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EX-31.2 - EXHIBIT 31.2 - LCNB CORPex31_26302016.htm
EX-32 - EXHIBIT 32 - LCNB CORPex326302016.htm
EX-31.1 - EXHIBIT 31.1 - LCNB CORPex31_16302016.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 June 30, 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 August 4, 2016 was 9,978,975 shares.
 
 
 
 
 



LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)

 
 
June 30, 2016
 
December 31,
2015
 
 
(Unaudited)
 
ASSETS:
 
 
 
 
Cash and due from banks
 
$
17,254

 
14,155

Interest-bearing demand deposits
 
1,753

 
832

Total cash and cash equivalents
 
19,007

 
14,987

Investment securities:
 
 

 
 

Available-for-sale, at fair value
 
353,528

 
377,978

Held-to-maturity, at cost
 
39,447

 
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
 
797,092

 
767,809

Premises and equipment, net
 
24,985

 
22,100

Goodwill
 
30,183

 
30,183

Core deposit and other intangibles
 
4,986

 
5,396

Bank owned life insurance
 
26,921

 
22,561

Other assets
 
10,116

 
10,514

TOTAL ASSETS
 
$
1,312,635

 
1,280,531

 
 
 
 
 
LIABILITIES:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing
 
$
252,498

 
250,306

Interest-bearing
 
872,200

 
836,854

Total deposits
 
1,124,698

 
1,087,160

Short-term borrowings
 
30,541

 
37,387

Long-term debt
 
726

 
5,947

Accrued interest and other liabilities
 
10,960

 
9,929

TOTAL LIABILITIES
 
1,166,925

 
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 19,000,000 and 12,000,000 shares at June 30, 2016 and December 31, 2015, respectively; issued 10,690,889 and 10,679,174 shares at June 30, 2016 and December 31, 2015, respectively
 
75,602

 
76,908

Retained earnings
 
77,384

 
74,629

Treasury shares at cost, 753,627 shares at June 30, 2016 and December 31, 2015
 
(11,665
)
 
(11,665
)
Accumulated other comprehensive income, net of taxes
 
4,389

 
236

TOTAL SHAREHOLDERS' EQUITY
 
145,710

 
140,108

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,312,635

 
1,280,531


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

The consolidated condensed 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 CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2016
 
2015
 
2016
 
2015
INTEREST INCOME:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
8,892

 
9,492

 
17,519

 
18,032

Interest on investment securities:
 
 

 
 

 
 

 
 

Taxable
 
1,187

 
1,033

 
2,376

 
1,889

Non-taxable
 
794

 
702

 
1,552

 
1,355

Other investments
 
135

 
121

 
182

 
162

TOTAL INTEREST INCOME
 
11,008

 
11,348

 
21,629

 
21,438

INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Interest on deposits
 
870

 
671

 
1,693

 
1,353

Interest on short-term borrowings
 
8

 
4

 
22

 
8

Interest on long-term debt
 
5

 
73

 
17

 
149

TOTAL INTEREST EXPENSE
 
883

 
748

 
1,732

 
1,510

NET INTEREST INCOME
 
10,125

 
10,600

 
19,897

 
19,928

PROVISION FOR LOAN LOSSES
 
396

 
677

 
486

 
746

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
9,729

 
9,923

 
19,411

 
19,182

NON-INTEREST INCOME:
 
 

 
 

 
 

 
 

Trust income
 
837

 
852

 
1,600

 
1,652

Service charges and fees on deposit accounts
 
1,243

 
1,234

 
2,436

 
2,341

Net gain on sales of securities
 
279

 
221

 
650

 
332

Bank owned life insurance income
 
191

 
155

 
360

 
314

Gains from sales of loans
 
61

 
219

 
102

 
254

Other operating income
 
139

 
150

 
244

 
244

TOTAL NON-INTEREST INCOME
 
2,750

 
2,831

 
5,392

 
5,137

NON-INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
4,532

 
4,381

 
9,095

 
8,671

Equipment expenses
 
239

 
302

 
488

 
590

Occupancy expense, net
 
588

 
584

 
1,157

 
1,179

State franchise tax
 
276

 
250

 
557

 
502

Marketing
 
201

 
220

 
368

 
383

Amortization of intangibles
 
188

 
175

 
375

 
321

FDIC insurance premiums
 
162

 
145

 
327

 
296

Other real estate owned
 
356

 
20

 
385

 
55

Merger-related expenses
 

 
522

 

