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EX-32 - EXHIBIT 32 - LCNB CORPex323312016.htm
EX-31.2 - EXHIBIT 31.2 - LCNB CORPex31_23312016.htm
EX-31.1 - EXHIBIT 31.1 - LCNB CORPex31_13312016.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
¨
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 001-35292
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 May 3, 2016 was 9,894,743 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, except per share data)

 
 
March 31, 2016
 
December 31,
2015
 
 
(Unaudited)
 
ASSETS:
 
 
 
 
Cash and due from banks
 
$
13,060

 
14,155

Interest-bearing demand deposits
 
8,029

 
832

Total cash and cash equivalents
 
21,089

 
14,987

Investment securities:
 
 

 
 

Available-for-sale, at fair value
 
351,101

 
377,978

Held-to-maturity, at cost
 
36,505

 
22,633

Federal Reserve Bank stock, at cost
 
2,732

 
2,732

Federal Home Loan Bank stock, at cost
 
3,638

 
3,638

Loans, net
 
775,564

 
767,809

Premises and equipment, net
 
21,985

 
22,100

Goodwill
 
30,183

 
30,183

Core deposit and other intangibles
 
5,183

 
5,396

Bank owned life insurance
 
26,730

 
22,561

Other assets
 
11,212

 
10,514

TOTAL ASSETS
 
$
1,285,922

 
1,280,531

LIABILITIES:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing
 
$
249,439

 
250,306

Interest-bearing
 
870,769

 
836,854

Total deposits
 
1,120,208

 
1,087,160

Short-term borrowings
 
11,668

 
37,387

Long-term debt
 
789

 
5,947

Accrued interest and other liabilities
 
10,324

 
9,929

TOTAL LIABILITIES
 
1,142,989

 
1,140,423

COMMITMENTS AND CONTINGENT LIABILITIES
 


 


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 10,685,415 and 10,679,174 shares at March 31, 2016 and December 31, 2015, respectively
 
75,487

 
76,908

Retained earnings
 
76,005

 
74,629

Treasury shares at cost, 753,627 shares at March 31, 2016 and December 31, 2015
 
(11,665
)
 
(11,665
)
Accumulated other comprehensive income, net of taxes
 
3,106

 
236

TOTAL SHAREHOLDERS' EQUITY
 
142,933

 
140,108

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,285,922

 
1,280,531


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

The consolidated balance sheet as of December 31, 2015 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 
 March 31,
 
 
 
2016
 
2015
INTEREST INCOME:
 
 
 
 
 
Interest and fees on loans
 
 
8,627

 
8,540

Interest on investment securities:
 
 
 

 
 

Taxable
 
 
1,189

 
856

Non-taxable
 
 
758

 
653

Other investments
 
 
47

 
41

TOTAL INTEREST INCOME
 
 
10,621

 
10,090

INTEREST EXPENSE:
 
 
 

 
 

Interest on deposits
 
 
823

 
682

Interest on short-term borrowings
 
 
14

 
4

Interest on long-term debt
 
 
12

 
76

TOTAL INTEREST EXPENSE
 
 
849

 
762

NET INTEREST INCOME
 
 
9,772

 
9,328

PROVISION FOR LOAN LOSSES
 
 
90

 
69

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
 
9,682

 
9,259

NON-INTEREST INCOME:
 
 
 

 
 

Trust income
 
 
763

 
800

Service charges and fees on deposit accounts
 
 
1,193

 
1,107

Net gain (loss) on sales of securities
 
 
371

 
111

Bank owned life insurance income
 
 
169

 
159

Gains from sales of loans
 
 
41

 
35

Other operating income
 
 
105

 
94

TOTAL NON-INTEREST INCOME
 
 
2,642

 
2,306

NON-INTEREST EXPENSE:
 
 
 

 
 

