Attached files

file filename
EX-32 - EXHIBIT - LCNB CORPex329302014.htm
EX-31.1 - EXHIBIT - LCNB CORPex31_19302014.htm
EX-31.2 - EXHIBIT - LCNB CORPex31_29302014.htm
EXCEL - IDEA: XBRL DOCUMENT - LCNB CORPFinancial_Report.xls

 
 
 
 
 
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, 2014
¨
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 incorporation or organization)
 
(I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes         ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o

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 November 3, 2014 was 9,305,413 shares.
 
 
 
 
 



LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

 
 
September 30, 2014
 
December 31,
2013
 
 
(Unaudited)
 
ASSETS:
 
 
 
 
Cash and due from banks
 
$
13,388

 
10,410

Interest-bearing demand deposits
 
19,665

 
4,278

Total cash and cash equivalents
 
33,053

 
14,688

Investment securities:
 
 

 
 

Available-for-sale, at fair value
 
292,853

 
258,241

Held-to-maturity, at cost
 
23,504

 
16,323

Federal Reserve Bank stock, at cost
 
2,346

 
1,603

Federal Home Loan Bank stock, at cost
 
3,638

 
2,854

Loans, net
 
682,617

 
570,766

Premises and equipment, net
 
20,907

 
19,897

Goodwill
 
27,638

 
14,186

Bank owned life insurance
 
21,773

 
21,280

Other assets
 
15,027

 
12,500

TOTAL ASSETS
 
$
1,123,356

 
932,338

LIABILITIES:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing
 
$
190,875

 
164,912

Interest-bearing
 
765,758

 
620,849

Total deposits
 
956,633

 
785,761

Short-term borrowings
 
24,954

 
8,655

Long-term debt
 
11,432

 
12,102

Accrued interest and other liabilities
 
7,158

 
6,947

TOTAL LIABILITIES
 
1,000,177

 
813,465

SHAREHOLDERS' EQUITY:
 
 

 
 

Preferred shares – no par value, authorized 1,000,000 shares, none outstanding
 

 

Common shares – no par value, authorized 12,000,000 shares, issued 10,058,835 and 10,041,163 shares at September 30, 2014 and December 31, 2013, respectively
 
67,086

 
66,785

Retained earnings
 
67,667

 
65,475

Treasury shares at cost, 753,627 shares at September 30, 2014 and December 31, 2013
 
(11,665
)
 
(11,665
)
Accumulated other comprehensive income (loss), net of taxes
 
91

 
(1,722
)
TOTAL SHAREHOLDERS' EQUITY
 
123,179

 
118,873

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,123,356

 
932,338


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

The consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated balance sheet as of that day.

2


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
INTEREST INCOME:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
8,168

 
6,902

 
24,008

 
20,298

Interest on investment securities:
 
 

 
 

 
 

 
 

Taxable
 
984

 
862

 
2,901

 
2,556

Non-taxable
 
716

 
654

 
2,019

 
1,932

Other investments
 
38

 
32

 
182

 
145

TOTAL INTEREST INCOME
 
9,906

 
8,450

 
29,110

 
24,931

INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Interest on deposits
 
800

 
875

 
2,423

 
2,789

Interest on short-term borrowings
 
10

 
11

 
18

 
18

Interest on long-term debt
 
101

 
109

 
305

 
331

TOTAL INTEREST EXPENSE
 
911

 
995

 
2,746

 
3,138

NET INTEREST INCOME
 
8,995

 
7,455

 
26,364

 
21,793

PROVISION FOR LOAN LOSSES
 
401

 
178

 
737

 
369

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
8,594

 
7,277

 
25,627

 
21,424

NON-INTEREST INCOME:
 
 

 
 

 
 

 
 

Trust income
 
688

 
626

 
2,071

 
1,810

Service charges and fees on deposit accounts
 
1,245

 
1,062

 
3,619

 
3,114

Net gain on sales of securities
 
97

 
58

 
93

 
753

Bank owned life insurance income
 
165

 
168

 
507

 
512

Gains from sales of mortgage loans
 
24

 
57

 
92

 
305

Other operating income
 
96

 
76

 
311

 
238

TOTAL NON-INTEREST INCOME
 
2,315

 
2,047

 
6,693

 
6,732

NON-INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
4,022

 
3,247

 
11,896

 
9,783

Equipment expenses
 
337

 
318

 
976

 
908

Occupancy expense, net
 
541

 
505

 
1,706

 
1,529

State franchise tax
 
231

 
208

 
714

 
635

Marketing
 
212

 
145

 
541

 
446

FDIC insurance premiums
 
183

 
128

 
492

 
375

Merger-related expenses
 
4

 

