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LCNB CORP - Quarter Report: 2016 March (Form 10-Q)

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                        to                                                      

Commission File Number 001-35292
LCNB Corp.
(Exact name of registrant as specified in its charter)
Ohio
 
 31-1626393
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨ Yes         x No
The number of shares outstanding of the issuer's common stock, without par value, as of May 3, 2016 was 9,894,743 shares.
 
 
 
 
 


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

 
14,155

Interest-bearing demand deposits
 
8,029

 
832

Total cash and cash equivalents
 
21,089

 
14,987

Investment securities:
 
 

 
 

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

 
377,978

Held-to-maturity, at cost
 
36,505

 
22,633

Federal Reserve Bank stock, at cost
 
2,732

 
2,732

Federal Home Loan Bank stock, at cost
 
3,638

 
3,638

Loans, net
 
775,564

 
767,809

Premises and equipment, net
 
21,985

 
22,100

Goodwill
 
30,183

 
30,183

Core deposit and other intangibles
 
5,183

 
5,396

Bank owned life insurance
 
26,730

 
22,561

Other assets
 
11,212

 
10,514

TOTAL ASSETS
 
$
1,285,922

 
1,280,531

LIABILITIES:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing
 
$
249,439

 
250,306

Interest-bearing
 
870,769

 
836,854

Total deposits
 
1,120,208

 
1,087,160

Short-term borrowings
 
11,668

 
37,387

Long-term debt
 
789

 
5,947

Accrued interest and other liabilities
 
10,324

 
9,929

TOTAL LIABILITIES
 
1,142,989

 
1,140,423

COMMITMENTS AND CONTINGENT LIABILITIES
 


 


SHAREHOLDERS' EQUITY:
 
 

 
 

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

 

Common shares – no par value, authorized 12,000,000 shares, issued 10,685,415 and 10,679,174 shares at March 31, 2016 and December 31, 2015, respectively
 
75,487

 
76,908

Retained earnings
 
76,005

 
74,629

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

 
236

TOTAL SHAREHOLDERS' EQUITY
 
142,933

 
140,108

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

 
1,280,531


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

The consolidated balance sheet as of December 31, 2015 has been derived from the audited consolidated balance sheet as of that day.

2

Table of Contents



LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended 
 March 31,
 
 
 
2016
 
2015
INTEREST INCOME:
 
 
 
 
 
Interest and fees on loans
 
 
8,627

 
8,540

Interest on investment securities:
 
 
 

 
 

Taxable
 
 
1,189

 
856

Non-taxable
 
 
758

 
653

Other investments
 
 
47

 
41

TOTAL INTEREST INCOME
 
 
10,621

 
10,090

INTEREST EXPENSE:
 
 
 

 
 

Interest on deposits
 
 
823

 
682

Interest on short-term borrowings
 
 
14

 
4

Interest on long-term debt
 
 
12

 
76

TOTAL INTEREST EXPENSE
 
 
849

 
762

NET INTEREST INCOME
 
 
9,772

 
9,328

PROVISION FOR LOAN LOSSES
 
 
90

 
69

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
 
9,682

 
9,259

NON-INTEREST INCOME:
 
 
 

 
 

Trust income
 
 
763

 
800

Service charges and fees on deposit accounts
 
 
1,193

 
1,107

Net gain (loss) on sales of securities
 
 
371

 
111

Bank owned life insurance income
 
 
169

 
159

Gains from sales of loans
 
 
41

 
35

Other operating income
 
 
105

 
94

TOTAL NON-INTEREST INCOME
 
 
2,642

 
2,306

NON-INTEREST EXPENSE:
 
 
 

 
 

Salaries and employee benefits
 
 
4,563

 
4,290

Equipment expenses
 
 
249

 
288

Occupancy expense, net
 
 
569

 
595

State franchise tax
 
 
281

 
252

Marketing
 
 
167

 
163

Amortization of intangibles
 
 
187

 
146

FDIC insurance premiums
 
 
165

 
151

Merger-related expenses
 
 

 
70

Other non-interest expense
 
 
2,111

 
1,694

TOTAL NON-INTEREST EXPENSE
 
 
8,292

 
7,649

INCOME BEFORE INCOME TAXES
 
 
4,032

 
3,916

PROVISION FOR INCOME TAXES
 
 
1,068

 
1,082

NET INCOME
 
 
2,964

 
2,834

 
 
 
 
 
 
Dividends declared per common share
 
 
0.16

 
0.16

Earnings per common share:
 
 
 

 
 

Basic
 
 
0.30

 
0.30

Diluted
 
 
0.30

 
0.30

Weighted average common shares outstanding:
 
 
 

 
 

Basic
 
 
9,916,114

 
9,312,636

Diluted
 
 
9,998,516

 
9,410,774

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

3

Table of Contents



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

 
 
 
Three Months Ended 
 March 31,
 
 
 
2016
 
2015
Net income
 
 
2,964

 
2,834

Other comprehensive income (loss):
 
 
 

 
 

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

 
1,480

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

 
28

TOTAL COMPREHENSIVE INCOME
 
 
5,834

 
4,269


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


4

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, 2014
 
9,311,318

 
$
67,181

 
69,394

 
(11,665
)
 
785

 
125,695

Net income
 
 

 
 

 
2,834

 
 

 
 

 
2,834

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
1,435

 
1,435

Dividend Reinvestment and Stock Purchase Plan
 
6,265

 
95

 
 

 
 

 
 

 
95

Compensation expense relating to stock options
 
 

 
7

 
 

 
 

 
 

 
7

Common stock dividends, $0.16 per share
 
 

 
 

 
(1,490
)
 
 

 
 

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

 
$
67,283

 
70,738

 
(11,665
)
 
2,220

 
128,576

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
9,925,547

 
$
76,908

 
74,629

 
(11,665
)
 
236

 
140,108

Net income
 
 

 
 

 
2,964

 
 

 
 

 
2,964

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
2,870

 
2,870

Dividend Reinvestment and Stock Purchase Plan
 
6,241

 
101

 
 

 
 

 
 

 
101

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

 
 
 
 
 
 
 
1

Compensation expense relating to restricted stock
 
 
 
22

 
 
 
 
 
 
 
22

Common stock dividends, $0.16 per share
 
 

 
 

 
(1,588
)
 
 

 
 

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

 
$
75,487

 
76,005

 
(11,665
)
 
3,106

 
142,933


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


5

Table of Contents



LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
2,964

 
2,834

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

 
 

Depreciation, amortization, and accretion
 
806

 
753

Provision for loan losses
 
90

 
69

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

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

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

 
1,693

Compensation expense related to stock options
 
1

 
7

Compensation expense related to restricted stock
 
22

 

Changes in:
 
 

 
 

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

 
559

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

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

 
6,002

Proceeds from maturities and calls of investment securities:
 
 

 
 

Available-for-sale
 
16,141

 
2,824

Held-to-maturity
 
565

 
207

Purchases of investment securities:
 
 

 
 

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

Proceeds from sale of other real estate owned and repossessed assets
 

 
114

Additions to other real estate owned
 

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

 

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

 
(16,495
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase in deposits
 
33,048

 
27,520

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

 
16

Repurchase of stock warrants
 
(1,545
)
 

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

NET CHANGE IN CASH AND CASH EQUIVALENTS
 
6,102

 
1,794

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
14,987

 
15,845

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

 
17,639

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
888

 
819

Income taxes paid
 
830

 
1,000

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
 
 

 
 

Transfer from loans to other real estate owned and repossessed assets
 

 
79


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

6

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

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

The consolidated balance sheet as of December 31, 2015 has been derived from the audited consolidated balance sheet as of that day.

