Annual Statements Open main menu

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

UNITED STATES




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

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 
 
  

March 31,

 

December 31,

  

2005

 

2004

  

(Unaudited)

  

ASSETS:

        

   Cash and due from banks

 

$

15,967 

   

10,715 

 

   Federal funds sold

  

8,900 

   

32,400 

 

        Total cash and cash equivalents

  

24,867 

   

43,115 

 
         

   Securities available for sale, at market value

  

127,417 

   

113,437 

 

   Federal Reserve Bank stock and Federal Home

     Loan Bank stock, at cost

  


3,085 

   


3,058 

 

   Loans, net

  

338,401 

   

334,440 

 

   Premises and equipment, net

  

12,914 

   

12,233 

 

   Intangibles, net

  

2,018 

   

2,173 

 
         

   Other assets

  

14,774 

   

13,795 

 

            TOTAL ASSETS

 

$

523,476 

   

522,251 

 
         

LIABILITIES

        

   Deposits -

        

    Noninterest-bearing

 

$

73,325 

   

73,417 

 

    Interest-bearing

  

392,436 

   

390,483 

 

        Total deposits

  

465,761 

   

463,900 

 

   Long-term debt

  

2,121 

   

2,137 

 

   Accrued interest and other liabilities

  

3,751 

   

3,918 

 

            TOTAL LIABILITIES

  

471,633 

   

469,955 

 
         

SHAREHOLDERS' EQUITY

        

   Common stock-no par value, authorized 4,000,000

     shares; issued and outstanding 3,551,884 shares

  


10,560 

   


10,560 

 

   Surplus

  

10,555 

   

10,553 

 

   Retained earnings

  

37,177 

   

36,735 

 

   Treasury shares at cost, 226,635 and 223,585 shares

     at March 31, 2005 and December 31, 2004,   

     respectively

  



(6,194)

   



(6,078)

 

   Accumulated other comprehensive income (loss),

     net of taxes

  


(255)

   


526 

 

            TOTAL SHAREHOLDERS' EQUITY

  

51,843 

   

52,296 

 
         

            TOTAL LIABILITES AND

               SHAREHOLDERS' EQUITY

 


$


523,476 

   


522,251 

 
         
         

The accompanying notes to the consolidated financial statements are an integral part of these statements.

         

- 1 -













LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands)

(Unaudited)

 
   

Three Months Ended

 
   

March 31,

 
   

2005

   

2004

 

INTEREST INCOME:

        

   Interest and fees on loans

 

$

5,335

   

5,060

 

   Dividends on Federal Reserve Bank

     and Federal Home Loan Bank stock

  


27

   


23

 

   Interest on investment securities-

        

       Taxable

  

613

   

747

 

       Non-taxable

  

494

   

494

 

   Other short-term investments

  

79

   

34

 

        TOTAL INTEREST INCOME

  

6,548

   

6,358

 
         

INTEREST EXPENSE:

        

   Interest on deposits

  

1,942

   

1,808

 

   Interest on borrowings

  

33

   

54

 

        TOTAL INTEREST EXPENSE

  

1,975

   

1,862

 

           NET INTEREST INCOME

  

4,573

   

4,496

 

   PROVISION FOR LOAN LOSSES

  

98

   

90

 
         

        NET INTEREST INCOME AFTER

          PROVISION FOR LOAN LOSSES

  


4,475

   


4,406

 
         

NON-INTEREST INCOME:

        

   Trust income

  

314

   

365

 

   Service charges and fees

  

926

   

899

 

   Net gain on sales of securities

  

-

   

127

 

   Insurance agency income

  

311

   

326

 

   Earnings from bank owned life insurance

  

118

   

-

 

   Gains from sales of mortgage loans

  

11

   

21

 

   Gain from sale of credit card portfolio

  

-

   

403

 

   Other operating income

  

35

   

37

 

        TOTAL NON-INTEREST INCOME

  

1,715

   

2,178

 
         

NON-INTEREST EXPENSE:

        

   Salaries and wages

  

1,829

   

1,772

 

   Pension and other employee benefits

  

502

   

532

 

   Equipment expenses

  

