<SUBMISSION>



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 September 30, 2007


 (      )

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.

.                                                 [X] Yes         [  ] No


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  

[  ] Large accelerated filer          [X] Accelerated filer          [  ] Non-accelerated filer


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

.                                                 [  ] Yes         [X] No


The number of shares outstanding of the issuer's common stock, without par value, as of October 26, 2007 was 6,345,486 shares.





LCNB Corp.


INDEX

Page No.

Part I - Financial Information


Item 1.      Financial Statements


Consolidated Balance Sheets -

September 30, 2007, and December 31, 2006

1


Consolidated Statements of Income -

Three and Nine Months Ended September 30, 2007 and 2006

2


Consolidated Statements of Comprehensive Income -

Three and Nine Months Ended September 30, 2007 and 2006

3


Consolidated Statements of Stockholders' Equity -

Nine Months Ended September 30, 2007 and 2006

4


Consolidated Statements of Cash Flows -

Nine Months Ended September 30, 2007 and 2006

5


Notes to Consolidated Financial Statements

6-16


Report of Independent Registered Public Accounting Firm

17


Item 2.      Management's Discussion and Analysis of Financial

    Condition and Results of Operations

18-28


Item 3.      Quantitative and Qualitative Disclosures about

   Market Risks

29


Item 4.      Controls and Procedures

30


Part II - Other Information


Item 1.      Legal Proceedings

31


Item 1A.   Risk Factors

31


Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

31


Item 3.      Defaults Upon Senior Securities

31


Item 4.      Submission of Matters to a Vote of Security Holders

31


Item 5.      Other Information

31


Item 6.      Exhibits

32


Signatures

33










 

LCNB CORP. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands)

        
     

September 30,

 

December 31,

     

2007

 

2006

     

(Unaudited)

  

ASSETS:

    
 

Cash and due from banks

$

18,085 

 

14,864 

 

Federal funds sold and interest-bearing demand deposits

 

25,078 

 

   641 

  

Total cash and cash equivalents

 

43,163 

 

15,505 

        
 

Securities available for sale, at estimated fair value

 

 91,123 

 

111,142 

 

Federal Reserve Bank stock and Federal Home Loan Bank stock, at cost

 

2,332 

 

3,332 

 

Loans, net

 

394,116 

 

388,320 

 

Premises and equipment, net

 

12,780 

 

12,090 

 

Intangibles, net

 

  939 

 

1,426 

 

Bank owned life insurance

 

11,330 

 

         10,979 

 

Other assets

 

6,079 

 

           5,421 

   

TOTAL ASSETS

$

561,862 

 

548,215 

        

LIABILITIES:

    
 

Deposits –

    
  

Noninterest-bearing

$

83,929 

 

82,360 

  

Interest-bearing

 

414,443 

 

396,255 

   

Total deposits

 

498,372 

 

478,615 

 

Short-term borrowings

 

              2,805 

 

         15,370 

 

Long-term debt

 

              5,000 

 

   - 

 

Accrued interest and other liabilities

 

3,555 

 

3,231 

   

TOTAL LIABILITIES

 

509,732 

 

497,216 

        

SHAREHOLDERS’ EQUITY:

    
 

Preferred stock – no par value, authorized 1,000,000 shares,

    
  

none outstanding

 

 

 

Common stock – no par value, authorized 8,000,000 shares,

    
  

issued 7,103,768 shares

 

10,560 

 

10,560 

 

Surplus

 

10,595 

 

10,577 

 

Retained earnings

 

43,655 

 

42,245 

 

Treasury shares at cost, 758,282 and 724,132 shares at

    
  

September 30, 2007 and December 31, 2006, respectively

 

(11,737)

 

(11,242)

 

Accumulated other comprehensive loss, net of taxes

 

  (943)

 

 (1,141)

   

TOTAL SHAREHOLDERS’ EQUITY

 

52,130 

 

50,999 

        
   

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

561,862 

 

548,215 

        

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


-1-










LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

        
    

Three Months Ended

 

Nine Months Ended

    

September 30,

 

September 30,

     

2007

 

2006

 

2007

 

2006

INTEREST INCOME:

        
 

Interest and fees on loans

$

6,732 

 

6,489 

 

20,096 

 

18,624 

 

Dividends on Federal Reserve Bank

        
  

and Federal Home Loan Bank stock

 

27 

 

38 

 

111 

 

130 

 

Interest on investment securities –

        
  

Taxable

 

533 

 

678 

 

1,719 

 

2,024 

  

Non-taxable

 

452 

 

464 

 

1,417 

 

  1,491 

 

Other short-term investments

 

176 

 

154 

 

360 

 

349 

   

TOTAL INTEREST INCOME

 

7,920 

 

7,823 

 

23,703 

 

22,618 

            

INTEREST EXPENSE:

        
 

Interest on deposits

 

3,455 

 

3,289 

 

9,908 

 

8,856 

 

Interest on short-term borrowings

 

11 

 

13 

 

                172 

 

55 

 

Interest on long-term debt

 

66 

 

 1 

 

146 

 

 30 

   

TOTAL INTEREST EXPENSE

 

3,532 

 

3,303 

 

10,226 

 

8,941 

   

NET INTEREST INCOME

 

4,388 

 

4,520 

 

13,477 

 

13,677 

 

PROVISION FOR LOAN LOSSES

 

 75 

 

66 

 

158 

 

100 

            
   

NET INTEREST INCOME AFTER

        
   

  PROVISION FOR LOAN LOSSES

 

4,313 

 

4,454 

 

13,319 

 

13,577 

            

NON-INTEREST INCOME:

        
 

Trust income

 

472 

 

485 

 

1,416 

 

1,388 

 

Service charges and fees

 

1,081 

 

1,071 

 

3,031 

 

3,075 

 

Net loss on sales of securities

 

 

 

                    - 

 

  (12)

 

Insurance agency income

 

392 

 

391 

 

1,228 

 

1,239 

 

Bank owned life insurance income

 

118 

 

117 

 

351 

 

347 

 

Other operating income

 

54 

 

 

194 

 

135 

   

TOTAL NON-INTEREST INCOME

 

2,117 

 

2,073 

 

6,220 

 

6,172 

            

NON-INTEREST EXPENSE:

        
 

Salaries and wages

 

2,027 

 

2,009 

 

6,075 

 

5,912 

 

Pension and other employee benefits

 

536 

 

501 

 

1,576 

 

1,517 

 

Equipment expenses

 

274 

 

267 

 

758 

 

788 

 

Occupancy expense, net

 

426 

 

367 

 

1,147 

 

1,018 

 

State franchise tax

 

155 

 

154 

 

476 

 

467 

 

Marketing

 

108 

 

85 

 

317 

 

280 

 

Intangible amortization

 

151 

 

162 

 

466 

 

459 

 

Other non-interest expense

 

951 

 

965 

 

2,962 

 

2,991 

   