Salaries and employee benefits
 
 
4,563

 
4,290

Equipment expenses
 
 
249

 
288

Occupancy expense, net
 
 
569

 
595

State franchise tax
 
 
281

 
252

Marketing
 
 
167

 
163

Amortization of intangibles
 
 
187

 
146

FDIC insurance premiums
 
 
165

 
151

Merger-related expenses
 
 

 
70

Other non-interest expense
 
 
2,111

 
1,694

TOTAL NON-INTEREST EXPENSE
 
 
8,292

 
7,649

INCOME BEFORE INCOME TAXES
 
 
4,032

 
3,916

PROVISION FOR INCOME TAXES
 
 
1,068

 
1,082

NET INCOME
 
 
2,964

 
2,834

 
 
 
 
 
 
Dividends declared per common share
 
 
0.16

 
0.16

Earnings per common share:
 
 
 

 
 

Basic
 
 
0.30

 
0.30

Diluted
 
 
0.30

 
0.30

Weighted average common shares outstanding:
 
 
 

 
 

Basic
 
 
9,916,114

 
9,312,636

Diluted
 
 
9,998,516

 
9,410,774

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 
 March 31,
 
 
 
2016
 
2015
Net income
 
 
2,964

 
2,834

Other comprehensive income (loss):
 
 
 

 
 

Net unrealized gain (loss) on available-for-sale securities (net of taxes of $1,590 and $763 for the three months ended March 31, 2016 and 2015, respectively)
 
 
3,087

 
1,480

Reclassification adjustment for net realized (gain) loss on sale of available-for-sale securities included in net income (net of taxes of $126 and $38 for the three months ended March 31, 2016 and 2015, respectively)
 
 
(245
)
 
(73
)
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $14 and $14 for the three months ended March 31, 2016 and 2015, respectively)
 
 
28

 
28

TOTAL COMPREHENSIVE INCOME
 
 
5,834

 
4,269


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, 2014
 
9,311,318

 
$
67,181

 
69,394

 
(11,665
)
 
785

 
125,695

Net income
 
 

 
 

 
2,834

 
 

 
 

 
2,834

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
1,435

 
1,435

Dividend Reinvestment and Stock Purchase Plan
 
6,265

 
95

 
 

 
 

 
 

 
95

Compensation expense relating to stock options
 
 

 
7

 
 

 
 

 
 

 
7

Common stock dividends, $0.16 per share
 
 

 
 

 
(1,490
)
 
 

 
 

 
(1,490
)
Balance at March 31, 2015
 
9,317,583

 
$
67,283

 
70,738

 
(11,665
)
 
2,220

 
128,576

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
9,925,547

 
$
76,908

 
74,629

 
(11,665
)
 
236

 
140,108

Net income
 
 

 
 

 
2,964

 
 

 
 

 
2,964

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
2,870

 
2,870

Dividend Reinvestment and Stock Purchase Plan
 
6,241

 
101

 
 

 
 

 
 

 
101

Repurchase of stock warrants
 
 
 
(1,545
)
 
 
 
 
 
 
 
(1,545
)
Compensation expense relating to stock options
 
 
 
1

 
 
 
 
 
 
 
1

Compensation expense relating to restricted stock
 
 
 
22

 
 
 
 
 
 
 
22

Common stock dividends, $0.16 per share
 
 

 
 

 
(1,588
)
 
 

 
 

 
(1,588
)
Balance at March 31, 2016
 
9,931,788

 
$
75,487

 
76,005

 
(11,665
)
 
3,106

 
142,933


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)
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
2,964

 
2,834

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

 
 

Depreciation, amortization, and accretion
 
806

 
753

Provision for loan losses
 
90

 
69

Increase in cash surrender value of bank owned life insurance
 
(169
)
 
(159
)
Realized gain from sales of securities available-for-sale
 
(371
)
 
(111
)
Realized gain from sales of premises and equipment
 
(1
)
 

Realized loss from sales and write-downs of other real estate owned and repossessed assets
 

 
(9
)
Origination of mortgage loans for sale
 
(1,661
)
 