 
592

Other non-interest expense
 
1,926

 
1,827

 
4,008

 
3,486

TOTAL NON-INTEREST EXPENSE
 
8,468

 
8,426

 
16,760

 
16,075

INCOME BEFORE INCOME TAXES
 
4,011

 
4,328

 
8,043

 
8,244

PROVISION FOR INCOME TAXES
 
1,043

 
1,205

 
2,111

 
2,287

NET INCOME
 
$
2,968

 
3,123

 
5,932

 
5,957

 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.16

 
0.16

 
0.32

 
0.32

Earnings per common share:
 
 

 
 

 
 

 
 

Basic
 
$
0.30

 
0.33

 
0.60

 
0.63

Diluted
 
0.29

 
0.32

 
0.59

 
0.62

Weighted average common shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
$
9,922,024

 
9,694,732

 
9,919,070

 
9,504,739

Diluted
 
9,943,797

 
9,804,728

 
9,971,900

 
9,609,050


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

3


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

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
2,968

 
3,123

 
5,932

 
5,957

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Net unrealized gain (loss) on available-for-sale securities (net of taxes of $742 and $838 for the three months ended June 30, 2016 and 2015, respectively and $2,332 and $75 for the six months ended June 30, 2016 and 2015, respectively.)
 
1,439

 
(1,627
)
 
4,526

 
(147
)
Reclassification adjustment for net realized (gain) loss on sale of available-for-sale securities included in net income (net of taxes of $95 and $75 for the three months ended June 30, 2016 and 2015, respectively and $221 and $113 for the six months ended June 30, 2016 and 2015, respectively)
 
(184
)
 
(146
)
 
(429
)
 
(219
)
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $14 and $15 for the three months ended June 30, 2016 and 2015, respectively and $28 and $29 for the six months ended June 30, 2016 and 2015, respectively)
 
28

 
28

 
56

 
56

TOTAL COMPREHENSIVE INCOME
 
$
4,251

 
1,378

 
10,085

 
5,647


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


4


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED 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
 
 

 
 

 
5,957

 
 

 
 

 
5,957

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
(310
)
 
(310
)
Dividend Reinvestment and Stock Purchase Plan
 
12,005

 
188

 
 

 
 

 
 

 
188

Acquisition of BNB Bancorp, Inc
 
560,132

 
9,063

 
 
 
 
 
 
 
9,063

Exercise of stock options
 
13,449

 
152

 


 


 
 

 
152

Excess tax benefit on exercise of stock options
 
 
 
13

 
 
 
 
 
 
 
13

Compensation expense relating to stock options
 
 

 
10

 
 

 
 

 
 

 
10

Common stock dividends, $0.32 per share
 
 

 
 

 
(3,070
)
 
 

 
 

 
(3,070
)
Balance at June 30, 2015
 
9,896,904

 
$
76,607

 
72,281

 
(11,665
)
 
475

 
137,698

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
9,925,547

 
$
76,908

 
74,629

 
(11,665
)
 
236

 
140,108

Net income
 
 

 
 

 
5,932

 
 

 
 

 
5,932

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
4,153

 
4,153

Dividend Reinvestment and Stock Purchase Plan
 
11,715

 
192

 
 

 
 

 
 

 
192

Repurchase of stock warrants
 
 
 
(1,545
)
 
 
 
 
 
 
 
(1,545
)
Compensation expense relating to stock options
 
 
 
2

 
 
 
 
 
 
 
2

Compensation expense relating to restricted stock
 
 
 
45

 
 
 
 
 
 
 
45

Common stock dividends, $0.32 per share
 
 

 
 

 
(3,177
)
 
 

 
 

 
(3,177
)
Balance at June 30, 2016
 
9,937,262

 
$
75,602

 
77,384

 
(11,665
)
 
4,389

 
145,710


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


5


LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended 
 June 30,
 
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
5,932

 
5,957

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

 
 

Depreciation, amortization, and accretion
 
1,680

 
1,257

Provision for loan losses
 
486

 
746

Increase in cash surrender value of bank owned life insurance
 
(360
)
 
(314
)
Realized gain from sales of securities available-for-sale
 
(650
)
 
(332
)
Realized loss from sales of premises and equipment
 
35

 

Realized (gain) loss from sales and write-downs of other real estate owned and repossessed assets
 
346

 
(9
)
Origination of mortgage loans for sale
 
(4,850
)
 
(3,594
)
Realized gains from sales of loans
 
(102
)
 
(254
)
Proceeds from sales of mortgage loans
 
4,907

 
3,633

Compensation expense related to stock options
 
2

 
10

Compensation expense related to restricted stock
 
45

 

Changes in:
 
 

 
 

Accrued income receivable
 
(224
)
 
