LCNB CORP - Annual Report: 2011 (Form 10-K)

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x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Ohio		31-1626393
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

Title of Each Class		Name of each exchange on which registered
None		None

 

 

 

 

 

PART I		3
	Item 1.  Business	3
	Item 1A.  Risk Factors	23
	Item 1B. Unresolved Staff Comments	28
	Item 2.  Properties	29
	Item 3.  Legal Proceedings	30
	Item 4.  Mine Safety Disclosures	30
PART II		31
	Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.	31
	Item 6.  Selected Financial Data	34
	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	36
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk	51
	Item 8.  Financial Statements and Supplementary Data	53
	REPORT OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING	53
	REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	54
	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	57
	Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	104
	Item 9A.  Controls and Procedures	104
	Item 9B.  Other Information	104
PART III		105
	Item 10. Directors, Executive Officers and Corporate Governance	105
	Item 11. Executive Compensation	105
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	105
	Item 13. Certain Relationships and Related Transactions, and Director Independence	105
	Item 14.  Principal Accounting Fees and Services	105
PART IV		106
	Item 15.  Exhibits, Financial Statement Schedules	106
SIGNATURES		108

		Warren				Butler				Clinton				Hamilton				Montgomery
Population, 2000 census			158,383				332,807				40,543				845,303				559,062
Population, 2010 census			212,693				368,130				42,040				802,374				535,153
Percentage increase/decrease in population			34.3	%			10.6	%			3.0	%			-5.1	%			-4.3	%
Estimated percentage of persons below poverty level			6.1	%			12.7	%			12.9	%			14.2	%			15.4	%
Estimated median household income		$	70,939			$	54,344			$	47,842			$	48,363			$	43,815
Median age			36.8				35.4				37.4				36.8				38.2
Unemployment rate:
December 2011			7.0	%			7.9	%			11.1	%			7.5	%			8.5	%
December 2010			8.4	%			8.8	%			15.0	%			8.5	%			10.1	%
December 2009			9.3	%			9.9	%			18.5	%			9.5	%			12.0	%

 

Once primarily a rural county (its population according to the 1950 census was only 38,505), Warren County experienced significant growth during the latter half of the twentieth century and into the twenty-first century.  Many people who now live in Warren County are employed by companies located in the Cincinnati and Dayton metropolitan areas.  People employed within Warren County usually work in the trade, transportation, and utilities sector, the manufacturing sector, the professional and businesses services sector, and the leisure and hospitality sector.  A sizable tourist industry that includes King’s Island, the Beach Waterpark, and the Ohio Renaissance Festival provides a number of temporary summer jobs.  Not including local government entities and school districts, which are significant sources of employment, the top five major employers in Warren County are Macy’s Credit and Customer Service, Procter and Gamble’s Mason Business Center, Atrium Medical Center (a hospital), WellPoint (health insurance), and Luxottica.

 

1.

Required regulatory agencies to take "prompt corrective action" with financial  institutions that do not meet minimum capital requirements;

 

2.

Established five capital tiers:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized;

 

3.

Imposed significant restrictions on the operations of a financial institution that is not rated well-capitalized or adequately capitalized;

 

4.

Prohibited a depository institution from making any capital distributions, including payments of dividends or paying any management fee to its holding company, if the institution would be undercapitalized as a result;

 

5.

Implemented a risk-based premium system;

 

6.

Required an audit committee to be comprised of outside directors;

 

7.

Required a financial institution with more than $1 billion in total assets to issue annual, audited financial statements prepared in conformity with U.S. generally accepted accounting principles; and

 

8.

Required a financial institution with more than $1 billion in total assets to document, evaluate, and report on the effectiveness of the entity's internal control system and required an independent public accountant to attest to management's assertions concerning the bank's internal control system.

 

 

At December 31, 2011, the Bank was well capitalized based on FDICIA's guidelines.

1.

securities underwriting, dealing, and market making;

2.

sponsoring mutual funds and investment companies;

3.

insurance underwriting and agency;

4.

merchant banking activities; and

5.

other activities that the Federal Reserve Board, in consultation with and subject to the approval of the U.S. Department of the Treasury (the “Treasury Department”), determines are financial in nature.