272

   

248

 

   Occupancy expense – net

  

350

   

296

 

   State franchise tax

  

152

   

137

 

   Marketing

  

120

   

135

 

   Intangible amortization

  

146

   

152

 
         
         
         

   Other non-interest expense

  

954

   

1,008

 

        TOTAL NON-INTEREST EXPENSE

  

4,325

   

4,280

 
         

        INCOME BEFORE INCOME TAXES

  

1,865

   

2,304

 

PROVISION FOR INCOME TAXES

  

459

   

642

 

        NET INCOME

 

$

1,406

   

1,662

 
         

Dividends declared per common share

 

$

0.29

   

0.275

 
         

Earnings per common share:

        

   Basic

 

$

0.42

   

0.49

 

   Diluted

  

0.42

   

0.49

 
         

Average shares outstanding:

        

   Basic

  

3,326,606

   

3,373,582

 

   Diluted

  

3,327,982

   

3,374,534

 
         
         

The accompanying notes to consolidated financial statements are an integral part of these statements.

         

- 2 -














LCNB CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(Unaudited)

 
         
   

Three Months Ended

 
   

March 31,

 
   

2005

   

2004

 
         

Net Income

 

$

1,406 

   

1,662 

 
         

Other comprehensive income (loss):

        

   Net unrealized gain (loss) on available for

        

     sale securities (net of taxes of $402

        

     and $264 for the three months ended March 31, 2005

        
         

     and March 31, 2004, respectively)

  

(781)

   

512 

 
         

   Reclassification adjustment for net realized

        

     gain on sale of available for sale securities

        

     included in net income (net of taxes of

        

     $43 for the three months ended March

        

     31, 2004)

  

   

(85)

 
         

Total comprehensive income

 

$

625 

   

2,089 

 
         
         
         

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

- 3 -















LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

(Unaudited)

                 
          

Accumulated

    
          

Other

  

Total

 
  

Common

   

Retained

 

Treasury

 

Comprehensive

 

Shareholders'

  

Shares

 

Surplus

 

Earnings

 

Shares

 

Income

  

Equity

 
                 

Balance January 1, 2004

$

10,560

 

10,553

 

33,872 

 

(4,356)

  

1,819 

   

52,448 

 
                 

Net income

     

1,662 

        

1,662 

 
                 

Change in estimated fair value of    

  securities available for sale, net of  

  tax and reclassification adjustment

          



427 

   



427 

 
                 

Treasury shares purchased

       

(70)

      

(70)

 
                 

Cash dividends declared

                

  $0.275 per share

     

(927)

        

(927)

 
                 

Balance March 31, 2004

$

10,560

 

10,553

 

34,607 

 

(4,426)

  

2,246 

   

53,540 

 
                 
                 

Balance January 1, 2005

$

10,560

 

10,553

 

36,735 

 

(6,078)

  

526 

   

52,296 

 
                 

Net income

     

1,406 

        

1,406 

 
                 

Change in estimated fair value of

  securities available for sale, net of

  tax and reclassification adjustment

          



(781)

   



(781)

 
                 

Compensation expense relating to

  stock options

   


2

          


 
                 

Treasury shares purchased

       

(116)

      

(116)

 
                 

Cash dividends declared

                

  $0.29 per share

     

(964)

        

(964)

 
                 

Balance March 31, 2005

$

10,560

 

10,555

 

37,177 

 

(6,194)

  

(255)

   

51,843 

 
                 
                 
                 

The accompanying notes to consolidated financial statements are an integral part of these statements.

