LCNB 3.31.2015 10Q

 
 
 
 
 
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, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                        to                                                      

Commission File Number 000-26121
LCNB Corp.
(Exact name of registrant as specified in its charter)
Ohio
 
 31-1626393
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

2 North Broadway, Lebanon, Ohio 45036
(Address of principal executive offices, including Zip Code)

(513) 932-1414
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes         ¨ No

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨ Yes         x No
The number of shares outstanding of the issuer's common stock, without par value, as of May 4, 2015 was 9,317,895 shares.
 
 
 
 
 


Table of Contents



LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

Table of Contents



PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements

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

 
 
March 31, 2015
 
December 31,
2014
 
 
(Unaudited)
 
ASSETS:
 
 
 
 
Cash and due from banks
 
$
12,760

 
14,235

Interest-bearing demand deposits
 
4,879

 
1,610

Total cash and cash equivalents
 
17,639

 
15,845

Investment securities:
 
 

 
 

Available-for-sale, at fair value
 
300,527

 
285,365

Held-to-maturity, at cost
 
22,918

 
22,725

Federal Reserve Bank stock, at cost
 
2,346

 
2,346

Federal Home Loan Bank stock, at cost
 
3,638

 
3,638

Loans, net
 
698,848

 
695,835

Premises and equipment, net
 
20,495

 
20,733

Goodwill
 
27,638

 
27,638

Core deposit and other intangibles
 
4,598

 
4,780

Bank owned life insurance
 
22,095

 
21,936

Other assets
 
8,755

 
7,225

TOTAL ASSETS
 
$
1,129,497

 
1,108,066

LIABILITIES:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing
 
$
209,521

 
213,303

Interest-bearing
 
764,204

 
732,902

Total deposits
 
973,725

 
946,205

Short-term borrowings
 
13,454

 
16,645

Long-term debt
 
6,153

 
11,357

Accrued interest and other liabilities
 
7,589

 
8,164

TOTAL LIABILITIES
 
1,000,921

 
982,371

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 10,071,210 and 10,064,945 shares at March 31, 2015 and December 31, 2014, respectively
 
67,283

 
67,181

Retained earnings
 
70,738

 
69,394

Treasury shares at cost, 753,627 shares at March 31, 2015 and December 31, 2014
 
(11,665
)
 
(11,665
)
Accumulated other comprehensive income, net of taxes
 
2,220

 
785

TOTAL SHAREHOLDERS' EQUITY
 
128,576

 
125,695

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,129,497

 
1,108,066


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

The consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated balance sheet as of that day.

2

Table of Contents



LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
 
2015
 
2014
 
INTEREST INCOME:
 
 
 
 
 
Interest and fees on loans
 
$
8,540

 
7,696

 
Interest on investment securities:
 
 

 
 

 
Taxable
 
856

 
891

 
Non-taxable
 
653

 
646

 
Other investments
 
41

 
45

 
TOTAL INTEREST INCOME
 
10,090

 
9,278

 
INTEREST EXPENSE:
 
 

 
 

 
Interest on deposits
 
682

 
809

 
Interest on short-term borrowings
 
4

 
3

 
Interest on long-term debt
 
76

 
103

 
TOTAL INTEREST EXPENSE
 
762

 
915

 
NET INTEREST INCOME
 
9,328

 
8,363

 
PROVISION FOR LOAN LOSSES
 
69

 
81

 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
9,259

 
8,282

 
NON-INTEREST INCOME:
 
 

 
 

 
Trust income
 
800

 
655

 
Service charges and fees on deposit accounts
 
1,107

 
1,122

 
Net gain (loss) on sales of securities
 
111

 
(4
)
 
Bank owned life insurance income
 
159

 
172

 
Gains from sales of mortgage loans
 
35

 
15

 
Other operating income
 
94

 
117

 
TOTAL NON-INTEREST INCOME
 
2,306

 
2,077

 
NON-INTEREST EXPENSE:
 
 

 
 

 
Salaries and employee benefits
 
4,290

 
3,918

 
Equipment expenses
 
288

 
294

 
Occupancy expense, net
 
595

 
651

 
State franchise tax
 
252

 
244

 
Marketing
 
163

 
132

 
Amortization of intangibles
 
146

 
126

 
FDIC insurance premiums
 
151

 
149

 
Merger-related expenses
 
70

 
1,292

 
Other non-interest expense
 
1,694

 
1,866

 
TOTAL NON-INTEREST EXPENSE
 
7,649

 
8,672

 
INCOME BEFORE INCOME TAXES
 
3,916

 
1,687

 
PROVISION FOR INCOME TAXES
 
1,082

 
364

 
NET INCOME
 
$
2,834

 
1,323

 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.16

 
0.16

 
Earnings per common share:
 
 

 
 

 
Basic
 
$
0.30

 
0.14

 
Diluted
 
0.30

 
0.14

 
Weighted average common shares outstanding:
 
 

 
 

 
Basic
 
9,312,636

 
9,288,400

 
Diluted
 
9,410,774

 
9,413,049

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

3

Table of Contents



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

 
 
Three Months Ended 
 March 31,
 
 
 
2015
 
2014
 
Net income
 
$
2,834

 
1,323

 
Other comprehensive income (loss):
 
 

 
 

 
Net unrealized gain (loss) on available-for-sale securities (net of taxes of $763 and $493 for the three months ended March 31, 2015 and 2014, respectively)
 
1,480

 
956

 
Reclassification adjustment for net realized (gain) loss on sale of available-for-sale securities included in net income (net of taxes of $38 and $1 for the three months ended March 31, 2015 and 2014, respectively)
 
(73
)
 
3

 
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $14 and $1 for the three months ended March 31, 2015 and 2014, respectively)
 
28

 
2

 
TOTAL COMPREHENSIVE INCOME
 
$
4,269

 
2,284

 

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


4

Table of Contents



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, 2013
 
9,287,536

 
$
66,785

 
65,475

 
(11,665
)
 
(1,722
)
 
118,873

Net income
 
 

 
 

 
1,323

 
 

 
 

 
1,323

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
961

 
961

Dividend Reinvestment and Stock Purchase Plan
 
4,690

 
82

 
 

 
 

 
 

 
82

Compensation expense relating to stock options
 
 

 
7

 
 

 
 

 
 

 
7

Common stock dividends, $0.16 per share
 
 

 
 

 
(1,485
)
 
 

 
 

 
(1,485
)
Balance at March 31, 2014
 
9,292,226

 
$
66,874

 
65,313

 
(11,665
)
 
(761
)
 
119,761

 
 
 
 
 
 
 
 
 
 
 
 
 
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


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


5

Table of Contents



LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
2,834

 
1,323

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

 
 

Depreciation, amortization, and accretion
 
753

 
775

Provision for loan losses
 
69

 
81

Increase in cash surrender value of bank owned life insurance
 
(159
)
 
(172
)
Realized gain from sales of securities available-for-sale
 
(111
)
 
4

Realized gain from sales of premises and equipment
 

 
(5
)
Realized (gain) loss from sales and write-downs of other real estate owned and repossessed assets
 
(9
)
 
19

Origination of mortgage loans for sale
 
(1,675
)
 
(610
)
Realized gains from sales of mortgage loans
 
(35
)
 
(15
)
Proceeds from sales of mortgage loans
 
1,693

 
620

Compensation expense related to stock options
 
7

 
7

Changes in:
 
 

 
 

Accrued income receivable
 
(656
)
 
(599
)
Other assets
 
(1,336
)
 
309

Other liabilities
 
(816
)
 
(767
)
TOTAL ADJUSTMENTS
 
(2,275
)
 
(353
)
NET CASH FLOWS FROM OPERATING ACTIVITIES
 
559

 
970

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of investment securities available-for-sale
 
6,002

 
26,071

Proceeds from maturities and calls of investment securities:
 
 

 
 

Available-for-sale
 
2,824

 
7,795

Held-to-maturity
 
207

 
562

Purchases of investment securities:
 
 

 
 

Available-for-sale
 
(22,035
)
 
(48,672
)
Held-to-maturity
 
(400
)
 
(706
)
Proceeds from redemption of Federal Reserve Bank stock
 

 
41

Net (increase) decrease in loans
 
(3,097
)
 
4,749

Proceeds from redemption of bank owned life insurance
 

 
3,633

Proceeds from sale of other real estate owned and repossessed assets
 
114

 
137

Additions to other real estate owned
 
(20
)
 
(17
)
Purchases of premises and equipment
 
(90
)
 
(178
)
Proceeds from sale of premises and equipment
 

 
6

Net cash acquired from (paid for) acquisition
 

 
(9,115
)
NET CASH FLOWS USED IN INVESTING ACTIVITIES
 
(16,495
)
 
(15,694
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase in deposits
 
27,520

 
33,475

Net increase (decrease) in short-term borrowings
 
(3,191
)
 
1,909

Principal payments on long-term debt
 
(5,204
)
 
(522
)
Proceeds from issuance of common stock
 
16

 
11

Cash dividends paid on common stock
 
(1,411
)
 
(1,414
)
NET CASH FLOWS FROM FINANCING ACTIVITIES
 
17,730

 
33,459

NET CHANGE IN CASH AND CASH EQUIVALENTS
 
1,794

 
18,735

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
15,845

 
14,688

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
17,639

 
33,423

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
819

 
784

Income taxes paid
 
1,000

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
 
 

 
 

Transfer from loans to other real estate owned and repossessed assets
 
79

 
213


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

6

Table of Contents



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

Note 1 - Basis of Presentation
 
Substantially all of the assets, liabilities and operations of LCNB Corp. ("LCNB" or the "Company") are attributable to its wholly-owned subsidiary, LCNB National Bank (the "Bank").  The accompanying unaudited consolidated financial statements include the accounts of LCNB and the Bank.

The unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (the "SEC").  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.

The consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated balance sheet as of that day.

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

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

Results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.  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 2014 Annual Report on Form 10-K filed with the SEC.

Note 2 – Acquisitions
 
On October 28, 2013, LCNB and Colonial Banc Corp. (“Colonial”) entered into a Stock Purchase Agreement (“Purchase Agreement”) pursuant to which LCNB purchased from Colonial on January 24, 2014 all of the issued and outstanding shares of Eaton National Bank & Trust Co. ("Eaton National") in a cash transaction valued at $24.75 million. Immediately following the acquisition, Eaton National was merged into the Bank.  Eaton National operated five full–service branches with a main office and another facility in Eaton, Ohio and branch offices in each of West Alexandria, Ohio, New Paris, Ohio, and Lewisburg, Ohio.  These offices became branches of the Bank after the merger.



7

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

Note 2 – Acquisitions (continued)


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

 
 

Identifiable Assets Acquired:
 

Cash and cash equivalents
15,635

Investment securities:
 

Available-for-sale
35,859

Federal Reserve Bank stock
41

Federal Home Loan Bank stock
784

Loans
115,944

Premises and equipment
1,314

Bank owned life insurance
3,618

Core deposit intangible
2,466

Other real estate owned
262

Other assets
1,624

Total identifiable assets acquired
177,547

 
 

Liabilities Assumed:
 

Deposits
165,335

Short-term borrowings
651

Other liabilities
263

Total liabilities assumed
166,249

 
 

Total Identifiable Net Assets Acquired
11,298

 
 

Goodwill resulting from merger
$
13,452


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

Direct costs related to the acquisition were expensed as incurred and are recorded as a merger-related expense in the consolidated statements of income.  
 
The results of operations are included in the consolidated statement of income from the date of the merger.  

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 in a stock and cash transaction valued at $12,574,170. 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 LCNB after the merger.

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

8

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

Note 2 – Acquisitions (continued)


The acquisition will be accounted for in accordance with applicable accounting guidance. Accordingly, the assets and liabilities of BNB will be recorded at their estimated fair values at the acquisition date.  The excess of the cash paid over the net fair values of the assets acquired, including identifiable intangible assets and liabilities assumed, will be recorded as goodwill.  The results of operations will be included in the consolidated income statement from the date of the acquisition. Goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be charged to expense at the time of impairment.

The estimated fair values of the assets and liabilities have not yet been determined.  The recorded amounts reflected on the historic financial records of BNB as of December 31, 2014 include total assets of approximately $108.8 million, consisting primarily of net loans of $36.4 million and investments of $58.3 million. Recorded liabilities totaling approximately $98.2 million consisted primarily of deposits totaling $97.9 million.



9

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



Note 3 - Investment Securities
 
The amortized cost and estimated fair value of available-for-sale investment securities at March 31, 2015 and December 31, 2014 are summarized as follows (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
March 31, 2015
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
71,207

 
901

 
30

 
72,078

U.S. Agency notes
92,086

 
442

 
312

 
92,216

U.S. Agency mortgage-backed securities
30,125

 
473

 
94

 
30,504

Certificates of deposit
2,581

 
8

 

 
2,589

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
79,549

 
1,793

 
130

 
81,212

Taxable
17,140

 
558

 
29

 
17,669

Mutual funds
2,491

 
1

 
11

 
2,481

Trust preferred securities
50

 

 

 
50

Equity securities
1,463

 
304

 
39

 
1,728

 
$
296,692

 
$
4,480

 
645

 
300,527

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
22,318

 
441

 
142

 
22,617

Taxable
600

 

 
4

 
596

 
$
22,918

 
441

 
146

 
23,213

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
62,406

 
290

 
136

 
62,560

U.S. Agency notes
84,661

 
188

 
1,212

 
83,637

U.S. Agency mortgage-backed securities
37,838

 
413

 
219

 
38,032

Certificates of deposit
3,076

 
10

 

 
3,086

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
75,727

 
1,972

 
304

 
77,395

Taxable
16,005

 
465

 
75

 
16,395

Mutual funds
2,483

 

 
22

 
2,461

Trust preferred securities
50

 

 

 
50

Equity securities
1,415

 
372

 
38

 
1,749

 
$
283,661

 
3,710

 
2,006

 
285,365

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
22,525

 
108

 
695

 
21,938

Taxable
200

 

 

 
200

 
$
22,725

 
108

 
695

 
22,138


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

Note 3 - Investment Securities (continued)


Information concerning available-for-sale investment securities with gross unrealized losses at March 31, 2015 and December 31, 2014, 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, 2015
 
 
 
 
 
 
 
Investment Securities Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$

 

 
$
8,874

 
30

U.S. Agency notes

 

 
45,716

 
312

U.S. Agency mortgage-backed securities
14

 

 
5,353

 
94

Municipal securities:
 

 
 

 
 
 
 
Non-taxable
6,947

 
28

 
9,293

 
102

Taxable

 

 
2,193

 
29

Mutual funds
285

 
11

 

 

Equity securities
251

 
24

 
137

 
15

 
$
7,497

 
63

 
$
71,566

 
582

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
838

 
2

 
4,215

 
140

  Taxable
395

 
4

 

 

 
$
1,233

 
6

 
$
4,215

 
140

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Investment Securities Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
9,141

 
7

 
$
8,774

 
129

U.S. Agency notes

 

 
65,971

 
1,212

U.S. Agency mortgage-backed securities
3,795

 
2

 
11,456

 
217

Municipal securities:
 

 
 

 
 

 
 
Non-taxable
7,211

 
58

 
11,419

 
246

Taxable
3,117

 
15

 
3,668

 
60

Mutual funds
281

 
12

 
1,190

 
10

Trust preferred securities
50

 

 

 

Equity securities
197

 
29

 
123

 
9

 
$
23,792

 
123

 
$
102,601

 
1,883

 
 
 
 
 
 
 
 
Investment Securities Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
8,152

 
540

 
$
4,200

 
155

  Taxable

 

 

 

 
$
8,152

 
540

 
$
4,200

 
155



11

Table of Contents
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, 2015 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, 2015 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
$
10,878

 
10,964

 
3,003

 
3,007

Due from one to five years
154,708

 
156,372

 
3,651

 
3,632

Due from five to ten years
93,038

 
94,323

 
4,109

 
4,021

Due after ten years
3,939

 
4,105

 
12,155

 
12,553

 
262,563

 
265,764

 
22,918

 
23,213

U.S. Agency mortgage-backed securities
30,125

 
30,504

 

 

Mutual funds
2,491

 
2,481

 

 

Trust preferred securities
50

 
50

 

 

Equity securities
1,463

 
1,728

 

 

 
$
296,692

 
300,527

 
22,918

 
23,213


Investment securities with a market value of $188,134,000 and $175,094,000 at March 31, 2015 and December 31, 2014, 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, 2015 and 2014 was as follows (in thousands):
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
 
Proceeds from sales
$
6,002

 
26,071

 
Gross realized gains
111

 
2

 
Gross realized losses

 
6

 



12

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



Note 4 - Loans
 
Major classifications of loans at March 31, 2015 and December 31, 2014 are as follows (in thousands):
 
March 31, 2015
 
December 31, 2014
Commercial and industrial
36,447

 
35,424

Commercial, secured by real estate
381,371

 
379,141

Residential real estate
255,926

 
254,087

Consumer
17,296

 
18,006

Agricultural
9,816

 
11,472

Other loans, including deposit overdrafts
678

 
680

 
701,534

 
698,810

Deferred net origination costs (fees)
151

 
146

 
701,685

 
698,956

Less allowance for loan losses
2,837

 
3,121

Loans, net
698,848

 
695,835


All advances from the Federal Home Loan Bank of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $216 million and $212 million at March 31, 2015 and December 31, 2014, respectively.  Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings.

Loans acquired from the mergers with First Capital Bancshares, Inc. in the first quarter of 2013 ("First Capital") and Eaton National are recorded at fair value with no carryover of the acquired entity's previously established allowance for loan losses.  The excess of expected cash flows over the estimated fair value of acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses.  Subsequent improvements in expected cash flows result in the recognition of additional interest income over the then-remaining contractual lives of the loans.

