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EX-32 - EXHIBIT 32 - LCNB CORPex323312017.htm
EX-31.2 - EXHIBIT 31.2 - LCNB CORPex31_23312017.htm
EX-31.1 - EXHIBIT 31.1 - LCNB CORPex31_13312017.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
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.
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).
Yes         No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company ☐
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes         No
The number of shares outstanding of the issuer's common stock, without par value, as of May 2, 2017 was 10,003,788 shares.
 
 
 
 
 



LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements

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

 
 
March 31, 2017
 
December 31,
2016
 
 
(Unaudited)
 
ASSETS:
 
 
 
 
Cash and due from banks
 
$
14,712

 
$
18,378

Interest-bearing demand deposits
 
18,562

 
487

Total cash and cash equivalents
 
33,274

 
18,865

Investment securities:
 
 

 
 

Available-for-sale, at fair value
 
326,676

 
320,659

Held-to-maturity, at cost
 
38,455

 
41,003

Federal Reserve Bank stock, at cost
 
2,732

 
2,732

Federal Home Loan Bank stock, at cost
 
3,638

 
3,638

Loans, net
 
807,153

 
816,228

Premises and equipment, net
 
33,157

 
30,244

Goodwill
 
30,183

 
30,183

Core deposit and other intangibles
 
4,390

 
4,582

Bank owned life insurance
 
27,496

 
27,307

Other assets
 
11,920

 
11,358

TOTAL ASSETS
 
$
1,319,074

 
$
1,306,799

 
 
 
 
 
LIABILITIES:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing
 
$
270,999

 
$
271,332

Interest-bearing
 
877,199

 
839,573

Total deposits
 
1,148,198

 
1,110,905

Short-term borrowings
 
15,957

 
42,040

Long-term debt
 
480

 
598

Accrued interest and other liabilities
 
9,121

 
10,312

TOTAL LIABILITIES
 
1,173,756

 
1,163,855

 
 
 
 
 
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 shares; issued 10,763,269 and 10,751,652 shares at March 31, 2017 and December 31, 2016, respectively
 
76,691

 
76,490

Retained earnings
 
82,381

 
80,736

Treasury shares at cost, 753,627 shares at March 31, 2017 and December 31, 2016
 
(11,665
)
 
(11,665
)
Accumulated other comprehensive income (loss), net of taxes
 
(2,089
)
 
(2,617
)
TOTAL SHAREHOLDERS' EQUITY
 
145,318

 
142,944

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,319,074

 
$
1,306,799


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

The consolidated condensed balance sheet as of December 31, 2016 has been derived from the audited consolidated balance sheet as of that day.

2


LCNB CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
INTEREST INCOME:
 
 
 
 
Interest and fees on loans
 
$
8,915

 
$
8,627

Interest on investment securities:
 
 

 
 

Taxable
 
1,093

 
1,189

Non-taxable
 
799

 
758

Other investments
 
57

 
47

TOTAL INTEREST INCOME
 
10,864

 
10,621

INTEREST EXPENSE:
 
 

 
 

Interest on deposits
 
843

 
823

Interest on short-term borrowings
 
30

 
14

Interest on long-term debt
 
4

 
12

TOTAL INTEREST EXPENSE
 
877

 
849

NET INTEREST INCOME
 
9,987

 
9,772

PROVISION FOR LOAN LOSSES
 
15

 
90

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
9,972

 
9,682

NON-INTEREST INCOME:
 
 

 
 

Trust income
 
852

 
763

Service charges and fees on deposit accounts
 
1,222

 
1,193

Net gain on sales of securities
 

 
371

Bank owned life insurance income
 
189

 
169

Gains from sales of loans
 
39

 
41

Other operating income
 
128

 
105

TOTAL NON-INTEREST INCOME
 
2,430

 
2,642

NON-INTEREST EXPENSE:
 
 

 
 

Salaries and employee benefits
 
4,526

 
4,563

Equipment expenses
 
211

 
249

Occupancy expense, net
 
568

 
569

State franchise tax
 
284

 
281

Marketing
 
143

 
167

Amortization of intangibles
 
185

 
187

FDIC insurance premiums
 
104

 
165

Other non-interest expense
 
1,947

 
2,111

TOTAL NON-INTEREST EXPENSE
 
7,968

 
8,292

INCOME BEFORE INCOME TAXES
 
4,434

 
4,032

PROVISION FOR INCOME TAXES
 
1,188

 
1,068

NET INCOME
 
$
3,246

 
$
2,964

 
 
