NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
Substantially all of the assets, liabilities and operations of LCNB Corp. ("LCNB") are attributable to its wholly-owned subsidiary, LCNB National Bank (the "Bank"). The accompanying unaudited consolidated condensed financial statements include the accounts of LCNB and the Bank.
The unaudited interim consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.
The consolidated balance sheet as of
December 31, 2015
has been derived from the audited consolidated balance sheet as of that day.
Certain prior period data presented in the financial statements have been reclassified to conform with the current year presentation.
LCNB adopted ASU No. 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)" during the first quarter of 2016. ASU No. 2015-07 applies to entities that measure an investment's fair value using the net asset value per share, or an equivalent, as a practical expedient. It eliminates the requirement to classify such investments within the fair value hierarchy. The amendments are to be applied retrospectively to all periods presented. LCNB measures the fair value of certain mutual fund investments using the net asset value per share practical expedient and disclosures concerning these investments in Note 15 - Fair Value Measurements have been changed to comply with the new guidance. Adoption did not have an impact on LCNB's results of operations or financial position.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Results of operations for the
three and six
months ended
June 30, 2016
are not necessarily indicative of the results to be expected for the full year ending
December 31, 2016
. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's
2015
Annual Report on Form 10-K filed with the SEC.
Note 2 – Acquisitions
On
December 29, 2014
, LCNB and BNB Bancorp, Inc. (“BNB”) entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which BNB was acquired by LCNB on April 30, 2015. Immediately following the merger of BNB into LCNB, Brookville National Bank ("Brookville"), a wholly-owned subsidiary of BNB, was merged into LCNB National Bank. Brookville operated a main office and a branch office, both in Brookville, Ohio. These offices became branches of the Bank after the merger.
Under the terms of the Merger Agreement, the shareholders of BNB common stock received, for each share of BNB common stock, (i) $
15.75
in cash and (ii)
2.005
LCNB common shares.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 2 – Acquisitions (continued)
The merger with BNB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the merger date, as summarized in the following table (in thousands):
|
|
|
|
|
Consideration Paid:
|
|
Common shares issued
|
$
|
9,063
|
|
Cash paid to shareholder(s)
|
4,403
|
|
Total consideration paid
|
13,466
|
|
|
|
Identifiable Assets Acquired:
|
|
Cash and cash equivalents
|
13,396
|
|
Investment securities
|
58,239
|
|
Federal Reserve Bank stock
|
130
|
|
Loans
|
34,661
|
|
Premises and equipment
|
2,311
|
|
Core deposit intangible
|
1,418
|
|
Other assets
|
532
|
|
Total identifiable assets acquired
|
110,687
|
|
|
|
Liabilities Assumed:
|
|
Deposits
|
99,133
|
|
Deferred income taxes
|
576
|
|
Other liabilities
|
57
|
|
Total liabilities assumed
|
99,766
|
|
|
|
Total Identifiable Net Assets Acquired
|
10,921
|
|
|
|
Goodwill resulting from merger
|
$
|
2,545
|
|
The amount of goodwill recorded reflects LCNB's entrance into a new market and related synergies that are expected to result from the acquisition and represent the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable on LCNB's financial records, but is deductible for tax purposes. The core deposit intangible is being amortized over
nine
years using the straight-line method.
Direct costs related to the acquisition were expensed as incurred and are recorded as a merger-related expense in the consolidated condensed statements of income.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 - Investment Securities
The amortized cost and estimated fair value of investment securities at
June 30, 2016
and
December 31, 2015
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
June 30, 2016
|
|
|
|
|
|
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
$
|
52,567
|
|
|
1,414
|
|
|
—
|
|
|
53,981
|
|
U.S. Agency notes
|
113,554
|
|
|
1,784
|
|
|
—
|
|
|
115,338
|
|
U.S. Agency mortgage-backed securities
|
47,701
|
|
|
592
|
|
|
17
|
|
|
48,276
|
|
Certificates of deposit
|
248
|
|
|
—
|
|
|
—
|
|
|
248
|
|
Municipal securities:
|
|
|
|
|
|
|
|
|
|
|
|
Non-taxable
|
108,842
|
|
|
2,397
|
|
|
6
|
|
|
111,233
|
|
Taxable
|
20,507
|
|
|
721
|
|
|
2
|
|
|
21,226
|
|
Mutual funds
|
2,508
|
|
|
8
|
|
|
17
|
|
|
2,499
|
|
Trust preferred securities
|
49
|
|
|
—
|
|
|
—
|
|
|
49
|
|
Equity securities
|
633
|
|
|
48
|
|
|
3
|
|
|
678
|
|
|
$
|
346,609
|
|
|
$
|
6,964
|
|
|
45
|
|
|
353,528
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
Municipal securities:
|
|
|
|
|
|
|
|
Non-taxable
|
30,084
|
|
|
796
|
|
|
29
|
|
|
30,851
|
|
Taxable
|
9,363
|
|
|
68
|
|
|
—
|
|
|
9,431
|
|
|
$
|
39,447
|
|
|
864
|
|
|
29
|
|
|
40,282
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
$
|
72,672
|
|
|
309
|
|
|
135
|
|
|
72,846
|
|
U.S. Agency notes
|
140,876
|
|
|
164
|
|
|
1,151
|
|
|
139,889
|
|
U.S. Agency mortgage-backed securities
|
29,608
|
|
|
174
|
|
|
404
|
|
|
29,378
|
|
Certificates of deposit
|
248
|
|
|
1
|
|