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

Less fair value adjustment
1,347

Fair value of acquired loans
$
101,136

 
 

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



13

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

Note 4 – Loans (continued)


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

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

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


Non-accrual, past-due, and accruing restructured loans as of March 31, 2015 and December 31, 2014 are as follows (in thousands):
 
March 31, 2015
 
December 31, 2014
Non-accrual loans:
 
 
 
Commercial and industrial

 

Commercial, secured by real estate
2,823

 
4,277

Agricultural
148

 
70

Residential real estate
1,001

 
1,252

Total non-accrual loans
3,972

 
5,599

Past-due 90 days or more and still accruing
355

 
203

Total non-accrual and past-due 90 days or more and still accruing
4,327

 
5,802

Accruing restructured loans
15,091

 
14,269

Total
19,418

 
20,071


The allowance for loan losses for the three months ended March 31, 2015 and 2014 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
Three Months Ended March 31, 2015
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
$
175

 
2,520

 
826

 
66

 

 
1

 
3,588

Provision charged to expenses
(109
)
 
213

 
(25
)
 
(3
)
 

 
5

 
81

Losses charged off

 
(203
)
 
(119
)
 
(23
)
 

 
(18
)
 
(363
)
Recoveries
6

 

 
21

 
24

 

 
13

 
64

Balance, end of period
$
72

 
2,530

 
703

 
64

 

 
1

 
3,370




14

Table of Contents
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, 2015 and December 31, 2014 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
9

 
317

 
102

 

 

 

 
428

Collectively evaluated for impairment
122

 
1,301

 
832

 
54

 
10

 
1

 
2,320

Acquired credit impaired loans

 
22

 

 

 
67

 

 
89

Balance, end of period
$
131

 
1,640

 
934

 
54

 
77

 
1

 
2,837

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
393

 
12,765

 
1,737

 
53

 

 

 
14,948

Collectively evaluated for impairment
34,731

 
355,866

 
251,211

 
17,264

 
9,635

 
146

 
668,853

Acquired credit impaired loans
1,337

 
12,391

 
3,383

 
60

 
181

 
532

 
17,884

Balance, end of period
$
36,461

 
381,022

 
256,331

 
17,377

 
9,816

 
678

 
701,685

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
10

 
415

 
89

 

 

 

 
514

Collectively evaluated for impairment
119

 
1,273

 
836

 
63

 
11

 
2

 
2,304

Acquired credit impaired loans

 
302

 
1

 

 

 

 
303

Balance, end of period
$
129

 
1,990

 
926

 
63

 
11

 
2

 
3,121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
401

 
13,022

 
1,701

 
55

 

 

 
15,179

Collectively evaluated for impairment
33,941

 
352,774

 
249,374

 
17,954

 
11,371

 
167

 
665,581

Acquired credit impaired loans
1,092

 
12,984

 
3,425

 
81

 
101

 
513

 
18,196

Balance, end of period
$
35,434

 
378,780

 
254,500

 
18,090

 
11,472

 
680

 
698,956



15

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

Note 4 – Loans (continued)


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

Commercial and Industrial Loans. LCNB’s commercial and industrial loan portfolio consists of loans for various purposes, including loans to fund working capital requirements (such as inventory and receivables financing) and purchases of machinery and equipment.  LCNB offers a variety of commercial and industrial loan arrangements, including term loans, balloon loans, and lines of credit.  Most commercial and industrial loans have a variable rate, with adjustments occurring monthly, annually, every three years, or every five years.  Adjustments are generally based on a publicly available index rate plus a margin.  The margin varies based on the terms and collateral securing the loan.  Commercial and industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial and industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business.  Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets.  As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.

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

Commercial real estate loans are underwritten based on the ability of the property, in the case of income producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt. Secondary emphasis is placed upon global debt service, collateral value, financial strength of any guarantors, and other factors. Commercial real estate loans are generally originated with a 75% maximum loan to appraised value ratio.

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

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

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

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

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

16

Table of Contents
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, 2015 and December 31, 2014 is as follows (in thousands):
 
Pass
 
OAEM
 
Substandard
 
Doubtful
 
Total
March 31, 2015
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
35,054

 

 
1,407

 

 
36,461

Commercial, secured by real estate
356,497

 
5,937

 
18,588

 

 
381,022

Residential real estate
249,879

 
1,207

 
5,245

 

 
256,331

Consumer
17,277

 

 
100

 

 
17,377

Agricultural
9,548

 

 
268

 

 
9,816

Other
678

 

 

 

 
678

Total
$
668,933

 
7,144

 
25,608

 

 
701,685

 
 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
34,322

 

 
1,112

 

 
35,434

Commercial, secured by real estate
353,957

 
6,421

 
18,402

 

 
378,780

Residential real estate
246,335

 
920

 
7,245

 

 
254,500

Consumer
17,979

 

 
111

 

 
18,090

Agricultural
11,273

 

 
199

 

 
11,472

Other
680

 

 

 

 
680

Total
$
664,546

 
7,341

 
27,069

 

 
698,956



17

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

Note 4 – Loans (continued)


A loan portfolio aging analysis at March 31, 2015 and December 31, 2014 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, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
$

 

 

 

 
36,461

 
36,461

 

Commercial, secured by real estate
276

 
303

 
2,896

 
3,475

 
377,547

 
381,022

 
72

Residential real estate
634

 
21

 
921

 
1,576

 
254,755

 
256,331

 
263

Consumer
72

 
29

 
20

 
121

 
17,256

 
17,377

 
20

Agricultural

 
2

 
121

 
123

 
9,693

 
9,816

 

Other
79

 

 

 
79

 
599

 
678

 

Total
$
1,061

 
355

 
3,958

 
5,374

 
696,311

 
701,685

 
355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
4

 

 

 
4

 
35,430

 
35,434

 

Commercial, secured by real estate
1,000

 
83

 
3,179

 
4,262

 
374,518

 
378,780

 
9

Residential real estate
648

 
297

 
1,289

 
2,234

 
252,266

 
254,500

 
177

Consumer
59

 
28

 
17

 
104

 
17,986

 
18,090

 
17

Agricultural
73

 
70

 

 
143

 
11,329

 
11,472

 

Other
106

 

 

 
106

 
574

 
680

 

Total
$
1,890

 
478

 
4,485

 
6,853

 
692,103

 
698,956

 
203


 Impaired loans, including acquired credit impaired loans, at March 31, 2015 and December 31, 2014 are as follows (in thousands):

18

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

Note 4 – Loans (continued)


 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
March 31, 2015
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
Commercial & industrial
$
1,354

 
2,337

 

Commercial, secured by real estate
21,232

 
25,566

 

Residential real estate
4,241

 
5,758

 

Consumer
95

 
156

 

Agricultural
60

 
228

 

Other
532

 
743

 

Total
$
27,514

 
34,788

 

 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

Commercial & industrial
$
376

 
376

 
9

Commercial, secured by real estate
3,924

 
4,447

 
339

Residential real estate
879

 
974

 
102

Consumer
18

 
18

 

Agricultural
121

 
403

 
67

Other

 

 

Total
$
5,318

 
6,218

 
517

 
 
 
 
 
 
Total:
 

 
 

 
 

Commercial & industrial
$
1,730

 
2,713

 
9

Commercial, secured by real estate
25,156

 
30,013

 
339

Residential real estate
5,120

 
6,732

 
102

Consumer
113

 
174

 

Agricultural
181

 
631

 
67

Other
532

 
743

 

Total
$
32,832

 
41,006

 
517

 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

With no related allowance recorded:
 

 
 

 
 

Commercial & industrial
$
1,092

 
2,077

 

Commercial, secured by real estate
21,822

 
26,715

 

Residential real estate
4,057

 
5,549

 

Consumer
117

 
178

 

Agricultural
101

 
619

 

Other
513

 
744

 

Total
$
27,702

 
35,882

 

 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

Commercial & industrial
$
401

 
406

 
10

Commercial, secured by real estate
4,184

 
4,538

 
717

Residential real estate
1,069

 
1,265

 
90

Consumer
19

 
20

 

Total
$
5,673

 
6,229

 
817

 
 
 
 
 
 
Total:
 

 
 

 
 

Commercial & industrial
$
1,493

 
2,483

 
10

Commercial, secured by real estate
26,006

 
31,253

 
717

Residential real estate
5,126

 
6,814

 
90

Consumer
136

 
198

 

Agricultural
101


619



Other
513


744



Total
$
33,375

 
42,111

 
817


19

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

Note 4 – Loans (continued)


The following presents information related to the average recorded investment and interest income recognized on impaired loans, including acquired credit impaired loans, for the three months ended March 31, 2015 and 2014 (in thousands):
 
2015
 
2014
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Three Months Ended March 31,
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial & industrial
$
1,232

 
35

 
164

 

Commercial, secured by real estate
21,608

 
362

 
10,587

 
82

Residential real estate
4,326

 
82

 
845

 
9

Consumer
107

 
4

 
3

 

Agricultural
20

 
97

 

 

Other
522

 
19

 

 

Total
$
27,815

 
599

 
11,599

 
91

 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
Commercial & industrial
$
380

 
5

 

 

Commercial, secured by real estate
3,989

 
27

 
4,076

 
27

Residential real estate
944

 
10

 
1,191

 
11

Consumer
18

 
1

 
17

 

Agricultural
121

 

 

 

Other

 

 

 

Total
$
5,452

 
43

 
5,284

 
38

 
 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
 
Commercial & industrial
$
1,612

 
40

 
164

 

Commercial, secured by real estate
25,597

 
389

 
14,663

 
109

Residential real estate
5,270

 
92

 
2,036

 
20

Consumer
125

 
5

 
20

 

Agricultural
141

 
97

 

 

Other
522

 
19

 

 

Total
$
33,267

 
642

 
16,883

 
129


Of the interest income recognized on impaired loans during the three months ended March 31, 2015 and 2014, approximately $11,000 and $1,000, respectively, were recognized on a cash basis.