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

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

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

Results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2015 Annual Report on Form 10-K filed with the SEC.


Note 2 – Acquisitions

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

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



7

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

Note 2 – Acquisitions (continued)


The merger with BNB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the merger date, as summarized in the following table (in thousands):

Consideration Paid:
 
Common shares issued
$
9,063

Cash paid to shareholder(s)
4,403

    Total consideration paid
13,466

 
 
Identifiable Assets Acquired:
 
Cash and cash equivalents
13,396

Investment securities
58,239

Federal Reserve Bank stock
130

Loans
34,661

Premises and equipment
2,311

Core deposit intangible
1,418

Other assets
532

Total identifiable assets acquired
110,687

 
 
Liabilities Assumed:
 
Deposits
99,133

Deferred income taxes
576

Other liabilities
57

Total liabilities assumed
99,766

 
 
Total Identifiable Net Assets Acquired
10,921

 
 
Goodwill resulting from merger
$
2,545


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

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

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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 investment securities at March 31, 2016 and December 31, 2015 are summarized as follows (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
March 31, 2016
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
52,591

 
1,001

 

 
53,592

U.S. Agency notes
126,835

 
1,473

 
6

 
128,302

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

 
281

 
74

 
33,768

Certificates of deposit
248

 
1

 

 
249

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
102,900

 
1,798

 
56

 
104,642

Taxable
26,714

 
596

 
5

 
27,305

Mutual funds
2,527

 

 
35

 
2,492

Trust preferred securities
49

 

 

 
49

Equity securities
659

 
59

 
16

 
702

 
$
346,084

 
$
5,209

 
192

 
351,101

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

 
528

 
78

 
30,323

Taxable
6,632

 
7

 
14

 
6,625

 
$
36,505

 
535

 
92

 
36,948

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

 
309

 
135

 
72,846

U.S. Agency notes
140,876

 
164

 
1,151

 
139,889

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

 
174

 
404

 
29,378

Certificates of deposit
248

 
1

 

 
249

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
103,900

 
1,713

 
134

 
105,479

Taxable
26,738

 
337

 
134

 
26,941

Mutual funds
2,517

 

 
51

 
2,466

Trust preferred securities
49

 
1

 

 
50

Equity securities
659

 
40

 
19

 
680

 
$
377,267

 
2,739

 
2,028

 
377,978

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

 
95

 
97

 
22,231

Taxable
400

 

 
1

 
399

 
$
22,633

 
95

 
98

 
22,630


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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 investment securities with gross unrealized losses at March 31, 2016 and December 31, 2015, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
 
Less than Twelve Months
 
Twelve Months or Greater
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
March 31, 2016
 
 
 
 
 
 
 
Investment Securities Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$

 

 
$

 

U.S. Agency notes
9,989

 
6

 

 

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

 
17

 
4,013

 
57

Municipal securities:
 

 
 

 
 
 
 
Non-taxable
9,202

 
32

 
4,220

 
24

Taxable
1,660

 
4

 
449

 
1

Mutual funds
1,221

 
1

 
272

 
34

Trust preferred securities

 

 

 

Equity securities
124

 
11

 
73

 
5

 
$
27,477

 
71

 
$
9,027

 
121

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

 
2

 
3,444

 
76

  Taxable
3,286

 
14

 

 

 
$
4,159

 
16

 
$
3,444

 
76

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

 
75

 
$
4,846

 
60

U.S. Agency notes
104,053

 
1,000

 
9,869

 
151

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

 
256

 
4,068

 
148

Municipal securities:
 

 
 

 
 

 
 
Non-taxable
13,124

 
74

 
7,037

 
60

Taxable
15,601

 
114

 
880

 
20

Mutual funds
1,215

 
17

 
268

 
34

Trust preferred securities

 

 

 

Equity securities
248

 
12

 
73

 
7

 
$
186,285

 
1,548

 
$
27,041

 
480

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

 
3

 
$
3,426

 
94

  Taxable
399

 
1

 

 

 
$
1,231

 
4

 
$
3,426

 
94



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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, 2016 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.

Contractual maturities of investment securities at March 31, 2016 were as follows (in thousands).  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due within one year
$
22,647

 
22,759

 
3,859

 
3,866

Due from one to five years
158,647

 
161,011

 
4,021

 
4,010

Due from five to ten years
127,994

 
130,320

 
10,732

 
10,781

Due after ten years

 

 
17,893

 
18,291

 
309,288

 
314,090

 
36,505

 
36,948

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

 
33,768

 

 

Mutual funds
2,527

 
2,492

 

 

Trust preferred securities
49

 
49

 

 

Equity securities
659

 
702

 

 

 
$
346,084

 
351,101

 
36,505

 
36,948


Investment securities with a market value of $226,644,000 and $215,952,000 at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Certain information concerning the sale of investment securities available-for-sale for the three months ended March 31, 2016 and 2015 was as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
Proceeds from sales
 
$
20,429

 
6,002

Gross realized gains
 
371

 
111

Gross realized losses
 

 




11

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




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

 
45,275

Commercial, secured by real estate
430,179

 
419,633

Residential real estate
271,812

 
273,139

Consumer
17,925

 
18,510

Agricultural
12,589

 
13,479

Other loans, including deposit overdrafts
643

 
665

 
778,472

 
770,701

Deferred net origination costs (fees)
242

 
237

 
778,714

 
770,938

Less allowance for loan losses
3,150

 
3,129

Loans, net
$
775,564

 
767,809


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

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

Impaired loans acquired are accounted for under FASB ASC 310-30.  Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and updated loan-to-value information.  The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference.  The interest component of the cash flows expected to be collected is referred to as the accretable yield and is recognized as interest income over the remaining contractual life of the loan using the level yield method.   Subsequent decreases in expected cash flows will require additions to the allowance for loan losses.  Subsequent improvements in expected cash flows will result in a reclassification from the nonaccretable difference to the accretable yield.
 