|
—
|
|
|
249
|
|
Municipal securities:
|
|
|
|
|
|
|
|
|
|
|
|
Non-taxable
|
103,900
|
|
|
1,713
|
|
|
134
|
|
|
105,479
|
|
Taxable
|
26,738
|
|
|
337
|
|
|
134
|
|
|
26,941
|
|
Mutual funds
|
2,517
|
|
|
—
|
|
|
51
|
|
|
2,466
|
|
Trust preferred securities
|
49
|
|
|
1
|
|
|
—
|
|
|
50
|
|
Equity securities
|
659
|
|
|
40
|
|
|
19
|
|
|
680
|
|
|
$
|
377,267
|
|
|
2,739
|
|
|
2,028
|
|
|
377,978
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
Municipal securities:
|
|
|
|
|
|
|
|
Non-taxable
|
22,233
|
|
|
95
|
|
|
97
|
|
|
22,231
|
|
Taxable
|
400
|
|
|
—
|
|
|
1
|
|
|
399
|
|
|
$
|
22,633
|
|
|
95
|
|
|
98
|
|
|
22,630
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 - Investment Securities (continued)
Information concerning investment securities with gross unrealized losses at
June 30, 2016
and
December 31, 2015
, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
June 30, 2016
|
|
|
|
|
|
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
U.S. Agency notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
U.S. Agency mortgage-backed securities
|
—
|
|
|
—
|
|
|
3,909
|
|
|
17
|
|
Municipal securities:
|
|
|
|
|
|
|
|
|
|
Non-taxable
|
—
|
|
|
—
|
|
|
2,770
|
|
|
6
|
|
Taxable
|
1,005
|
|
|
—
|
|
|
451
|
|
|
2
|
|
Mutual funds
|
—
|
|
|
—
|
|
|
263
|
|
|
17
|
|
Trust preferred securities
|
49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity securities
|
68
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
$
|
1,122
|
|
|
3
|
|
|
$
|
7,393
|
|
|
42
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
Municipal securities:
|
|
|
|
|
|
|
|
Non-taxable
|
$
|
—
|
|
|
—
|
|
|
2,636
|
|
|
29
|
|
Taxable
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
2,636
|
|
|
29
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Available-for-Sale:
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
$
|
32,854
|
|
|
75
|
|
|
$
|
4,846
|
|
|
60
|
|
U.S. Agency notes
|
104,053
|
|
|
1,000
|
|
|
9,869
|
|
|
151
|
|
U.S. Agency mortgage-backed securities
|
19,190
|
|
|
256
|
|
|
4,068
|
|
|
148
|
|
Municipal securities:
|
|
|
|
|
|
|
|
|
|
|
Non-taxable
|
13,124
|
|
|
74
|
|
|
7,037
|
|
|
60
|
|
Taxable
|
15,601
|
|
|
114
|
|
|
880
|
|
|
20
|
|
Mutual funds
|
1,215
|
|
|
17
|
|
|
268
|
|
|
34
|
|
Trust preferred securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity securities
|
248
|
|
|
12
|
|
|
73
|
|
|
7
|
|
|
$
|
186,285
|
|
|
1,548
|
|
|
$
|
27,041
|
|
|
480
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity:
|
|
|
|
|
|
|
|
Municipal securities:
|
|
|
|
|
|
|
|
Non-taxable
|
$
|
832
|
|
|
3
|
|
|
$
|
3,426
|
|
|
94
|
|
Taxable
|
399
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
$
|
1,231
|
|
|
4
|
|
|
$
|
3,426
|
|
|
94
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 3 - Investment Securities (continued)
Management has determined that the unrealized losses at
June 30, 2016
are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities. Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.
Contractual maturities of investment securities at
June 30, 2016
were as follows (in thousands). Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
Held-to-Maturity
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
Due within one year
|
$
|
23,089
|
|
|
23,181
|
|
|
3,620
|
|
|
3,626
|
|
Due from one to five years
|
150,743
|
|
|
153,748
|
|
|
4,211
|
|
|
4,222
|
|
Due from five to ten years
|
121,380
|
|
|
124,583
|
|
|
11,073
|
|
|
11,239
|
|
Due after ten years
|
506
|
|
|
514
|
|
|
20,543
|
|
|
21,195
|
|
|
295,718
|
|
|
302,026
|
|
|
39,447
|
|
|
40,282
|
|
U.S. Agency mortgage-backed securities
|
47,701
|
|
|
48,276
|
|
|
—
|
|
|
—
|
|
Mutual funds
|
2,508
|
|
|
2,499
|
|
|
—
|
|
|
—
|
|
Trust preferred securities
|
49
|
|
|
49
|
|
|
—
|
|
|
—
|
|
Equity securities
|
633
|
|
|
678
|
|
|
—
|
|
|
—
|
|
|
$
|
346,609
|
|
|
353,528
|
|
|
39,447
|
|
|
40,282
|
|
Investment securities with a market value of
$228,901,000
and
$215,952,000
at
June 30, 2016
and
December 31, 2015
, respectively, were pledged to secure public deposits and for other purposes required as permitted by law.
Certain information concerning the sale of investment securities available-for-sale for the
three and six
months ended
June 30, 2016
and
2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Proceeds from sales
|
$
|
16,100
|
|
|
48,953
|
|
|
$
|
36,529
|
|
|
54,955
|
|
Gross realized gains
|
300
|
|
|
234
|
|
|
671
|
|
|
345
|
|
Gross realized losses
|
21
|
|
|
13
|
|
|
21
|
|
|
13
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 - Loans
Major classifications of loans at
June 30, 2016
and
December 31, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Commercial and industrial
|
$
|
45,153
|
|
|
45,275
|
|
Commercial, secured by real estate
|
455,654
|
|
|
419,633
|
|
Residential real estate
|
266,625
|
|
|
273,139
|
|
Consumer
|
18,545
|
|
|
18,510
|
|
Agricultural
|
13,605
|
|
|
13,479
|
|
Other loans, including deposit overdrafts
|
635
|
|
|
665
|
|
|
800,217
|
|
|
770,701
|
|
Deferred net origination costs (fees)
|
248
|
|
|
237
|
|
|
800,465
|
|
|
770,938
|
|
Less allowance for loan losses
|
3,373
|
|
|
3,129
|
|
Loans, net
|
$
|
797,092
|
|
|
767,809
|
|
All advances from the Federal Home Loan Bank ("FHLB") of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately
$225 million
and
$231 million
at
June 30, 2016
and
December 31, 2015
, respectively. Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings.