TOTAL NON-INTEREST EXPENSE

 

4,628 

 

4,510 

 

13,777 

 

13,432 

   

INCOME BEFORE INCOME TAXES

 

1,802 

 

2,017 

 

5,762 

 

6,317 

PROVISION FOR INCOME TAXES

 

432 

 

511 

 

  1,397 

 

1,593 

   

NET INCOME

$

1,370 

 

1,506 

 

4,365 

 

4,724 

            

Dividends declared per common share

$

0.155 

 

0.15 

 

0.465 

 

0.45 

            

Earnings per common share:

        
 

Basic

$

0.22 

 

0.23 

 

0.69 

 

0.73 

 

Diluted

 

0.22 

 

0.23 

 

0.69 

 

0.73 

          

Average shares outstanding:

        
 

Basic

 

6,345,486 

 

6,472,132 

 

6,360,654 

 

6,506,383 

 

Diluted

 

6,345,615 

 

6,474,569 

 

6,361,415 

 

6,508,862 

          

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

 

Nine Months Ended

     

September 30,

 

September 30,

      

2007

 

2006

 

2007

 

2006

         

Net Income

$

1,370 

 

1,506 

 

4,365 

 

4,724 

         

Other comprehensive income (loss):

        
         
 

Net unrealized gain (loss) on available-for-sale

securities (net of taxes of $312 and $218 for the three months ended September 30, 2007 and 2006, respectively, and net of taxes of $100 and $33 for the nine months ended September 30, 2007 and 2006, respectively)

 






     607 

 






    423 

 






      194 

 






(64)

           
 

Reclassification adjustment for net realized

loss on sale of available-for-sale securities

included in net income (net of taxes of $4 for the nine months ended September 30, 2006)

 




 




 




 




          
 

Amortization of pension plan unrecognized net loss (net of taxes of $1and $2 for the three and nine months ended September 30, 2007

 



 



 



 



          
  

TOTAL COMPREHENSIVE INCOME

$

1,978 

 

1,929 

 

4,563 

 

4,668 

 

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 (Loss)

Equity

Balance January 1, 2007

$

10,560 

 

10,577 

 

42,245 

 

(11,242)

 

 (1,141)

 

   50,999 

             

Net income

     

4,365 

     

 4,365 

             

Change in estimated fair value of

  securities available for sale, net of tax

         


        194 

 


               194 

             

Amortization of pension plan

  unrecognized net loss, net of tax

         


            4 

 


                  4 

             

Compensation expense relating to

  stock options

   


18 

       

                 

                 18 

             

Treasury shares purchased

       

(495)

   

(495)

             

Cash dividends declared, $0.465 per

  share

     


(2,955)

     


(2,955)


Balance September 30, 2007


$


10,560 

 


10,595 

 


43,655 

 


(11,737)

 


(943)

 


52,130 

             
             

Balance January 1, 2006

$

10,560 

 

10,562 

 

39,612 

 

(8,011)

 

 (701)

 

52,022 

             

Net income

     

4,724 

     

4,724 

             

Change in estimated fair value of

  securities available for sale, net of tax

  and reclassification adjustment

         



(56)

 



(56)

             

Compensation expense relating to

  stock options

   


11 

       

                  

                11 

             

Treasury shares purchased

       

(1,877)

   

(1,877)

             

Cash dividends declared, $0.45 per share

     

(2,924)

     

(2,924)


Balance September 30, 2006


$


10,560 

 


10,573 

 


41,412 

 


(9,888)

 


(757)

 


51,900 

             

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)

         
       

Nine Months Ended

       

September 30,

       

2007

 

2006

CASH FLOWS FROM OPERATING ACTIVITIES:

    
 

Net income

$

        4,365 

 

       4,724 

 

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

    
   

Depreciation, amortization, and accretion

 

        1,640 

 

        1,680 

   

Provision for loan losses

 

           158 

 

           100 

   

Federal Home Loan Bank stock dividends

 

               - 

 

(111)

   

Bank-owned life insurance income

 

(351)

 

    (347)

   

Realized loss on sales of securities available for sale

 

               - 

 

             12 

   

Realized loss (gain) on sale of premises and equipment

 

       (6)

 

            32 

   

Mortgage loans originated for sale

 

(2,517)

 

 (2,471)

   

Realized gains from sales of mortgage loans

 

(42)

 

 (41)

   

Proceeds from sales of mortgage loans

 

       2,532 

 

        2,485 

   

Compensation expense related to stock options

 

            18 

 

            11 

   

Increase (decrease) due to changes in assets and liabilities:

    
   

  Income receivable

 

     (255)

 

(238)

   

  Other assets

 

           525 

 

    (886)

   

  Other liabilities

 

       (695)

 

            34 

     

NET CASH FLOWS FROM OPERATING ACTIVITIES

 

       5,372 

 

        4,984 

          

CASH FLOWS FROM INVESTING ACTIVITIES:

    
 

Proceeds from sales of securities available for sale

 

             - 

 

        8,204 

 

Proceeds from maturities of securities available for sale

 

    27,842 

 

34,162 

 

Purchases of securities available for sale

 

(7,629)

 

(16,218)

 

Proceeds from redemption of Federal Home Loan Bank stock

 

      1,000 

 

               - 

 

Net decrease (increase) in loans

 

(6,190)

 

(29,754)

 

Net cash paid for acquisition

 

             - 

 

(515)

 

Proceeds from sale of other real estate acquired through foreclosure

 

             - 

 

            84 

 

Additions to other real estate acquired through foreclosure

 

(5)

 

               - 

 

Purchases of premises and equipment

 

(1,480)

 

(332)

 

Proceeds from sales of premises and equipment

 

              6 

 

  6 

     

NET CASH FLOWS FROM INVESTING ACTIVITIES

 

   13,544 

 

(4,363)

          

CASH FLOWS FROM FINANCING ACTIVITIES:

    
 

Net change in deposits

 

    19,757 

 

    11,725 

 

Net change in short-term borrowings

 

  (12,565)

 

         921 

 

Proceeds from long-term debt

 

      5,000 

 

             - 

 

Principal payments on long-term debt

 

             - 

 

(2,050)

 

Cash dividends paid

 

(2,955)

 

(2,924)

 

Purchases of treasury shares

 

(495)

 

(1,877)

     

NET CASH FLOWS FROM FINANCING ACTIVITIES

 

     8,742 

 

      5,795 

          
     

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

    27,658 

 

      6,416 

       

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

     15,505 

 

     15,324 

       

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

   43,163 

 

     21,740 

          

SUPPLEMENTAL CASH FLOW INFORMATION:

    

CASH PAID DURING THE YEAR FOR:

    
 

Interest

$

  10,200 

 

       8,947 

 

Income taxes

 

   1,809 

 

       1,646 

  NON-CASH INVESTING ACTIVITY:

    
 

Transfer from loans to real estate acquired through foreclosure

 

         - 

 

         752 

          

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


-5-







LCNB CORP. AND SUBSIDIARIES

NOTES TO 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, LCNB National Bank (formerly Lebanon Citizens National Bank) (the "Bank"), and Dakin Insurance Agency, Inc. ("Dakin").  The accompanying unaudited consolidated financial statements include the accounts of LCNB, the Bank, and Dakin.