(1,675
)
Realized gains from sales of loans
 
(41
)
 
(35
)
Proceeds from sales of mortgage loans
 
1,687

 
1,693

Compensation expense related to stock options
 
1

 
7

Compensation expense related to restricted stock
 
22

 

Changes in:
 
 

 
 

Accrued income receivable
 
(930
)
 
(656
)
Other assets
 
(180
)
 
(1,336
)
Other liabilities
 
(630
)
 
(816
)
TOTAL ADJUSTMENTS
 
(1,377
)
 
(2,275
)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
 
1,587

 
559

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of investment securities available-for-sale
 
20,429

 
6,002

Proceeds from maturities and calls of investment securities:
 
 

 
 

Available-for-sale
 
16,141

 
2,824

Held-to-maturity
 
565

 
207

Purchases of investment securities:
 
 

 
 

Available-for-sale
 
(5,310
)
 
(22,035
)
Held-to-maturity
 
(14,437
)
 
(400
)
Net (increase) decrease in loans
 
(7,837
)
 
(3,097
)
Purchase of bank owned life insurance
 
(4,000
)
 

Proceeds from sale of other real estate owned and repossessed assets
 

 
114

Additions to other real estate owned
 

 
(20
)
Purchases of premises and equipment
 
(176
)
 
(90
)
Proceeds from sale of premises and equipment
 
1

 

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
5,376

 
(16,495
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase in deposits
 
33,048

 
27,520

Net (decrease) increase in short-term borrowings
 
(25,719
)
 
(3,191
)
Principal payments on long-term debt
 
(5,158
)
 
(5,204
)
Proceeds from issuance of common stock
 
20

 
16

Repurchase of stock warrants
 
(1,545
)
 

Cash dividends paid on common stock
 
(1,507
)
 
(1,411
)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
(861
)
 
17,730

NET CHANGE IN CASH AND CASH EQUIVALENTS
 
6,102

 
1,794

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
14,987

 
15,845

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
21,089

 
17,639

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
888

 
819

Income taxes paid
 
830

 
1,000

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
 
 

 
 

Transfer from loans to other real estate owned and repossessed assets
 

 
79


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") 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, 2015 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.

LCNB adopted ASU No. 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)" during the first quarter 2016. ASU No. 2015-07 applies to entities that measure an investment's fair value using the net asset value per share, or an equivalent, as a practical expedient. It eliminates the requirement to classify such investments within the fair value hierarchy. The amendments are to be applied retrospectively to all periods presented. LCNB measures the fair value of certain mutual fund investments using the net asset value per share practical expedient and disclosures concerning these investments in Note 15 - Fair Value Measurements have been changed to comply with the new guidance. Adoption did not have an impact on LCNB's results of operations or financial position.

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

Results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016.  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 2015 Annual Report on Form 10-K filed with the SEC.


Note 2 – Acquisitions

On December 29, 2014, LCNB and BNB Bancorp, Inc. (“BNB”) entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which BNB was acquired by LCNB on April 30, 2015. Immediately following the merger of BNB into LCNB, Brookville National Bank ("Brookville"), a wholly-owned subsidiary of BNB, was merged into LCNB National Bank. Brookville operated a main office and a branch office, both in Brookville, Ohio.  These offices became branches of the Bank after the merger.

Under the terms of the Merger Agreement, the shareholders of BNB common stock received, for each share of BNB common stock, (i) $15.75 in cash and (ii) 2.005 LCNB common shares.



7

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

Note 2 – Acquisitions (continued)


The merger with BNB 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:
 
Common shares issued
$
9,063

Cash paid to shareholder(s)
4,403

    Total consideration paid
13,466

 
 
Identifiable Assets Acquired:
 
Cash and cash equivalents
13,396

Investment securities
58,239

Federal Reserve Bank stock
130

Loans
34,661

Premises and equipment
2,311

Core deposit intangible
1,418

Other assets
532

Total identifiable assets acquired
110,687

 
 
Liabilities Assumed:
 
Deposits
99,133

Deferred income taxes
576

Other liabilities
57

Total liabilities assumed
99,766

 
 
Total Identifiable Net Assets Acquired
10,921

 
 
Goodwill resulting from merger
$
2,545


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 represent 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 nine years using the straight-line method.