 
 
 
Dividends declared per common share
 
$
0.16

 
$
0.16

Earnings per common share:
 
 

 
 

Basic
 
$
0.32

 
$
0.30

Diluted
 
0.32

 
0.30

Weighted average common shares outstanding:
 
 

 
 

Basic
 
9,995,054

 
9,916,114

Diluted
 
10,002,878

 
9,996,826


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

3


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

 
 
 
Three Months Ended 
 March 31,
 
 
 
2017
 
2016
Net income
 
 
$
3,246

 
$
2,964

Other comprehensive income:
 
 
 

 
 

Net unrealized gain on available-for-sale securities (net of taxes of $256 and $1,590 for the three months ended March 31, 2017 and 2016, respectively)
 
 
528

 
3,087

Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income (net of taxes of $0 and $126 for the three months ended March 31, 2017 and 2016, respectively)
 
 

 
(245
)
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $0 and $14 for the three months ended March 31, 2017 and 2016, respectively)
 
 

 
28

  Other comprehensive income, net of tax
 
 
528

 
2,870

TOTAL COMPREHENSIVE INCOME
 
 
$
3,774

 
$
5,834


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


4


LCNB CORP. AND SUBSIDIARY
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
 
Total Shareholders'
Equity
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

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
9,998,025

 
$
76,490

 
$
80,736

 
$
(11,665
)
 
$
(2,617
)
 
$
142,944

Net income
 
 

 
 

 
3,246

 
 

 
 

 
3,246

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
528

 
528

Dividend Reinvestment and Stock Purchase Plan
 
4,192

 
93

 
 

 
 

 
 

 
93

Exercise of stock options
 
3,398

 
51

 
 

 
 

 
 

 
51

Compensation expense relating to stock options
 
 
 
1

 
 
 
 
 
 
 
1

Compensation expense relating to restricted stock
 
4,027

 
56

 
 
 
 
 
 
 
56

Common stock dividends, $0.16 per share
 
 

 
 

 
(1,601
)
 
 

 
 

 
(1,601
)
Balance at March 31, 2017
 
10,009,642

 
$
76,691

 
$
82,381

 
$
(11,665
)
 
$
(2,089
)
 
$
145,318


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


5


LCNB CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
3,246

 
$
2,964

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

 
 

Depreciation, amortization, and accretion
 
771

 
806

Provision for loan losses
 
15

 
90

Increase in cash surrender value of bank owned life insurance
 
(189
)
 
(169
)
Realized gain from sales of securities available-for-sale
 

 
(371
)
Realized loss from sales of premises and equipment
 

 
(1
)
Realized loss from sales and write-downs of other real estate owned and repossessed assets
 
3

 

Origination of mortgage loans for sale
 
(1,957
)
 
(1,661
)
Realized gains from sales of loans
 
(39
)
 
(41
)
Proceeds from sales of mortgage loans
 
1,971

 
1,687

Penalty for prepayment of long-term debt
 

 
251

Compensation expense related to stock options
 
1

 
1

Compensation expense related to restricted stock
 
56

 
22

Changes in:
 
 

 
 

Accrued income receivable
 
(652
)
 
(930
)
Other assets
 
(165
)
 
(180
)
Other liabilities
 
(1,192
)
 
(630
)
TOTAL ADJUSTMENTS
 
(1,377
)
 
(1,126
)
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
1,869

 
1,838

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of investment securities available-for-sale
 

 
20,429

Proceeds from maturities and calls of investment securities:
 
 

 
 

Available-for-sale
 
4,205

 
16,141

Held-to-maturity
 
5,398

 
565

Purchases of investment securities:
 
 

 
 

Available-for-sale
 
(9,916
)
 
(5,310
)
Held-to-maturity
 
(2,850
)
 
(14,437
)
Net (increase) decrease in loans
 
8,263

 
(7,837
)
Purchase of bank owned life insurance
 

 
(4,000
)
Proceeds from sale of other real estate owned and repossessed assets
 
971

 

Purchases of premises and equipment
 
(3,166
)
 