The unaudited interim consolidated financial statements, which have been reviewed by J.D. Cloud & Co. L.L.P., LCNB’s independent registered public accounting firm, in accordance with standards established by the Public Company Accounting Oversight Board, as indicated by their report included herein and which does not express an opinion on those statements, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”).  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 interim 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, as required by Regulation S-X, Rule 10-01.


Certain prior period data presented in the financial statements have been reclassified to conform with the current year presentation.


Share and per share data have been restated to reflect a 100% stock dividend, accounted for as a stock split, declared by the Board of Directors on April 10, 2007 and paid on May 10, 2007 to shareholders of record on April 25, 2007.


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 and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year ending December 31, 2007.  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 2006 Form 10-K filed with the SEC.



Note 2 – Acquisition

On August 13, 2007, LCNB signed a definitive agreement to acquire Sycamore National Bank (“Sycamore”) in a stock and cash transaction valued at approximately $9.7 million.  Sycamore operates two full–service branches in Cincinnati, Ohio.  As of September 30, 2007, Sycamore had total assets of $49.1 million, deposits of $44.2 million, loans of $44.0 million and shareholders’ equity of $4.6 million.



-6-







LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 2 – Acquisition (continued)

Under the terms of the agreement, Sycamore will be merged with and into the Bank and Sycamore’s two offices will become branches of the Bank.  Each share of Sycamore common stock will be exchanged for, at the election of each shareholder, $33.75 in cash, 2.444 shares of LCNB common stock, or a combination of cash and shares.    A Sycamore shareholder’s election to receive cash or stock is subject to allocation procedures that will ensure that, in the aggregate, 50% of the shares of Sycamore common stock will be exchanged for cash and 50% will be exchanged for stock.  Subject to regulatory approvals and Sycamore shareholder approval, the transaction is anticipated to be completed during the fourth quarter, 2007.  



Note 3 - 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 and nine months ended September 30 (dollars in thousands, except share and per share data):


   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
  

2007

 

2006

 

2007

 

2006

         

Net income

$

1,370

 

1,506

 

4,365

 

4,724

         

Weighted average number of shares outstanding used in the calculation of basic earnings per common share

 



6,345,486

 



6,472,132

 



6,360,654

 



6,506,383

         

Add- Dilutive effect of stock options

 

  129

 

2,437

 

761

 

2,479

         

Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share

 




6,345,615

 




6,474,569

 




6,361,415

 




6,508,862

         

Basic earnings per common share

$

0.22

 

0.23

 

0.69

 

0.73

         

Diluted earnings per common share

$

0.22

 

0.23

 

0.69

 

0.73

         



 

- 7 -







LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 4 - Investment Securities

The amortized cost and estimated fair value of available-for-sale investment securities at September 30, 2007 and December 31, 2006 are summarized as follows (in thousands):

 

 

September 30, 2007

 
  

Amortized

Cost

 

Unrealized

Gains

 

Unrealized

Losses

 

Fair

Value

 

U.S. Treasury notes

$

1,200

 

-

 

2

 

1,198

 

U.S. Agency notes


 

19,124

 

1

 

78

 

19,047

 

U.S. Agency mortgage-backed securities

 

20,745

 

-

 

401

 

20,344

 

Municipal securities:

         

     Non-taxable

 

45,311

 

252

 

166

 

45,397

 

     Taxable

 

5,137

 

28

 

49

 

5,116

 

Marketable equity securities

 

15

 

6

 

-

 

21

 
 

$

91,532

 

287

 

696

 

91,123

 


 

December 31, 2006

  

Amortized

Cost

 

Unrealized

Gains

 

Unrealized

Losses

 

Fair

Value

 

U.S. Treasury notes

$

1,198 

 

 - 

 

19 

 

1,179 

 

U.S. Agency notes

 

30,749 

 

 16 

 

272 

 

30,493 

 

U.S. Agency mortgage-backed securities

 

22,792 

 

  26 

 

518 

 

22,300 

 

Municipal securities:

         

     Non-taxable

 

50,409 

 

  351 

 

247 

 

50,513 

 

     Taxable

 

6,683 

 

32 

 

79 

 

6,636 

 

Marketable equity securities

 

    14 

 

 

  - 

 

21 

 
 

$

111,845 

 

  432 

 

1,135 

 

111,142 

 


Information concerning securities with gross unrealized losses at September 30, 2007, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands):


  

Less than Twelve Months

 

Twelve Months or Greater

  

Fair

Value

 

Unrealized

Losses

 

Fair

Value

 

Unrealized

Losses

U.S. Treasury notes

$

-

 

-

 

1,198

 

2

U.S. Agency notes

 

 8,956

 

21

 

 9,091

 

57

U.S. Agency mortgage-backed securities

 

7,108

 

14

 

13,072

 

387

Municipal securities:

        

     Non-taxable

 

 3,908

 

 18

 

19,087

 

148

     Taxable

 

    -

 

-

 

2,277

 

 49

 

$

19,972

 

 53

 

44,725

 

  643



- 8 -







LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 4 - Investment Securities (continued)

The decline in fair values is primarily due to increases in market interest rates.  Unrealized losses on securities at September 30, 2007 have not been recognized into income currently 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 5 - Loans

Major classifications of loans at September 30, 2007 and December 31, 2006 are as follows (in thousands):


   

September 30,

 

 December 31,

    

2007

   

2006

 

Commercial and industrial

$

 

29,056

   

26,952

 

Commercial, secured by real estate

  

144,181

   

141,863

 

Residential real estate

  

175,912

   

173,890

 

Consumer

  

33,248

   

36,471

 

Agricultural

  

3,636

   

2,232

 

Other loans, including deposit overdrafts

  

9,352

   

8,101

 

Lease financing

  

-

   

  16

 
    

395,385

   

389,525

 

Deferred net origination costs

  

782

   

845

 
    

396,167

   

390,370

 

Less allowance for loan losses

  

2,051

   

   2,050

 
 

Loans, net

$

 

394,116

   

388,320

 







-9-







LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 5 - Loans (continued)

Changes in the allowance for loan losses for the nine months ended September 30, 2007 and 2006 were as follows (in thousands):


   

Nine Months Ended

   

September 30,

   

2007

  

2006

Balance, beginning of period

$

2,050 

  

2,150 

Provision for loan losses

 

       158 

  

100 

Charge-offs

 

(434)

  

(495)

Recoveries

 

       277 

  

      296 

 

Balance, end of period

$

     2,051 

  

2,051 


Charge-offs for the nine months ended September 30, 2007 and 2006 consisted primarily of consumer loans, and checking and NOW account overdrafts, but also included some residential and commercial real estate loans.  