Direct costs related to the acquisition were expensed as incurred and are recorded as a merger-related expense in the consolidated statements of income.  

8

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




Note 3 - Investment Securities
 
The amortized cost and estimated fair value of investment securities at March 31, 2016 and December 31, 2015 are summarized as follows (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
March 31, 2016
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
52,591

 
1,001

 

 
53,592

U.S. Agency notes
126,835

 
1,473

 
6

 
128,302

U.S. Agency mortgage-backed securities
33,561

 
281

 
74

 
33,768

Certificates of deposit
248

 
1

 

 
249

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
102,900

 
1,798

 
56

 
104,642

Taxable
26,714

 
596

 
5

 
27,305

Mutual funds
2,527

 

 
35

 
2,492

Trust preferred securities
49

 

 

 
49

Equity securities
659

 
59

 
16

 
702

 
$
346,084

 
$
5,209

 
192

 
351,101

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
29,873

 
528

 
78

 
30,323

Taxable
6,632

 
7

 
14

 
6,625

 
$
36,505

 
535

 
92

 
36,948

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
72,672

 
309

 
135

 
72,846

U.S. Agency notes
140,876

 
164

 
1,151

 
139,889

U.S. Agency mortgage-backed securities
29,608

 
174

 
404

 
29,378

Certificates of deposit
248

 
1

 

 
249

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
103,900

 
1,713

 
134

 
105,479

Taxable
26,738

 
337

 
134

 
26,941

Mutual funds
2,517

 

 
51

 
2,466

Trust preferred securities
49

 
1

 

 
50

Equity securities
659

 
40

 
19

 
680

 
$
377,267

 
2,739

 
2,028

 
377,978

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
22,233

 
95

 
97

 
22,231

Taxable
400

 

 
1

 
399

 
$
22,633

 
95

 
98

 
22,630


9

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

Note 3 - Investment Securities (continued)


Information concerning investment securities with gross unrealized losses at March 31, 2016 and December 31, 2015, 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
March 31, 2016
 
 
 
 
 
 
 
Investment Securities Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$

 

 
$

 

U.S. Agency notes
9,989

 
6

 

 

U.S. Agency mortgage-backed securities
5,281

 
17

 
4,013

 
57

Municipal securities:
 

 
 

 
 
 
 
Non-taxable
9,202

 
32

 
4,220

 
24

Taxable
1,660

 
4

 
449

 
1

Mutual funds
1,221

 
1

 
272

 
34

Trust preferred securities

 

 

 

Equity securities
124

 
11

 
73

 
5

 
$
27,477

 
71

 
$
9,027

 
121

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
873

 
2

 
3,444

 
76

  Taxable
3,286

 
14

 

 

 
$
4,159

 
16

 
$
3,444

 
76

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Investment Securities Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
32,854

 
75

 
$
4,846

 
60

U.S. Agency notes
104,053

 
1,000

 
9,869

 
151

U.S. Agency mortgage-backed securities
19,190

 
256

 
4,068

 
148

Municipal securities:
 

 
 

 
 

 
 
Non-taxable
13,124

 
74

 
7,037

 
60

Taxable
15,601

 
114

 
880

 
20

Mutual funds
1,215

 
17

 
268

 
34

Trust preferred securities

 

 

 

Equity securities
248

 
12

 
73

 
7

 
$
186,285

 
1,548

 
$
27,041

 
480

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
832

 
3

 
$
3,426

 
94

  Taxable
399

 
1

 

 

 
$
1,231

 
4

 
$
3,426

 
94



10

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

Note 3 - Investment Securities (continued)


Management has determined that the unrealized losses at March 31, 2016 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 March 31, 2016 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
$
22,647