 
1,366

 
1,326

Other non-interest expense
 
1,708

 
1,612

 
5,819

 
4,576

TOTAL NON-INTEREST EXPENSE
 
7,238

 
6,163

 
23,510

 
19,578

INCOME BEFORE INCOME TAXES
 
3,671

 
3,161

 
8,810

 
8,578

PROVISION FOR INCOME TAXES
 
953

 
804

 
2,158

 
2,145

NET INCOME
 
$
2,718

 
2,357

 
6,652

 
6,433

Dividends declared per common share
 
$
0.16

 
0.16

 
0.48

 
0.48

Earnings per common share:
 
 

 
 

 
 

 
 

Basic
 
$
0.30

 
0.31

 
0.72

 
0.85

Diluted
 
0.29

 
0.30

 
0.71

 
0.83

Weighted average common shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
9,299,691

 
7,636,098

 
9,293,866

 
7,592,818

Diluted
 
9,405,013

 
7,787,098

 
9,407,110

 
7,722,686


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

3


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
2,718

 
2,357

 
6,652

 
6,433

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Net unrealized gain (loss) on available-for-sale securities (net of taxes of $(353) and $391 for the three months ended September 30, 2014 and 2013, respectively, and $962 and $(2,452) for the nine months ended September 30, 2014 and 2013, respectively)
 
(687
)
 
760

 
1,867

 
(4,758
)
Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $33 and $20 for the three months ended September 30, 2014 and 2013, respectively, and $32 and $256 for the nine months ended September 30, 2014 and 2013, respectively)
 
(64
)
 
(38
)
 
(61
)
 
(497
)
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $3 and $5 for the three months ended September 30, 2014 and 2013, respectively, and $4 and $14 for the nine months ended September 30, 2014 and 2013)
 
4

 
8

 
7

 
26

TOTAL COMPREHENSIVE INCOME
 
$
1,971

 
3,087

 
8,465

 
1,204


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


4


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
(Unaudited)

 
 
Common Shares Outstanding
 
Common Stock
 
Retained
Earnings
 
Treasury
Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Shareholders'
Equity
Balance at December 31, 2012
 
6,731,900

 
$
27,107

 
61,843

 
(11,665
)
 
4,721

 
82,006

Net income
 
 

 
 

 
6,433

 
 

 
 

 
6,433

Other comprehensive loss, net of taxes
 
 

 
 

 
 

 
 

 
(5,229
)
 
(5,229
)
Dividend Reinvestment and Stock Purchase Plan
 
13,832

 
248

 
 

 
 

 
 

 
248

Exercise of stock options
 
5,620

 
70

 


 


 
 

 
70

Acquisition of First Capital Bancshares, Inc.
 
888,811

 
12,321

 
 
 
 
 
 
 
12,321

Compensation expense relating to stock options
 
 

 
28

 
 

 
 

 
 

 
28

Common stock dividends, $0.48 per share
 
 

 
 

 
(3,662
)
 
 

 
 

 
(3,662
)
Balance at September 30, 2013
 
7,640,163

 
$
39,774

 
64,614

 
(11,665
)
 
(508
)
 
92,215

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
9,287,536

 
$
66,785

 
65,475

 
(11,665
)
 
(1,722
)
 
118,873

Net income
 
 

 
 

 
6,652

 
 

 
 

 
6,652

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
1,813

 
1,813

Dividend Reinvestment and Stock Purchase Plan
 
17,672

 
283

 
 

 
 

 
 

 
283

Compensation expense relating to stock options
 
 
 
18

 
 
 
 
 
 
 
18

Common stock dividends, $0.48 per share
 
 

 
 

 
(4,460
)
 
 

 
 

 
(4,460
)
Balance at September 30, 2014
 
9,305,208

 
$
67,086

 
67,667

 
(11,665
)
 
91

 
123,179


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


5


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
6,652

 
6,433

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

 
 