Non-accrual, past-due, and restructured loans as of September 30, 2007 and December 31, 2006 were as follows (in thousands):


   

September 30,

 

December 31,

   

2007

  

      2006

 

Non-accrual loans

$

1,480

  

872

 

Past-due 90 days or more and still accruing

 

  210

  

126

 

Restructured loans

 

2,198

  

    -

 
 

Total

$

3,888

  

  998

 


Non-accrual loans at September 30, 2007 consisted of two home equity line of credit loans, one residential real estate mortgage loan, and one commercial real estate mortgage loan.  Non-accrual loans at December 31, 2006 consisted of a residential real estate mortgage loan and a home equity line of credit loan made to the same borrower, and a loan secured by farmland.  The residential real estate mortgage loan and home equity loan were paid current during the second quarter, 2007 and the loan secured by farmland was paid in full during the second quarter, 2007.  


The commercial real estate mortgage loan included in non-accrual loans at September 30, 2007 had a balance of $1,277,000 at that date.  This loan was previously classified as a restructured loan and was removed from that classification during the fourth quarter, 2006 because it was current at that time and had a market interest rate.


-10-







LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 5 - Loans (continued)

Loans past-due 90 days or more and still accruing interest at September 30, 2007 and December 31, 2006 consisted of consumer loans and residential mortgage loans.  


Restructured loans at September 30, 2007 consisted of a commercial loan secured by commercial real estate.  It was previously classified as restructured and was removed from that classification during the fourth quarter, 2006 because it was current and had a market interest rate.  It was returned to the restructured classification during the second quarter, 2007 because of the Bank’s agreement to waive the required principal payments for a period of one year, pending the sale of the underlying collateral property.


Real estate acquired through foreclosure was $757,000 and $752,000 at September 30, 2007 and December 31, 2006, respectively, and is included in “other assets” in the consolidated balance sheets.  Real estate acquired at September 30, 2007  and December 31, 2006 consisted of one single-family residential home.

 

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 September 30, 2007 and December 31, 2006 were $40,809,000 and $42,431,000, respectively.  Loans sold to the FHLMC during the three and nine months ended September 30, 2007 totaled $511,000 and $2,517,000, respectively, and $346,000 and $2,471,000 during the three and nine months ended September 30, 2006, respectively.



Note 6 – Borrowings

During March, 2007, LCNB obtained a $5 million advance from the Federal Home Loan Bank of Cincinnati.  The term of the advance is ten years and interest is payable monthly at a fixed rate of 5.25%.  The loan is secured by a blanket pledge of LCNB’s 1-4 family first lien mortgage loans.


At September 30, 2007, short-term borrowings included U.S. Treasury demand note borrowings of approximately $2,805,000.  The interest rate on the U.S. Treasury demand note borrowings is variable and was 4.52% at September 30, 2007.


At December 31, 2006, short-term borrowings included federal funds borrowed of $14,100,000 and U.S. Treasury demand note borrowings of approximately $1,264,000.  The interest rate on federal funds borrowed was 5.25% and the interest rate on the U.S. Treasury demand note borrowings was 5.04% at December 31, 2006.  




-11-







LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 7 – Regulatory Capital

The Bank 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, the Bank 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 Bank's or LCNB's category.  A summary of the regulatory capital and capital ratios of LCNB follows:


    

 At

  

 At

 
    

September 30,

 

 December 31,

    

2007

  

2006

 
    

 (Dollars in thousands)

 

Regulatory Capital:

      
 

Shareholders' equity

$

       52,130 

  

50,999 

 
 

Goodwill and other intangibles

 

(770)

  

(1,238)

 
 

Accumulated other comprehensive loss

 

          943 

  

     1,141 

 
  

Tier 1 risk-based capital

 

      52,303 

  

50,902 

 
         

Eligible allowance for loan losses

 

        2,051 

  

2,050 

 
  

Total risk-based capital

$

      54,354 

  

52,952 

 
         

Capital ratios:

      
 

Total risk-based (required 8.00%)

 

14.04%

  

13.95%

 
 

Tier 1 risk-based (required 4.00%)

 

13.51%

  

13.41%

 
 

Leverage (required 3.00%)

 

9.54%

  

9.27%

 



-12-


LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 8 - 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 included commitments to extend credit and stand-by letters of 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 and stand-by letters of 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 September 30, 2007 and December 31, 2006 were as follows (in thousands):


   

 September  30,

 

 December 31,

   

2007

  

2006

 
 

Commitments to extend credit:

      
 

     Fixed rate

$

1,228

  

679

 
 

     Adjustable rate

 

836

  

1,425

 
 

Unused lines of credit:

      
 

     Fixed rate

 

4,050

  

5,201

 
 

     Adjustable rate

 

68,232

  

65,845

 
 

Unused overdraft protection amounts on

      
 

  demand and NOW accounts

 

9,932

  

10,082

 
 

Standby letters of credit

 

8,615

  

5,728

 
  

$

92,893

  

88,960

 


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.  Unused lines of credit include amounts not drawn in line of credit loans.  Commitments to extend credit and unused lines of credit 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 September 30, 2007 and December 31, 2006, outstanding guarantees of $2,276,000 and $1,674,000, 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 September 30, 2007 and December 31, 2006 were approximately $6.3 million and $4.1 million, respectively.  The letter of credit balance is greater at September 30, 2007 because it was re-written in April, 2007.  At that time, LCNB’s participation amount was increased to the higher amount.  The new agreement has a final maturity date of January, 2012.




-13-







LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 8 – Commitments and Contingent Liabilities (continued)

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 September 30, 2007, LCNB is committed under various contracts to expend approximately $720,000 to complete certain building and office acquisition and/or renovation projects and computer upgrades.  Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.


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 9 - Stock Options

Under the Ownership Incentive Plan (the "Plan"), LCNB may grant 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 200,000 shares.  As of September 30, 2007, only stock options have been granted under the Plan.  Options granted to date vest ratably over a five year period and expire ten years after the date of grant.  Stock options outstanding at September 30, 2007, as adjusted for the 100% stock dividend paid May 10, 2007, were as follows:


  

Outstanding

 

Exercisable

  
 



Exercise

Price




Number

Weighted

Average

Exercise

 Price

 




Number

Weighted

Average

Exercise

Price



Number

Exercised



Expiration

Date

$

13.09

11,056

$

13.09

 

8,845

$

13.09

-

 

Feb, 2013

 

17.66

8,108

 

17.66

 

4,865

 

17.66

-

 

Jan, 2014

 

18.95

7,934

 

18.95

 

1,587

 

18.95

-

 

Jan, 2016

 

17.88

8,116

 

17.88

 

       -

 

17.88

-

 

Feb, 2017

  

35,214

 

16.57

 

15,297

 

15.15

-

  




- 14 -







LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 9 - Stock Options (continued)

The following table summarizes stock option activity for the periods indicated, as restated for the 100% stock dividend paid May 10, 2007:


  

Nine Months ended September 30,

 
  

2007

 

2006

 
  




Options

 

Weighted Average Exercise Price

 




Options

 

Weighted Average Exercise Price

 

Outstanding, January 1,

 

27,098

 

$16.17

 

19,164

 

$15.02

 

Granted

 

8,116

 

17.88

 

7,934

 

18.95

 

Exercised

 

-

 

-

 

-

 

-

 

Outstanding, September 30,

 

35,214

 

$16.57

 

27,098

 

$16.17

 

Exercisable,  September 30,

 

15,297

 

$15.15

 

9,877

 

$14.59

 


At September 30, 2007, the aggregate intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) for options outstanding at that date and that were “in the money” (market price greater than exercise price) was approximately $10,000.  The aggregate intrinsic value at that date for only the options that were exercisable was approximately $8,000.  The intrinsic value changes based on changes in the market value of the Company’s stock.