                 

- 4 -
















LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
   
  

Three Months Ended

  

March 31,

  

2005

 

2004

CASH FLOWS FROM OPERATING ACTIVITIES:

    

   Net income

$

1,406 

 

1,662 

   Adjustments to reconcile net income to net cash flows from operating activities-

    

      Depreciation, amortization and accretion

 

639 

 

783 

      Provision for loan losses

 

98 

 

90 

      Federal Home Loan Bank stock dividends

 

(27)

 

(23)

      Earnings on bank owned life insurance

 

(118)

 

      Realized gains on sales of securities available for sale

 

 

(127)

      Realized gain on sale of credit card portfolio

 

 

(403)

      Origination of mortgage loans for sale

 

(728)

 

(578)

      Realized gains from sales of mortgage loans

 

(11)

 

(21)

      Proceeds from sales of mortgage loans

 

731 

 

593 

      Compensation expense related to stock options

 

 

      (Increase) decrease in income receivable

 

(335)

 

229 

      (Increase) decrease in other assets

 

(197)

 

(29)

      Increase (decrease) in other liabilities

 

267 

 

383 

         TOTAL ADJUSTMENTS

 

321 

 

897 

     

            NET CASH FLOWS FROM OPERATING ACTIVITIES

 

1,727 

 

2,559 

     

CASH FLOWS FROM INVESTING ACTIVITIES:

    

   Proceeds from sales of securities available for sale

 

 

11,510 

   Proceeds from maturities of securities available for sale

 

5,065 

 

13,676 

   Purchase of securities available for sale

 

(20,394)

 

(10,618)

   Proceeds from sale of credit card portfolio

 

 

2,963 

   Net decrease (increase) in loans

 

(4,115)

 

(3,551)

   Purchases of premises and equipment

 

(937)

 

(659)

   Proceeds from sales of premises and equipment

 

 

            NET CASH FLOWS FROM INVESTING ACTIVITIES

 

(20,381)

 

13,323 

     

CASH FLOWS FROM FINANCING ACTIVITIES:

    

   Net change in deposits

 

1,861 

 

(23,894)

   Net change in short-term borrowings

 

(359)

 

(218)

   Principal payments on long-term debt

 

(16)

 

(15)

   Cash dividends paid

 

(964)

 

(927)

   Purchases of treasury shares

 

(116)

 

(70)

            NET CASH FLOWS FROM FINANCING ACTIVITIES

 

406 

 

(25,124)

     

            NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(18,248)

 

(9,242)

     

CASH AND CASH EQUIVALENTS AT

   BEGINNING OF  PERIOD

 


43,115 

 


34,409 

     

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

24,867 

 

25,167 

     

SUPPLEMENTAL CASH FLOW INFORMATION:

    
     

CASH PAID DURING THE YEAR FOR:

    

   Interest paid

$

1,976 

 

1,949 

   Income tax paid

 

23 

 

     
     
     

The accompanying notes to consolidated financial statements are an integral part of these statements.

     

- 5 -

















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.



- 6 -














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):


  

For the Three Months

 
  

Ended March 31,

 
  

2005

 

2004

 
      

Net income

$

1,406

 

1,662

 
      

Weighted average number of shares

 outstanding used in the calculation of

 basic earnings per common share

 



3,326,606

 



3,373,582

 
      

Add- Dilutive effect of stock options

 

1,376

 

952

 
      

Adjusted weighted average number

 of shares outstanding used in the

 calculation of diluted earnings per

 common share

 




3,327,982

 




3,374,534

 
      

Basic earnings per common share

$

0.42

 

0.49

 
      

Diluted earnings per common share

$

0.42

 

0.49

 
      


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):

 

 

March 31, 2005

  

Amortized

Cost

 

Unrealized

Gains

 

Unrealized

Losses

 

Market

Value

 

U.S. Treasury notes

$

4,165

 

-

 

39

 

4,126

 

U.S. Agency notes

 

37,835

 

26

 

322

 

37,539

 

U.S. Agency mortgage-backed securities

 

27,034

 

41

 

534

 

26,541

 

Municipal securities:

         

     Non-taxable

 

51,289

 

724

 

204

 

51,809

 

     Taxable

 

7,479

 

28

 

105

 

7,402

 
 

$

127,802

 

819

 

1,204

 

127,417

 



- 7 -











LCNB Corp. and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

(Continued)



Note 3 – Investment Securities (continued)


 

December 31, 2004

  

Amortized

Cost

 

Unrealized

Gains

 

Unrealized

Losses

 

Market

Value

 
          

U.S. Treasury notes

$

1,193

 

1

 

-

 

1,194

 

U.S. Agency notes

 

23,940

 

45

 

196

 

23,789

 