12

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

Note 4 – Loans (continued)


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

 

Commercial, secured by real estate
1,759

 
876

Agricultural
413

 
48

Residential real estate
1,144

 
799

Consumer
12

 

Total non-accrual loans
3,328

 
1,723

Past-due 90 days or more and still accruing
99

 
559

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

 
2,282

Accruing restructured loans
13,955

 
13,723

Total
$
17,382

 
16,005


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

 
1,908

 
854

 
54

 
66

 
3

 
3,129

Provision charged to expenses

 
(35
)
 
66

 
61

 
(10
)
 
8

 
90

Losses charged off

 
(23
)
 
(28
)
 
(44
)
 

 
(23
)
 
(118
)
Recoveries
3

 
18

 
4

 
10

 

 
14

 
49

Balance, end of period
$
247

 
1,868

 
896

 
81

 
56

 
2

 
3,150

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

 
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of year
$
129

 
1,990

 
926

 
63

 
11

 
2

 
3,121

Provision charged to expenses
1

 
(37
)
 
64

 
(29
)
 
66

 
4

 
69

Losses charged off

 
(313
)
 
(82
)
 
(11
)
 

 
(14
)
 
(420
)
Recoveries
1

 

 
26

 
31

 

 
9

 
67

Balance, end of period
$
131

 
1,640

 
934

 
54

 
77

 
1

 
2,837




13

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

 
210

 
93

 
13

 

 

 
324

Collectively evaluated for impairment
239

 
1,629

 
803

 
68

 
56

 
2

 
2,797

Acquired credit impaired loans

 
29

 

 

 

 

 
29

Balance, end of period
$
247

 
1,868

 
896

 
81

 
56

 
2

 
3,150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
362

 
13,065

 
1,593

 
63

 
384

 

 
15,467

Collectively evaluated for impairment
44,236

 
410,441

 
267,682

 
17,934

 
12,184

 
139

 
752,616

Acquired credit impaired loans
739

 
6,351

 
2,986

 
22

 
29

 
504

 
10,631

Balance, end of period
$
45,337

 
429,857

 
272,261

 
18,019

 
12,597

 
643

 
778,714

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

 
306

 
48

 

 

 

 
363

Collectively evaluated for impairment
235

 
1,602

 
806

 
54

 
66

 
3

 
2,766

Acquired credit impaired loans

 

 

 

 

 

 

Balance, end of period
$
244

 
1,908

 
854

 
54

 
66

 
3

 
3,129

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
370

 
12,351

 
1,541

 
56

 

 

 
14,318

Collectively evaluated for impairment
43,726

 
399,092

 
269,001

 
18,516

 
13,438

 
179

 
743,952

Acquired credit impaired loans
1,191

 
7,877

 
3,039

 
27

 
48

 
486

 
12,668

Balance, end of period
$
45,287

 
419,320

 
273,581

 
18,599

 
13,486

 
665

 
770,938



14

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 adjustment periods ranging from one month to five years.  Adjustments are generally based on a publicly available index rate plus a margin.  The margin varies based on the terms and collateral securing the loan.  Commercial and industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial and industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business.  Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets.  As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.

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

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

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

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

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

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

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

15

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

 

 
752

 

 
45,337

Commercial, secured by real estate
409,710

 
7,521

 
12,626

 

 
429,857

Residential real estate
266,809

 
1,198

 
4,254

 

 
272,261

Consumer
17,911

 

 
108

 

 
18,019

Agricultural
11,111

 
728

 
758

 

 
12,597

Other
643

 

 

 

 
643

Total
$
750,769

 
9,447

 
18,498

 

 
778,714

 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
44,596

 

 
691

 

 
45,287

Commercial, secured by real estate
397,938

 
9,316

 
12,066

 

 
419,320

Residential real estate
267,567

 
1,935

 
4,079

 

 
273,581

Consumer
18,528

 

 
71

 

 
18,599

Agricultural
12,246

 
850

 
390

 

 
13,486

Other
665

 

 

 

 
665

Total
$
741,540

 
12,101

 
17,297

 

 
770,938



16

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

 

 

 
61

 
45,276

 
45,337

 

Commercial, secured by real estate
75

 
73

 
836

 
984

 
428,873

 
429,857

 

Residential real estate
1,008

 
2

 
1,025

 
2,035

 
270,226

 
272,261

 
64

Consumer
54

 
9

 
48

 
111

 
17,908

 
18,019

 
35

Agricultural

 

 

 

 
12,597

 
12,597

 

Other
70

 

 

 
70

 
573

 
643

 

Total
$
1,268

 
84

 
1,909

 
3,261

 
775,453

 
778,714

 
99

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial & industrial
$

 

 

 

 
45,287

 
45,287

 

Commercial, secured by real estate
73

 
81

 
876

 
1,030

 
418,290

 
419,320

 

Residential real estate
777

 
198

 
1,124

 
2,099

 
271,482

 
273,581

 
516

Consumer
62

 
7

 
43

 
112

 
18,487

 
18,599

 
43

Agricultural

 

 

 

 
13,486

 
13,486

 

Other
109

 

 

 
109

 
556

 
665

 

Total
$
1,021

 
286

 
2,043

 
3,350

 
767,588

 
770,938

 
559































17

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

Note 4 – Loans (continued)


Impaired loans, including acquired credit impaired loans, at March 31, 2016 and December 31, 2015 are as follows (in thousands):
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
March 31, 2016
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
Commercial & industrial
$
752

 
1,036

 

Commercial, secured by real estate
16,811

 
18,584

 

Residential real estate
3,746

 
4,976

 

Consumer
38

 
60

 

Agricultural
413

 
504

 

Other
504

 
700

 

Total
$
22,264

 
25,860

 

 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

Commercial & industrial
$
349

 
354

 
8

Commercial, secured by real estate
2,605

 
2,731

 
239

Residential real estate
833

 
937

 
93

Consumer
47

 
66

 
13

Agricultural

 

 

Other

 

 

Total
$
3,834

 
4,088

 
353

 
 
 
 
 
 
Total:
 

 
 

 
 

Commercial & industrial
$
1,101

 
1,390

 
8

Commercial, secured by real estate
19,416

 
21,315

 
239

Residential real estate
4,579

 
5,913

 
93

Consumer
85

 
126

 
13

Agricultural
413

 
504

 

Other
504

 
700

 

Total
$
26,098

 
29,948

 
353

 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

With no related allowance recorded:
 

 
 

 
 

Commercial & industrial
$
1,205

 
1,500

 

Commercial, secured by real estate
16,345

 
18,335

 

Residential real estate
3,734

 
5,055

 

Consumer
81

 
109

 

Agricultural
48

 
151

 

Other
486

 
701

 

Total
$
21,899

 
25,851

 

 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

Commercial & industrial
$
356

 
356

 
9

Commercial, secured by real estate
3,883

 
4,014

 
306

Residential real estate
846

 
958

 
48

Consumer
2

 
1

 

Total
$
5,087

 
5,329

 
363

 
 
 
 
 
 
Total:
 

 
 

 
 

Commercial & industrial
$
1,561

 
1,856

 
9

Commercial, secured by real estate
20,228

 
22,349

 
306

Residential real estate
4,580

 
6,013

 
48

Consumer
83

 
110

 

Agricultural
48


151



Other
486


701



Total
$
26,986

 
31,180

 
363


18

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, 2016 and 2015 (in thousands):
 
2016
 
2015
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial & industrial
$
978

 
29

 
1,232

 
35

Commercial, secured by real estate
17,631

 
387

 
21,608

 
362

Residential real estate
3,778

 
67

 
4,326

 
82

Consumer
41

 
7

 
107

 
4

Agricultural
422

 
12

 
20

 
97

Other
495

 
20

 
522

 
19

Total
$
23,345

 
522

 
27,815

 
599

 
 
 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

 
 

Commercial & industrial
$
352

 
5

 
380

 
5

Commercial, secured by real estate
2,624

 
19

 
3,989

 
27

Residential real estate
834

 
10

 
944

 
10

Consumer
61

 
1

 
18

 
1

Agricultural

 

 
121

 

Other

 

 

 

Total
$
3,871

 
35

 
5,452

 
43

 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

Commercial & industrial
$
1,330

 
34

 
1,612

 
40

Commercial, secured by real estate
20,255

 
406

 
25,597

 
389

Residential real estate
4,612

 
77

 
5,270

 
92

Consumer
102

 
8

 
125

 
5

Agricultural
422

 
12

 
141

 
97

Other
495

 
20

 
522

 
19

Total
$
27,216

 
557

 
33,267

 
642

Of the interest income recognized on impaired loans during the three months ended March 31, 2016 and 2015, approximately $0 and $11,000, respectively, were recognized on a cash basis.