 
22,759

 
3,859

 
3,866

Due from one to five years
158,647

 
161,011

 
4,021

 
4,010

Due from five to ten years
127,994

 
130,320

 
10,732

 
10,781

Due after ten years

 

 
17,893

 
18,291

 
309,288

 
314,090

 
36,505

 
36,948

U.S. Agency mortgage-backed securities
33,561

 
33,768

 

 

Mutual funds
2,527

 
2,492

 

 

Trust preferred securities
49

 
49

 

 

Equity securities
659

 
702

 

 

 
$
346,084

 
351,101

 
36,505

 
36,948


Investment securities with a market value of $226,644,000 and $215,952,000 at March 31, 2016 and December 31, 2015, 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 months ended March 31, 2016 and 2015 was as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
Proceeds from sales
 
$
20,429

 
6,002

Gross realized gains
 
371

 
111

Gross realized losses
 

 




11

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




Note 4 - Loans
 
Major classifications of loans at March 31, 2016 and December 31, 2015 are as follows (in thousands):
 
March 31, 2016
 
December 31, 2015
Commercial and industrial
$
45,324

 
45,275

Commercial, secured by real estate
430,179

 
419,633

Residential real estate
271,812

 
273,139

Consumer
17,925

 
18,510

Agricultural
12,589

 
13,479

Other loans, including deposit overdrafts
643

 
665

 
778,472

 
770,701

Deferred net origination costs (fees)
242

 
237

 
778,714

 
770,938

Less allowance for loan losses
3,150

 
3,129

Loans, net
$
775,564

 
767,809


All advances from the Federal Home Loan Bank ("FHLB") of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $230 million and $231 million at March 31, 2016 and December 31, 2015, respectively.  Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings.

Loans acquired through mergers 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.
 













12

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

Note 4 – Loans (continued)


Non-accrual, past-due, and accruing restructured loans as of March 31, 2016 and December 31, 2015 are as follows (in thousands):
 
March 31, 2016
 
December 31, 2015
Non-accrual loans:
 
 
 
Commercial and industrial
$

 

Commercial, secured by real estate
1,759

 
876

Agricultural
413

 
48

Residential real estate
1,144

 
799

Consumer
12

 

Total non-accrual loans
3,328

 
1,723

Past-due 90 days or more and still accruing
99

 
559

Total non-accrual and past-due 90 days or more and still accruing
3,427

 
2,282

Accruing restructured loans
13,955

 
13,723

Total
$
17,382

 
16,005


The allowance for loan losses for the three months ended March 31, 2016 and 2015 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
Three Months Ended March 31, 2016
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
244

 
1,908

 
854

 
54

 
66

 
3

 
3,129

Provision charged to expenses

 
(35
)
 
66

 
61

 
(10
)
 
8

 
90

Losses charged off

 
(23
)
 
(28
)
 
(44
)
 

 
(23
)
 
(118
)
Recoveries
3

 
18

 
4

 
10

 

 
14

 
49

Balance, end of period
$
247

 
1,868

 
896

 
81

 
56

 
2

 
3,150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2015
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of year
$
129

 
1,990

 
926

 
63

 
11

 
2

 
3,121

Provision charged to expenses
1

 
(37
)
 
64

 
(29
)
 
66

 
4

 
69

Losses charged off

 
(313
)
 
(82
)
 
(11
)
 

 
(14
)
 
(420
)
Recoveries
1

 

 
26

 
31

 

 
9

 
67

Balance, end of period
$
131

 
1,640

 
934

 
54

 
77

 
1

 
2,837




13

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 March 31, 2016 and December 31, 2015 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
8

 
210

 
93

 
13

 

 

 
324

Collectively evaluated for impairment
239

 
1,629

 
803

 
68

 
56

 
2

 
2,797

Acquired credit impaired loans

 
29

 

 

 

 