(176
)
Proceeds from sale of premises and equipment
 

 
1

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
2,905

 
5,376

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase in deposits
 
37,293

 
33,048

Net decrease in short-term borrowings
 
(26,083
)
 
(25,719
)
Principal payments on long-term debt
 
(118
)
 
(5,158
)
Penalty for prepayment of long-term debt
 

 
(251
)
Proceeds from issuance of common stock
 
12

 
20

Repurchase of stock warrants
 

 
(1,545
)
Proceeds from exercise of stock options
 
51

 

Cash dividends paid on common stock
 
(1,520
)
 
(1,507
)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
9,635

 
(1,112
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
 
14,409

 
6,102

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
18,865

 
14,987

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
33,274

 
$
21,089

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
903

 
$
888

Income taxes paid
 
500

 
830

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
 
 

 
 

Transfer from loans to other real estate owned and repossessed assets
 
974

 


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

6


LCNB CORP. AND SUBSIDIARY
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 condensed balance sheet as of December 31, 2016 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.

Accounting Standards Update ("ASU") No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," was issued by the Financial Accounting Standards Board ("FASB") in March 2016 and affects all entities that issue share-based payment awards to their employees. The new guidance involves several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU No. 2016-09, any excess tax benefits or tax deficiencies should be recognized as income tax expense or benefit in the income statement. Excess tax benefits are to be classified as an operating activity in the statement of cash flows. In accruing compensation cost, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, as required under current guidance, or account for forfeitures when they occur. For an award to qualify for equity classification, an entity cannot partially settle the award in excess of the employer's maximum statutory withholding requirements. Such cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. The amendments in ASU No. 2016-09 were effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Accordingly, LCNB adopted the update as of January 1, 2017. Adoption did not have a material impact on LCNB's results of operations or financial position.

ASU No. 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities," was issued by the FASB in March 2017 and applies to all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). The ASU requires the premium to be amortized to the earliest call date, not the maturity date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted and management elected to adopt the update as of January 1, 2017. Adoption did not have a material 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, the 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, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.  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 2016 Annual Report on Form 10-K filed with the SEC.

7

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




Note 2 - Investment Securities
 
The amortized cost and estimated fair value of investment securities at March 31, 2017 and December 31, 2016 are summarized as follows (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
March 31, 2017
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
33,236

 
$
102

 
$
33

 
$
33,305

U.S. Agency notes
91,911

 
137

 
1,723

 
90,325

U.S. Agency mortgage-backed securities
69,162

 
79

 
1,273

 
67,968

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
113,180

 
640

 
1,334

 
112,486

Taxable
19,189

 
224

 
62

 
19,351

Mutual funds
2,536

 

 
45

 
2,491

Trust preferred securities
49

 

 

 
49

Equity securities
632

 
75

 
6

 
701

 
$
329,895

 
$
1,257

 
$
4,476

 
$
326,676

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
$
33,279

 
$
103

 
$
368

 
$
33,014

Taxable
5,176

 

 
178

 
4,998

 
$
38,455

 
$
103

 
$
546

 
$
38,012

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
28,180

 
$
41

 
$
76

 
$
28,145

U.S. Agency notes
87,098

 
150

 
1,848

 
85,400

U.S. Agency mortgage-backed securities
72,402

 
89

 
1,444

 
71,047

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
114,064

 
574

 
1,623

 
113,015

Taxable
19,710

 
220

 
85

 
19,845

Mutual funds
2,527

 

 
45

 
2,482

Trust preferred securities
49

 

 
1

 
48

Equity securities
632

 
55

 
10

 
677

 
$
324,662

 
$
1,129

 
$
5,132

 
$
320,659

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
$
31,015

 
$
56

 
$
352

 
$
30,719

Taxable
9,988

 

 
217

 
9,771

 
$
41,003

 
$
56

 
$
569

 
$
40,490


8

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

Note 2 - Investment Securities (continued)


Information concerning investment securities with gross unrealized losses at March 31, 2017 and December 31, 2016, 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, 2017
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
11,090

 
$
33

 
$

 
$

U.S. Agency notes
77,741

 
1,723

 

 

U.S. Agency mortgage-backed securities
62,000

 
1,145

 
3,393

 
128

Municipal securities:
 

 
 

 
 
 
 
Non-taxable
58,461

 
1,334

 
301

 