Depreciation, amortization, and accretion
 
2,299

 
1,886

Provision for loan losses
 
737

 
369

Increase in cash surrender value of bank owned life insurance
 
(507
)
 
(512
)
Realized gain from sales of securities available-for-sale
 
(93
)
 
(753
)
Realized gain from sales of premises and equipment
 
(116
)
 
(1
)
Realized (gain) loss from sales and write-downs of other real estate owned and repossessed assets
 
9

 
(175
)
Origination of mortgage loans for sale
 
(5,024
)
 
(16,831
)
Realized gains from sales of mortgage loans
 
(92
)
 
(305
)
Proceeds from sales of mortgage loans
 
5,066

 
16,970

Compensation expense related to stock options
 
18

 
28

Changes in:
 
 

 
 

Accrued income receivable
 
(575
)
 
(802
)
Other assets
 
689

 
745

Other liabilities
 
(46
)
 
(239
)
TOTAL ADJUSTMENTS
 
2,365

 
380

NET CASH FLOWS FROM OPERATING ACTIVITIES
 
9,017

 
6,813

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of investment securities available-for-sale
 
55,795

 
41,888

Proceeds from maturities and calls of investment securities:
 
 

 
 

Available-for-sale
 
24,133

 
15,724

Held-to-maturity
 
3,345

 
4,437

Purchases of investment securities:
 
 

 
 

Available-for-sale
 
(76,801
)
 
(57,106
)
Held-to-maturity
 
(10,526
)
 
(9,687
)
Purchase of Federal Reserve Bank stock
 
(743
)
 
(497
)
Proceeds from redemption of Federal Reserve Bank stock
 
41

 

Net (increase) decrease in loans
 
3,152

 
(13,446
)
Proceeds from redemption of bank owned life insurance
 
3,633

 

Proceeds from sale of other real estate owned and repossessed assets
 
711

 
1,062

Additions to other real estate owned
 
(20
)
 

Purchases of premises and equipment
 
(857
)
 
(614
)
Proceeds from sale of premises and equipment
 
167

 
1

Net cash acquired from (paid for) acquisition
 
(9,114
)
 
9,771

NET CASH FLOWS FROM INVESTING ACTIVITIES
 
(7,084
)
 
(8,467
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase (decrease) in deposits
 
5,631

 
206

Net increase (decrease) in short-term borrowings
 
15,648

 
9,055

Principal payments on long-term debt
 
(670
)
 
(3,051
)
Proceeds from issuance of common stock
 
50

 
32

Proceeds from exercise of stock options
 

 
70

Cash dividends paid on common stock
 
(4,227
)
 
(3,446
)
NET CASH FLOWS FROM FINANCING ACTIVITIES
 
16,432

 
2,866

NET CHANGE IN CASH AND CASH EQUIVALENTS
 
18,365

 
1,212

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
14,688

 
13,475

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
33,053

 
14,687

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
2,665

 
3,150

Income taxes paid
 
2,000

 
2,715

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
 
 

 
 

Transfer from loans to other real estate owned and repossessed assets
 
435

 
133


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

6


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" or the "Company") are attributable to its wholly-owned subsidiary, LCNB National Bank (the "Bank").  The accompanying unaudited consolidated financial statements include the accounts of LCNB and the Bank.

The unaudited interim consolidated financial 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.

The consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated balance sheet as of that day.

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

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, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.  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 2013 Annual Report on Form 10-K filed with the SEC.

Note 2 – Acquisitions
 
On October 9, 2012, LCNB and First Capital Bancshares, Inc. ("First Capital") entered into an Agreement and Plan of Merger ("Merger Agreement") pursuant to which First Capital was merged into LCNB on January 11, 2013 in a stock and cash transaction valued at approximately $20.2 million.  Immediately following the merger of First Capital into LCNB, Citizens National Bank of Chillicothe ("Citizens"), a wholly-owned subsidiary of First Capital, was merged into LCNB National Bank. Citizens operated six full–service branches with a main office and two other facilities in Chillicothe, Ohio and one branch in each of Frankfort, Ohio, Clarksburg, Ohio, and Washington Court House, Ohio.  These offices became branches of the Bank after the merger.