Loans acquired through mergers are recorded at fair value with no carryover of the acquired entity's previously established allowance for loan losses. The excess of expected cash flows over the estimated fair value of acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows result in the recognition of additional interest income over the then-remaining contractual lives of the loans.
Impaired loans acquired are accounted for under FASB ASC 310-30. Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and updated loan-to-value information. The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference. The interest component of the cash flows expected to be collected is referred to as the accretable yield and is recognized as interest income over the remaining contractual life of the loan using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows will result in a reclassification from the nonaccretable difference to the accretable yield.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)
Non-accrual, past-due, and accruing restructured loans as of
June 30, 2016
and
December 31, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Non-accrual loans:
|
|
|
|
Commercial and industrial
|
$
|
—
|
|
|
—
|
|
Commercial, secured by real estate
|
1,362
|
|
|
876
|
|
Residential real estate
|
951
|
|
|
799
|
|
Consumer
|
—
|
|
|
—
|
|
Agricultural
|
384
|
|
|
48
|
|
Total non-accrual loans
|
2,697
|
|
|
1,723
|
|
Past-due 90 days or more and still accruing
|
369
|
|
|
559
|
|
Total non-accrual and past-due 90 days or more and still accruing
|
3,066
|
|
|
2,282
|
|
Accruing restructured loans
|
13,855
|
|
|
13,723
|
|
Total
|
$
|
16,921
|
|
|
16,005
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)
The allowance for loan losses for the
three and six
months ended
June 30, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Industrial
|
|
Commercial, Secured by
Real Estate
|
|
Residential
Real Estate
|
|
Consumer
|
|
Agricultural
|
|
Other
|
|
Total
|
Three Months Ended June 30, 2016
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
247
|
|
|
1,868
|
|
|
896
|
|
|
81
|
|
|
56
|
|
|
2
|
|
|
3,150
|
|
Provision charged to expenses
|
74
|
|
|
320
|
|
|
(1
|
)
|
|
(12
|
)
|
|
6
|
|
|
9
|
|
|
396
|
|
Losses charged off
|
(49
|
)
|
|
(117
|
)
|
|
(14
|
)
|
|
(9
|
)
|
|
—
|
|
|
(19
|
)
|
|
(208
|
)
|
Recoveries
|
1
|
|
|
—
|
|
|
4
|
|
|
20
|
|
|
—
|
|
|
10
|
|
|
35
|
|
Balance, end of period
|
$
|
273
|
|
|
2,071
|
|
|
885
|
|
|
80
|
|
|
62
|
|
|
2
|
|
|
3,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
$
|
244
|
|
|
1,908
|
|
|
854
|
|
|
54
|
|
|
66
|
|
|
3
|
|
|
3,129
|
|
Provision charged to expenses
|
74
|
|
|
285
|
|
|
65
|
|
|
49
|
|
|
(4
|
)
|
|
17
|
|
|
486
|
|
Losses charged off
|
(49
|
)
|
|
(140
|
)
|
|
(42
|
)
|
|
(53
|
)
|
|
—
|
|
|
(42
|
)
|
|
(326
|
)
|
Recoveries
|
4
|
|
|
18
|
|
|
8
|
|
|
30
|
|
|
—
|
|
|
24
|
|
|
84
|
|
Balance, end of period
|
$
|
273
|
|
|
2,071
|
|
|
885
|
|
|
80
|
|
|
62
|
|
|
2
|
|
|
3,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
131
|
|
|
1,640
|
|
|
934
|
|
|
54
|
|
|
77
|
|
|
1
|
|
|
2,837
|
|
Provision charged to expenses
|
41
|
|
|
552
|
|
|
53
|
|
|
16
|
|
|
6
|
|
|
9
|
|
|
677
|
|
Losses charged off
|
(11
|
)
|
|
(633
|
)
|
|
(115
|
)
|
|
(18
|
)
|
|
(67
|
)
|
|
(12
|
)
|
|
(856
|
)
|
Recoveries
|
1
|
|
|
96
|
|
|
42
|
|
|
10
|
|
|
67
|
|
|
5
|
|
|
221
|
|
Balance, end of period
|
$
|
162
|
|
|
1,655
|
|
|
914
|
|
|
62
|
|
|
83
|
|
|
3
|
|
|
2,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
$
|
129
|
|
|
1,990
|
|
|
926
|
|
|
63
|
|
|
11
|
|
|
2
|
|
|
3,121
|
|
Provision charged to expenses
|
42
|
|
|
515
|
|
|
117
|
|
|
(13
|
)
|
|
72
|
|
|
13
|
|
|
746
|
|
Losses charged off
|
(11
|
)
|
|
(946
|
)
|
|
(197
|
)
|
|
(29
|
)
|
|
(67
|
)
|
|
(26
|
)
|
|
(1,276
|
)
|
Recoveries
|
2
|
|
|
96
|
|
|
68
|
|
|
41
|
|
|
67
|
|
|
14
|
|
|
288
|
|
Balance, end of period
|
$
|
162
|
|
|
1,655
|
|
|
914
|
|
|
62
|
|
|
83
|
|
|
3
|
|
|
2,879
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)
A breakdown of the allowance for loan losses and the loan portfolio by loan segment at
June 30, 2016
and
December 31, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
& Industrial
|
|
Commercial, Secured by
Real Estate
|
|
Residential
Real Estate
|
|
Consumer
|
|
Agricultural
|
|
Other
|
|
Total
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
6
|
|
|
195
|
|
|
90
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
300
|
|
Collectively evaluated for impairment
|
267
|
|
|
1,875
|
|
|
795
|
|
|
71
|
|
|
62
|
|
|
2
|
|
|
3,072
|
|
Acquired credit impaired loans
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Balance, end of period
|
$
|
273
|
|
|
2,071
|
|
|
885
|
|
|
80
|
|
|
62
|
|
|
2
|
|
|
3,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
354
|
|
|
12,672
|
|
|
1,584
|
|
|
47
|
|
|
384
|
|
|
—
|
|
|
15,041
|
|
Collectively evaluated for impairment
|
43,452
|
|
|
436,405
|
|
|
262,558
|
|
|
18,571
|
|
|
13,230
|
|
|
164
|
|
|
774,380
|
|
Acquired credit impaired loans
|
1,363
|
|
|
6,249
|
|
|
2,941
|
|
|
20
|
|
|
—