Taxable
8,957

 
59

 
450

 
3

Mutual funds
1,211

 
37

 
280

 
8

Trust preferred securities
49

 

 

 

Equity securities
42

 
6

 

 

 
$
219,551

 
$
4,337

 
$
4,424

 
$
139

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
19,061

 
289

 
2,586

 
79

  Taxable
3,122

 
178

 

 

 
$
22,183

 
$
467

 
$
2,586

 
$
79

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
16,076

 
$
76

 
$

 
$

U.S. Agency notes
69,784

 
1,848

 

 

U.S. Agency mortgage-backed securities
64,564

 
1,310

 
3,518

 
134

Municipal securities:
 

 
 

 
 

 
 
Non-taxable
72,867

 
1,621

 
451

 
2

Taxable
9,721

 
82

 
450

 
3

Mutual funds
1,205

 
37

 
277

 
8

Trust preferred securities
49

 
1

 

 

Equity securities
201

 
10

 

 

 
$
234,467

 
$
4,985

 
$
4,696

 
$
147

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
20,429

 
$
251

 
$
2,564

 
$
101

  Taxable
8,030

 
217

 

 

 
$
28,459

 
$
468

 
$
2,564

 
$
101



9

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

Note 2 - Investment Securities (continued)


Management has determined that the unrealized losses at March 31, 2017 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, 2017 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
$
11,856

 
$
11,925

 
$
6,035

 
$
6,043

Due from one to five years
117,046

 
117,557

 
4,108

 
4,070

Due from five to ten years
121,065

 
118,832

 
10,365

 
10,142

Due after ten years
7,549

 
7,153

 
17,947

 
17,757

 
257,516

 
255,467

 
38,455

 
38,012

U.S. Agency mortgage-backed securities
69,162

 
67,968

 

 

Mutual funds
2,536

 
2,491

 

 

Trust preferred securities
49

 
49

 

 

Equity securities
632

 
701

 

 

 
$
329,895

 
$
326,676

 
$
38,455

 
$
38,012


Investment securities with a market value of $185,788,000 and $149,990,000 at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

Certain information concerning the sale of investment securities available-for-sale for the three months ended March 31, 2017 and 2016 was as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Proceeds from sales
 
$

 
$
20,429

Gross realized gains
 

 
371

Gross realized losses
 

 


Realized gains or losses from the sale of securities are computed using the specific identification method.

10

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




Note 3 - Loans
 
Major classifications of loans at March 31, 2017 and December 31, 2016 are as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
Commercial and industrial
$
40,039

 
$
41,878

Commercial, secured by real estate
475,594

 
477,275

Residential real estate
260,853

 
265,788

Consumer
17,646

 
19,173

Agricultural
15,459

 
14,802

Other loans, including deposit overdrafts
609

 
633

 
810,200

 
819,549

Deferred origination costs (fees), net
281

 
254

 
810,481

 
819,803

Less allowance for loan losses
3,328

 
3,575

Loans, net
$
807,153

 
$
816,228


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 Accounting Standards Codification ("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.
 
Non-accrual, past-due, and accruing restructured loans as of March 31, 2017 and December 31, 2016 are as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
Non-accrual loans:
 
 
 
Commercial and industrial
$

 
$

Commercial, secured by real estate
2,609

 
4,312

Residential real estate
926

 
1,079

Consumer

 

Agricultural
334

 
334

Total non-accrual loans
3,869

 
5,725

Past-due 90 days or more and still accruing
12

 
23

Total non-accrual and past-due 90 days or more and still accruing
3,881

 
5,748

Accruing restructured loans
11,606

 
11,731

Total
$
15,487

 
$
17,479


11

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

Note 3 – Loans (continued)


The allowance for loan losses for the three months ended March 31, 2017 and 2016 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
Three Months Ended March 31, 2017
Balance, beginning of period
$
350

 
$
2,179

 
$
885

 
$
96

 
$
60

 
$
5

 
$
3,575

Provision charged to expenses
(2
)
 
90

 
(107
)
 
23

 
6

 
5

 
15

Losses charged off

 
(262
)
 
(17
)
 
(45
)
 

 
(30
)
 
(354
)
Recoveries
5

 

 
48

 
17

 