On October 28, 2013, LCNB and Colonial Banc Corp. (“Colonial”) entered into a Stock Purchase Agreement (“Purchase Agreement”) pursuant to which LCNB purchased from Colonial on January 24, 2014 all of the issued and outstanding shares of Eaton National Bank & Trust Co. ("ENB") in a cash transaction valued at $24.75 million. Immediately following the acquisition, ENB was merged into the Bank.  ENB operated five full–service branches with a main office and another facility in Eaton, Ohio and branch offices in each of West Alexandria, Ohio, New Paris, Ohio, and Lewisburg, Ohio.  These offices became branches of the Bank after the merger.



7

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 2 – Acquisitions (continued)


The merger with ENB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the merger date, as summarized in the following table (in thousands):
Consideration Paid:
 
Cash paid to shareholder
$
24,750

 
 

Identifiable Assets Acquired:
 

Cash and cash equivalents
15,635

Investment securities:
 

Available-for-sale
35,859

Federal Reserve Bank stock
41

Federal Home Loan Bank stock
784

Loans
115,944

Premises and equipment
1,314

Bank owned life insurance
3,618

Core deposit intangible
2,466

Other real estate owned
262

Other assets
1,624

Total identifiable assets acquired
177,547

 
 

Liabilities Assumed:
 

Deposits
165,335

Short-term borrowings
651

Other liabilities
263

Total liabilities assumed
166,249

 
 

Total Identifiable Net Assets Acquired
11,298

 
 

Goodwill resulting from merger
$
13,452


The amount of goodwill recorded reflects LCNB's entrance into a new market and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired.  The goodwill will not be amortizable on LCNB's financial records, but is deductible for tax purposes.  The core deposit intangible is being amortized over eight years using the straight-line method.

Prior to the end of the one-year measurement period for finalizing the purchase allocation, if information becomes available which would indicate adjustments to the purchase price allocation, such adjustments will be included in the purchase price retrospectively.

Direct costs related to the acquisition were expensed as incurred and are recorded as a merger-related expense in the consolidated statements of income.  
 
The results of operations are included in the consolidated statement of income from the date of the merger.  The estimated amount of ENB revenue (net interest income plus non-interest income) and net income, excluding merger and data conversion costs, included in LCNB's consolidated statement of income for the nine months ended September 30, 2014 were as follows (in thousands):
Total revenue
$
4,592

Net income
1,936


8

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 2 – Acquisitions (continued)



The following table presents unaudited pro forma information as if the merger with ENB had occurred on January 1, 2013 (in thousands).  This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of the core deposit intangible, and related income tax effects.  It does not include merger and data conversion costs.  The pro forma information does not necessarily reflect the results of operations that would have occurred had the merger with ENB occurred in 2013.  In particular, expected operational cost savings are not reflected in the pro forma amounts.
 
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
Total revenue
 
$
33,324

 
35,314

Net income
 
7,537

 
8,085

Basic earnings per common share
 
0.81

 
0.88

Diluted earnings per common share
 
0.80

 
0.86



9

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 3 - Investment Securities
 
The amortized cost and estimated fair value of available-for-sale investment securities at September 30, 2014 and December 31, 2013 are summarized as follows (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
September 30, 2014
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
60,602

 
105

 
228

 
60,479

U.S. Agency notes
87,775

 
83

 
1,877

 
85,981

U.S. Agency mortgage-backed securities
39,533

 
404

 
403

 
39,534

Certificates of deposit
3,077

 
8

 

 
3,085

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
83,198

 
2,011

 
358

 
84,851

Taxable
14,431

 
372

 
118

 
14,685

Mutual funds
2,473

 

 
24

 
2,449

Trust preferred securities
50

 

 

 
50

Equity securities
1,465

 
314

 
40

 
1,739

 
$
292,604

 
$
3,297

 
3,048

 
292,853

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
23,104

 
66

 
993

 
22,177

Taxable
400

 

 

 
400

 
$
23,504

 
66

 
993

 
22,577

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
13,184

 

 
290

 
12,894

U.S. Agency notes
110,248

 
141

 
3,714

 
106,675

U.S. Agency mortgage-backed securities
40,602

 
555

 
848

 
40,309

Certificates of deposit
1,492

 
9

 

 
1,501

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
74,185

 
2,116

 
968

 
75,333

Taxable
17,020

 
503

 
214

 
17,309

Mutual funds
2,419

 