Loan modifications that were classified as troubled debt restructurings during the three months ended March 31, 2016 and 2015 are as follows (dollars in thousands):
 
2016
 
2015
 
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, secured by real estate
1

 
$
299

 
372

 

 

 

Residential real estate
1

 
18

 
18

 
3

 
87

 
87

Consumer
1

 
17

 
17

 

 

 

Total
3

 
$
334

 
407

 
3

 
$
87

 
87


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, 2016 and 2015 and that remained in default at period end.

19

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




Note 5 - Acquired Credit Impaired Loans

The following table provides at March 31, 2016 and December 31, 2015 the major classifications of acquired credit impaired loans that are accounted for in accordance with FASB ASC 310-30 (in thousands):
 
March 31, 2016
 
December 31, 2015
Commercial & industrial
$
739

 
1,191

Commercial, secured by real estate
6,351

 
7,877

Residential real estate
2,986

 
3,039

Consumer
22

 
27

Agricultural
29

 
48

Other loans, including deposit overdrafts
504

 
486

 
10,631

 
12,668

Less allowance for loan losses
29

 

Loans, net
$
10,602

 
12,668


The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):
 
March 31, 2016
 
December 31, 2015
Outstanding balance
$
14,129

 
16,507

Carrying amount
10,631

 
12,668


Activity during the three months ended March 31, 2016 and 2015 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):
 
2016
 
2015
Accretable discount at beginning of year
$
1,503

 
2,674

Reclass from nonaccretable discount to accretable discount
75

 
17

Less disposals
(3
)
 
(1
)
Less accretion
(237
)
 
(199
)
Accretable discount at end of period
$
1,338

 
2,491




Note 6 – Other Real Estate Owned
 
Other real estate owned includes property acquired through foreclosure or deed-in-lieu of foreclosure 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,
 
2016
 
2015
Balance, beginning of year
$
846

 
1,370

Additions

 
99

Reductions due to sales

 
(105
)
Balance, end of period
$
846

 
1,364



20

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

Note 6 – Other Real Estate Owned (continued)


Other real estate owned at March 31, 2016 and December 31, 2015 consisted of (dollars in thousands):
 
March 31, 2016
 
December 31, 2015
Commercial real estate
$
846

 
$
846

Residential real estate

 

 
$
846

 
$
846


The total recorded investment in residential consumer mortgage loans secured by residential real estate that was in the process of foreclosure at March 31, 2016 was $613,000


Note 7 - Affordable Housing Tax Credit Limited Partnership

LCNB is a limited partner in a limited partnership that sponsors affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of this investment is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnership include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.

The following table presents the balances of LCNB's affordable housing tax credit investment and related unfunded commitment at March 31, 2016 and December 31, 2015 (in thousands):
 
March 31,
2016
 
December 31,
2015
Affordable housing tax credit investment
$
1,000

 
1,000

Less amortization
32

 
12

Net affordable housing tax credit investment
$
968

 
988

 
 
 
 
Unfunded commitment
$
865

 
907


LCNB expects to fund the unfunded commitment over ten years.

The following table presents other information relating to LCNB's affordable housing tax credit investment for the periods indicated (in thousands):
 
Three Months ended March 31,
 
2016
 
2015
Tax credits and other tax benefits recognized
$
28

 

Tax credit amortization expense included in provision for income taxes
20

 



21

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




Note 8 – Short-Term Borrowings

Short-term borrowings at March 31, 2016 and December 31, 2015 are as follows (dollars in thousands):

 
March 31, 2016
 
December 31, 2015
 
Amount
 
Rate

 
Amount
 
Rate
Line of credit
$

 
%
 
$
13,187

 
1.00
%
FHLB short-term advance

 
%
 
10,000

 
0.35
%
Repurchase agreements
11,668

 
0.10
%
 
14,200

 
0.10
%
 
$
11,668

 
0.10
%
 
$
37,387

 
0.48
%

Repurchase agreements are an option customers may use in managing their cash positions and mature the next business day after issuance. Repurchase agreements at March 31, 2016 and December 31, 2015 were secured by U.S. Agency notes and such collateral securities were held by the Federal Reserve Bank.


Note 9 – 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,
 
 
2016
 
2015
Statutory tax rate
 
34.2
 %
 
34.0
 %
Increase (decrease) resulting from:
 
 

 
 

Tax exempt interest
 
(6.3
)%
 
(5.5
)%
Tax exempt income on bank owned life insurance
 
(1.4
)%
 
(1.4
)%
Other, net
 
 %
 
0.5
 %
Effective tax rate
 
26.5
 %
 
27.6
 %


Note 10 - 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.  

22

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

Note 10 – Commitments and Contingent Liabilities (continued)


Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2016 and December 31, 2015 are as follows (in thousands):
 
March 31, 2016
 
December 31,
2015
Commitments to extend credit:
 
 
 
Commercial loans
$
6,627

 
8,160

Other loans
 

 
 

Fixed rate
4,827

 
2,293

Adjustable rate
1,315

 
1,362

Unused lines of credit:
 

 
 

Fixed rate
6,656

 
6,378

Adjustable rate
89,724

 
90,153

Unused overdraft protection amounts on demand and NOW accounts
10,113

 
10,057

Standby letters of credit
357

 
457

 
$
119,619

 
118,860


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, 2016 totaled approximately $10,922,000, which includes estimated costs for construction of a new operations center in Lebanon, Ohio.

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

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.

23

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




Note 11 – Accumulated Other Comprehensive Income
 
Changes in accumulated other comprehensive income for the three months ended March 31, 2016 and 2015 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, 2016
 
 
 
 
 
Balance at beginning of period
$
469

 
(233
)
 
236

Before reclassifications
3,087

 
28

 
3,115

Reclassifications
(245
)
 

 
(245
)
Balance at end of period
$
3,311

 
(205
)
 
3,106

 
 
 
 
 
 
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


Reclassifications out of accumulated other comprehensive income during the three months ended March 31, 2016 and 2015 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
 
2016
 
2015
 
Realized gain on sale of securities
$
371

 
111

 
Net gain on sale of securities
Less provision for income taxes
126

 
38

 
Provision for income taxes
Reclassification adjustment, net of taxes
$
245

 
73

 
 


Note 12 – 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 hired before this date who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5% or 7% of their annual compensation, depending on the sum of an employee's age and vesting service, into their defined contribution plans (401(k) plans), regardless of the contributions made by the employees.  These contributions are made annually and these employees do not receive any employer matches to their 401(k) contributions.