U.S. Agency mortgage-backed securities

 

28,659

 

98

 

254

 

28,503

 

Municipal securities:

         

     Non-taxable

 

51,149

 

1,197

 

74

 

52,272

 

     Taxable

 

7,699

 

55

 

75

 

7,679

 
 

$

112,640

 

1,396

 

599

 

113,437

 


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):


  

March 31,

 

December 31,

   

2005

   

2004

 
         

Commercial and industrial

 

$

35,969 

   

32,931 

 

Commercial, secured by real estate

  

105,649 

   

107,138 

 

Residential real estate

  

164,341 

   

159,286 

 

Consumer

  

32,917 

   

34,672 

 

Agricultural

  

905 

   

1,653 

 

Other loans

  

165 

   

167 

 

Lease financing

  

110 

   

253 

 
   

340,056 

   

336,100 

 

Deferred net origination costs

  

495 

   

490 

 
   

340,551 

   

336,590 

 

Allowance for loan losses

  

(2,150)

   

(2,150)

 

      Loans – net

 

$

338,401 

   

334,440 

 



- 8 -












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):


   

Three Months Ended

 
   

March 31,

 
   

2005

   

2004

 
         

Balance - beginning of year

 

$

2,150 

   

2,150 

 

Provision for loan losses

  

98 

   

90 

 

Charge-offs

  

(196)

   

(107)

 

Recoveries

  

98 

   

17 

 

     Balances – end of period

 

$

2,150 

   

2,150 

 


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):


  

March 31,

 

December 31,

   

2005

   

2004

 
         

Non-accrual loans

 

$

78

   

-

 

Past-due 90 days or more and still accruing

  

70

   

165

 

Restructured loans

  

1,817

   

1,817

 

     Total

 

$

1,965

   

1,982

 


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.  



- 9 -












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):


  

March 31,

 

December 31,

   

2005

   

2004

 
         

Commitments to extend credit

 

$

75,661

   

68,235

 

Standby letters of credit

  

6,270

   

6,186

 


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.


.


- 10 -













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.




- 11 -













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):


  

For the Three Months

 
  

Ended March 31,

 
  

2005

 

2004

 
      

Service cost

$

155 

 

163 

 

Interest cost

 

73 

 

62 

 

Expected return on plan assets

 

(80)

 

(81) 

 

Amortization on net (gain) loss

 

 

18 

 

     Net periodic pension cost

$

149 

 

162 

 


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.



















- 12 -













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



- 13 -












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.



- 14 -












LCNB Corp. and Subsidiaries


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

Operations (continued)


 

Three Months Ended March 31,

 

2005

 

2004

 

Average

 

Interest

 

Average

 

Average

 

Interest

 

Average

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

 

(Dollars in thousands)

                      

Loans (1)

$

338,498 

  

$

5,335

  

6.39%

  

$

318,089 

  

$

5,062

  

6.45%

 

Federal funds sold

 

14,790 

   

79

  

2.17

   

14,206 

   

34

  

0.97

 

Federal Reserve Bank stock

 

647 

   

-

  

-

   

647 

   

-

  

-

 

Federal Home Loan Bank stock

 

2,412 

   

27

  

4.54

   

2,315 

   

23

  

4.03

 

Investment securities:

                     

   Taxable

 

71,234 

   

613

  

3.49

   

88,049 

   

747

  

3.44

 

   Non-taxable (2)

 

52,389 

   

748

  

5.79

   

53,675 

   

748

  

5.65

 

      Total interest-earning assets

 

479,970 

   

6,802

  

5.75

   

476,981 

   

6,614

  

5.62

 

Non-earning assets

 

43,233 

          

33,504 

        

Allowance for loan losses

 

(2,157)

          

(2,153)

        

      Total assets

$

521,046 

         

$

508,332 

        
                      

Interest-bearing deposits

$

388,706 

   

1,942

  

2.03

   

378,089 

   

1,808

  

1.94

 

Short-term debt

 

495 

   

3

  

2.46

   

430 

   

1

  

0.94

 

Long-term debt

 

2,129 

   

30

  

5.71

   

4,189 

   

53

  

5.13

 