 
39

 
2,380

Trust preferred securities
149

 
4

 
6

 
147

Equity securities
1,429

 
329

 
65

 
1,693

 
$
260,728

 
3,657

 
6,144

 
258,241

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
15,923

 
159

 
285

 
15,797

Taxable
400

 

 
1

 
399

 
$
16,323

 
159

 
286

 
16,196


10

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 - Investment Securities (continued)



Information concerning available-for-sale investment securities with gross unrealized losses at September 30, 2014 and December 31, 2013, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
 
Less than Twelve Months
 
Twelve Months or Greater
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2014
 
 
 
 
 
 
 
Investment Securities Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
18,178

 
44

 
$
8,720

 
184

U.S. Agency notes
11,770

 
23

 
68,434

 
1,854

U.S. Agency mortgage-backed securities
13,418

 
38

 
11,663

 
365

Municipal securities:
 

 
 

 
 
 
 
Non-taxable
1,385

 
38

 
15,643

 
320

Taxable
1,499

 
7

 
4,291

 
111

Mutual funds
257

 
4

 
1,163

 
20

Trust preferred securities

 

 

 

Equity securities
252

 
22

 
214

 
18

 
$
46,759

 
176

 
$
110,128

 
2,872

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
12,158

 
993

 

 

  Taxable

 

 

 

 
$
12,158

 
993

 
$

 

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Investment Securities Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
12,894

 
290

 
$

 

U.S. Agency notes
89,080

 
2,880

 
9,636

 
834

U.S. Agency mortgage-backed securities
17,557

 
575

 
5,130

 
273

Municipal securities:
 

 
 

 
 

 
 
Non-taxable
15,641

 
398

 
10,751

 
570

Taxable
4,903

 
202

 
1,252

 
12

Mutual funds
1,380

 
39

 

 

Trust preferred securities

 

 
93

 
6

Equity securities
300

 
44

 
93

 
21

 
$
141,755

 
4,428

 
$
26,955

 
1,716

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
4,890

 
285

 
$

 

  Taxable
399

 
1

 

 

 
$
5,289

 
286

 
$

 



11

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 - Investment Securities (continued)


Management has determined that the unrealized losses at September 30, 2014 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.

Contractual maturities of investment securities at September 30, 2014 were as follows (in thousands).  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due within one year
$
13,134

 
13,181

 
1,861

 
1,868

Due from one to five years
132,414

 
132,725

 
4,092

 
4,099

Due from five to ten years
94,219

 
94,027

 
5,117

 
4,980

Due after ten years
9,316

 
9,148

 
12,434

 
11,630

 
249,083

 
249,081

 
23,504

 
22,577

U.S. Agency mortgage-backed securities
39,533

 
39,534

 

 

Mutual funds
2,473

 
2,449

 

 

Trust preferred securities
50

 
50

 

 

Equity securities
1,465

 
1,739

 

 

 
$
292,604

 
292,853

 
23,504

 
22,577


Investment securities with a market value of $191,941,000 and $157,956,000 at September 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Certain information concerning the sale of investment securities available-for-sale for the three and nine months ended September 30, 2014 and 2013 was as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Proceeds from sales
$
29,724

 
3,883

 
55,795

 
41,888

Gross realized gains
169

 
58

 
171

 
759

Gross realized losses
72

 

 
78

 
6




12

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 4 - Loans
 
Major classifications of loans at September 30, 2014 and December 31, 2013 are as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
Commercial and industrial
34,997

 
29,337

Commercial, secured by real estate
371,533

 
314,252

Residential real estate
248,113

 
215,587

Consumer
19,305

 
12,643

Agricultural
9,249

 
2,472

Other loans, including deposit overdrafts
2,651

 
91

 
685,848

 
574,382

Deferred net origination costs (fees)
67

 
(28
)
 
685,915

 
574,354

Less allowance for loan losses
3,298

 
3,588

Loans, net
682,617

 
570,766


All advances from the Federal Home Loan Bank of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $207 million and $183 million at September 30, 2014 and December 31, 2013, respectively.  Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings.

Loans acquired from the mergers with First Capital and ENB are recorded at fair value with no carryover of the acquired entity's previously established allowance for loan losses.  The excess of expected cash flows over the estimated fair value of acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method.
Subsequent decreases in expected cash flows will require additions to the allowance for loan losses.  Subsequent improvements in expected cash flows result in the recognition of additional interest income over the then-remaining contractual lives of the loans.