Loan modifications that were classified as troubled debt restructurings during the three months ended March 31, 2015 and 2014 are as follows (dollars in thousands):
 
2015
 
2014
 
Number
of Loans
 
Pre-Modification Recorded Balance
 
Post-Modification Recorded Balance
 
Number
of Loans
 
Pre-Modification Recorded Balance
 
Post-Modification Recorded Balance
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial

 
$

 

 
1

 
$
10

 
10

Commercial, secured by real estate

 

 

 

 

 

Residential real estate
3

 
87

 
87

 

 

 

Consumer

 

 

 
1

 
2

 
2

Total
3

 
$
87

 
87

 
2

 
$
12

 
12



20

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

Note 4 – Loans (continued)


Each restructured loan is separately negotiated with the borrower and includes terms and conditions that reflect the borrower's ability to pay the debt as modified.  Modifications may include interest only payments for a period of time, temporary or permanent reduction of the loan's interest rate, capitalization of delinquent interest, or extensions of the maturity date.

LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring.

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, 2015 and 2014.

Note 5 - Acquired Credit Impaired Loans

The following table provides at March 31, 2015 and December 31, 2014 the major classifications of acquired credit impaired loans that are accounted for in accordance with FASB ASC 310-30 (in thousands):
 
March 31, 2015
 
December 31, 2014
Commercial & industrial
$
1,337

 
1,092

Commercial, secured by real estate
12,391

 
12,984

Residential real estate
3,383

 
3,425

Consumer
60

 
81

Agricultural
181

 
101

Other loans, including deposit overdrafts
532

 
513

 
17,884

 
18,196

Less allowance for loan losses
89

 
303

Loans, net
17,795

 
17,893


The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):
 
March 31, 2015
 
December 31,
2014
Outstanding balance
$
26,165

 
26,697

Carrying amount
17,884

 
18,196


Activity during the three months ended March 31, 2015 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):
Accretable discount at December 31, 2014
$
2,674

Reclass from nonaccretable discount to accretable discount
17

Less disposals
(1
)
Less accretion
(199
)
Accretable discount at March 31, 2015
$
2,491



21

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



Note 6 – Other Real Estate Owned
 
Other real estate owned includes property acquired through foreclosure or deed-in-lieu of foreclosure and also includes property deemed to be in-substance foreclosed and are included in "other assets" in the consolidated balance sheets.  Changes in other real estate owned are as follows (in thousands):
 
Three Months Ended March 31,
 
2015
 
2014
Balance, beginning of year
$
1,370

 
1,463

Additions
99

 
230

Additions due to merger

 
262

Reductions due to sales
(105
)
 
(151
)
Reductions due to valuation write downs

 
(5
)
Balance, end of period
$
1,364

 
1,799


Other real estate owned at March 31, 2015 and December 31, 2014 consisted of (dollars in thousands):
 
March 31, 2015
 
December 31, 2014
Commercial real estate
$
1,265

 
$
1,265

Residential real estate
99

 
105

 
$
1,364

 
$
1,370


The total recorded investment in residential consumer mortgage loans secured by residential real estate that was in the process of foreclosure at March 31, 2015 was $379,000.

 
Note 7 – Income Taxes
 
A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
 
For the Three Months Ended
March 31,
 
 
2015
 
2014
 
Statutory tax rate
34.0
 %
 
34.0
 %
 
Increase (decrease) resulting from:
 

 
 

 
Tax exempt interest
(5.5
)%
 
(12.7
)%
 
Tax exempt income on bank owned life insurance
(1.4
)%
 
(3.5
)%
 
Other, net
0.5
 %
 
3.8
 %
 
Effective tax rate
27.6
 %
 
21.6
 %
 


22

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



Note 8 - Commitments and Contingent Liabilities
 
LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.

The Bounce Protection product, a customer deposit overdraft program, is offered as a service and does not constitute a contract between the customer and LCNB.

LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  

Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2015 and December 31, 2014 are as follows (in thousands):
 
March 31, 2015
 
December 31,
2014
Commitments to extend credit:
 
 
 
Commercial loans
$
8,768

 
5,152

Other loans
 

 
 

Fixed rate
8,177

 
877

Adjustable rate
3,477

 
2,011

Unused lines of credit:
 

 
 

Fixed rate
4,947

 
6,496

Adjustable rate
68,193

 
67,981

Unused overdraft protection amounts on demand and NOW accounts
10,128

 
10,206

Standby letters of credit
488

 
563

Commitments to purchase municipal securities
1,243

 

 
$
105,421

 
93,286


Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Unused lines of credit include amounts not drawn on line of credit loans.  Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  These guarantees generally are fully secured and have varying maturities.  

LCNB evaluates each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower.  Collateral held varies, but may include accounts receivable, inventory, residential realty, income-producing commercial property, and property, plant, and equipment.

Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB's offices, purchases of furniture and equipment, and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of March 31, 2015 totaled approximately $105,000.

Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.


23

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

Note 8 – Commitments and Contingent Liabilities (continued)


LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business.  Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.

Note 9 – Accumulated Other Comprehensive Income
 
Changes in accumulated other comprehensive income for the three months ended March 31, 2015 and 2014 are as follows (in thousands):
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Changes in Pension Plan Assets and Benefit Obligations
 
Total
March 31, 2015
 
 
 
 
 
Balance at beginning of period
$
1,126

 
(341
)
 
785

Before reclassifications
1,480

 
28

 
1,508

Reclassifications
(73
)
 

 
(73
)
Balance at end of period
$
2,533

 
(313
)
 
2,220

 
 
 
 
 
 
March 31, 2014
 

 
 

 
 

Balance at beginning of period
$
(1,641
)
 
(81
)
 
(1,722
)
Before reclassifications
956

 
2

 
958

Reclassifications
3

 

 
3

Balance at end of period
$
(682
)
 
(79
)
 
(761
)

Reclassifications out of accumulated other comprehensive income during the three months ended March 31, 2015 and 2014 and the affected line items in the consolidated statements of income are as follows (in thousands):
 
Three Months Ended
March 31,
 
Affected Line Item in the Consolidated Statements of Income
 
2015
 
2014
 
Realized gain on sale of securities
$
111

 
(4
)
 
Net gain on sale of securities
Less provision for income taxes
38

 
(1
)
 
Provision for income taxes
Reclassification adjustment, net of taxes
$
73

 
(3
)
 
 


Note 10 – Retirement Plans
 
LCNB participates in a noncontributory defined benefit multi-employer retirement plan that covers substantially all regular full-time employees hired before January 1, 2009.

Employees of LCNB also participate in a defined contribution retirement plan.  Employees hired on or after January 1, 2009 receive a 50% employer match on their contributions into the 401(k) plan, up to a maximum LCNB contribution of 3% of each individual employee's annual compensation.  Employees hired before January 1, 2009 who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5% or 7% of annual compensation, depending on the sum of an employee's age and vesting service, into the 401(k) plan, regardless of the contributions made by the employees.  This contribution is made annually and these employees do not receive any employer matches to their 401(k) contributions.

24

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


Note 10 – Retirement Plans (continued)


Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated statements of income for the three-month periods ended March 31, 2015 and 2014 are as follows (in thousands):
 
For the Three Months
Ended March 31,
 
 
2015
 
2014
 
Qualified noncontributory defined benefit retirement plan
$
270

 
207

 
401(k) plan
87

 
78

 

Certain highly compensated employees participate in a nonqualified defined benefit retirement plan.  The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code.

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three months ended March 31, 2015 and 2014 are summarized as follows (in thousands):
 
 
Three Months Ended
March 31,
 
 
 
2015
 
2014
 
Service cost
 
$
9

 
17

 
Interest cost
 
17

 
15

 
Amortization of unrecognized net loss
 
42

 

 
Amortization of unrecognized prior service cost
 

 
4

 
Net periodic pension cost
 
$
68

 
36

 

Amounts recognized in accumulated other comprehensive income, net of tax, at March 31, 2015 and December 31, 2014 for the nonqualified defined benefit retirement plan consists of (in thousands):
 
March 31, 2015
 
December 31,
2014
Net actuarial loss
$
311

 
339



Note 11 - Stock Based Compensation
 
LCNB established an Ownership Incentive Plan (the "Plan") during 2002 that allowed for stock-based awards to eligible employees, as determined by the Board of Directors.  The awards were made in the form of stock options, share awards, and/or appreciation rights.  The Plan provided for the issuance of up to 200,000 shares. The plan expired on April 16, 2012. Any outstanding unexercised options, however, continue to be exercisable in accordance with their terms.

Options granted to date vest ratably over a five-year period and expire ten years after the date of grant.