|
|
|
471
|
|
|
11,044
|
|
Balance, end of period
|
$
|
45,169
|
|
|
455,326
|
|
|
267,083
|
|
|
18,638
|
|
|
13,614
|
|
|
635
|
|
|
800,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
9
|
|
|
306
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
363
|
|
Collectively evaluated for impairment
|
235
|
|
|
1,602
|
|
|
806
|
|
|
54
|
|
|
66
|
|
|
3
|
|
|
2,766
|
|
Acquired credit impaired loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, end of period
|
$
|
244
|
|
|
1,908
|
|
|
854
|
|
|
54
|
|
|
66
|
|
|
3
|
|
|
3,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
370
|
|
|
12,351
|
|
|
1,541
|
|
|
56
|
|
|
—
|
|
|
—
|
|
|
14,318
|
|
Collectively evaluated for impairment
|
43,726
|
|
|
399,092
|
|
|
269,001
|
|
|
18,516
|
|
|
13,438
|
|
|
179
|
|
|
743,952
|
|
Acquired credit impaired loans
|
1,191
|
|
|
7,877
|
|
|
3,039
|
|
|
27
|
|
|
48
|
|
|
486
|
|
|
12,668
|
|
Balance, end of period
|
$
|
45,287
|
|
|
419,320
|
|
|
273,581
|
|
|
18,599
|
|
|
13,486
|
|
|
665
|
|
|
770,938
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)
The risk characteristics of LCNB's material loan portfolio segments are as follows:
Commercial and Industrial Loans.
LCNB’s commercial and industrial loan portfolio consists of loans for various purposes, including loans to fund working capital requirements (such as inventory and receivables financing) and purchases of machinery and equipment. LCNB offers a variety of commercial and industrial loan arrangements, including term loans, balloon loans, and lines of credit. Most commercial and industrial loans have a variable rate, with adjustment periods ranging from
one month
to
five years
. Adjustments are generally based on a publicly available index rate plus a margin. The margin varies based on the terms and collateral securing the loan. Commercial and industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial and industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business. Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets. As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.
Commercial, Secured by Real Estate Loans.
Commercial real estate loans include loans secured by a variety of commercial, retail, and office buildings, religious facilities, multifamily (more than two-family) residential properties, construction and land development loans, and other land loans. Commercial real estate loan products generally amortize over
five
to
twenty-five
years and are payable in monthly principal and interest installments. Some have balloon payments due within
one
to
ten
years after the origination date. Many have adjustable interest rates with adjustment periods ranging from
one
to
ten
years, some of which are subject to established “floor” interest rates.
Commercial real estate loans are underwritten based on the ability of the property, in the case of income producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt. Secondary emphasis is placed upon global debt service, collateral value, financial strength of any guarantors, and other factors. Commercial real estate loans are generally originated with a
75%
maximum loan to appraised value ratio.
Residential Real Estate Loans.
Residential real estate loans include loans secured by first or second mortgage liens on one to two-family residential property. Home equity lines of credit and mortgage loans secured by owner-occupied agricultural property are included in this category. First and second mortgage loans are generally amortized over
five
to
thirty
years with monthly principal and interest payments. Home equity lines of credit generally have a
five
year draw period with interest only payments followed by a repayment period with monthly payments based on the amount outstanding. LCNB offers both fixed and adjustable rate mortgage loans. Adjustable rate loans are available with adjustment periods ranging between
one
to
ten
years and adjust according to an established index plus a margin, subject to certain floor and ceiling rates. Home equity lines of credit have a variable rate based on the Wall Street Journal prime rate plus a margin.
LCNB does not originate reverse mortgage loans or residential real estate loans generally considered to be “subprime.”
Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral. LCNB generally requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than
80%
.
Consumer Loans.
LCNB’s portfolio of consumer loans generally includes secured and unsecured loans to individuals for household, family and other personal expenditures. Secured loans include loans to fund the purchase of automobiles, recreational vehicles, boats, and similar acquisitions. Consumer loans made by LCNB generally have fixed rates and terms ranging up to
72
months, depending upon the nature of the collateral, size of the loan, and other relevant factors.
Consumer loans generally have higher interest rates, but pose additional risks of collectability and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation. The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.