The estimated weighted-average fair value of the options granted in the first quarter of 2007 and 2006 were $3.76 and $4.51 per option, respectively.  The fair value was estimated at the dates of grant using the Black-Scholes option-pricing model and the following assumptions:


 

2007

2006

 

Risk-free interest rate

4.83%

4.64%

 

Average dividend yield

3.68%

3.04%

 

Volatility factor of the expected market

   

  price of LCNB’s common stock

22.41%

22.70%

 

Average life

8.3 years

8.5 years

 


Total expense related to options included in salaries and wages in the consolidated statements of income for the three and nine months ended September 30, 2007 were $6,000 and $18,000, respectively and $4,000 and $11,000 for the three and nine months ended September 30, 2006, respectively.  






-15-







LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Continued)



Note 10 – 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 and nine months ended September 30, 2007 and 2006, are summarized as follows (in thousands):


   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
  

2007

 

2006

 

2007

 

2006

         

Service cost

$

            171 

 

 162 

 

           512 

 

484 

Interest cost

 

             97 

 

            83 

 

           288 

 

          248 

Expected return on plan assets

 

(107)

 

(92)

 

 (316)

 

(273)

Amortization of net loss

 

               2 

 

              - 

 

               6 

 

              1 

Net periodic pension cost

 

           163 

 

          153 

 

           490 

 

          460 


LCNB previously disclosed in its consolidated financial statements for the year ended December 31, 2006, that it expected to contribute $975,000 to its pension plan in 2007.  A contribution of $1,004,000 was made to the pension plan on October 1, 2007.  LCNB expects to contribute another $52,000 during the fourth quarter, 2007.  


At September 30, 2007, accumulated other comprehensive income included $673,000, net of tax, of unrecognized net actuarial loss.



Note 11 – Recent Accounting Pronouncements

SFAS No. 157, “Fair Value Measurements,” was issued by the FASB in September, 2006.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements.  This statement does not require any new fair value measurements, but increases consistency and comparability in the use of fair value measurements and calculations.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years.  Management does not anticipate that the adoption of SFAS No. 157 will have a material effect on LCNB’s consolidated balance sheet or income statement.


SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” was issued by the FASB in February, 2007.  It permits, but does not require, corporations to measure many financial instruments and certain other items at fair value.  The decision to elect the fair value option is made individually for each instrument and is irrevocable once made.  Changes in fair value will be recorded in earnings.  SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  Early adoption is permitted.  Management intends to adopt SFAS No. 159 in the year beginning January 1, 2008 and does not anticipate that adoption of this standard will have a material effect on LCNB’s consolidated balance sheet or income statement.



-16-







 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 September 30, 2007, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2007 and 2006, and the related consolidated statements of shareholders’ equity and cash flows for the nine-month periods ended September 30, 2007 and 2006.  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 reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements referred to above 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, 2006 (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 21, 2007, 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, 2006, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.





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



Cincinnati, Ohio

October 26, 2007




-17-







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.  Forward looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualifying words and their derivatives such as “expects,” “anticipates,” “believes,” “estimates,” “plans,” “projects,” or other statements concerning opinions or judgments of the Company and its management about future events.   Factors that could influence the accuracy of such forward looking statements include, but are not limited to, regulatory policy changes, interest rate fluctuations, loan demand, loan delinquencies and losses, general economic conditions and other risks.  Such forward-looking statements represent management's judgment as of the current date.  Actual strategies and results in future time periods may differ materially from those currently expected.  LCNB disclaims, however, any intent or obligation to update such forward-looking statements.  LCNB intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.



Acquisition

On May 31, 2006, Dakin purchased the existing book of business of Altemeier Oliver & Company Agency, Inc. (“AOC”), an independent insurance agency located in Blue Ash, Ohio. The acquisition of AOC was accounted for using the purchase accounting method and the results of operations of AOC have been included in the consolidated financial statements of LCNB since the acquisition date.  The acquired assets consisted solely of a customer list intangible asset. This intangible asset is being amortized on a straight-line basis over a ten year period.



Results of Operations

LCNB earned $1,370,000 or $0.22 per diluted share for the three months ended September 30, 2007, compared to $1,506,000 or $0.23 per diluted share for the three months ended September 30, 2006.  The return on average assets (ROAA) for the third quarter, 2007 was 0.99% and the return on average equity (ROAE) was 10.47%, compared with an ROAA of 1.08% and an ROAE of 11.47% for the third quarter of 2006.  The decrease in net income for the third quarter, 2007 is primarily attributable to a decrease in net interest income and an increase in non-interest expense.


LCNB earned $4,365,000 or $0.69 per diluted share during the first nine months of 2007 compared to $4,724,000 or $0.73 per diluted share for the first nine months of 2006.  The ROAA and ROAE for the first nine months of 2007 were 1.07% and 11.28%, respectively.  The comparable ratios for the first nine months of 2006 were 1.16% and 12.09%, respectively.  The decrease in net income for the nine months ended September 30, 2007 is primarily attributable to a decrease in net interest income, an increase in the provision for loan losses, and an increase in non-interest expense.     




-18-







LCNB Corp. and Subsidiaries


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

Operations (continued)


Net Interest Income


Three Months Ended September 30, 2007 vs. 2006.

LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the three months ended September 30, 2007 and 2006, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.