(66
)
Other assets
 
46

 
(2,671
)
Other liabilities
 
(613
)
 
651

TOTAL ADJUSTMENTS
 
748

 
(943
)
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
6,680

 
5,014

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of investment securities available-for-sale
 
36,529

 
54,955

Proceeds from maturities and calls of investment securities:
 
 

 
 

Available-for-sale
 
33,025

 
10,858

Held-to-maturity
 
3,342

 
1,471

Purchases of investment securities:
 
 

 
 

Available-for-sale
 
(38,915
)
 
(70,922
)
Held-to-maturity
 
(20,156
)
 
(3,413
)
Proceeds from sale of impaired loans
 

 
4,559

Net increase in loans
 
(29,740
)
 
(26,123
)
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
 
(182
)
 
(20
)
Purchases of premises and equipment
 
(3,565
)
 
(231
)
Proceeds from sale of premises and equipment
 
61

 
21

Net cash acquired from acquisition
 

 
8,993

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
(23,601
)
 
(19,738
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase in deposits
 
37,538

 
38,695

Net decrease in short-term borrowings
 
(6,846
)
 
(3,914
)
Principal payments on long-term debt
 
(5,221
)
 
(5,272
)
Proceeds from issuance of common stock
 
30

 
28

Repurchase of stock warrants
 
(1,545
)
 

Proceeds and excess tax benefit from exercise of stock options
 

 
165

Cash dividends paid on common stock
 
(3,015
)
 
(2,910
)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
20,941

 
26,792

NET CHANGE IN CASH AND CASH EQUIVALENTS
 
4,020

 
12,068

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
14,987

 
15,845

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
19,007

 
27,913

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
1,780

 
1,542

Income taxes paid
 
2,160

 
2,450

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
 
 

 
 

Transfer from loans to other real estate owned and repossessed assets
 

 
79


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

6


LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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 condensed financial statements include the accounts of LCNB and the Bank.

The unaudited interim consolidated condensed 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").  Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.  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 of 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 and six months ended June 30, 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 CONDENSED 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 condensed statements of income.  

8

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




Note 3 - Investment Securities
 
The amortized cost and estimated fair value of investment securities at June 30, 2016 and December 31, 2015 are summarized as follows (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
June 30, 2016
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
52,567

 
1,414

 

 
53,981

U.S. Agency notes
113,554

 
1,784

 

 
115,338

U.S. Agency mortgage-backed securities
47,701

 
592

 
17

 
48,276

Certificates of deposit
248

 

 

 
248

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
108,842

 
2,397

 
6

 
111,233

Taxable
20,507

 
721

 
2

 
21,226

Mutual funds
2,508

 
8

 
17

 
2,499

Trust preferred securities
49

 

 

 
49

Equity securities
633

 
48

 
3

 
678

 
$
346,609

 
$
6,964

 
45

 
353,528

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
30,084

 
796

 
29

 
30,851

Taxable
9,363

 
68

 

 
9,431

 
$
39,447

 
864

 
29

 
40,282

 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
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 CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 - Investment Securities (continued)


Information concerning investment securities with gross unrealized losses at June 30, 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
June 30, 2016
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$

 

 
$

 

U.S. Agency notes

 

 

 

U.S. Agency mortgage-backed securities

 

 
3,909

 
17

Municipal securities:
 

 
 

 
 
 
 
Non-taxable

 

 
2,770

 
6

Taxable
1,005

 

 
451

 
2

Mutual funds

 

 
263

 
17

Trust preferred securities
49

 

 

 

Equity securities
68

 
3

 

 

 
$
1,122

 
3

 
$
7,393

 
42

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$

 

 
2,636

 
29

  Taxable

 

 

 

 
$

 

 
$
2,636

 
29

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
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 CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 - Investment Securities (continued)


Management has determined that the unrealized losses at June 30, 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 June 30, 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
$
23,089

 
23,181

 
3,620

 
3,626

Due from one to five years
150,743

 
153,748

 
4,211

 
4,222

Due from five to ten years
121,380

 
124,583

 
11,073

 
11,239

Due after ten years
506

 
514

 
20,543

 
21,195

 
295,718

 
302,026

 
39,447

 
40,282

U.S. Agency mortgage-backed securities
47,701

 
48,276

 

 

Mutual funds
2,508

 
2,499

 

 

Trust preferred securities
49

 
49

 

 

Equity securities
633

 
678

 

 

 
$
346,609

 
353,528

 
39,447

 
40,282


Investment securities with a market value of $228,901,000 and $215,952,000 at June 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for other purposes required as permitted by law.