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.  


24

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


Note 12 – 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, 2016 and 2015 are as follows (in thousands):
 
 
For the Three Months
Ended March 31,
 
 
2016
 
2015
Qualified noncontributory defined benefit retirement plan
 
$
220

 
270

401(k) plan
 
83

 
87


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, 2016 and 2015 are summarized as follows (in thousands):
 
 
 
Three Months Ended
March 31,
 
 
 
2016
 
2015
Service cost
 
 
$
10

 
9

Interest cost
 
 
19

 
17

Amortization of unrecognized net loss
 
 
42

 
42

Net periodic pension cost
 
 
$
71

 
68


Amounts recognized in accumulated other comprehensive income, net of tax, at March 31, 2016 and December 31, 2015 for the nonqualified defined benefit retirement plan consists of (in thousands):
 
March 31, 2016
 
December 31,
2015
Net actuarial loss
$
205

 
233



Note 13 - Stock Based Compensation
 
LCNB established an Ownership Incentive Plan (the "2002 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 2002 Plan provided for the issuance of up to 200,000 shares. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continue to be exercisable in accordance with their terms.

The 2015 Ownership Incentive Plan (the "2015 Plan") was ratified by LCNB's shareholders at the annual meeting on April 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450,000 shares. The 2015 Plan will terminate on April 28, 2025 and is subject to earlier termination by the Compensation Committee.

Stock-based awards may be in the form of treasury shares or new shares.




25

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


Note 13 – Stock Based Compensation (continued)

LCNB has not granted stock option awards since 2012. Options granted to date under the 2002 Plan vest ratably over a five-year period and expire ten years after the date of grant. Stock options outstanding at March 31, 2016 were 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
 
17,633

 
$
9.00

 
2.8
 
17,633

 
$
9.00

 
2.8
$11.00 - $12.99
 
53,266

 
12.04

 
4.3
 
50,767

 
12.02

 
4.3
$17.00 - $18.99
 
6,562

 
17.88

 
0.9
 
6,562

 
17.88

 
0.9
 
 
77,461

 
11.85

 
3.7
 
74,962

 
11.82

 
3.6

The following table summarizes stock option activity for the periods indicated:
 
2016
 
2015
 
Options
 
Weighted Average Exercise
Price
 
Options
 
Weighted Average Exercise
Price
Outstanding, January 1,
83,861

 
$
12.39

 
99,810

 
$
12.16

Granted

 

 

 

Exercised

 

 

 

Expired
(6,400
)
 
18.95

 
(2,500
)
 
9.00

Outstanding, March 31,
77,461

 
11.85

 
97,310

 
12.24

Exercisable, March 31,
74,962

 
11.82

 
86,762

 
12.24


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, 2016 that were "in the money" (market price greater than exercise price) was $339,000.  The aggregate intrinsic value at that date for only the options that were exercisable was $330,000.  The aggregate intrinsic value for options outstanding at March 31, 2015 that were in the money was $338,000 and the aggregate intrinsic value at that date for only the options that were exercisable was $305,000.  The intrinsic value changes based upon fluctuations in the market value of LCNB's common stock.

Total expense related to options included in salaries and employee benefits for the three months ended March 31, 2016 and 2015 was $1,000 and $7,000, respectively. The related tax benefit for the three months ended March 31, 2016 and 2015 was $0 and $0, respectively. Unrecognized compensation cost related to option awards to be recognized through the first quarter of 2017 is approximately $5,000.














26

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


Note 13 – Stock Based Compensation (continued)

Restricted stock awards granted under the 2015 Plan were as follows:
 
2016
 
2015
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
Outstanding, January 1,
16,038

 
$
15.47

 

 
$

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Outstanding, March 31,
16,038

 
$
15.47

 

 
$


Total expense related to restricted stock awards included in salaries and wages in the consolidated statements of income for the three months ended March 31, 2016 was $22,000 and the related tax benefit was $8,000. Unrecognized compensation expense for restricted stock awards was $136,000 at March 31, 2016 and is expected to be recognized over a period of five years.


Note 14 - 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, 2016 and 2015 (dollars in thousands, except share and per share data):
 
 
For the Three Months
Ended March 31,
 
 
2016
 
2015
Net income
 
$
2,964

 
2,834

Weighted average number of shares outstanding used in the calculation of basic earnings per common share
 
9,916,114

 
9,312,636

Add dilutive effect of:
 
 

 
 

Stock options
 
17,225

 
16,203

Stock warrants
 
63,487

 
81,935

Restricted shares
 
1,690

 

Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share
 
9,998,516

 
9,410,774

Earnings per common share:
 
 

 
 

Basic
 
$
0.30

 
0.30

Diluted
 
0.30

 
0.30


Options to purchase 6,562 and 12,962 shares of common stock at a weighted average price of $17.88 and $18.41 per share were outstanding at March 31, 2016 and 2015, 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.

27

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




Note 15 - 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.

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 (level 1) are used to determine fair values for the trust preferred securities, equity securities, and a publicly traded mutual fund. Investments in two mutual funds that are measured at fair value using net asset values ("NAV") per share as a practical expedient are not required to be classified in the fair value hierarchy.  These funds can be redeemed at any time at their current NAVs. 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 15 - 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, 2016 and December 31, 2015 (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, 2016
 
 
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
     U.S. Treasury notes
 
$
53,592

 
53,592

 

 

 
     U.S. Agency notes
 
128,302

 

 
128,302

 

 
     U.S. Agency mortgage-backed securities
 
33,768

 

 
33,768

 

 
     Certificates of deposit with other banks
 
249

 

 
249

 

 
     Municipal securities:
 
 

 
 

 
 

 
 

 
          Non-taxable
 
104,642

 

 
104,642

 

 
          Taxable
 
27,305

 

 
27,305

 

 
     Mutual funds
 
1,016

 
16

 
1,000

 

 
     Mutual funds measured at net asset value (a)
 
1,476

 
 
 
 
 
 
 
     Trust preferred securities
 
49

 
49

 

 

 
     Equity securities
 
702

 
702

 

 

 
          Total recurring fair value measurements
 
$
351,101

 
54,359

 
295,266

 

 
 
 
 
 
 
 
 
 
 
Nonrecurring fair value measurements:
 
 

 
 

 
 
 
 

 
Impaired loans
 
$
3,527

 

 

 
3,527

 
Other real estate owned and repossessed assets
 
846

 

 

 
846

 
     Total nonrecurring fair value measurements
 
$
4,373

 

 

 
4,373

 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 

 
 

 
 

 
 

Recurring fair value measurements:
 
 

 
 

 
 

 
 

 
Investment securities available-for-sale:
 
 

 
 

 
 

 
 

 
     U.S. Treasury notes
 
$
72,846

 
72,846

 

 

 
     U.S. Agency notes
 
139,889

 

 
139,889

 

 
     U.S. Agency mortgage-backed securities
 
29,378

 

 
29,378

 

 
     Certificates of deposit with other banks
 
249

 

 
249

 

 
     Municipal securities:
 
 

 
 

 
 

 
 

 
          Non-taxable
 
105,479

 

 
105,479

 

 
          Taxable
 
26,941

 

 
26,941

 

 
     Mutual funds
 
1,018

 
18

 
1,000

 

 
     Mutual funds measured at net asset value (a)
 
1,448

 
 
 
 
 
 
 
     Trust preferred securities
 
50

 
50

 

 

 
     Equity securities
 
680

 
680

 

 

 
          Total recurring fair value measurements
 
$
377,978

 
73,594

 
302,936

 

 
 
 
 
 
 
 
 
 
 
Nonrecurring fair value measurements:
 
 

 
 

 
 

 
 

 
Impaired loans
 
$
4,722

 

 

 
4,722

 
Other real estate owned and repossessed assets
 
846

 

 

 
846

 
     Total nonrecurring fair value measurements
 
$
5,568

 

 

 
5,568

 
 
 
 
 
 
 
 
 
 
(a)
In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheets.