 

1.

Certification of financial reports by the chief executive officer ("CEO") and the chief financial officer ("CFO"), who are responsible for designing and monitoring internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to the certifying officers by others within the company;

 

2.

Inclusion of an internal control report in annual reports that include management's assessment of the effectiveness of a company's internal control over financial reporting and a report by the company's independent registered public accounting firm attesting to the effectiveness of internal control over financial reporting;

 

3.

Accelerated reporting of stock trades on Form 4 by directors and executive officers;

 

 

4.

Disgorgement requirements of incentive pay or stock-based compensation profits received within twelve months of the release of financial statements if the company is later required to restate those financial statements due to material noncompliance with any financial reporting requirement that resulted from misconduct;

 

5.

Disclosure in a company's periodic reports stating if it has adopted a code of ethics for its CFO and principal accounting officer or controller and, if such code of ethics has been implemented,  immediate disclosure of any change in or waiver of the code of ethics;

 

6.

Disclosure in a company's periodic reports stating if at least one member of the audit committee is a "financial expert," as that term is defined by the Securities and Exchange Commission (the "SEC"); and

 

7.

Implementation of new duties and responsibilities for a company's audit committee, including independence requirements, the direct responsibility to appoint the outside auditing firm and to provide oversight of the auditing firm's work, and a requirement to establish procedures for the receipt, retention, and treatment of complaints from a company's employees regarding questionable accounting, internal control, or auditing matters.

1.

Merging the Bank Insurance Fund and the Savings Association Insurance Fund into a new fund called the Deposit Insurance Fund, effective March 31, 2006;

 

2.

Increasing insurance coverage for retirement accounts from $100,000 to $250,000, effective April 1, 2006;

 

3.

Adjusting deposit insurance levels of $100,000 for non-retirement accounts and $250,000 for retirement accounts every five years based on an inflation index, with the first adjustment to be effective on January 1, 2011;

 

4.

Eliminating a 1.25% hard target Designated Reserve Ratio, as defined, and giving the FDIC discretion to set the Designated Reserve Ratio within a range of 1.15% to 1.50% for any given year;

 

5.

Eliminating certain restrictions on premium rates the FDIC charges covered institutions and establishing a risk-based premium system; and

 

6.

Providing for a one-time credit for institutions that paid premiums to the Bank Insurance Fund or the Savings Association Insurance Fund prior to December 31, 1996.

1.

The FDIC guaranteed certain newly issued senior unsecured debt of eligible institutions, including FDIC-insured banks and thrifts and certain holding companies, issued on or after October 14, 2008 and before June 30, 2009; and

2.

The FDIC temporarily provided full deposit insurance coverage for non-interest bearing deposit transaction accounts in FDIC-insured institutions, regardless of the dollar amount, through December 31, 2009, later extended to December 31, 2010.

 

 

 

Robert C. Haines II

Executive Vice President, CFO

LCNB Corp.

2 N. Broadway

P.O. Box 59

Lebanon, Ohio  45036

The following table presents the carrying values of securities for the years indicated:

		At December 31,
		2011				2010				2009
		(Dollars in thousands)
Securities available-for-sale:
U.S. Treasury notes		$	17,550				19,585				13,308
U.S. Agency notes			82,927				82,862				45,888
U.S. Agency mortgage-backed securities			52,287				33,094				49,624
Corporate securities			6,365				2,025				8,488
Municipal securities			91,610				96,396				83,323
Mutual funds			2,125				1,053				538
Trust preferred securities			564				604				344
Equity securities			578				263				65
Total securities available-for-sale			254,006				235,882				201,578
Securities held-to-maturity:
Municipal securities			10,734				12,141				13,030
Federal Reserve Bank Stock			940				939				940
Federal Home Loan Bank Stock			2,091				2,091				2,091
Total securities		$	267,771				251,053				217,639

 

 