Impaired loans acquired are accounted for under FASB ASC 310-30.  Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and updated loan-to-value information.  The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference.  The interest component of the cash flows expected to be collected is referred to as the accretable yield and is recognized as interest income over the remaining contractual life of the loan using the level yield method.   Subsequent decreases in expected cash flows will require additions to the allowance for loan losses.  Subsequent improvements in expected cash flows will result in a reclassification from the nonaccretable difference to the accretable yield.
 
The following table provides certain information at the acquisition date on loans acquired from ENB, not including loans considered to be impaired (in thousands):
Contractually required principal at acquisition
$
102,483

Less fair value adjustment
1,347

Fair value of acquired loans
$
101,136

 
 

Contractual cash flows not expected to be collected
$
1,702


13

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)


The following table provides details on acquired credit impaired loans obtained through the merger with ENB that are accounted for in accordance with FASB ASC 310-30 (in thousands):
Contractually required principal at acquisition
$
23,414

Contractual cash flows not expected to be collected (nonaccretable difference)
(6,088
)
Expected cash flows at acquisition
17,326

Interest component of expected cash flows (accretable discount)
(2,163
)
Fair value of acquired impaired loans
$
15,163


Non-accrual, past-due, and accruing restructured loans as of September 30, 2014 and December 31, 2013 are as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
Non-accrual loans:
 
 
 
Commercial and industrial

 
144

Commercial, secured by real estate
4,476

 
1,418

Agricultural
68

 

Residential real estate
1,720

 
1,399

Total non-accrual loans
6,264

 
2,961

Past-due 90 days or more and still accruing
111

 
250

Total non-accrual and past-due 90 days or more and still accruing
6,375

 
3,211

Accruing restructured loans
14,462

 
15,151

Total
20,837

 
18,362



14

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)


The allowance for loan losses for the three and nine months ended September 30, 2014 and 2013 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
Three Months Ended September 30, 2014
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
331

 
2,068

 
916

 
69

 
8

 
2

 
3,394

Provision charged to expenses
75

 
97

 
201

 
5

 
3

 
20

 
401

Losses charged off
(261
)
 
(112
)
 
(106
)
 
(24
)
 

 
(32
)
 
(535
)
Recoveries
1

 

 
1

 
25

 

 
11

 
38

Balance, end of period
$
146

 
2,053

 
1,012

 
75

 
11

 
1

 
3,298

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
175

 
2,520

 
826

 
66

 

 
1

 
3,588

Provision charged to expenses
221

 
16

 
440

 
19

 
11

 
30

 
737

Losses charged off
(261
)
 
(483
)
 
(281
)
 
(85
)
 

 
(65
)
 
(1,175
)
Recoveries
11

 

 
27

 
75

 

 
35

 
148

Balance, end of period
$
146

 
2,053

 
1,012

 
75

 
11

 
1

 
3,298

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2013
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
$
169

 
2,373

 
804

 
78

 

 
2

 
3,426

Provision charged to expenses
(9
)
 
7

 
150

 
20

 

 
10

 
178

Losses charged off
(1
)
 

 
(169
)
 
(63
)
 

 
(23
)
 
(256
)
Recoveries
4

 
15

 
8

 
37

 

 
11

 
75

Balance, end of period
$
163

 
2,395

 
793

 
72

 

 

 
3,423

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of year
$
320

 
2,296

 
712

 
108

 

 
1

 
3,437

Provision charged to expenses
(41
)
 
107

 
268

 
14

 

 
21

 
369

Losses charged off
(120
)
 
(34
)
 
(208
)
 
(148
)
 

 
(56
)
 
(566
)
Recoveries
4

 
26

 
21

 
98

 

 
34

 
183

Balance, end of period
$
163

 
2,395

 
793

 
72

 

 

 
3,423




15

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)


A breakdown of the allowance for loan losses and the loan portfolio by loan segment at September 30, 2014 and December 31, 2013 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
12

 
430

 
283

 

 

 

 
725

Collectively evaluated for impairment
134

 
1,535

 
729

 
75

 
11

 
1

 
2,485

Acquired credit impaired loans

 
88

 