29

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

Note 15 - Fair Value Measurements (continued)

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at March 31, 2016 and December 31, 2015 (dollars in thousands):
 
 
 
 
 
 
 
 
Range
 
 
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
High
 
Low
 
Weighted Average
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
3,527

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

 
Discounted cash flows
 
Discount rate
 
11.00
%
 
4.50
%
 
5.61
%
Other real estate owned
 
846

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
4,722

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
 
 
Discounted cash flows
 
Discount rate
 
11.00
%
 
4.00
%
 
5.27
%
Other real estate owned
 
846

 
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 15 - Fair Value Measurements (continued)

Carrying amounts and estimated fair values of financial instruments as of March 31, 2016 and December 31, 2015 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, 2016
 
 
 
 
 
 
 
 
 
 
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
21,089

 
21,089

 
21,089

 

 

Investment securities, held-to-maturity
 
36,505

 
36,948

 

 

 
36,948

Federal Reserve Bank stock
 
2,732

 
2,732

 
2,732

 

 

Federal Home Loan Bank stock
 
3,638

 
3,638

 
3,638

 

 

Loans, net
 
775,564

 
770,069

 

 

 
770,069

  Accrued interest receivable
 
4,279

 
4,279

 
256

 
1,879

 
2,144

 
 
 
 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 

 
 

 
 
 
 
 
 
Deposits
 
1,120,208

 
1,120,932

 
902,813

 
218,119

 

Short-term borrowings
 
11,668

 
11,668

 
11,668

 

 

Long-term debt
 
789

 
817

 

 
817

 

  Accrued interest payable
 
305

 
305

 
16

 
289

 

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
14,987

 
14,987

 
14,987

 

 

Investment securities, held-to-maturity
 
22,633

 
22,630

 

 

 
22,630

Federal Reserve Bank stock
 
2,732

 
2,732

 
2,732

 

 

Federal Home Loan Bank stock
 
3,638

 
3,638

 
3,638

 

 

Loans, net
 
767,809

 
761,388

 

 

 
761,388

  Accrued interest receivable
 
3,380

 
3,380

 
208

 
1,280

 
1,892

 
 
 
 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 

 
 

 
 
 
 
 
 
Deposits
 
1,087,160

 
1,087,914

 
869,940

 
217,974

 

Short-term borrowings
 
37,387

 
37,387

 
37,387

 

 

Long-term debt
 
5,947

 
6,290

 

 
6,290

 

Accrued interest payable
 
345

 
345

 
16

 
329

 


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

Note 15 - Fair Value Measurements (continued)

The fair values of off-balance-sheet financial instruments at March 31, 2016 and December 31, 2015 were 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.

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 analysis 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.

Accrued interest receivable and Accrued interest payable
Carrying amount approximates fair value and is aligned with the underlying assets or liabilities.


Note 16 – Recent Accounting Pronouncements
 
ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)"
ASU No. 2014-09 was issued in May 2014 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. As extended by ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," ASU No. 2014-09 is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Transitional guidance is included in the update. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. 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.


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

Note 16 – Recent Accounting Pronouncements (continued)

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. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities"
ASU No. 2016-01 was issued in January 2016 and applies to all entities that hold financial assets or owe financial liabilities. It makes targeted changes to generally accepted accounting principles for public companies as follows:
1.
Requires most equity investments to be measured at fair value with changes in fair value recognized in net income.
2.
Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.
3.
Eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
4.
Requires use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
5.
Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
6.
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
7.
Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

For public business entities, the new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Adoption of ASU No. 2016-01 is not expected to have a material impact on LCNB's results of operations or financial position.

ASU No. 2016-02, "Leases (Topic 842)"
ASU No. 2016-02 was issued in February 2016 and requires a lessee to recognize in the statement of financial position a liability to make lease payments ("the lease liability") and a right-of-use asset representing its right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments.

A lessee shall classify a lease as a finance lease if it meets any of five listed criteria:
1.
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
2.
The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
3.
The lease term is for the major part of the remaining economic life of the underlying asset.
4.
The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.
5.
The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.


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

Note 16 – Recent Accounting Pronouncements (continued)

For finance leases, a lessee shall recognize in the statement of comprehensive income interest on the lease liability separately from amortization of the right-of-use asset. Amortization of the right-of-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease and shall recognize a single lease cost on a straight-line basis over the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.

The amendments in this update are to be applied using a modified retrospective approach, as defined, and are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. LCNB management is currently evaluating the financial statement impact of adopting the new guidance.

ASU No. 2016-04, "Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products (a consensus of the FASB Emerging Issues Task Force)"
ASU No. 2016-04 was issued in March 2016 and determines that liabilities related to the sale of certain prepaid stored-value products (such as prepaid gift cards, prepaid telecommunication cards, and traveler's checks) are financial liabilities. The amendments in this update provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage for these liabilities be accounted for consistent with breakage guidance in Topic 606, "Revenue from Contracts with Customers." The amendments in ASU No. 2016-04 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. LCNB does not currently sell prepaid stored-value products and adoption of ASU No. 2016-04 is not expected to have an impact on LCNB's results of operations or financial position.

ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force)"
ASU No. 2016-05 was issued in March 2016 and applies to reporting entities for which there is a change in a counterparty to a derivative instrument that has been designated a hedging instrument under Topic 815, "Derivatives and Hedging." The amendments in this update clarify that a change in a counterparty to such a derivative instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria under applicable guidance continue to be met. The amendments in ASU No. 2016-05 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. LCNB does not currently have any investments in derivative instruments that have been designated as hedging instruments and adoption of ASU No. 2016-05 is not expected to have an impact on LCNB's results of operations or financial position.

ASU No. 2016-06 , "Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force)"
ASU No. 2016-06 was issued in March 2016 and clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. An entity performing the assessment under the amendments in this update is required to assess the
embedded call (put) options solely in accordance with the four-step decision sequence. The four-step decision sequence requires an entity to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount, and (4) the call (put) option is contingently exercisable. The amendments in ASU No. 2016-06 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. LCNB does not currently have any investments in debt instruments containing such call (put) options and adoption of ASU No. 2016-06 is not expected to have an 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 16 – Recent Accounting Pronouncements (continued)

ASU No. 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting"
ASU No. 2016-07 was issued in March 2016 and affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this update eliminate the requirement that, when an investment qualifies for use of the equity method, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU No. 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments also require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in ASU No. 2016-07 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Earlier application is permitted. Adoption of ASU No. 2016-07 is not expected to have a material impact on LCNB's results of operations or financial position.

ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)"
ASU No. 2016-08 was issued in March 2016 and affects the guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is not yet effective. When another party is involved in providing goods or services to a customer, ASU No. 2014-09 requires an entity to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). The amendments in ASU No. 2016-08 are intended to improve the operability and understandability of the implementation guidance in ASU No. 2014-09 on principal versus agent considerations by offering additional guidance to be considered in making the determination. ASU No. 2016-08 is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Transitional guidance is included in the update. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Adoption of ASU No. 2016-08 is not expected to have a material impact on LCNB's results of operation or financial position.

ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting"
ASU No. 2016-09 was issued in March 2016 and affects all entities that issue share-based payment awards to their employees. The new guidance involves several aspects of the accounting for share-based payment transactions, including income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU No. 2016-09, any excess tax benefits or tax deficiencies should be recognized as income tax expense or benefit in the income statement. Excess tax benefits are to be classified as an operating activity in the statement of cash flows. In accruing compensation cost, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, as required under current guidance, or account for forfeitures when they occur. For an award to qualify for equity classification, an entity cannot partially settle the award in excess of the employer's maximum statutory withholding requirements. Such cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. The amendments in ASU No. 2016-09 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Adoption of ASU No. 2016-07 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 16 – Recent Accounting Pronouncements (continued)

ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing"
ASU No. 2016-10 was issued in April 2016 and affects the guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is not yet effective. ASU No. 2016-10 clarifies the following two aspects of Topic 606:
1.
evaluating whether promised goods and services are separately identifiable, and
2.
determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property, which is satisfied at a point in time, or a right to access the entity's intellectual property, which is satisfied over time.

ASU No. 2016-10 is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Transitional guidance is included in the update. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Adoption of ASU No. 2016-10 is not expected to have a material impact on LCNB's results of operation 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;
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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LCNB CORP. AND SUBSIDIARIES

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, 2016 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. 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 Bank & Trust Co.  Goodwill is not subject to amortization, but is reviewed annually for impairment.  Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives.  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, 2016 was $2,964,000 (total basic and diluted earnings per share of $0.30). This compares to net income of $2,834,000 (total basic and diluted earnings per share of $0.30) for the same three-month period in 2015. Results for 2016 were significantly affected by the acquisition of BNB Bancorp, Inc. ("BNB") on April 30, 2015.

Net interest income for the three months ended March 31, 2016 increased $444,000 from the comparable period in 2015, due
primarily to a $72.2 million increase in average loans and a $76.4 million increase in average investment securities and stock.
The BNB acquisition added $34.7 million to LCNB's loan portfolio as of the effective date. The remainder of the increase in average loans was due to new loan origination. These increases were partially offset by a decrease in the tax equivalent net interest margin.

The provision for loan losses for the three months ended March 31, 2016 was $21,000 greater than the comparable period in
2015. Net loan charge-offs for the first quarter 2016 and 2015 totaled $69,000 and $353,000, respectively. Non-accrual loans
and loans past due 90 days or more and still accruing interest increased $1,145,000, from $2,282,000 or 0.30% of total loans at
December 31, 2015 to $3,427,000 or 0.44% of total loans at March 31, 2016, primarily due to two loans to the same borrower
totaling $1,307,000 that were newly classified as non-accrual during the first quarter 2016. Other real estate owned (which
includes property acquired through foreclosure) was $846,000 at both March 31, 2016 and December 31, 2015 and consisted of
one commercial property.





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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 for the three months ended March 31, 2016 was $336,000 greater than the comparable period in 2015,
primarily due to a $260,000 increase in gains from sales of investment securities.

Non-interest expense for the three months ended March 31, 2016 was $643,000 greater than the comparable period in 2015,
primarily due to a $273,000 increase in salaries and employee benefits and a $251,000 penalty for early payoff of a $5 million
Federal Home Loan Bank ("FHLB") advance (included in other non-interest expense). Salaries and employee benefits
increased primarily due to salary and wage increases, employees retained from the BNB acquisition, and an increase in the
number of employees outside of the acquisitions. The FHLB advance had an interest rate of 5.25% and was paid off to reduce
interest expense on long-term debt.


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LCNB CORP. AND SUBSIDIARIES

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




Net Interest Income

Three Months Ended March 31, 2016 vs. 2015
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, 2016 and 2015, 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,
 
 
2016
 
2015
 
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
 
 
 
(Dollars in thousands)
 
 
 
 
Loans (1)
 
$
772,204

 
8,627

 
4.49
%
 
$
699,959

 
8,540

 
4.95
%
Interest-bearing demand deposits
 
9,857

 
10

 
0.41
%
 
8,834

 
4

 
0.18
%
Federal Reserve Bank stock
 
2,732

 

 
%
 
2,346

 

 
%
Federal Home Loan Bank stock
 
3,638

 
37

 
4.09
%
 
3,638

 
37

 
4.12
%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
253,681

 
1,189

 
1.89
%
 
207,179

 
856

 
1.68
%
Non-taxable (2)
 
129,597

 
1,152

 
3.58
%
 
100,116

 
989

 
4.01
%
Total earnings assets
 
1,171,709

 
11,015

 
3.78
%
 
1,022,072

 
10,426

 
4.14
%
Non-earning assets
 
109,435

 
 

 
 

 
106,124

 
 

 
 

Allowance for loan losses
 
(3,130
)
 
 

 
 

 
(2,870
)
 
 

 
 

Total assets
 
$
1,278,014

 
 

 
 

 
$
1,125,326

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
641,769

 
158

 
0.10
%
 
$
551,219

 
120

 
0.09
%
IRA and time certificates
 
217,473

 
665

 
1.23
%
 
210,970

 
562

 
1.08
%
Short-term borrowings
 
20,710

 
14

 
0.27
%
 
13,824

 
4

 
0.12
%
Long-term debt
 
1,256

 
12

 
3.84
%
 
6,598

 
76

 
4.67
%
Total interest-bearing liabilities
 
881,208

 
849

 
0.39
%
 
782,611

 
762

 
0.39
%
Demand deposits
 
245,088

 
 

 
 

 
207,469

 
 

 
 

Other liabilities
 
9,271

 
 

 
 

 
7,638

 
 

 
 

Capital
 
142,447

 
 

 
 

 
127,608

 
 

 
 

Total liabilities and capital
 
$
1,278,014

 
 

 
 

 
$
1,125,326

 
 

 
 

Net interest rate spread (3)
 
 

 
 

 
3.39
%
 
 

 
 

 
3.75
%
Net interest income and net interest margin on a taxable-equivalent basis (4)
 
 

 
10,166

 
3.49
%
 
 

 
9,664

 
3.83
%
Ratio of interest-earning assets to interest-bearing liabilities
 
132.97
%
 
 

 
 

 
130.60
%
 
 

 
 

(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.
(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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LCNB CORP. AND SUBSIDIARIES

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, 2016 as compared to the same period in 2015.  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, 2016 vs. 2015
Increase (decrease) due to:
 