 

Three Months Ended September 30,

 

2007

 

2006

  

Average

 

Interest

 

Average

 

Average

 

Interest

 

Average

  

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

  

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

  

(Dollars in thousands)

    
             

Loans (1)

$

395,202 

$

6,732

 

6.76%

$

381,228 

$

6,489

 

6.75%

Federal funds sold and interest-

  bearing demand deposits

 


14,096 

 


176

 


4.95%

 


 11,433 

 


 154

 


5.34%

Federal Reserve Bank stock

 

648 

 

 -

 

    -%

 

647 

 

 -

 

    -%

Federal Home Loan Bank stock

 

1,685 

 

27

 

6.36%

 

2,607 

 

38

 

5.78%

Investment securities:

            
 

Taxable

 

47,491 

 

533

 

4.45%

 

65,730 

 

678

 

4.09%

 

Non-taxable (2)

 

44,917 

 

685

 

6.05%

 

47,115 

 

703

 

5.92%

  

Total earnings assets

 

504,039 

 

8,153

 

6.42%

 

508,760 

 

8,062

 

6.29%

Non-earning assets

 

45,334 

     

45,696 

    

Allowance for loan losses

 

(2,055)

     

(2,052)

    
  

Total assets

$

547,318 

    

$

552,404 

    
             

Interest-bearing deposits

$

406,559 

 

3,455

 

3.37%

$

417,017 

 

3,289

 

3.13%

Short-term borrowings

 

             980 

 

11

 

4.45%

 

1,046 

 

13

 

4.93%

Long-term debt

 

5,000 

 

66

 

 5.24%

 

   32 

 

 1

 

12.40%

  

Total interest-bearing liabilities

 

412,539 

 

3,532

 

3.40%

 

418,095 

 

3,303

 

3.13%

Demand deposits

 

79,510 

     

78,863 

    

Other liabilities

 

3,367 

     

3,361 

    

Capital

 

51,902 

     

52,085 

    
  

Total liabilities and capital

$

547,318 

    

$

552,404 

    
             

Net interest rate spread (3)

     

3.02%

     

3.16%

             

Net interest income and net

  interest margin on a taxable-

  equivalent basis (4)

  



$



4,621

 



3.64%

  



$



4,759

 



3.71%

             

Ratio of interest-earning assets to

  interest-bearing liabilities

 


122.18%

     


121.69%

    


(1)

Includes nonaccrual loans, if any.

(2)

Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34%.

(3)

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

(4)

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


-19-







LCNB Corp. and Subsidiaries


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

Operations (continued)


The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended September 30, 2007 as compared to the same period in 2006.  Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.


      

 Three Months Ended

      

 September 30,

      

2007  vs. 2006

      

Increase (decrease) due to:

      

Volume

 

Rate

 

Total

      

(In thousands)

Interest-earning Assets:

      
 

Loans

 

$

    238 

 

        5 

 

   243 

 

Federal funds sold and interest-bearing

  demand deposits

 

      34 

 

(12)

 

    22 

 

Federal Home Loan Bank stock

 

(14)

 

        3 

 

(11)

 

Investment securities:

      
  

Taxable

 

(201)

 

      56 

 

(145)

  

Nontaxable

 

(33)

 

      15 

 

(18)

   

Total interest income

 

      24 

 

      67 

 

    91 

           

Interest-bearing Liabilities:

      
 

Deposits

 

(84)

 

    250 

 

   166 

 

Short-term borrowings

 

(1)

 

(1)

 

(2)

 

Long-term debt

 

      66 

 

(1)

 

    65 

   

Total interest expense

 

(19)

 

    248 

 

   229 

    

Net interest income

$

      43 

 

(181)

 

(138)



-20-







LCNB Corp. and Subsidiaries


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

Operations (continued)


Net interest income on a fully tax-equivalent basis for the three months ended September 30, 2007 totaled $4,621,000, a decrease of $138,000 from the comparable period in 2006.  Total interest expense increased $229,000, which was partially offset by an increase in total interest income of $91,000.  


The increase in total interest expense was primarily due to a 27 basis point increase in the average rate paid, which was primarily due to general increases in market interest rates, slightly offset by the decrease in average interest-bearing liabilities referred to above.


The increase in total interest income was due to a 13 basis point (one basis point equals 0.01%) increase in the average rate earned on earning assets and to a $14.0 million increase in average loans, partially offset by a $20.4 million decrease in average investment securities.  The increase in the average rate earned on earning assets was primarily due to general increases in market interest rates.  The decrease in average investment securities was used primarily to fund the growth in average loans.



The net interest margin decreased 7 basis points in the third quarter, 2007 compared to the third quarter, 2006. The lower margin reflects highly competitive market pricing conditions for both loans and deposits.  As a result, average deposit rates increased faster than average loan rates.



Nine Months Ended September 30, 2007 vs. 2006.

The following table presents, for the nine months ended September 30, 2007 and 2006, 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.







-21-







LCNB Corp. and Subsidiaries


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

Operations (continued)


 

Nine Months Ended September 30,

 

2007

 

2006

  

Average

 

Interest

 

Average

 

Average

 

Interest

 

Average

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

  

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

  

(Dollars in thousands)

    
             

Loans (1)

$

392,038 

$

20,096

 

6.85%

$

370,813 

$

18,624

 

6.72%

Federal funds sold and interest-

  bearing demand deposits

 


 9,338 

 


360

 


5.15%

 


 9,338 

 


349

 


5.00%

Federal Reserve Bank stock

 

648 

 

19

 

3.92%

 

647 

 

19

 

3.93%

Federal Home Loan Bank stock

 

1,901 

 

 92

 

6.47%

 

2,571 

 

111

 

5.77%

Investment securities:

            
 

Taxable

 

51,468 

 

1,719

 

4.47%

 

67,506 

 

2,024

 

4.01%

 

Non-taxable (2)

 

47,216 

 

2,147

 

6.08%

 

50,925 

 

2,259

 

5.93%

   

Total earnings assets

 

502,609 

 

24,433

 

6.50%

 

501,800 

 

23,386

 

6.23%

Non-earning assets

 

44,665 

     

44,744 

    

Allowance for loan losses

 

(2,056)

     

(2,088)

    
   

Total assets

$

545,218 

    

$

544,456 

    
             

Interest-bearing deposits

$

402,835 

 

9,908

 

3.29%

$

407,589 

 

8,856

 

2.90%

Short-term borrowings

 

           4,263

 

172

 

5.39%

 

1,561 

 

55

 

4.71%

Long-term debt

 

3,718 

 

146

 

5.25%

 

  700 

 

 30

 

5.73%

   

Total interest-bearing liabilities

 

410,816 

 

10,226

 

3.33%

 

409,850 

 

8,941

 

2.92%

Demand deposits

 

79,510 

     

79,399 

    

Other liabilities

 

3,163 

     

2,969 

    

Capital

 

51,729 

     

52,238 

    
   

Total liabilities and capital

$

545,218 

    

$

544,456 

    
             

Net interest rate spread (3)

     

3.17%

     

3.31%

             
 

Net interest income and net

  interest margin on a taxable-

  equivalent basis (4)

  



$



14,207

 



3.78%

  



$



14,445

 



3.85%

             
 

Ratio of interest-earning assets to

  interest-bearing liabilities

 


122.34%

     


122.44%

    


(1)

Includes nonaccrual loans, if any.

(2)

Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 34%.

(3)

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

(4)

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



-22-







LCNB Corp. and Subsidiaries


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

Operations (continued)


The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the nine months ended September 30, 2007 as compared to the same period in 2006.  