      Total interest-bearing liabilities

 

391,330 

   

1,975

  

2.05

   

382,708 

   

1,862

  

1.97

 

Demand deposits

 

74,620 

          

69,571 

        

Other liabilities

 

2,453 

          

3,017 

        

Capital

 

52,643 

          

53,036 

        

      Total liabilities and capital

$

521,046 

         

$

508,332 

        
                      

Net interest rate spread (3)

        

3.70

          

3.65

 
                      

Net interest income and net

                     

   interest margin on a taxable

                     

    equivalent basis (4)

    

$

4,827

  

4.08

      

$

4,752

  

4.04

 
                      

Ratio of interest-earning assets

                     

   to interest-bearing liabilities

 

122.65%

          

124.63%

        



(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.



- 15 -












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.


   

Three Months Ended

 
   

March 31,

 
   

2005 vs. 2004

 
   

Increase (decrease) due to:

 
  

Volume

 

Rate

  

Total

 
   

(In thousands)

 

Interest-earning Assets:

          

   Loans

 

$

322 

  

(49)

  

273 

 

   Federal funds sold

  

  

44 

  

45 

 

   Federal Reserve Bank stock

  

  

  

 

   Federal Home Loan Bank stock

  

  

  

 

   Investment securities:

          

     Taxable

  

(145)

  

11 

  

(134)

 

     Nontaxable

  

(18)

  

18 

  

 

        Total interest income

  

161 

  

27 

  

188 

 
           

Interest-bearing Liabilities:

          

   Deposits

  

52 

  

82 

  

134 

 

   Short-term borrowings

  

  

  

 

   Long-term debt

  

(28)

  

  

(23)

 

        Total interest expense

  

24 

  

89 

  

113 

 

           Net interest income

 

$

137 

  

(62)

  

75 

 


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.      




- 16 -













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.  


  

Three Months Ended

 
  

March 31,

 
  

2005

 

2004

 
  

(In thousands)

      

Balance, beginning of period

$

2,150 

 

2,150 

 
      

   Charge-offs

 

(196)

 

(107)

 

   Recoveries

 

98 

 

17 

 

      Net charge-offs

 

(98)

 

(90)

 
      

Provision for loan losses

 

98 

 

90 

 
      

Balance, end of period

$

2,150 

 

2,150 

 


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.



- 17 -












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:


  

March 31,

 

December 31,

   

2005

   

2004

 
   

(In thousands)

         

Non-accrual loans

 

$

78

   

-

 

Past due 90 days or more and still accruing

  

70

   

165

 

Restructured loans

  

1,817

   

1,817

 

     Total

 

$

1,965

   

1,982

 


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.  



- 18 -












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.



- 19 -












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.  


  

CONDENSED QUARTERLY AVERAGE

 
  

BALANCE SHEETS

 
 

March 31,

 

December 31,

 

September 30,

  

2005

   

2004

   

2004

 
  

(In thousands)

 

ASSETS

           

  Interest earning:

           

    Federal funds sold

$

14,790 

   

31,674 

   

8,252 

 

    Investment securities

 

126,682 

   

122,496 

   

137,943 

 

    Loans

 

338,498 

   

336,022 

   

333,352 

 

      Total interest-earning assets

 

479,970 

   

490,192 

   

479,547 

 
            

  Noninterest-earning:

           

    Cash and due from banks

 

14,433 

   

14,080 

   

14,153 

 

    All other assets

 

28,800 

   

21,264 

   

19,146 

 

    Allowance for credit losses

 

(2,157)

   

(2,155)

   

(2,160)

 

        TOTAL ASSETS

$

521,046 

   

523,381 

   

510,686 

 
            

LIABILITIES

           

  Interest-bearing:

           

    Interest-bearing deposits

$

388,706 

   

386,722 

   

376,460 

 

    Short-term borrowings

 

495 

   

691 

   

529 

 

    Long-term debt

 

2,129 

   

3,747 

   

4,160 

 

      Total interest-bearing liabilities

 

391,330 

   

391,160 

   

381,149 

 
            

  Noninterest-bearing:

           

    Noninterest-bearing deposits

 