25

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


Note 11 – Stock Based Compensation (continued)

Stock options outstanding at March 31, 2015 are as follows:
 
 
Outstanding Stock Options
 
Exercisable Stock Options
Exercise Price Range
 
Number
 
Weighted Average
Exercise
Price
 
Weighted Average Remaining Contractual
Life (Years)
 
Number
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual
Life (Years)
$9.00 - $10.99
 
20,994

 
$
9.00

 
3.8
 
20,994

 
$
9.00

 
3.8
$11.00 - $12.99
 
63,354

 
12.05

 
5.3
 
52,806

 
12.02

 
5.1
$17.00 - $18.99
 
12,962

 
18.41

 
1.4
 
12,962

 
18.41

 
1.4
 
 
97,310

 
12.24

 
4.5
 
86,762

 
12.24

 
4.2

The following table summarizes stock option activity for the periods indicated:
 
2015
 
2014
 
Options
 
Weighted Average Exercise
Price
 
Options
 
Weighted Average Exercise
Price
Outstanding, January 1
99,810

 
$
12.16

 
104,966

 
$
12.43

Granted

 

 

 

Exercised

 

 

 

Expired
(2,500
)
 
9.00

 
(5,156
)
 
17.66

Outstanding, March 31
97,310

 
12.24

 
99,810

 
12.16

Exercisable, March 31
86,762

 
12.24

 
78,705

 
12.17


The aggregate intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) for options outstanding at March 31, 2015 that were "in the money" (market price greater than exercise price) was $338,000.  The aggregate intrinsic value at that date for only the options that were exercisable was $305,000.  The aggregate intrinsic value for options outstanding at March 31, 2014 that were in the money was $528,000 and the aggregate intrinsic value at that date for only the options that were exercisable was $418,000.  The intrinsic value changes based upon fluctuations in the market value of LCNB's common stock.

Total expenses related to options included in salaries and employee benefits in the consolidated statements of income for the three months ended March 31, 2015 and 2014 was $7,000 and $7,000, respectively.



26

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



Note 12 - Earnings per Common Share
 
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrants, and restricted stock.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options and warrants with proceeds used to purchase treasury shares at the average market price for the period.  The computations are as follows for the three months ended March 31, 2015 and 2014 (dollars in thousands, except share and per share data):
 
For the Three Months
Ended March 31,
 
 
2015
 
2014
 
Net income
$
2,834

 
1,323

 
Weighted average number of shares outstanding used in the calculation of basic earnings per common share
9,312,636

 
9,288,400

 
Add dilutive effect of:
 

 
 

 
Stock options
16,203

 
21,769

 
Stock warrants
81,935

 
102,880

 
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share
9,410,774

 
9,413,049

 
Earnings per common share:
 

 
 

 
Basic
$
0.30

 
0.14

 
Diluted
0.30

 
0.14

 

Options to purchase 12,962 and 18,118 shares of common stock at a weighted average price of $18.41 and $18.19 per share were outstanding at March 31, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per common share because the exercise prices of the options were greater than the average market price of the common shares.

Note 13 - Fair Value Measurements
 
LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset.  Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:
Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets,  quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
Level 3 - inputs that are unobservable for the asset or liability.
The majority of LCNB's financial debt securities are classified as available-for-sale.  The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income.


27

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

Note 13 - Fair Value Measurements (continued)

LCNB utilizes a pricing service for determining the fair values of most of its investment securities.  Fair value for U.S. Treasury notes are determined based on market quotations (level 1).  Fair value for most of the other investment securities is calculated using the discounted cash flow method for each security.  The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2).  Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.  In addition, LCNB has invested in trust preferred securities, equity securities, and four mutual funds that are not priced by the pricing service. Market quotations (level1) are used to determine fair values for the trust preferred securities and equity securities. Investments in mutual funds that are publicly traded in active markets and that publish daily net asset values are considered to have level 1 inputs.  An investment in a mutual fund that is not traded in an active market is considered to have level 2 inputs because an investor can have its interest in the fund redeemed for the balance of its capital account at any quarter-end assuming the fund is given a 60 day notice.  The investment in this fund is carried at fair value, which approximates cost.
 
Assets that may be recorded at fair value on a nonrecurring basis include impaired loans, other real estate owned, and other repossessed assets.  A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement.  Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance.  The inputs are considered to be level 3.

Other real estate owned is adjusted to fair value upon transfer of the loan to foreclosed assets, usually based on an appraisal of the property.  Subsequently, foreclosed assets are carried at the lower of carrying value or fair value.  These inputs are also considered to be level 3.


28

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

Note 13 - Fair Value Measurements (continued)

The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, 2015 and December 31, 2014 (in thousands):
 
 
Fair Value Measurements at the End of
the Reporting Period Using
 
 
Fair Value Measurements
 
Quoted
Prices
in Active
Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
March 31, 2015
 
 
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
 
 
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. Treasury notes
 
$
72,078

 
72,078

 

 

U.S. Agency notes
 
92,216

 

 
92,216

 

U.S. Agency mortgage-backed securities
 
30,504

 

 
30,504

 

Certificates of deposit with other banks
 
2,589

 

 
2,589

 

Municipal securities:
 
 

 
 

 
 

 
 

Non-taxable
 
81,212

 

 
81,212

 

Taxable
 
17,669

 

 
17,669

 

Mutual funds
 
2,481

 
1,481

 
1,000

 

Trust preferred securities
 
50

 
50

 

 

Equity securities
 
1,728

 
1,728

 

 

Total recurring fair value measurements
 
$
300,527

 
75,337

 
225,190

 

Nonrecurring fair value measurements:
 
 

 
 

 
 
 
 

Impaired loans
 
$
4,801

 

 

 
4,801

Other real estate owned and repossessed assets
 
1,364

 

 

 
1,364

Total nonrecurring fair value measurements
 
$
6,165

 

 

 
6,165

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

 
 

Recurring fair value measurements:
 
 

 
 

 
 

 
 

Investment securities available-for-sale:
 
 

 
 

 
 

 
 

U.S. Treasury notes
 
$
62,560

 
62,560

 

 

U.S. Agency notes
 
83,637

 

 
83,637

 

U.S. Agency mortgage-backed securities
 
38,032

 

 
38,032

 

Certificates of deposit with other banks
 
3,086

 

 
3,086

 

Municipal securities:
 
 

 
 

 
 

 
 

Non-taxable
 
77,395

 

 
77,395

 

Taxable
 
16,395

 

 
16,395

 

Mutual funds
 
2,461

 
1,461

 
1,000

 

Trust preferred securities
 
50

 
50

 

 

Equity securities
 
1,749

 
1,749

 

 

Total recurring fair value measurements
 
$
285,365

 
65,820

 
219,545

 

Nonrecurring fair value measurements:
 
 

 
 

 
 

 
 

Impaired loans
 
$
4,872

 

 

 
4,872

Other real estate owned and repossessed assets
 
1,370

 

 

 
1,370

Total nonrecurring fair value measurements
 
$
6,242

 

 

 
6,242







29

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

Note 13 - Fair Value Measurements (continued)

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements at March 31, 2015 and December 31, 2014 (dollars in thousands):
 
 
 
 
 
 
 
 
Range
 
 
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
High
 
Low
 
Weighted Average
March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
4,801

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 

 
Discounted cash flows
 
Discount rate
 
10.50
%
 
4.00
%
 
5.22
%
Other real estate owned
 
1,364

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
4,872

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
 
 
Discounted cash flows
 
Discount rate
 
10.50
%
 
4.00
%
 
5.36
%
Other real estate owned
 
$
1,370

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable


30

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

Note 13 - Fair Value Measurements (continued)

Carrying amounts and estimated fair values of financial instruments as of March 31, 2015 and December 31, 2014 are as follows (in thousands):
 
 
 
 
Fair Value Measurements at the End of
the Reporting Period Using
 
 
Carrying
Amount
 
Fair
Value
 
Quoted
Prices
in Active
Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
March 31, 2015
 
 
 
 
 
 
 
 
 
 
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
17,639

 
17,639

 
17,639

 

 

Investment securities, held-to-maturity
 
22,918

 
23,213

 

 

 
23,213

Federal Reserve Bank stock
 
2,346

 
2,346

 
2,346

 

 

Federal Home Loan Bank stock
 
3,638

 
3,638

 
3,638

 

 

Loans, net
 
698,848

 
704,705

 

 

 
704,705

 
 
 
 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 

 
 

 
 
 
 
 
 
Deposits
 
973,725

 
974,851

 
765,791

 
209,060

 

Short-term borrowings
 
13,454

 
13,454

 
13,454

 

 

Long-term debt
 
6,153

 
6,667

 

 
6,667

 

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
15,845

 
15,845

 
15,845

 

 

Investment securities, held-to-maturity
 
22,725

 
22,138

 

 

 
22,138

Federal Reserve Bank stock
 
2,346

 
2,346

 
2,346

 

 

Federal Home Loan Bank stock
 
3,638

 
3,638

 
3,638

 

 

Loans, net
 
695,835

 
699,715

 

 

 
699,715

 
 
 
 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 

 
 

 
 
 
 
 
 
Deposits
 
946,205

 
947,541

 
731,766

 
215,775

 

Short-term borrowings
 
16,645

 
16,645

 
16,645

 

 

Long-term debt
 
11,357

 
11,944

 

 
11,944

 


The fair value of off-balance-sheet financial instruments at March 31, 2015 and December 31, 2014 was not material.

Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions.  In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of LCNB.  The following methods and assumptions were used to estimate the fair value of certain financial instruments:

Cash and cash equivalents
The carrying amounts presented are deemed to approximate fair value.