Certain information concerning the sale of investment securities available-for-sale for the three and six months ended June 30, 2016 and 2015 was as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from sales
$
16,100

 
48,953

 
$
36,529

 
54,955

Gross realized gains
300

 
234

 
671

 
345

Gross realized losses
21

 
13

 
21

 
13




11

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




Note 4 - Loans
 
Major classifications of loans at June 30, 2016 and December 31, 2015 are as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
Commercial and industrial
$
45,153

 
45,275

Commercial, secured by real estate
455,654

 
419,633

Residential real estate
266,625

 
273,139

Consumer
18,545

 
18,510

Agricultural
13,605

 
13,479

Other loans, including deposit overdrafts
635

 
665

 
800,217

 
770,701

Deferred net origination costs (fees)
248

 
237

 
800,465

 
770,938

Less allowance for loan losses
3,373

 
3,129

Loans, net
$
797,092

 
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 $225 million and $231 million at June 30, 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 CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Loans (continued)



Non-accrual, past-due, and accruing restructured loans as of June 30, 2016 and December 31, 2015 are as follows (in thousands):
 
June 30, 2016
 
December 31, 2015
Non-accrual loans:
 
 
 
Commercial and industrial
$

 

Commercial, secured by real estate
1,362

 
876

Residential real estate
951

 
799

Consumer

 

Agricultural
384

 
48

Total non-accrual loans
2,697

 
1,723

Past-due 90 days or more and still accruing
369

 
559

Total non-accrual and past-due 90 days or more and still accruing
3,066

 
2,282

Accruing restructured loans
13,855

 
13,723

Total
$
16,921

 
16,005



13

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

Note 4 – Loans (continued)


The allowance for loan losses for the three and six months ended June 30, 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 June 30, 2016
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
247

 
1,868

 
896

 
81

 
56

 
2

 
3,150

Provision charged to expenses
74

 
320

 
(1
)
 
(12
)
 
6

 
9

 
396

Losses charged off
(49
)
 
(117
)
 
(14
)
 
(9
)
 

 
(19
)
 
(208
)
Recoveries
1

 

 
4

 
20

 

 
10

 
35

Balance, end of period
$
273

 
2,071

 
885

 
80

 
62

 
2

 
3,373

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
244

 
1,908

 
854

 
54

 
66

 
3

 
3,129

Provision charged to expenses
74

 
285

 
65

 
49

 
(4
)
 
17

 
486

Losses charged off
(49
)
 
(140
)
 
(42
)
 
(53
)
 

 
(42
)
 
(326
)
Recoveries
4

 
18

 
8

 
30

 

 
24

 
84

Balance, end of period
$
273

 
2,071

 
885

 
80

 
62

 
2

 
3,373

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
$
131

 
1,640

 
934

 
54

 
77

 
1

 
2,837

Provision charged to expenses
41

 
552

 
53

 
16

 
6

 
9

 
677

Losses charged off
(11
)
 
(633
)
 
(115
)
 
(18
)
 
(67
)
 
(12
)
 
(856
)
Recoveries
1

 
96

 
42

 
10

 
67

 
5

 
221

Balance, end of period
$
162

 
1,655

 
914

 
62

 
83

 
3

 
2,879

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of year
$
129

 
1,990

 
926

 
63

 
11

 
2

 
3,121

Provision charged to expenses
42

 
515

 
117

 
(13
)
 
72

 
13

 
746

Losses charged off
(11
)
 
(946
)
 
(197
)
 
(29
)
 
(67
)
 
(26
)
 
(1,276
)
Recoveries
2

 
96

 
68

 
41

 
67

 
14

 
288

Balance, end of period
$
162

 
1,655

 
914

 
62

 
83

 
3

 
2,879




14

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

Note 4 – Loans (continued)


A breakdown of the allowance for loan losses and the loan portfolio by loan segment at June 30, 2016 and December 31, 2015 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
6

 
195

 
90

 
9

 

 

 
300

Collectively evaluated for impairment
267

 
1,875

 
795

 
71

 
62

 
2

 
3,072

Acquired credit impaired loans

 
1

 

 

 

 

 
1

Balance, end of period
$
273

 
2,071

 
885

 
80

 
62

 
2

 
3,373

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
354

 
12,672

 
1,584

 
47

 
384

 

 
15,041

Collectively evaluated for impairment
43,452

 
436,405

 
262,558

 
18,571

 
13,230

 
164

 
774,380

Acquired credit impaired loans
1,363

 
6,249

 
2,941

 
20

 

 
471

 
11,044

Balance, end of period
$
45,169

 
455,326

 
267,083

 
18,638

 
13,614

 
635

 
800,465

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



15

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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.