 
22

 
92

Balance, end of period
$
353

 
$
2,007

 
$
809

 
$
91

 
$
66

 
$
2

 
$
3,328

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
Balance, beginning of period
$
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




12

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

Note 3 – Loans (continued)


A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, 2017 and December 31, 2016 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
8

 
$
30

 
$
81

 
$
13

 
$

 
$

 
$
132

Collectively evaluated for impairment
345

 
1,977

 
728

 
78

 
66

 
2

 
3,196

Acquired credit impaired loans

 

 

 

 

 

 

Balance, end of period
$
353

 
$
2,007

 
$
809

 
$
91

 
$
66

 
$
2

 
$
3,328

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
329

 
$
12,036

 
$
1,455

 
$
63

 
$
334

 
$

 
$
14,217

Collectively evaluated for impairment
39,332

 
458,586

 
257,439

 
17,672

 
15,132

 
138

 
788,299

Acquired credit impaired loans
405

 
4,654

 
2,426

 
9

 

 
471

 
7,965

Balance, end of period
$
40,066

 
$
475,276

 
$
261,320

 
$
17,744

 
$
15,466

 
$
609

 
$
810,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
9

 
$
55

 
$
100

 
$
13

 
$

 
$

 
$
177

Collectively evaluated for impairment
341

 
1,832

 
785

 
83

 
60

 
5

 
3,106

Acquired credit impaired loans

 
292

 

 

 

 

 
292

Balance, end of period
$
350

 
$
2,179

 
$
885

 
$
96

 
$
60

 
$
5

 
$
3,575

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
337

 
$
12,580

 
$
1,518

 
$
52

 
$
334

 
$

 
$
14,821

Collectively evaluated for impairment
41,466

 
458,059

 
262,266

 
19,192

 
14,475

 
178

 
795,636

Acquired credit impaired loans
98

 
6,305

 
2,471

 
17

 

 
455

 
9,346

Balance, end of period
$
41,901

 
$
476,944

 
$
266,255

 
$
19,261

 
$
14,809

 
$
633

 
$
819,803



13

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

Note 3 – 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.

14

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

Note 3 – 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 as 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, 2017 and December 31, 2016 is as follows (in thousands):
 
Pass
 
OAEM
 
Substandard
 
Doubtful
 
Total
March 31, 2017
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
39,432

 
$
239

 
$
395

 
$

 
$
40,066

Commercial, secured by real estate
445,157

 
6,378

 
23,741

 

 
475,276

Residential real estate
257,044

 
186

 
4,090

 

 
261,320

Consumer
17,682

 

 
62

 

 
17,744

Agricultural
13,931

 

 
1,535

 

 
15,466

Other
609

 

 

 

 
609

Total
$
773,855

 
$
6,803

 
$
29,823

 
$

 
$
810,481

 
 
 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
41,178

 
$
304

 
$
419

 
$

 
$
41,901

Commercial, secured by real estate
443,781

 
5,479

 
27,684

 

 
476,944

Residential real estate
261,839

 
442

 
3,974

 

 
266,255

Consumer
19,182

 

 
79

 

 
19,261

Agricultural
13,311

 

 
1,498

 

 
14,809

Other
633

 

 

 

 
633

Total
$
779,924

 
$
6,225

 
$
33,654

 
$

 
$
819,803















15

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

Note 3 – Loans (continued)


A loan portfolio aging analysis at March 31, 2017 and December 31, 2016 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, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
8

 
$

 
$

 
$
8

 
$
40,058

 
$
40,066

 
$

Commercial, secured by real estate
201

 

 
622

 
823

 
474,453

 
475,276

 

Residential real estate
1,303

 
75

 
706

 
2,084

 
259,236

 
261,320

 
12

Consumer
26

 
8

 

 
34

 
17,710

 
17,744

 

Agricultural

 
60

 
334

 
394

 
15,072

 
15,466

 

Other
76

 

 

 
76

 
533

 
609

 

Total
$
1,614

 
$
143

 
$
1,662

 
$
3,419

 
$
807,062

 
$
810,481

 
$
12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
19

 
$

 
$

 
$
19

 
$
41,882

 
$
41,901

 
$

Commercial, secured by real estate
99

 
69

 
127

 
295

 
476,649

 
476,944

 

Residential real estate
686

 
80

 
727

 
1,493

 
264,762

 
266,255

 
20

C