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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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
June 30, 2016
and
December 31, 2015
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
OAEM
|
|
Substandard
|
|
Doubtful
|
|
Total
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
44,477
|
|
|
39
|
|
|
653
|
|
|
—
|
|
|
45,169
|
|
Commercial, secured by real estate
|
438,822
|
|
|
4,487
|
|
|
12,017
|
|
|
—
|
|
|
455,326
|
|
Residential real estate
|
261,423
|
|
|
998
|
|
|
4,662
|
|
|
—
|
|
|
267,083
|
|
Consumer
|
18,528
|
|
|
—
|
|
|
110
|
|
|
—
|
|
|
18,638
|
|
Agricultural
|
12,037
|
|
|
850
|
|
|
727
|
|
|
—
|
|
|
13,614
|
|
Other
|
635
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
635
|
|
Total
|
$
|
775,922
|
|
|
6,374
|
|
|
18,169
|
|
|
—
|
|
|
800,465
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)
A loan portfolio aging analysis at
June 30, 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
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
45,154
|
|
|
45,169
|
|
|
—
|
|
Commercial, secured by real estate
|
—
|
|
|
—
|
|
|
1,362
|
|
|
1,362
|
|
|
453,964
|
|
|
455,326
|
|
|
—
|
|
Residential real estate
|
590
|
|
|
436
|
|
|
1,140
|
|
|
2,166
|
|
|
264,917
|
|
|
267,083
|
|
|
335
|
|
Consumer
|
16
|
|
|
22
|
|
|
34
|
|
|
72
|
|
|
18,566
|
|
|
18,638
|
|
|
34
|
|
Agricultural
|
44
|
|
|
—
|
|
|
384
|
|
|
428
|
|
|
13,186
|
|
|
13,614
|
|
|
—
|
|
Other
|
97
|
|
|
—
|
|
|
—
|
|
|
97
|
|
|
538
|
|
|
635
|
|
|
—
|
|
Total
|
$
|
762
|
|
|
458
|
|
|
2,920
|
|
|
4,140
|
|
|
796,325
|
|
|
800,465
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)
Impaired loans, including acquired credit impaired loans, at
June 30, 2016
and
December 31, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
June 30, 2016
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
Commercial & industrial
|
$
|
1,362
|
|
|
1,635
|
|
|
—
|
|
Commercial, secured by real estate
|
16,289
|
|
|
18,063
|
|
|
—
|
|
Residential real estate
|
3,808
|
|
|
4,980
|
|
|
—
|
|
Consumer
|
33
|
|
|
48
|
|
|
—
|
|
Agricultural
|
384
|
|
|
384
|
|
|
—
|
|
Other
|
471
|
|
|
665
|
|
|
—
|
|
Total
|
$
|
22,347
|
|
|
25,775
|
|
|
—
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
355
|
|
|
354
|
|
|
6
|
|
Commercial, secured by real estate
|
2,632
|
|
|
2,709
|
|
|
196
|
|
Residential real estate
|
717
|
|
|
855
|
|
|
90
|
|
Consumer
|
34
|
|
|
34
|
|
|
9
|
|
Agricultural
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
3,738
|
|
|
3,952
|
|
|
301
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
1,717
|
|
|
1,989
|
|
|
6
|
|
Commercial, secured by real estate
|
18,921
|
|
|
20,772
|
|
|
196
|
|
Residential real estate
|
4,525
|
|
|
5,835
|
|
|
90
|
|
Consumer
|
67
|
|
|
82
|
|
|
9
|
|
Agricultural
|
384
|
|
|
384
|
|
|
—
|
|
Other
|
471
|
|
|
665
|
|
|
—
|
|
Total
|
$
|
26,085
|
|
|
29,727
|
|
|
301
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
Agricultural
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
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
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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 and six
months ended
June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
964
|
|
|
26
|
|
|
1,609
|
|
|
60
|
|
Commercial, secured by real estate
|
17,292
|
|
|
278
|
|
|
19,259
|
|
|
742
|
|
Residential real estate
|
3,855
|
|
|
123
|
|
|
4,175
|
|
|
138
|
|
Consumer
|
40
|
|
|
8
|
|
|
93
|
|
|
3
|
|
Agricultural
|
423
|
|
|
123
|
|
|
110
|
|
|
35
|
|
Other
|
495
|
|
|
20
|
|
|
516
|
|
|
20
|
|
Total
|
$
|
23,069
|
|
|
578
|
|
|
25,762
|
|
|
998
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
358
|
|
|
5
|
|
|
389
|
|
|
6
|
|
Commercial, secured by real estate
|
2,651
|
|
|
20
|
|
|
3,746
|
|
|
29
|
|
Residential real estate
|
780
|
|
|
8
|
|
|
884
|
|
|
10
|
|
Consumer
|
34
|
|
|
1
|
|
|
18
|
|
|
—
|
|
Agricultural
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
3,823
|
|
|
34
|
|
|
5,037
|
|
|
45
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
1,322
|
|
|
31
|
|
|
1,998
|
|
|
66
|
|
Commercial, secured by real estate
|
19,943
|
|
|
298
|
|
|
23,005
|
|
|
771
|
|
Residential real estate
|
4,635
|
|
|
131
|
|
|
5,059
|
|
|
148
|
|
Consumer
|
74
|
|
|
9
|
|
|
111
|
|
|
3
|
|
Agricultural
|
423
|
|
|
123
|
|
|
110
|
|
|
35
|
|
Other
|
495
|
|
|
20
|
|
|
516
|
|
|
20
|
|
Total
|
$
|
26,892
|
|
|
612
|
|
|
30,799
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
964
|
|
|
55
|
|
|
1,437
|
|
|
82
|
|
Commercial, secured by real estate
|
17,460
|
|
|
660
|
|
|
20,317
|
|
|
1,099
|
|
Residential real estate
|
3,823
|
|
|
194
|
|
|
4,305
|
|
|
221
|
|
Consumer
|
54
|
|
|
15
|
|
|
101
|
|
|
7
|
|
Agricultural
|
422
|
|
|
135
|
|
|
107
|
|
|
132
|
|
Other
|
495
|
|
|
40
|
|
|
515
|
|
|
39
|
|
Total
|
$
|
23,218
|
|
|
1,099
|
|
|
26,782
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
362
|
|
|
10
|
|
|
393
|
|
|
11
|
|
Commercial, secured by real estate
|
2,671
|
|
|
42
|
|
|
3,694
|
|
|
56
|
|
Residential real estate
|
760
|
|
|
16
|
|
|
862
|
|
|
20
|
|
Consumer
|
34
|
|
|
2
|
|
|
18
|
|
|
1
|
|
Agricultural
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
3,827
|
|
|
70
|
|
|
4,967
|
|
|
88
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
$
|
1,326
|
|
|
65
|
|
|
1,830
|
|
|
93
|
|
Commercial, secured by real estate
|
20,131
|
|
|
702
|
|
|
24,011
|
|
|
1,155
|
|
Residential real estate
|
4,583
|
|
|
210
|
|
|
5,167
|
|
|
241
|
|
Consumer
|
88
|
|
|
17
|
|
|
119
|
|
|
8
|
|
Agricultural
|
422
|
|
|
135
|
|
|
107
|
|
|
132
|
|
Other
|
495
|
|
|
40
|
|
|
515
|
|
|
39
|
|
Total
|
$
|
27,045
|
|
|
1,169
|
|
|
31,749
|
|
|
1,668
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 4 – Loans (continued)
Of the interest income recognized on impaired loans during the
six
months ended
June 30, 2016
and
2015
, approximately
$46,000
and
$11,000
, respectively, were recognized on a cash basis.