31

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

Note 13 - Fair Value Measurements (continued)

Investment securities
Fair values for securities, excluding Federal Home Loan Bank and Federal Reserve Bank stock, are based on quoted market prices, if available.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and/or discounted cash flow analyses or other methods.  The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions.

Loans
Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, incorporating assumptions of current and projected prepayment speeds.  These current rates approximate market rates.

Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities, which approximates market rates.

Borrowings
The carrying amounts of federal funds purchased, repurchase agreements, and U.S. Treasury demand note borrowings are deemed to approximate fair value of short-term borrowings.  For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rates.


Note 14 – Recent Accounting Pronouncements
 
Financial Accounting Standards Board Accounting Standards Update ("ASU") No. 2014-01, "Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)"
ASU No. 2014-01 was issued in January 2014 and provides guidance on accounting for investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. Entities are permitted to make an accounting policy election to account for such investments using the proportional amortization method, as defined, if certain enumerated conditions are met. Under the proportional amortization method, an investor amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Investments not accounted for using the proportional amortization method should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. ASU No. 2014-01 was effective for public companies for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014 and is to be applied retrospectively to all periods presented. LCNB currently does not have any investments in qualified affordable housing projects and adoption of ASU No. 2014-01 did not have a material impact on LCNB's results of operations or financial position.

ASU No. 2014-04, "Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)"
ASU No. 2014-04 was issued in January 2014 and clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor through completion of a deed in lieu of foreclosure or through a similar legal agreement. In addition, the update requires interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate properties that are in the process of foreclosure. ASU No. 2014-04 was effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Adoption of ASU No. 2014-04 did not have a material impact on LCNB's results of operations or financial position.


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

Note 14 – Recent Accounting Pronouncements (continued)

ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity"
ASU No. 2014-08 was issued in April 2014 and changes the criteria for reporting discontinued operations and provides for expanded disclosures in this area. The new guidance provides that only disposals representing a strategic shift in operations should be presented as discontinued operations and that these strategic shifts should have a major effect on an organization's operations and financial results. ASU No. 2014-08 was effective in the first quarter of 2015 for public companies with calendar year-ends.

ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)"
ASU No. 2014-09 was issued in May 2014 and and supersedes most current revenue recognition guidance for contracts to transfer goods or services or other nonfinancial assets. Lease contracts, insurance contracts, and most financial instruments are not included in the scope of this update. ASU No. 2014-09 provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. Additional disclosures providing information about contracts with customers are required. ASU No. 2014-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Transitional guidance is included in the update; early adoption is not permitted. Since LCNB's products are substantially financial in nature, adoption of ASU No. 2014-09 is not expected to have a material impact on LCNB's results of operations or financial position.

ASU No. 2014-11, "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures"
ASU No. 2014-11 was issued in June 2014 and requires two accounting changes:
the accounting for repurchase-to-maturity transactions is changed to secured borrowing accounting, and
for repurchase financing arrangements, separate accounting is required for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which results in secured borrowing accounting.

Additional disclosures are required. ASU No. 2014-11 was effective for public business entities for the first interim or annual period beginning after December 15, 2014. Changes in accounting for transactions outstanding on the effective date are to be recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Since LCNB already accounts for repurchase agreements as borrowings, this update did not have a material impact on LCNB's results of operation or financial position.

ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, a consensus of the FASB Emerging Issues Task Force"
ASU No. 2014-12 was issued in June 2014 and requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and that current guidance for awards with performance conditions be followed. ASU No. 2014-12 is effective for all entities for annual and interim periods beginning after December 15, 2015 and early adoption is permitted. Entities may apply the amendments in the update either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. None of LCNB's currently outstanding stock option grants contain the performance targets described in this update and adoption of ASU No. 2014-11 is not expected to have a material impact on its results of operations or financial position.







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

Note 14 – Recent Accounting Pronouncements (continued)

ASU No. 2014-13, "Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (a consensus of the FASB Emerging Issues Task Force)"
ASU No. 2014-13 was issued in August 2014 and applies to entities that are required to (1) consolidate a collateralized financing entity ("CFE") under the guidance for Variable Interest Entities, (2) measure all of the financial assets and financial liabilities of the CFE at fair value, and (3) reflect the changes in fair value in earnings. Under ASU 2014-13, entities that meet these criteria can elect to measure both the financial assets and the financial liabilities of the CFE using the more observable of the fair value of the financial assets and the fair value of the financial liabilities, thereby eliminating the difference between the fair value of financial assets and financial liabilities. If that alternative is not elected, then ASU 2014-13 indicates that the fair value of the financial assets and the fair value of the financial liabilities of the consolidated CFE should be measured in accordance with ASC 820, Fair Value Measurement, and differences between the fair value of the financial assets and the financial liabilities of the consolidated CFE should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income or loss. The provisions of ASU 2014-13 are effective for public business entities for annual periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted. LCNB currently does not have any CFE investments and adoption of ASU No. 2014-13 is not expected to have a material impact on LCNB's results of operations or financial position.

ASU No. 2014-14, "Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)"
ASU No. 2014-14 was issued in August 2014 and affects creditors with government-guaranteed residential mortgage loans, including those guaranteed by the Federal Housing Administration and the U.S. Department of Veterans Affairs. ASU No. 2014-14 requires that a residential mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions described in the update are met. The amendments in ASU No. 2014-14 were effective for public business entities for annual periods, and interim periods within such periods, starting after December 15, 2014. LCNB currently does not hold any government-guaranteed residential mortgage loans and adoption of ASU No. 2014-14 did not have a material impact on LCNB's results of operations or financial position.

ASU No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern"
ASU No. 2014-15 was issued in August 2014 and requires management to evaluate for each annual and interim reporting period whether it is probable that the entity will not be able to meet its obligations as they become due within one year after the date that financial statements are issued (or are available to be issued, where applicable). Certain disclosures, as described in the update, are required if management identifies substantial doubt about the entity's ability to continue as a going concern. ASU No. 2014-15 will take effect in the annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. Adoption of ASU No. 2014-15 is not expected to have a material impact on LCNB's results of operations or financial position.

ASU No. 2014-16, "Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force)"
ASU No. 2014-16 was issued in November 2014 and requires an entity to determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and feature on the basis of the relevant facts and circumstances, when evaluating whether the host contract is more akin to a debt or equity instrument. ASU No. 2014-16 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The effects of initially adopting ASU No. 2014-16 should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the update is effective. Retrospective application to all relevant prior periods is permitted. Early adoption, including adoption in an interim period, is permitted. LCNB currently does not have any outstanding hybrid financial instruments issued as a share and adoption of ASU No. 2014-16 is not expected to have a material impact on LCNB's results of operations or financial position.




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

Note 14 – Recent Accounting Pronouncements (continued)

ASU No. 2014-17, "Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force)"
ASU No. 2014-17 was issued in November 2014 and applies to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity upon the occurrence of an event in which an acquirer obtains control of the acquired entity. The update allows an acquired entity the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurred, an acquired entity has the option to apply pushdown accounting in a subsequent reporting period provided the change in considered a change in accounting principle in accordance with Topic 250, "Accounting Changes and Error Corrections." Certain disclosures are required if pushdown accounting is elected. An election to apply pushdown accounting is irrevocable. ASU No. 2014-17 was effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. LCNB currently does not have any subsidiaries issuing separate financial statements and adoption of ASU No. 2014-17 did not have a material impact on LCNB's results of operations or financial position.

ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items"
ASU No. 2015-01 was issued in January 2015 and eliminates from the income statement the concept of extraordinary items. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. Adoption of ASU No. 2015-01 is not expected to have a material impact on LCNB's results of operations.

ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis"
ASU No. 2015-02 was issued in February 2015 and provides additional guidance for consolidation of legal entities. It (1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited partnership, (3) affects the consolidation analysis of reporting entities that are involved with variable interest entities, and (4) provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. Adoption of ASU No. 2015-02 is not expected to have a material impact on LCNB's results of operations or financial position.

ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs"
ASU No. 2015-03 was issued in April 2015 and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. The amendments in this update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The adoption of ASU No. 2015-03 is to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. Adoption of ASU No. 2015-03 is not expected to have a material impact on LCNB's results of operations or financial position.

ASU No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement"
ASU No. 2015-05 was issued in April 2015 and provides guidance to customers about whether a cloud computing arrangement includes a software license. Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments in this update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Adoption of ASU No. 2015-05 is not expected to have a material impact on LCNB's results of operations or financial position.

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LCNB CORP. AND SUBSIDIARIES

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

Forward Looking Statements
Certain statements made in this document regarding LCNB’s financial condition, results of operations, plans, objectives, future performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as “anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions.

These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:
1.
the success, impact, and timing of the implementation of LCNB’s business strategies, including the successful integration of recently completed and pending acquisitions;
2.
LCNB may incur increased charge-offs in the future;
3.
LCNB may face competitive loss of customers;
4.
changes in the interest rate environment may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;
5.
changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
6.
changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;
7.
LCNB may experience difficulties growing loan and deposit balances;
8.
the current economic environment poses significant challenges for us and could adversely affect our  financial condition and results of operations;
9.
deterioration in the financial condition of the U.S. banking system may impact the valuations of investments LCNB has made in the securities of other financial institutions resulting in either actual losses or other than temporary impairments on such investments; and
10.
the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the regulations promulgated and to be promulgated thereunder, which may subject LCNB and its subsidiaries to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses. 

Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist shareholders and potential investors in understanding current and anticipated financial operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made. 
 
Critical Accounting Policies

Allowance for Loan Losses.  The allowance for loan losses is established through a provision for loan losses charged to expense.  Loans are charged against the allowance for loan losses when management believes that the collection of the principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.  The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectability of loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.


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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




The allowance consists of specific and general components.  The specific component relates to loans that are classified as doubtful, substandard, or special mention.  For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.

Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses inherent in the current loan portfolio.

Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be measured at their fair values at the acquisition date. Acquired loans are reviewed to determine if there is evidence of deterioration in credit quality since inception and if it is probable that LCNB will be unable to collect all amounts due under the contractual loan agreements. The analysis includes expected prepayments and estimated cash flows including principal and interest payments at the date of acquisition. The amount in excess of the estimated future cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan (accretable yield). LCNB records these loans on the acquisition date at their net realizable value. Thus, an allowance for estimated future losses is not established on the acquisition date. Subsequent to the date of acquisition, expected future cash flows on loans acquired are updated and any losses or reductions in estimated cash flows which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan. Due to the number, size, and complexity of loans within the acquired loan portfolio, there is always a possibility of inherent undetected losses.

Accounting for Intangibles.  LCNB’s intangible assets at March 31, 2015 are composed primarily of goodwill and core deposit intangibles related to the acquisitions of Sycamore National Bank ("Sycamore") during the fourth quarter 2007, First Capital during the first quarter 2013, and Eaton National during the first quarter 2014. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National.  Goodwill is not subject to amortization, but is reviewed annually for impairment.  The core deposit intangible for Sycamore was amortized on a straight line basis over six years.  The core deposit intangible for First Capital is being amortized on a straight line basis over nine years and the core deposit intangible for Eaton National is being amortized on a straight line basis over eight years. Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values.  Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.

Results of Operations
Net income for the three months ended March 31, 2015 was $2,834,000 (total basic and diluted earnings per share of $0.30), compared to net income of $1,323,000 (total basic and diluted earnings per common share of $0.14) for the same three-month period in 2014. Results for 2014 were significantly affected by the completion of the acquisition of Eaton National on January 24, 2014.

Net interest income for the three months ended March 31, 2015 increased $965,000 from the comparative period in 2014 due
primarily to an increase in the volume of average interest earning assets, primarily loans, and to an increase in the net interest
margin.

The provision for loan losses for the three months ended March 31, 2015 was $12,000 less than the comparable period in 2014.
Net loan charge-offs for the first quarter of 2015 and 2014 totaled $353,000 and $299,000, respectively. Non-accrual loans
and loans past due 90 days or more and still accruing interest totaled $4,327,000 or 0.62% of total loans at March 31, 2015,
compared to $5,802,000 or 0.83% of total loans at December 31, 2014. Other real estate owned (which includes property
acquired through foreclosure or deed-in-lieu of foreclosure) totaled $1,364,000 and $1,370,000 at March 31, 2015 and 2014,
respectively.





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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




Non-interest income for the three months ended March 31, 2015 was $229,000 greater than the comparable period in 2014
primarily due to increases in trust income and gains from sales of investment securities. The increase in trust income was due
to growth in the fair value of assets serviced. The increase in gains from sales of investment securities was due to a higher
volume of sales during the 2015 period.

Non-interest expense for the three months ended March 31, 2015 was $1,023,000 less than the comparable periods in 2014
primarily due to the absence of an acquisition during the first quarter 2015. Merger-related expense for 2015 was $1,222,000 less than for the same period in 2014. This decrease was partially offset by a $372,000 increase in salaries and employee benefits primarily due to routine salary and wage increases, an increase in the number of employees, and to increased retirement plan expenses.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




Net Interest Income
LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the three months ended March 31, 2015 and 2014, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.

 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
 
 
 
(Dollars in thousands)
 
 
 
 
Loans (1)
 
$
699,959

 
8,540

 
4.95
%
 
$
647,535

 
7,696

 
4.82
%
Interest-bearing demand deposits
 
8,834

 
4

 
0.18
%
 
13,892

 
8

 
0.23
%
Federal Reserve Bank stock
 
2,346

 

 
%
 
1,603

 

 
%
Federal Home Loan Bank stock
 
3,638

 
37

 
4.12
%
 
3,368

 
37

 
4.46
%
Investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

Taxable
 
207,179

 
856

 
1.68
%
 
199,723

 
891

 
1.81
%
Non-taxable (2)
 
100,116

 
989

 
4.01
%
 
98,097

 
979

 
4.05
%
Total earnings assets
 
1,022,072

 
10,426

 
4.14
%
 
964,218

 
9,611

 
4.04
%
Non-earning assets
 
106,124

 
 

 
 

 
110,352

 
 

 
 

Allowance for loan losses
 
(2,870
)
 
 

 
 

 
(3,372
)
 
 

 
 

Total assets
 
$
1,125,326

 
 

 
 

 
$
1,071,198

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
$
762,189

 
682

 
0.36
%
 
$
736,604

 
809

 
0.45
%
Short-term borrowings
 
13,824

 
4

 
0.12
%
 
10,814

 
3

 
0.11
%
Long-term debt
 
6,598

 
76

 
4.67
%
 
11,821

 
103

 
3.53
%
Total interest-bearing liabilities
 
782,611

 
762

 
0.39
%
 
759,239

 
915

 
0.49
%
Demand deposits
 
207,469

 
 

 
 

 
185,447

 
 

 
 

Other liabilities
 
7,638

 
 

 
 

 
6,553

 
 

 
 

Capital
 
127,608

 
 

 
 

 
119,959

 
 

 
 

Total liabilities and capital
 
$
1,125,326

 
 

 
 

 
$
1,071,198

 
 

 
 

Net interest rate spread (3)
 
 

 
 

 
3.75
%
 
 

 
 

 
3.55
%
Net interest income and net interest margin on a taxable-equivalent basis (4)
 
 

 
9,664

 
3.83
%
 
 

 
8,696

 
3.66
%
Ratio of interest-earning assets to interest-bearing liabilities
 
130.60
%
 
 

 
 

 
127.00
%
 
 

 
 

(1)Includes nonaccrual loans, if any.
(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has
been divided by a factor comprised of the complement of the incremental tax rate of 34%.
(3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing
liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.




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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended March 31, 2015 as compared to the same period in 2014.  Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
 
 
Three Months Ended
March 31, 2015 vs. 2014
Increase (decrease) due to:
 
 
Volume
 
Rate
 
Total
 
 
(In thousands)
Interest-earning Assets:
 
 
 
 
 
 
Loans
 
$
636

 
208

 
844

Federal funds sold
 

 

 

Interest-bearing demand deposits
 
(3
)
 
(1
)
 
(4
)
Federal Reserve Bank stock
 

 

 

Federal Home Loan Bank stock
 
3

 
(3
)
 

Investment securities:
 
 

 
 

 
 

Taxable
 
32

 
(67
)
 
(35
)
Non-taxable
 
20

 
(10
)
 
10

Total interest income
 
688

 
127

 
815

Interest-bearing Liabilities:
 
 

 
 

 
 

Deposits
 
(18
)
 
(109
)
 
(127
)
Short-term borrowings
 
1

 

 
1

Long-term debt
 
(54
)
 
27

 
(27
)
Total interest expense
 
(71
)
 
(82
)
 
(153
)
Net interest income
 
$
759

 
209

 
968


Net interest income on a fully tax-equivalent basis for the three months ended March 31, 2015 totaled $9,664,000, an increase of $968,000 over the comparable period in 2014.  Total interest income increased $815,000 and total interest expense decreased $153,000.

The increase in total interest income was primarily due to a $57.9 million increase in average total earning assets and secondarily due to a 10 basis point (a basis point equals 0.01%) increase in the average rate earned on earning assets. The increase in average total earning assets was due to a $52.4 million increase in average loans and to a $9.5 increase in average total investment securities.

The decrease in total interest expense was due to a 10 basis point decrease in the average rate paid on interest-bearing liabilities and to a $5.2 million decrease in average long-term debt and to an $8.5 million decrease in average IRA and time certificates. Average interest-bearing deposits increased despite the decrease in IRA and time certificates due to increases in the average balances of savings, NOW, and money fund deposits. Average long-term debt decreased due to the payment in full during January 2015 of a $5.0 million advance from the Federal Home Loan Bank of Cincinnati.

Provision and Allowance For Loan Losses
The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio.  In addition to historic charge-off percentages, factors taken into consideration to determine the adequacy of the allowance for loan losses include the nature, volume, and consistency of the loan portfolio, overall portfolio quality, a review of specific problem loans, and current economic conditions that may affect borrowers' ability to pay.  The provision for loan losses for the three months ended March 31, 2015 and 2014 were $69,000 and $81,000, respectively.  Net charge-offs for the three months ended March 31, 2015 and 2014 were $353,000 and $299,000, respectively.