 
29

Balance, end of period
$
247

 
1,868

 
896

 
81

 
56

 
2

 
3,150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
362

 
13,065

 
1,593

 
63

 
384

 

 
15,467

Collectively evaluated for impairment
44,236

 
410,441

 
267,682

 
17,934

 
12,184

 
139

 
752,616

Acquired credit impaired loans
739

 
6,351

 
2,986

 
22

 
29

 
504

 
10,631

Balance, end of period
$
45,337

 
429,857

 
272,261

 
18,019

 
12,597

 
643

 
778,714

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
9

 
306

 
48

 

 

 

 
363

Collectively evaluated for impairment
235

 
1,602

 
806

 
54

 
66

 
3

 
2,766

Acquired credit impaired loans

 

 

 

 

 

 

Balance, end of period
$
244

 
1,908

 
854

 
54

 
66

 
3

 
3,129

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
370

 
12,351

 
1,541

 
56

 

 

 
14,318

Collectively evaluated for impairment
43,726

 
399,092

 
269,001

 
18,516

 
13,438

 
179

 
743,952

Acquired credit impaired loans
1,191

 
7,877

 
3,039

 
27

 
48

 
486

 
12,668

Balance, end of period
$
45,287

 
419,320

 
273,581

 
18,599

 
13,486

 
665

 
770,938



14

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 adjustment periods ranging from one month to 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% 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 generally 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 agricultural related collateral.

15

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 March 31, 2016 and December 31, 2015 is as follows (in thousands):
 
Pass
 
OAEM
 
Substandard
 
Doubtful
 
Total
March 31, 2016
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
44,585

 

 
752

 

 
45,337

Commercial, secured by real estate
409,710

 
7,521

 
12,626

 

 
429,857

Residential real estate
266,809

 
1,198

 
4,254

 

 
272,261

Consumer
17,911

 

 
108

 

 
18,019

Agricultural
11,111

 
728

 
758

 

 
12,597

Other
643

 

 

 

 
643

Total
$
750,769

 
9,447

 
18,498

 

 
778,714

 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
44,596

 

 
691

 

 
45,287

Commercial, secured by real estate
397,938

 
9,316

 
12,066

 

 
419,320

Residential real estate
267,567

 
1,935

 
4,079

 

 
273,581

Consumer
18,528

 

 
71

 

 
18,599

Agricultural
12,246

 
850

 
390

 

 
13,486

Other
665

 

 

 

 
665

Total
$
741,540

 
12,101

 
17,297

 

 
770,938



16

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

Note 4 – Loans (continued)


A loan portfolio aging analysis at March 31, 2016 and December 31, 2015 is as follows (in thousands):
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
90 Days
Past Due
 
Total
Past Due
 
Current
 
Total Loans
Receivable
 
Total Loans Greater Than
90 Days and
Accruing
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
61

 

 

 
61

 
45,276

 
45,337

 

Commercial, secured by real estate
75

 
73

 
836

 
984

 
428,873

 
429,857

 

Residential real estate
1,008

 
2

 
1,025

 
2,035

 
270,226

 
272,261

 
64

Consumer
54

 
9

 
48

 
111

 
17,908

 
18,019

 
35

Agricultural

 

 

 

 
12,597

 
12,597

 

Other
70

 

 

 
70

 
573

 
643

 

Total
$
1,268

 
84

 
1,909

 
3,261

 
775,453

 
778,714

 
99

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial & industrial
$

 

 

 

 
45,287

 
45,287

 

Commercial, secured by real estate
73

 
81

 
876

 
1,030

 
418,290

 
419,320

 

Residential real estate
777

 
198

 
1,124

 
2,099

 
271,482

 
273,581

 
516

Consumer
62

 
7

 
43

 
112

 
18,487

 
18,599

 
43

Agricultural

 

 

 

 
13,486

 
13,486

 

Other
109

 

 

 
109

 
556

 
665

 

Total
$
1,021

 
286

 
2,043

 
3,350

 
767,588

 
770,938

 
559