 
Volume
 
Rate
 
Total
 
 
(In thousands)
Interest-earning Assets:
 
 
 
 
 
 
Loans
 
$
841

 
(754
)
 
87

Federal funds sold
 

 

 

Interest-bearing demand deposits
 
1

 
5

 
6

Federal Reserve Bank stock
 

 

 

Federal Home Loan Bank stock
 

 

 

Investment securities:
 
 
 
 
 
 

Taxable
 
208

 
125

 
333

Non-taxable
 
269

 
(106
)
 
163

Total interest income
 
1,319

 
(730
)
 
589

Interest-bearing Liabilities:
 
 

 
 

 
 

Savings deposits
 
21

 
17

 
38

IRA and time certificates
 
18

 
85

 
103

Short-term borrowings
 
3

 
7

 
10

Long-term debt
 
(53
)
 
(11
)
 
(64
)
Total interest expense
 
(11
)
 
98

 
87

Net interest income
 
$
1,330

 
(828
)
 
502


Net interest income on a fully tax-equivalent basis for the three months ended March 31, 2016 totaled $10,166,000, an increase of $502,000 over the comparable period in 2015.  Total interest income increased $589,000 and total interest expense increased $87,000.

The increase in total interest income was due to a $149.6 million increase in average total earning assets, partially offset by a 36 basis point (a basis point equals 0.01%) decrease in the average rate earned on earning assets. The increase in average total earning assets was due to a $72.2 million increase in average loans and a $76.0 million increase in average total investment securities. The increase in average loans was partially due to the acquisition of BNB and partially due to organic loan growth.

The increase in total interest expense was due primarily to a 15 basis point increase in the average rate paid on IRA and time certificates, partially offset by an 83 basis point decrease in the average rate paid on long-term debt. The decrease in the average rate paid on long-term debt was due to the early payment in full during January 2016 of a $5.0 million FHLB advance bearing an interest rate of 5.25%. The advance was paid off to reduce interest expense. Partially offsetting the net positive effect of these rate changes was a $98.6 million increase in average interest-bearing liabilities. Average savings deposits increased $90.6 million, average IRA and time certificates increased $6.5 million, and average short-term borrowings increased $6.9 million. Average savings deposits and IRA and time certificates increased largely due to the acquisition of BNB. Partially offsetting these increases was a $5.3 million decrease in average long-term debt due to the FHLB advance payoff.








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LCNB CORP. AND SUBSIDIARIES

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




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, 2016 and 2015 were $90,000 and $69,000, respectively. Net charge-offs for the three months ended
March 31, 2016 and 2015 were $69,000 and $353,000, respectively.

Non-Interest Income
Total non-interest income for the first quarter 2016 was $336,000 greater than for the first quarter 2015 primarily due to a $260,000 increase in net gains from sales of investment securities, due to a greater volume of loan sales during 2016. Approximately $20.1 million of investment securities were sold during the first quarter 2016, compared to $5.9 million during the first quarter 2015.

Non-Interest Expense
Non-interest expense for the first quarter 2016 was $643,000 greater than for the first quarter 2015 primarily due to a $273,000 increase in salaries and employee benefits and a $417,000 increase in other non-interest expense. Salaries and employee benefits increased primarily due to salary and wage increases, employees retained from the BNB acquisition, and an increase in the number of employees outside of the acquisition. The increase in other non-interest expense included a $251,000 penalty incurred on the early payoff of the FHLB advance mentioned earlier and smaller increases in various other accounts.

Income Taxes
LCNB's effective tax rates for the three months ended March 31, 2016 and 2015 were 26.5% and 27.6%, 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 investment securities at March 31, 2016 were $13.0 million less than at December 31, 2015. During the first quarter of 2016, LCNB purchased $19.7 million in new securities. The purchases were more than offset by the sale of $20.1 million of investment securities and maturities and calls of an additional $16.7 million of investment securities.

Net loans at March 31, 2016 were $7.8 million greater than at December 31, 2015. Commercial real estate loans increased by $10.5 million, partially offset by decreases in residential real estate, consumer, and agricultural loans.

Bank owned life insurance at March 31, 2016 was $4.2 million greater than at December 31, 2015 primarily due to the purchase of $4.0 million of new policies during the first quarter 2016.

Total deposits at March 31, 2016 were $33.0 million greater than at December 31, 2015. Included in this increase was a $30.5 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.

Shareholders' equity at March 31, 2016 was $2.8 million greater than at December 31, 2015, primarily due to earnings retained and an increase in accumulated other comprehensive income, net of taxes, resulting from market driven increases in the market value of investments securities. Partially offsetting these increases was a $1.4 million decrease in common shares primarily resulting from the repurchase and cancellation of all outstanding warrants.

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.

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LCNB CORP. AND SUBSIDIARIES

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




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 began 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.

A summary of the regulatory capital and capital ratios of LCNB follows (dollars in thousands):
 
 
March 31, 2016
 
December 31,
2015
Regulatory Capital:
 
 
Shareholders' equity
 
$
142,933

 
140,108

Goodwill and other intangibles
 
(33,015
)
 
(32,146
)
Accumulated other comprehensive (income) loss
 
(3,106
)
 
(256
)
Tier 1 risk-based capital
 
106,812

 
107,706

Eligible allowance for loan losses
 
3,150

 
3,129

Total risk-based capital
 
$
109,962

 
110,835

Capital ratios:
 
 

 
 

Common Equity Tier 1 Capital to risk-weighted assets
 
13.13
%
 
13.46
%
Tier 1 Capital to risk-weighted assets
 
13.13
%
 
13.46
%
Total Capital to risk-weighted assets
 
13.52
%
 
13.85
%
Leverage
 
8.60
%
 
8.62
%

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, 2016, LCNB's liquid assets amounted to $372.2 million or 28.9% of total assets.  This compares to liquid assets totaling $393.0 million, or 30.7% of total assets, at December 31, 2015.


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LCNB CORP. AND SUBSIDIARIES

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




Liquidity is also provided by access to core funding sources, primarily core depositors in LCNB's market area.  Approximately 81.8% of total deposits at March 31, 2016 were "core" deposits, compared to 84.3% of deposits at December 31, 2015. 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, 2016 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
 
$
42,913

 
3,120

 
7.84
%
Up 200
 
41,829

 
2,036

 
5.12
%
Up 100
 
40,798

 
1,005

 
2.53
%
Base
 
39,793

 

 
%

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, 2016 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
 
$
146,092

 
(1,482
)
 
(1.00
)%
Up 200
 
145,799

 
(1,775
)
 
(1.20
)%
Up 100
 
146,061

 
(1,513
)
 
(1.03
)%
Base
 
147,574

 

 
 %

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, 2016, 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
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
LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 13, 2015, Exhibit A (001-35292)
 
 
10.3
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.
 
 
10.4
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.
 
 
10.5
Form of Restricted Share Grant Agreement under the LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2015, Exhibit 10.7
 
 
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, 2016 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, 2016
/s/ Steve P. Foster
 
 
Steve P. Foster
 
 
Chief Executive Officer and President
 
 
 
 
May 4, 2016
/s/ Robert C. Haines, II
 
 
Robert C. Haines, II
 
 
Executive Vice President and Chief Financial Officer
 

49