Loan modifications that were classified as troubled debt restructurings during the
three and six
months ended
June 30, 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 June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
1
|
|
|
$
|
72
|
|
|
74
|
|
Commercial, secured by real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
1
|
|
|
27
|
|
|
27
|
|
|
1
|
|
|
50
|
|
|
50
|
|
Consumer
|
1
|
|
|
10
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
2
|
|
|
$
|
37
|
|
|
37
|
|
|
2
|
|
|
$
|
122
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
1
|
|
|
$
|
72
|
|
|
74
|
|
Commercial, secured by real estate
|
1
|
|
|
$
|
299
|
|
|
372
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
2
|
|
|
45
|
|
|
45
|
|
|
4
|
|
|
137
|
|
|
137
|
|
Consumer
|
2
|
|
|
27
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
5
|
|
|
$
|
371
|
|
|
444
|
|
|
5
|
|
|
$
|
209
|
|
|
211
|
|
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
six
months ended
June 30, 2016
and that remained in default at period end. A restructured commercial real estate loan with a recorded balance of
$77,000
was classified as non-accrual at
June 30, 2015
, which was within twelve months of the loan's modification date.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 5 - Acquired Credit Impaired Loans
The following table provides at
June 30, 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):
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Commercial & industrial
|
$
|
1,363
|
|
|
1,191
|
|
Commercial, secured by real estate
|
6,249
|
|
|
7,877
|
|
Residential real estate
|
2,941
|
|
|
3,039
|
|
Consumer
|
20
|
|
|
27
|
|
Agricultural
|
—
|
|
|
48
|
|
Other loans, including deposit overdrafts
|
471
|
|
|
486
|
|
|
11,044
|
|
|
12,668
|
|
Less allowance for loan losses
|
1
|
|
|
—
|
|
Loans, net
|
$
|
11,043
|
|
|
12,668
|
|
The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Outstanding balance
|
$
|
14,369
|
|
|
16,507
|
|
Carrying amount
|
11,043
|
|
|
12,668
|
|
Activity during the
six
months ended
June 30, 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
|
|
Accretable discount acquired during period
|
—
|
|
|
413
|
|
Reclass from nonaccretable discount to accretable discount
|
307
|
|
|
943
|
|
Less disposals
|
(3
|
)
|
|
(857
|
)
|
Less accretion
|
(439
|
)
|
|
(1,404
|
)
|
Accretable discount at end of period
|
$
|
1,368
|
|
|
1,769
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 6 – Other Real Estate Owned
Other real estate owned includes property acquired through foreclosure or deed-in-lieu of foreclosure and are included in "other assets" in the consolidated condensed balance sheets. Changes in other real estate owned are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
Balance, beginning of year
|
$
|
846
|
|
|
1,370
|
|
Additions
|
182
|
|
|
99
|
|
Reductions due to sales
|
—
|
|
|
(105
|
)
|
Reductions due to valuation write downs
|
(346
|
)
|
|
—
|
|
Balance, end of period
|
$
|
682
|
|
|
1,364
|
|
Other real estate owned at
June 30, 2016
and
December 31, 2015
consisted of (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Commercial real estate
|
$
|
682
|
|
|
$
|
846
|
|
Residential real estate
|
—
|
|
|
—
|
|
|
$
|
682
|
|
|
$
|
846
|
|
The total recorded investment in residential consumer mortgage loans secured by residential real estate that was in the process of foreclosure at
June 30, 2016
was
$477,000
.
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
June 30, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Affordable housing tax credit investment
|
$
|
1,000
|
|
|
1,000
|
|
Less amortization
|
53
|
|
|
12
|
|
Net affordable housing tax credit investment
|
$
|
947
|
|
|
988
|
|
|
|
|
|
Unfunded commitment
|
$
|
865
|
|
|
907
|
|
LCNB expects to fund the unfunded commitment over
9.5 years
.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 7 – Affordable Housing Tax Credit Limited Partnership (continued)
The following table presents other information relating to LCNB's affordable housing tax credit investment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
Six Months ended June 30,
|
|
2016
|
|
2015
|
Tax credits and other tax benefits recognized
|
$
|
55
|
|
|
—
|
|
Tax credit amortization expense included in provision for income taxes
|
41
|
|
|
—
|
|
Note 8 – Short-Term Borrowings
Short-term borrowings at
June 30, 2016
and
December 31, 2015
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Amount
|
|
Rate
|
|
|
Amount
|
|
Rate
|
Line of credit
|
$
|
17,310
|
|
|
1.00
|
%
|
|
$
|
13,187
|
|
|
1.00
|
%
|
FHLB short-term advance
|
—
|
|
|
—
|
%
|
|
10,000
|
|
|
0.35
|
%
|
Repurchase agreements
|
13,231
|
|
|
0.10
|
%
|
|
14,200
|
|
|
0.10
|
%
|
|
$
|
30,541
|
|
|
0.61
|
%
|
|
$
|
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
June 30, 2016
and
December 31, 2015
were fully 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
June 30,
|
|
For the Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Statutory tax rate
|
34.2
|
%
|
|
34.0
|
%
|
|
34.2
|
%
|
|
34.0
|
%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt interest
|
(6.6
|
)%
|
|
(5.4
|
)%
|
|
(6.4
|
)%
|
|
(5.4
|
)%
|
Tax exempt income on bank owned life insurance
|
(1.6
|
)%
|
|
(1.2
|
)%
|
|
(1.5
|
)%
|
|
(1.3
|
)%
|
Other, net
|
—
|
%
|
|
0.4
|
%
|
|
(0.1
|
)%
|
|
0.4
|
%
|
Effective tax rate
|
26.0
|
%
|
|
27.8
|
%
|
|
26.2
|
%
|
|
27.7
|
%
|
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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 10 – Commitments and Contingent Liabilities (continued)
The Bounce Protection product, a customer deposit overdraft program, is offered as a service and does not constitute a contract between the customer and LCNB.
LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent off-balance-sheet credit risk at
June 30, 2016
and
December 31, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31,
2015
|
Commitments to extend credit:
|
|
|
|
Commercial loans
|
$
|
6,956
|
|
|
8,160
|
|
Other loans
|
|
|
|
|
|
Fixed rate
|
5,395
|
|
|
2,293
|
|
Adjustable rate
|
1,707
|
|
|
1,362
|
|
Unused lines of credit:
|
|
|
|
|
|
Fixed rate
|
4,584
|
|
|
6,378
|
|
Adjustable rate
|
84,678
|
|
|
90,153
|
|
Unused overdraft protection amounts on demand and NOW accounts
|
9,858
|
|
|
10,057
|
|
Standby letters of credit
|
357
|
|
|
457
|
|
|
$
|
113,535
|
|
|
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
June 30, 2016
totaled approximately
$7,903,000
, 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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 11 – Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income for the
six
months ended
June 30, 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
|
June 30, 2016
|
|
|
|
|
|
Balance at beginning of period
|
$
|
469
|
|
|
(233
|
)
|
|
236
|
|
Before reclassifications
|
4,526
|
|
|
56
|
|
|
4,582
|
|
Reclassifications
|
(429
|
)
|
|
—
|
|
|
(429
|
)
|
Balance at end of period
|
$
|
4,566
|
|
|
(177
|
)
|
|
4,389
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
1,126
|
|
|
(341
|
)
|
|
785
|
|
Before reclassifications
|
(149
|
)
|
|
58
|
|
|
(91
|
)
|
Reclassifications
|
(219
|
)
|
|
—
|
|
|
(219
|
)
|
Balance at end of period
|
$
|
758
|
|
|
(283
|
)
|
|
475
|
|
Reclassifications out of accumulated other comprehensive income during the
three and six
months ended
June 30, 2016
and
2015
and the affected line items in the consolidated condensed statements of income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
Affected Line Item in the Consolidated Condensed Statements of Income
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Realized gain on sale of securities
|
$
|
279
|
|
|
221
|
|
|
$
|
650
|
|
|
332
|
|
|
Net gain on sales of securities
|
Less provision for income taxes
|
95
|
|
|
75
|
|
|
221
|
|
|
113
|
|
|
Provision for income taxes
|
Reclassification adjustment, net of taxes
|
$
|
184
|
|
|
146
|
|
|
$
|
429
|
|
|
219
|
|
|
|
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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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 condensed statements of income for the
three and six
-month periods ended
June 30, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended June 30,
|
|
For the Six Months
Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Qualified noncontributory defined benefit retirement plan
|
$
|
220
|
|
|
273
|
|
|
$
|
440
|
|
|
543
|
|
401(k) plan
|
77
|
|
|
90
|
|
|
160
|
|
|
177
|
|
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 and six
months ended
June 30, 2016
and
2015
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
10
|
|
|
10
|
|
|
$
|
20
|
|
|
19
|
|
Interest cost
|
|
19
|
|
|
17
|
|
|
38
|
|
|
34
|
|
Amortization of unrecognized net loss
|
|
42
|
|
|
43
|
|
|
84
|
|
|
85
|
|
Net periodic pension cost
|
|
$
|
71
|
|
|
70
|
|
|
$
|
142
|
|
|
138
|
|
Amounts recognized in accumulated other comprehensive income, net of tax, at
June 30, 2016
and
December 31, 2015
for the nonqualified defined benefit retirement plan consists of (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31,
2015
|
Net actuarial loss
|
$
|
177
|
|
|
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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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
June 30, 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
|
|
|
2.6
|
|
17,633
|
|
|
$
|
9.00
|
|
|
2.6
|
$11.00 - $12.99
|
|
53,266
|
|
|
12.04
|
|
|
4.1
|
|
51,521
|
|
|
12.03
|
|
|
4.0
|
$17.00 - $18.99
|
|
5,160
|
|
|
17.88
|
|
|
0.6
|
|
5,160
|
|
|
17.88
|
|
|
0.6
|
|
|
76,059
|
|
|
11.73
|
|
|
3.5
|
|
74,314
|
|
|
11.71
|
|
|
3.4
|
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
|
—
|
|
|
—
|
|
|
(13,449
|
)
|
|
11.31
|
|
Expired
|
(7,802
|
)
|
|
18.76
|
|
|
(2,500
|
)
|
|
9.00
|
|
Outstanding, June 30,
|
76,059
|
|
|
11.73
|
|
|
83,861
|
|
|
12.39
|
|
Exercisable, June 30,
|
74,314
|
|
|
11.71
|
|
|
75,072
|
|
|
12.40
|
|
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
June 30, 2016
that were "in the money" (market price greater than exercise price) was
$320,000
. The aggregate intrinsic value at that date for only the options that were exercisable was
$314,000
. The aggregate intrinsic value for options outstanding at
June 30, 2015
that were in the money was
$349,000
and the aggregate intrinsic value at that date for only the options that were exercisable was
$314,000
. 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 and six
months ended
June 30, 2016
was
$1,000
and
$2,000
, respectively. The related tax benefit for the
three and six
months ended
June 30, 2016
was
$0
and
$1,000
, respectively. Total expense related to options included in salaries and employee benefits for the
three and six
months ended
June 30, 2015
was
$3,000
and
$10,000
, respectively. The related tax benefit for the
three and six
months ended
June 30, 2015
was
$1,000
and
$3,000
, respectively. Unrecognized compensation cost related to option awards to be recognized through the first quarter of 2017 is approximately
$4,000
.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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
|
(5,255
|
)
|
|
15.47
|
|
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding, June 30,
|
10,783
|
|
|
$
|
15.47
|
|
|
—
|
|
|
$
|
—
|
|
Total expense related to restricted stock awards included in salaries and wages in the consolidated condensed statements of income for the
three and six
months ended