 

 

 

 
88

Balance, end of period
$
146

 
2,053

 
1,012

 
75

 
11

 
1

 
3,298

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
408

 
13,316

 
2,042

 
18

 

 

 
15,784

Collectively evaluated for impairment
32,858

 
344,134

 
242,897

 
19,265

 
9,132

 
2,103

 
650,389

Acquired credit impaired loans
1,698

 
13,729

 
3,549

 
101

 
117

 
548

 
19,742

Balance, end of period
$
34,964

 
371,179

 
248,488

 
19,384

 
9,249

 
2,651

 
685,915

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2

 
760

 
270

 

 

 

 
1,032

Collectively evaluated for impairment
173

 
1,760

 
556

 
66

 

 
1

 
2,556

Acquired credit impaired loans

 

 

 

 

 

 

Balance, end of period
$
175

 
2,520

 
826

 
66

 

 
1

 
3,588

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
165

 
14,522

 
2,132

 
27

 

 

 
16,846

Collectively evaluated for impairment
28,809

 
295,028

 
212,378

 
12,703

 
2,472

 
91

 
551,481

Acquired credit impaired loans
332

 
4,363

 
1,332

 

 

 

 
6,027

Balance, end of period
$
29,306

 
313,913

 
215,842

 
12,730

 
2,472

 
91

 
574,354



16

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)


The risk characteristics of LCNB's material loan portfolio segments are as follows:

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 lines 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, Secured by Real Estate Loans.  Commercial real estate loans include loans secured by a variety of commercial, retail, and office buildings, religious facilities, multifamily (more than two-family) residential properties, construction and land development loans, and other land loans. Commercial real estate loan products generally amortize over five to twenty-five years and are payable in monthly principal and interest installments.  Some have balloon payments due within one to ten years after the origination date.  Many have adjustable interest rates with adjustment periods ranging from one to ten years, some of which are subject to established “floor” interest rates.

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 global debt service, collateral value, financial strength of any guarantors, and other factors. Commercial real estate loans are generally originated with a 75 percent maximum loan to appraised value ratio.

Residential Real Estate Loans.  Residential real estate loans include loans secured by first or second mortgage liens on one to two-family residential property.  Home equity lines of credit and mortgage loans secured by owner-occupied agricultural property are included in this category.  First and second mortgage loans are generally amortized over five to thirty years with monthly principal and interest payments.  Home equity lines of credit generally have a five year draw period with interest only payments followed by a repayment period with monthly payments based on the amount outstanding.  LCNB offers both fixed and adjustable rate mortgage loans.  Adjustable rate loans are available with adjustment periods ranging between one to ten years and adjust according to an established index plus a margin, subject to certain floor and ceiling rates.  Home equity lines of credit have a variable rate based on the Wall Street Journal prime rate plus a margin.

LCNB does not originate reverse mortgage loans or residential real estate loans generally considered to be “subprime.”

Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral.  LCNB requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80%.
Consumer Loans.  LCNB’s portfolio of consumer loans generally includes secured and unsecured loans to individuals for household, family and other personal expenditures.  Secured loans include loans to fund the purchase of automobiles, recreational vehicles, boats, and similar acquisitions. Consumer loans made by LCNB generally have fixed rates and terms ranging up to 72 months, depending upon the nature of the collateral, size of the loan, and other relevant factors.

Consumer loans generally have higher interest rates, but pose additional risks of collectability and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation.  The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.

Agricultural Loans.  LCNB’s portfolio of agricultural loans includes loans for financing agricultural production or for financing the purchase of equipment used in the production of agricultural products.  LCNB’s agricultural loans are generally secured by farm machinery, livestock, crops, vehicles, or other agri-related collateral.

17

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)


LCNB uses a risk-rating system to quantify loan quality.  A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends.  The categories used are:

Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.
Other Assets Especially Mentioned (OAEM) - loans in this category are currently protected but are potentially weak.  These loans constitute a risk but not to the point of justifying a classification of substandard.  The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.
Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected.
Doubtful – loans classified in this category have all the weaknesses inherent in loans classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
A breakdown of the loan portfolio by credit quality indicators at September 30, 2014 and December 31, 2013 is as follows (in thousands):
 
Pass
 
OAEM
 
Substandard