      

 Nine Months Ended

      

 September 30,

      

2007  vs. 2006

      

Increase (decrease) due to:

      

Volume

 

Rate

 

Total

      

(In thousands)

Interest-earning Assets:

      
 

Loans

 

$

  1,082 

 

     390 

 

  1,472 

 

Federal funds sold and interest-bearing

  demand deposits

 

        - 

 

       11 

 

       11 

 

Federal Home Loan Bank stock

 

(31)

 

       12 

 

(19)

 

Investment securities:

      
  

Taxable

 

(518)

 

     213 

 

(305)

  

Nontaxable

 

(168)

 

       56 

 

(112)

   

Total interest income

 

    365 

 

     682 

 

  1,047 

           

Interest-bearing Liabilities:

      
 

Deposits

 

(104)

 

   1,156 

 

   1,052 

 

Short-term borrowings

 

    108 

 

          9 

 

     117 

 

Long-term debt

 

    119 

 

(3)

 

     116 

   

Total interest expense

 

    123 

 

   1,162 

 

   1,285 

    

Net interest income

$

    242 

 

(480)

 

(238)


Net interest income on a fully tax-equivalent basis for the first nine months of 2007 totaled $14,207,000, a $238,000 decrease from the same period in 2006.  Total interest expense increased $1,285,000 and was partially offset by an increase in total interest income of $1,047,000.


The increase in total interest expense was due primarily to a 41 basis point increase in the average rate paid on interest-bearing liabilities.  The net interest margin decreased 7 basis points during the first nine months of 2007 compared to the first nine months of 2006 primarily due to competitive market pricing conditions for both loans and deposits and to a flat or inverted yield curve during much of the 2007 period.  As a result, average deposit rates increased faster than average loan rates.




-23-







LCNB Corp. and Subsidiaries


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

Operations (continued)


The increase in total interest income was due to a 27 basis point increase in the average rate earned on earning assets, from 6.23% for the first nine months of 2006 to 6.50% for the comparable period in 2007, and to a $21.2 million increase in average loans, partially offset by a $19.7 million decrease in average investment securities.  The decrease in average investment securities was used to fund the growth in average loans.



Provision and Allowance For Loan Losses

The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio.  In addition to historic charge-off percentages, factors taken into consideration to determine the adequacy of the allowance for loan losses include the nature, volume, and consistency of the loan portfolio, overall portfolio quality, a review of specific problem loans, and current economic conditions that may affect borrowers’ ability to pay.  The provision for loan losses for the three months ended September 30, 2007 and 2006 was $75,000 and $66,000, respectively, and $158,000 and $100,000 for the nine months ended September 30, 2007 and 2006, respectively.  



Non -Interest Income


Three Months Ended September 30, 2007 vs. 2006.

Non-interest income of $2,117,000 for the third quarter of 2007 was $44,000 greater than for the same period in 2006 primarily due to the absence of a loss on abandonment of an ATM recognized during the 2006 period, which was netted against other operating income.      


Nine Months Ended September 30, 2007 vs. 2006.

Non-interest income of $6,220,000 for the first nine months of 2007 was $48,000 greater than for the same period in 2006 for primarily the same reason mentioned above.  In addition trust income increased $28,000 primarily due to executor fees received during the 2007 period.  Service charges and fees decreased $44,000 due to a decrease in non-sufficient fund charges, partially offset by an increase in check card income.



Non-Interest Expense


Three Months Ended September 30, 2007 vs. 2006.

Total non-interest expense increased $118,000 during the third quarter, 2007 compared to the third quarter, 2006, primarily due to an $18,000 increase in salaries and wages, a $35,000 increase in pension and other employee benefits, and a $59,000 increase in occupancy expense.  Pension and other employee benefits increased primarily due to an increase in pension costs and occupancy expense increased primarily due to maintenance and repair costs and increased utilities expense.




-24-







LCNB Corp. and Subsidiaries


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

Operations (continued)


Nine Months Ended September 30, 2007 vs. 2006.

Total non-interest expense increased $345,000 during the nine months ended September 30, 2007 compared to the same period in 2006 primarily due to a $163,000 increase in salaries and wages, a $59,000 increase in pension and other employee benefits, and a $129,000 increase in occupancy expense.  Salaries and wages increased primarily due to additional employees and routine salary and wage increases.  Pension and other employee benefits increased primarily due to an increase in pension expense.  Occupancy expense increased primarily due to increased maintenance and repair costs, rent expense for the land for the new Oakwood office (opened May, 2007), and real estate taxes for the Oakwood office.



Income Taxes

LCNB’s effective tax rates for the nine months ended September 30, 2007 and 2006 were 24.2% and 25.2%, respectively.  The difference between the statutory rate of 34.0% and the effective tax rate is primarily due to tax-exempt interest income from municipal securities and tax-exempt earnings from bank owned life insurance.



Financial Condition

The fair value of securities available for sale was $91.1 million at September 30, 2007, approximately $20.0 million less than at December 31, 2006.  The decrease was due to maturities and calls; no securities were sold during the first nine months of 2007.  These additional funds, along with a $5.0 million FHLB advance obtained in March, 2007, and a $19.8 million increase in total deposits were primarily used to pay down short-term borrowings, fund loan growth, and build liquidity through investments in federal funds sold and interest-bearing demand deposits.


The term of the $5.0 million FHLB advance is ten years and interest is payable monthly at a fixed rate of 5.25%.


The $19.8 million increase in total deposits is due to public fund deposits from local governmental entities, which increased $20.5 million.


Short-term borrowings at September 30, 2007 were $2.8 million, a $12.6 million decrease from the December 31, 2006  balance of $15.4 million.


Net loans outstanding at September 30, 2007 totaled $394.1 million, approximately $5.8 million greater than at December 31, 2006.  Commercial and industrial loans, commercial real estate loans, and residential real estate loans comprised most of the increase.

  

-25-







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 sheets. The analysis uses quarterly averages to give a better indication of balance sheet trends.  