		Available-for-Sale												Held-to-Maturity
		Amortized				Fair								Amortized				Fair
		Cost				Value				Yield				Cost				Value				Yield
		(Dollars in thousands)
U.S. Treasury notes:
One to five years		$	7,709				7,824				0.97	%			-				-				-	%
Five to ten years			9,676				9,726				1.22	%			-				-				-	%
Total U.S. Treasury notes			17,385				17,550				1.11	%			-				-				-	%
U.S. Agency notes:
One to five years			81,415				82,927				1.42	%			-				-				-	%
Total U.S. Agency notes			81,415				82,927				1.42	%			-				-				-	%
Corporate securities:
One to five years			6,334				6,365				1.30	%			-				-				-	%
Total corporate securities			6,334				6,365				1.30	%			-				-				-	%
Municipal securities (1):
Within one year			4,364				4,398				1.70	%			1,837				1,837				3.05	%
One to five years			42,320				43,987				3.20	%			678				678				5.89	%
Five to ten years			35,159				37,833				4.58	%			4,314				4,314				6.62	%
After ten years			5,080				5,392				5.64	%			3,905				3,905				8.62	%
Total Municipal securities			86,923				91,610				3.89	%			10,734				10,734				6.69	%
U.S. Agency mortgage- backed securities			50,923				52,287				2.84	%			-				-				-	%
Mutual Funds			2,103				2,125				2.99	%			-				-				-	%
Trust preferred securities			549				564				7.98	%			-				-				-	%
Equity securities			526				578				3.70	%			-				-				-	%
Totals		$	246,158				254,006				2.59	%			10,734				10,734				6.69	%

(1)

Yields on tax-exempt obligations are computed on a taxable-equivalent basis based upon a 34% statutory Federal income tax rate.

 

Loan Portfolio

Interest rates charged by LCNB vary with degree of risk, type of loan, amount, complexity, repricing frequency and other relevant factors associated with the loan.

 

		At December 31,
		2011								2010								2009								2008								2007
		Amount				%				Amount				%				Amount				%				Amount				%				Amount				%
		(Dollars in thousands)
Commercial and industrial		$	30,990				6.7	%			36,122				7.9	%			42,807				9.3	%			38,724				8.6	%			37,325				8.4	%
Commercial, secured by real estate			219,188				47.6	%			196,136				43.1	%			185,024				40.2	%			174,493				38.5	%			159,384				35.8	%
Residential real estate			186,904				40.5	%			190,277				41.9	%			193,293				42.0	%			194,039				42.8	%			193,920				43.5	%
Consumer			14,562				3.2	%			19,691				4.3	%			26,185				5.7	%			33,369				7.4	%			43,410				9.7	%
Agricultural			2,835				0.6	%			2,966				0.7	%			3,125				0.7	%			3,216				0.7	%			2,707				0.6	%
Other loans, including deposit overdrafts			6,554				1.4	%			9,413				2.1	%			9,422				2.1	%			9,203				2.0	%			9,114				2.0	%
			461,033				100.0	%			454,605				100.0	%			459,856				100.0	%			453,044				100.0	%			445,860				100.0	%
Deferred origination costs, net			229								386								560								767								1,027
Total loans			461,262								454,991								460,416								453,811								446,887
Less allowance for loan losses			2,931								2,641								2,998								2,468								2,468
Loans, net		$	458,331								452,350								457,418								451,343								444,419

 

Commercial and Industrial Loans. LCNB’s commercial and industrial loan portfolio consists of loans for various purposes, including loans to fund working capital requirements (such as inventory and receivables financing) and purchases of machinery and equipment.  LCNB offers a variety of commercial and industrial loan arrangements, including term loans, balloon loans, and line of credit.  Most commercial and industrial loans have a variable rate, with adjustments occurring monthly, annually, every three years, or every five years.  Adjustments are generally based on a publicly available index rate plus a margin.  The margin varies based on the terms and collateral securing the loan.  Commercial and industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial and industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business.  Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets.  As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.

Commercial real estate loans are underwritten based on the ability of the property, in the case of income producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt. Secondary emphasis is placed upon collateral value, financial ability of any guarantors, and other factors. Commercial real estate loans are generally originated with a 75 percent maximum loan to appraised value ratio.