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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




Non-Interest Income
Total non-interest income for the first quarter 2015 was $229,000 greater than for the first quarter 2014 primarily due to a $145,000 increase in trust income and to a $115,000 increase in net gains from sales of securities. The increase in trust income reflects growth in the fair value of assets managed. The increase in net gains from sales of securities reflects and increase in the volume of securities sold.

Non-Interest Expense
Non-interest expense for the first quarter 2015 was $1,023,000 less than for the first quarter 2014 primarily due to a $1,222,000 decrease in merger-related expenses, reflecting the absence of an acquisition during the first quarter 2015. This decrease was partially offset by a $372,000 increase in salaries and employee benefits primarily due to routine salary and wage increases, and increase in the number of employees, and to increased retirement plan expenses.

Income Taxes
LCNB's effective tax rates for the three months ended March 31, 2015 and 2014 were 27.6% and 21.6%, respectively.  The difference between the statutory rate of 34.0% and the effective tax rate is primarily due to tax-exempt interest income from municipal securities and tax-exempt earnings from bank owned life insurance.

Financial Condition
Total assets increased at March 31, 2015 were $21.4 million greater than at December 31, 2014 primarily due to a $15.4 increase in total investment securities. Net loans at March 31, 2015 were $3.0 million greater than at December 31, 2014 primarily due to new loan origination.

Total deposits at March 31, 2015 were $27.5 million greater than at December 31, 2014. Included in this increase was a $23.5 million increase in public fund deposits by local government entities. Public fund deposits can be relatively volatile due to seasonal tax collections and the financial needs of the local entities.

Regulatory Capital
The Bank and LCNB are required by regulators to meet certain minimum levels of capital adequacy. These are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). Common Equity Tier 1 Capital is the sum of common stock, related surplus, and retained earnings net of treasury stock, accumulated other comprehensive income, and other adjustments. These three ratios, which are based on the degree of credit risk in LCNB's assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan commitments and standby letters of credit.  The leverage ratio supplements the risk-based capital guidelines.

For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy.
 
 
Minimum Requirement
 
To Be Considered
Well-Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets
 
4.5
%
 
6.5
%
Ratio of Tier 1 Capital to risk-weighted assets
 
6.0
%
 
8.0
%
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets
 
8.0
%
 
10.0
%
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)
 
4.0
%
 
5.0
%
 
A new rule requiring a Capital Conservation Buffer will begin phase-in on January 1, 2016. Under the fully-implemented rule, a financial institution will need to maintain a Capital Conservation Buffer composed of Common Equity Tier 1 Capital of at least 2.5% above its minimum risk-weighted capital requirements to avoid limitations on its ability to make capital distributions, including dividend payments to shareholders and certain discretionary bonus payments to executive officers. A financial institution with a buffer below 2.5% will be subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.

As of the most recent notification from their regulators, the Bank and LCNB were categorized as "well-capitalized" under the regulatory framework for prompt corrective action.  Management believes that no conditions or events have occurred since the last notification that would change the Bank's or LCNB's category.

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LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




 A summary of the regulatory capital and capital ratios of LCNB follows (dollars in thousands):
 
 
March 31, 2015
 
December 31,
2014
Regulatory Capital:
 
 
Shareholders' equity
 
$
128,576

 
125,695

Goodwill and other intangibles
 
(29,255
)
 
(31,886
)
Accumulated other comprehensive (income) loss
 
(2,220
)
 
(785
)
Tier 1 risk-based capital
 
97,101

 
93,024

Eligible allowance for loan losses
 
2,837

 
3,121

Total risk-based capital
 
$
99,938

 
96,145

Capital ratios:
 
 

 
 

Common Equity Tier 1 Capital to risk-weighted assets
 
13.92
%
 
N/A

Tier 1 Capital to risk-weighted assets
 
13.92
%
 
13.92
%
Total Capital to risk-weighted assets
 
14.33
%
 
14.38
%
Leverage
 
8.88
%
 
8.53
%

Liquidity
LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders.  National banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years.  Prior approval from the Office of the Comptroller of the Currency, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount.  In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes the Bank will be able to pay anticipated dividends to LCNB Corp. without needing to request approval.  The Bank is not aware of any reasons why it would not receive such approval.

Liquidity is the ability to have funds available at all times to meet the commitments of LCNB.  Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash and cash equivalents and securities available for sale.  At March 31, 2015, LCNB's liquid assets amounted to $318.2 million or 28.2% of total assets.  This compares to liquid assets totaling $301.2 million or 27.2% of total assets at December 31, 2014.

Liquidity is also provided by access to core funding sources, primarily core depositors in LCNB's market area.  Approximately 82.5% of total deposits at March 31, 2015 were "core" deposits, compared to 84.3% of deposits at December 31, 2014. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000. The percentage of core deposits to total deposits decreased because of the growth in public fund deposits discussed above in relation to total growth in deposits.

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

Management closely monitors the level of liquid assets available to meet ongoing funding needs.  It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost.  LCNB experienced no liquidity or operational problems as a result of the current liquidity levels.


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LCNB CORP. AND SUBSIDIARIES
Item 3.
Quantitative and Qualitative Disclosures about Market Risks

Market risk for LCNB is primarily interest rate risk.  LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates.  LCNB does not use derivatives such as interest rate swaps, caps, or floors to hedge this risk.  LCNB has not entered into any market risk instruments for trading purposes.

The Bank's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity Analysis ("IRSA") and Economic Value of Equity ("EVE") analysis for measuring and managing interest rate risk.  IRSA is used to estimate the effect on net interest income ("NII") during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, and 300 basis points.  Management considers the results of any significant downward scenarios to not be meaningful in the current interest rate environment.  The base projection uses a current interest rate scenario.  As shown below, the March 31, 2015 IRSA indicates that an increase in interest rates will have a positive effect on net interest income ("NII"). The changes in NII for all rate assumptions are within LCNB's acceptable ranges.

Rate Shock Scenario in Basis Points
 
Amount
 
$ Change in
NII
 
% Change in
NII
 
 
(Dollars in thousands)
Up 300
 
$
39,307

 
3,076

 
8.49
%
Up 200
 
38,268

 
2,037

 
5.62
%
Up 100
 
37,241

 
1,010

 
2.79
%
Base
 
36,231

 

 
%

IRSA shows the effect on NII during a one-year period only.  A more long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks.  As shown below, the March 31, 2015 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE.  The changes in EVE for all rate assumptions are within LCNB's acceptable ranges.

Rate Shock Scenario in Basis Points
 
Amount
 
$ Change in
EVE
 
% Change in
EVE
 
 
(Dollars in thousands)
Up 300
 
$
134,229

 
(2,161
)
 
(1.58
)%
Up 200
 
134,378

 
(2,012
)
 
(1.48
)%
Up 100
 
134,654

 
(1,736
)
 
(1.27
)%
Base
 
136,390

 

 
 %

The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results.  Assumptions used, including the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future net interest income or equity.  Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.


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LCNB CORP. AND SUBSIDIARIES
Item 4.
Controls and Procedures

a)  Disclosure controls and procedures.  The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures.  Based upon this evaluation, these officers have concluded that, as of March 31, 2015, LCNB's disclosure controls and procedures were effective.

b)  Changes in internal control over financial reporting.  During the period covered by this report, there were no changes in LCNB's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.

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PART II.  OTHER INFORMATION

LCNB CORP. AND SUBSIDIARIES
 
Item 1.
Legal Proceedings

None

Item 1A.
Risk Factors

No material changes

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

During the period of this report, LCNB did not sell any of its securities that were not registered under the Securities Act.

During the period covered by this report, LCNB did not purchase any shares of its equity securities.

Item 3.
Defaults Upon Senior Securities

None

Item 4.
Mine Safety Disclosures

Not applicable

Item 5.
Other Information

None
 

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LCNB CORP. AND SUBSIDIARIES
Item 6.
Exhibits

Exhibit No.
Exhibit Description
2.1
Stock Purchase Agreement dated as of October 28, 2013 by and between LCNB Corp. and Colonial Banc Corp.  – incorporated by reference to the Registrant's Form 8-K filed on October 28, 2013, Exhibit 2.1.
 
 
2.2
Agreement and Plan of Merger dated as of December 29, 2014 by and between LCNB Corp. and BNB Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on January 2, 2015, Exhibit 2.1.
 
 
3.1
Amended and Restated Articles of Incorporation of LCNB Corp., as amended – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, Exhibit 3.1.
 
 
3.2
Code of Regulations of LCNB Corp. – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).
 
 
10.1
LCNB Corp. Ownership Incentive Plan – incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A (000-26121).
 
 
10.2
Form of Option Grant Agreement under the LCNB Corp. Ownership Incentive Plan – incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, Exhibit 10.2.
 
 
10.3
Nonqualified Executive Retirement Plan – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2009, Exhibit 10.4.
 
 
31.1
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32
Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 is formatted in Extensible Business Reporting Language:  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
LCNB Corp.
 
 
 
 
May 4, 2015
/s/ Stephen P. Wilson
 
 
Stephen P. Wilson, Chief Executive Officer and
 
 
Chairman of the Board of Directors
 
 
 
 
May 4, 2015
/s/ Robert C. Haines, II
 
 
Robert C. Haines, II, Executive Vice President
 
 
and Chief Financial Officer
 

47