  

CONDENSED QUARTERLY AVERAGE BALANCE SHEETS

    

September 30,

 

June 30,

 

March 31,

    

2007

 

2007

 

2007

    

(In thousands)

ASSETS

       

Interest earning:

       
 

Federal funds sold and

  interest-bearing demand deposits

$

          14,096 

 

 11,862 

  

 1,923 

 

Investment securities

 

          94,741 

 

100,048 

  

109,066 

 

Loans

 

        395,202 

 

390,468 

  

390,392 

  

Total interest-earning assets

 

        504,039 

 

502,378 

  

501,381 

          

Noninterest-earning:

       
 

Cash and due from banks

 

          14,699 

 

12,669 

  

15,067 

 

All other assets

 

          30,635 

 

30,679 

  

30,265 

 

Allowance for credit losses

 

(2,055)

 

(2,055)

  

(2,056)

  

TOTAL ASSETS

$

        547,318 

 

543,671 

  

544,657 

          

LIABILITIES

       

Interest-bearing:

       
 

Interest-bearing deposits

$

        406,559 

 

402,689 

  

399,176 

 

Short-term borrowings

 

               980 

 

         1,090 

  

10,825 

 

Long-term debt

 

            5,000 

 

          5,000 

  

1,111 

  

Total interest-bearing liabilities

 

        412,539 

 

408,779 

  

411,112 

          

Noninterest-bearing:

       
 

Noninterest-bearing deposits

 

         79,510 

 

80,038 

  

78,940 

 

All other liabilities

 

           3,367 

 

3,014 

  

3,164 

  

TOTAL LIABILITIES

 

        495,416 

 

491,831 

  

493,216 

          

SHAREHOLDERS' EQUITY

 

          51,902 

 

51,840 

  

51,441 

          
  

TOTAL LIABILITIES AND      

  SHAREHOLDERS’ EQUITY

$

        547,318 

 

543,671 

  

544,657 


-26-







LCNB Corp. and Subsidiaries


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

Operations (continued)


Liquidity

LCNB depends on dividends from its subsidiaries for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders.  National banking law limits the amount of dividends the Bank may pay to the sum of retained net income, 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, the Bank’s primary regulator, would be necessary for the Bank to pay dividends in excess of this amount.  In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes the Bank will be able to pay anticipated dividends to LCNB 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 and cash equivalents and securities available for sale.  At September 30, 2007, LCNB’s liquid assets amounted to $134.3 million or 23.9% of total gross assets, a slight increase from $126.6 million or 23.1% at December 31, 2006.  


Liquidity is also provided by access to core funding sources, primarily core depositors in the bank’s market area.  Approximately 76.2% of total deposits at September 30, 2007 were “core” deposits, a decrease from 80.4% at December 31, 2006.  Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000.  Core deposits decreased because all of the growth in total deposits during 2007 has been due to public fund deposits.


Secondary sources of liquidity include LCNB’s ability to sell loan participations, borrow funds from the Federal Home Loan Bank, purchase federal funds, or use a line of credit established with another bank.  


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.



-27-
















LCNB Corp. and Subsidiaries


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

Operations (continued)



Recent Accounting Pronouncements

SFAS No. 157, “Fair Value Measurements,” was issued by the FASB in September, 2006.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements.  This statement does not require any new fair value measurements, but increases consistency and comparability in the use of fair value measurements and calculations.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years.  Management does not anticipate that the adoption of SFAS No. 157 will have a material effect on LCNB’s consolidated balance sheet or income statement.


SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” was issued by the FASB in February, 2007.  It permits, but does not require, corporations to measure many financial instruments and certain other items at fair value.  The decision to elect the fair value option is made individually for each instrument and is irrevocable once made.  Changes in fair value will be recorded in earnings.  SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  Early adoption is permitted.  Management intends to adopt SFAS No. 159 in the year beginning January 1, 2008 and does not anticipate that adoption of this standard will have a material effect on LCNB’s consolidated balance sheet or income statement.















-28-









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 September 30, 2007 IRSA indicates that either an increase or 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

Net Interest

Income

% Change in

Net Interest

Income

Up 300

$

18,509

(41)

-0.22%

Up 200

 

18,530

(20)

-0.11%

Up 100

 

18,546

(4)

-0.02%

Base

 

18,550

                  -

-%

Down 100

 

18,505

(45)

-0.24%

Down 200

 

18,329

(221)

-1.19%

Down 300

 

18,049

(501)

-2.70%


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 September 30, 2007 is shown below.  The changes in the economic value of equity for these rate assumptions are within LCNB’s acceptable ranges, except for the up 300 basis points scenario.  The change for the up 300 basis points scenario is slightly outside LCNB’s policy range of a 25% change for this category, but management has determined the change is acceptable in the current economic environment.


Rate Shock Scenario in Basis Points

 

Amount

(In thousands)

$ Change in

EVE

% Change in

EVE

Up 300

$

57,571

(19,259)

-25.07%

Up 200

 

60,130

(16,700)

-21.74%

Up 100

 

62,350

(14,480)

-18.85%

Base

 

76,830

-

-%

Down 100

 

64,138

(12,692)

-16.52%

Down 200

 

62,168

(14,662)

-19.08%

Down 300

 

60,574

(16,256)

-21.16%

 

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.  


- 29 -







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 September 30, 2007, LCNB's disclosure controls and procedures were effective.


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.



-30-







PART II.  OTHER INFORMATION


LCNB Corp. and Subsidiaries


Item 1.     Legal Proceedings - None


Item 1A.  Risk Factors – No material changes


Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities of LCNB during the third quarter, 2007.


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 was originally authorized to  purchase up to 100,000 shares of its stock through market transactions with a selected stockbroker.  On November 14, 2005, the Board of Directors extended the Market Repurchase Program by increasing the shares authorized for repurchase to 200,000 total shares.  Through September 30, 2007, 290,440 shares had been purchased under this program.  No shares were purchased under this program during the third quarter, 2007.


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 466,018 shares have been purchased under this program since its inception.  No shares were purchased under this program during the third quarter, 2007.


Item 3.     Defaults Upon Senior Securities - None


Item 4.     Submission of Matters to a Vote of Security Holders  - None


Item 5.     Other Information - None




-31-







PART II.  OTHER INFORMATION


LCNB Corp. and Subsidiaries


Item 6.    Exhibits

Exhibit No.

Title

 

2

 

Amended and Restated Affiliation Agreement dated September 24, 2007

   

by and among LCNB Corp., Lebanon-Citizens National Bank, and

   

Sycamore National Bank – incorporated by reference to Form S-4A filed on

   

October 22, 2007, Annex A.

    
 

3(i)

 

Articles of Incorporation – incorporated by reference to Form 10-Q

   

for the quarterly period ended March 31, 2005, Exhibit 3(i).

    
 

3(ii)

 

Regulations – incorporated by reference to Form 10-Q for the quarterly

   

period ended March 31, 2005, Exhibit 3(ii).

    
 

10.1

 

LCNB Corp. Ownership Incentive Plan – incorporated by reference to

   

Registrant’s Form DEF 14A Proxy Statement pursuant to Section 14(a),

   

Dated March 15, 2002, Exhibit A (000-26121).

    
 

10.2

 

Form of Option Grant Agreement under the LCNB Corp. Ownership

   

Incentive Plan – incorporated by reference to Form 10-K for the fiscal year

   

Ended December 31, 2005, Exhibit 10.2.

    
 

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 Financial Officer and Chief Financial Officer

   

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


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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.


October 29, 2007

/s/ Stephen P. Wilson


Stephen P. Wilson, President, CEO &

Chairman of the Board of Directors



October 29, 2007

/s/Steve P. Foster


Steve P. Foster, Executive Vice President

and Chief Financial Officer



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