		(Dollars in thousands)
Maturing in one year or less		$	21,401
Maturing after one year, but within five years			62,946
Maturing beyond five years			168,666
Total commercial and agricultural loans		$	253,013
Loans maturing beyond one year:
Fixed rate		$	70,228
Variable rate			161,384
Total		$	231,612

		At December 31,
		2011				2010				2009				2008				2007
		(Dollars in thousands)
Non-accrual loans		$	3,668				3,761				2,939				2,281				120
Past-due 90 days or more and still accruing			39				300				924				806				247
Accruing restructured loans			14,739				9,088				7,173				332				2,222
Total		$	18,446				13,149				11,036				3,419				2,589
Percent to total loans			4.00	%			2.89	%			2.40	%			0.75	%			0.58	%

		(Dollars in thousands)
Maturity within 3 months		$	10,541
After 3 but within 6 months			8,316
After 6 but within 12 months			7,860
After 12 months			56,046
		$	82,763

 

 

 

Proposals to change the laws governing financial institutions are periodically introduced in Congress and proposals to change regulations are periodically considered by the regulatory bodies.  Such future legislation and/or changes in regulations could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.  The likelihood of any major changes in the future and their effects are impossible to determine.

LCNB’s information systems may experience an interruption or breach in security.

 

 

		Name of Office		Address
1.		Main Office		2 North Broadway Lebanon, Ohio  45036		Owned
2.		Auto Bank		Silver and Mechanic Streets Lebanon, Ohio  45036		Owned
3.		Centerville Office		9605 Dayton-Lebanon Pike Centerville, Ohio 45458		Owned
4.		Colerain Township Office		3209 West Galbraith Road Cincinnati, Ohio 45239		Owned
5.		Columbus Avenue Office		730 Columbus Avenue Lebanon, Ohio  45036		Owned
6.		Fairfield Office		765 Nilles Road Fairfield, Ohio  45014		Leased
7.		Goshen Office		6726 Dick Flynn Blvd. Goshen, Ohio  45122		Owned
8.		Hamilton Office		794 NW Washington Blvd. Hamilton, Ohio  45013		Owned
9.		Hunter Office		3878 State Route 122 Franklin, Ohio  45005		Owned
10.		Loveland Office		500 Loveland-Madeira Road Loveland, OH 45140		Owned
11.		Maineville Office		7795 South State Route 48 Maineville, Ohio  45039		Owned
12.		Mason/West Chester Office		1050 Reading Road Mason, Ohio  45040		Owned
13.		Mason Christian Village Office		Mason Christian Village 411 Western Row Road Mason, Ohio 45040		Leased
14.		Middletown Office		4441 Marie Drive Middletown, Ohio  45044		Owned

		Name of Office		Address
15.		Monroe Office		101 Clarence F. Warner Drive Monroe, Ohio  45050		Owned
16.		Oakwood Office		2705 Far Hills Avenue Oakwood, Ohio  45419		(2)
17.		Okeana Office		6225 Cincinnati-Brookville Road Okeana, Ohio  45053		Owned
18.		Otterbein Office		Otterbein Retirement Community State Route 741 Lebanon, Ohio  45036		Leased
19.		Oxford Office (1)		30 West Park Place Oxford, Ohio  45056		(2)
20.		Rochester/Morrow Office		Route 22-3 at 123 Morrow, Ohio  45152		Owned
21.		South Lebanon Office		603 Corwin Nixon Blvd. South Lebanon, Ohio  45065		Owned
22.		Springboro/Franklin Office		525 West Central Avenue Springboro, Ohio  45066		Owned
23.		Warrior Office		Lebanon High School 1916 Drake Road Lebanon, Ohio  45036		Leased
24.		Waynesville Office		9 North Main Street Waynesville, Ohio  45068		Owned
25.		Wilmington Office		1243 Rombach Avenue Wilmington, Ohio  45177		Owned

 

(1)

Excess space in this office is leased to third parties.

(2)

The Bank owns the Oakwood and Oxford office buildings and leases the land.

 

		2011								2010
		High				Low				High				Low
First Quarter		$	12.25				11.56				12.50				10.50
Second Quarter			13.00				11.70				13.00				10.34
Third Quarter			14.22				11.85				12.50				11.25
Fourth Quarter			13.70				12.22				12.35				11.20