0 million greater than at December 31, 2004.  Most of the growth occurred in the NOW account, IRA, and certificate of deposit categories, partially offset by a decrease in regular savings.

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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 highlights the changes in the balance sheet. The analysis uses quarterly averages to give a better indication of balance sheet trends.  

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LCNB Corp. and Subsidiaries

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

Operations (continued)

Average total interest-earning assets decreased approximately $10.2 million or 2.1% during the first quarter, 2005 compared to the fourth quarter, 2004.  The decrease was due to the replacement of $10.0 million of interest-earning assets with bank owned life insurance during the fourth quarter, 2004.  Bank owned life insurance is included in non-interest earning assets in the consolidated balance sheets.

Average interest-bearing deposits increased $2.0 million when comparing the first quarter, 2005 with the fourth quarter, 2004.  Certificate of deposit accounts increased $5.9 million, while regular savings decreased $3.7 million when comparing the same periods.  The increase in deposits was largely offset by a $1.6 million decrease in average long-term debt, reflecting the maturation of a $2.0 Federal Home Loan Bank note during December, 2004.

Capital

Lebanon Citizens and LCNB are required by regulators to meet certain minimum levels of capital adequacy. These are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in LCNB's assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%.  The capital leverage ratio supplements the risk-based capital guidelines. Banks are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%. For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy.  The highest "well-capitalized" category requires capital ratios of at least 10% for total risk-based, 6% for Tier 1 risk-based, and 5% for leverage.  As of the most recent notification from their regulators, Lebanon Citizens and LCNB were categorized as "well-capitalized" under the regulatory framework for prompt corrective action.  Management believes that no conditions or events have occurred since the last notification that would change the Lebanon Citizens' or LCNB's category.  A summary of the regulatory capital and capital ratios of LCNB follows:

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LCNB Corp. and Subsidiaries

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

Operations (continued)

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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 Lebanon Citizens 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, Lebanon Citizens’ primary regulator, is necessary for Lebanon Citizens to pay dividends in excess of this amount.  In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes Lebanon Citizens 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, federal funds sold and securities available for sale.  At March 31, 2005, LCNB liquid assets amounted to $152.3 million or 29.1% of total gross assets, a slight decrease from $156.6 million or 30.0% at December 31, 2004.

Liquidity is also provided by access to core funding sources, primarily core depositors in the bank’s market area.  Approximately 84.9% of total deposits at March 31, 2005 were “core” deposits.  Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000.  

Secondary sources of liquidity include LCNB’s ability to sell loan participations, borrow funds from the Federal Home Loan Bank, purchase federal funds, and borrow funds from its Federal Reserve Primary Line.  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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LCNB Corp. and Subsidiaries

Item 3.  Quantitative and Qualitative Disclosures about Market Risks

The Bank's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity Analysis (IRSA) and Economic Value of Equity (EVE) analysis for measuring and managing interest rate risk.  The IRSA model is used to estimate the effect on net interest income during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, and 300 basis points.  The base projection uses a current interest rate scenario.  As shown below, the March 31, 2005 IRSA indicates that an increase in interest rates would have a positive effect on net interest income, and a decrease in rates would have a negative effect on net interest income. The changes in net interest income for the up and down 100, 200, and 300 basis point rate assumptions are within LCNB’s acceptable ranges.  

IRSA shows the affect on net interest income during a one-year period only.  A more long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks.  The EVE analysis at March 31, 2005 is shown below.  The changes in the economic value of equity for these rate assumptions are within LCNB’s acceptable ranges.

The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results.  Assumptions used, including the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future net interest income or equity.  Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.  

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LCNB Corp. and Subsidiaries

Item 4.  Controls and Procedures

a)  Disclosure controls and procedures.  The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.  Based upon this evaluation, these officers have concluded, that as of March 31, 2005, LCNB's disclosure controls and procedures were adequate.

b)  Changes in internal control over financial reporting.  During the period covered by this report, there were no changes in LCNB's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.

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PART II.  OTHER INFORMATION

LCNB Corp. and Subsidiaries

Item 1. Legal Proceedings - Not Applicable

Item 2. Changes in Securities and Use of Proceeds

On April 17, 2001, LCNB's Board of Directors authorized three separate stock repurchase programs, two phases of which continue.  The shares purchased will be held for future corporate purposes.

Under the "Market Repurchase Program" LCNB will purchase up to 100,000 shares of its stock through market transactions with a selected stockbroker.  Through March 31, 2005, 65,581 shares had been purchased under this program.  The following table shows information relating to the repurchase of shares under the Market Repurchase Program during the three months ended March 31, 2005:

The "Private Sale Repurchase Program" is available to shareholders who wish to sell large blocks of stock at one time.  Because LCNB's stock is not widely traded, a shareholder releasing large blocks may not be able to readily sell all shares through normal procedures.  Purchases of blocks will be considered on a case-by-case basis and will be made at prevailing market prices.  There is no limit to the number of shares that may be purchased under this program.  A total of 160,144 shares have been purchased since the inception of this program.  No shares were purchased during the first quarter, 2005.

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PART II.  OTHER INFORMATION

LCNB Corp. and Subsidiaries

Item 3. Defaults Upon Senior Securities - Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders  - Not Applicable

Item 5. Other Information - Not Applicable

Item 6. Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LCNB Corp.

May 2, 2005

/s/ Stephen P. Wilson

Stephen P. Wilson, President, CEO &

Chairman of the Board of Directors

May 2, 2005

/s/Steve P. Foster

Steve P. Foster, Executive Vice President

and Chief Financial Officer

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