74,620 

   

76,498 

   

75,157 

 

    All other liabilities

 

2,453 

   

3,120 

   

2,549 

 

        TOTAL LIABILITIES

 

468,403 

   

470,778 

   

458,855 

 
            

SHAREHOLDERS' EQUITY

 

52,643 

   

52,603 

   

51,831 

 
            

        TOTAL LIABILITIES AND

          SHAREHOLDERS' EQUITY


$


521,046 

   


523,381 

   


510,686 

 
            



- 20 -












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:



- 21 -












LCNB Corp. and Subsidiaries



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

Operations (continued)


  

At

 

At

  

March 31,

 

December 31,

   

2005

   

2004

 
  

(Dollars in thousands)

Regulatory Capital:

        

   Shareholders' equity

 

$

51,843 

   

52,296 

 

   Goodwill and other intangibles

  

(1,792)

   

(1,939)

 

   Net unrealized securities losses (gains)

  

255 

   

(526)

 

      Tier 1 risk-based capital

  

50,306 

   

49,831 

 
         

   Eligible allowance for loan losses

  

2,150 

   

2,150 

 

      Total risk-based capital

 

$

52,456 

   

51,981 

 
         

Capital ratios:

        

   Total risk-based

  

15.56%

   

15.49%

 

   Tier 1 risk-based

  

14.92%

   

14.85%

 

   Leverage

  

9.70%

   

9.58%

 
         

Minimum Requited Capital Ratios:

        

   Total risk-based

  

8.00%

   

8.00%

 

   Tier 1 risk-based

  

4.00%

   

4.00%

 

   Tier 1 leverage

  

3.00%

   

3.00%

 



- 22 -












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.


- 23 -












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.  


Rate Shock Scenario in Basis Points

 

Amount

(In thousands)

$ Change in

IRSA

% Change in

IRSA

Up 300

$

20,135

1,592 

8.59%

Up 200

 

19,628

1,085 

5.85%

Up 100

 

19,111

568 

3.06%

Base

 

18,543

-%

Down 100

 

17,886

(657)

-3.54%

Down 200

 

17,302

(1,241)

-6.69%

Down 300

 

16,827

(1,716)

-9.25%


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.


Rate Shock Scenario in Basis Points

 

Amount

(In thousands)

$ Change in

EVE

% Change in

EVE

Up 300

$

76,561

(3,391)

-4.24%

Up 200

 

78,867

(1,085)

-1.36%

Up 100

 

80,417

465 

0.58%

Base

 

79,952

-%

Down 100

 

76,989

(2,963)

-3.71%

Down 200

 

72,005

(7,947)

-9.94%

Down300

 

65,533

(14,419)

-18.03%

 

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.  


- 24 -












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.



- 25 -












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:



     

Total Number of

 

Maximum

     

Shares

 

Number of

     

Purchased as

 

Shares that May

 

Total

   

Part of Publicly

 

Yet Be

 

Number of

 

Average

 

Announced

 

Purchased

 

Shares

 

Price Paid

 

Plans or

 

Under the Plans

 

Purchased

 

Per Share

 

Programs

 

or Programs

        

January

 

-

  

$

-

   

-

   

37,469

 

February

 

3,050

   

38.00

   

3,050

   

34,419

 

March

 

-

   

-

   

-

   

34,419

 

   Total

 

3,050

  

$

38.00

   

3,050

   

34,419

 
                


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.



- 26 -













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


(a)

Exhibits

  
    
 

Exhibit No.

 

Title

 

  3(i)

 

Articles of Incorporation

    
    
 

  3(ii)

 

Regulations

    
    
 

  15

 

Letter regarding unaudited interim financial information.

    
 

  31.1

 

Certification of Chief Executive Officer under Section 302 of the

   

Sarbanes-Oxley Act of 2002.

    
 

  31.2

 

Certification of Chief Financial Officer under Section 302 of the

   

Sarbanes-Oxley Act of 2002.

    
 

  32

 

Certification of Chief Executive Officer and Chief Financial Officer

   

under Section 906 of the Sarbanes-Oxley Act of 2002.

    






- 27 -













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



- 28 -