June 30, 2016
was
$23,000
and
$45,000
, respectively. The related tax benefit for the
three and six
months end
June 30, 2016
was
$7,000
and
$15,000
, respectively. Unrecognized compensation expense for restricted stock awards was
$113,000
at
June 30, 2016
and is expected to be recognized over a period of
4.5 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 and six
months ended
June 30, 2016
and
2015
(dollars in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended June 30,
|
|
For the Six Months
Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
$
|
2,968
|
|
|
3,123
|
|
|
$
|
5,932
|
|
|
5,957
|
|
Weighted average number of shares outstanding used in the calculation of basic earnings per common share
|
9,922,024
|
|
|
9,694,732
|
|
|
9,919,070
|
|
|
9,504,739
|
|
Add dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
18,299
|
|
|
18,955
|
|
|
17,767
|
|
|
17,629
|
|
Stock warrants
|
—
|
|
|
91,041
|
|
|
32,465
|
|
|
86,682
|
|
Restricted shares
|
3,474
|
|
|
—
|
|
|
2,598
|
|
|
—
|
|
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share
|
9,943,797
|
|
|
9,804,728
|
|
|
9,971,900
|
|
|
9,609,050
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.30
|
|
|
0.33
|
|
|
$
|
0.60
|
|
|
0.63
|
|
Diluted
|
0.29
|
|
|
0.32
|
|
|
0.59
|
|
|
0.62
|
|
Options to purchase
5,160
and
12,962
shares of common stock at a weighted average price of
$17.88
and
$18.41
per share were outstanding at
June 30, 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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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
three
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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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
June 30, 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)
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
$
|
53,981
|
|
|
53,981
|
|
|
—
|
|
|
—
|
|
|
U.S. Agency notes
|
|
115,338
|
|
|
—
|
|
|
115,338
|
|
|
—
|
|
|
U.S. Agency mortgage-backed securities
|
|
48,276
|
|
|
—
|
|
|
48,276
|
|
|
—
|
|
|
Certificates of deposit with other banks
|
|
248
|
|
|
—
|
|
|
248
|
|
|
—
|
|
|
Municipal securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-taxable
|
|
111,233
|
|
|
—
|
|
|
111,233
|
|
|
—
|
|
|
Taxable
|
|
21,226
|
|
|
—
|
|
|
21,226
|
|
|
—
|
|
|
Mutual funds
|
|
1,000
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
Mutual funds measured at net asset value (a)
|
|
1,499
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
49
|
|
|
49
|
|
|
—
|
|
|
—
|
|
|
Equity securities
|
|
678
|
|
|
678
|
|
|
—
|
|
|
—
|
|
|
Total recurring fair value measurements
|
|
$
|
353,528
|
|
|
54,708
|
|
|
297,321
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
3,483
|
|
|
—
|
|
|
—
|
|
|
3,483
|
|
|
Other real estate owned and repossessed assets
|
|
682
|
|
|
—
|
|
|
—
|
|
|
682
|
|
|
Total nonrecurring fair value measurements
|
|
$
|
4,165
|
|
|
—
|
|
|
—
|
|
|
4,165
|
|
|
|
|
|
|
|
|
|
|
|
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 Condensed Balance Sheets.
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED 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
June 30, 2016
and
December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
High
|
|
Low
|
|
Weighted Average
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
3,483
|
|
|
Estimated sales price
|
|
Adjustments for comparable properties, discounts to reflect current market conditions
|
|
Not applicable
|
|
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
8.25
|
%
|
|
4.44
|
%
|
|
5.49
|
%
|
Other real estate owned
|
|
682
|
|
|
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
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 15 - Fair Value Measurements (continued)
Carrying amounts and estimated fair values of financial instruments as of
June 30, 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)
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,007
|
|
|
19,007
|
|
|
19,007
|
|
|
—
|
|
|
—
|
|
Investment securities, held-to-maturity
|
|
39,447
|
|
|
40,282
|
|
|
—
|
|
|
—
|
|
|
40,282
|
|
Federal Reserve Bank stock
|
|
2,732
|
|
|
2,732
|
|
|
2,732
|
|
|
—
|
|
|
—
|
|
Federal Home Loan Bank stock
|
|
3,638
|
|
|
3,638
|
|
|
3,638
|
|
|
—
|
|
|
—
|
|
Loans, net
|
|
797,092
|
|
|
792,749
|
|
|
—
|
|
|
—
|
|
|
792,749
|
|
Accrued interest receivable
|
|
3,514
|
|
|
3,514
|
|
|
168
|
|
|
1,186
|
|
|
2,160
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
1,124,698
|
|
|
1,125,291
|
|
|
908,910
|
|
|
216,381
|
|
|
—
|
|
Short-term borrowings
|
|
30,541
|
|
|
30,541
|
|
|
30,541
|
|
|
—
|
|
|
—
|
|
Long-term debt
|
|
726
|
|
|
749
|
|
|
—
|
|
|
749
|
|
|
—
|
|
Accrued interest payable
|
|
296
|
|
|
296
|
|
|
15
|
|
|
281
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
—
|
|
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 15 - Fair Value Measurements (continued)
The fair values of off-balance-sheet financial instruments at
June 30, 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, held-to-maturity
Fair values for investment securities, held-to-maturity are based on quoted market prices for similar securities and/or discounted cash flow analysis or other methods.
Federal Home Loan Bank stock and Federal Reserve Bank stock
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
From time to time the Financial Accounting Standards Board issues an Accounting Standards Update ("ASU") to communicate changes to Generally Accepted Accounting Principles. The following information provides brief summaries of newly issued but not yet effective ASUs that could have an effect on LCNB’s financial position or results of operations:
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 16 – Recent Accounting Pronouncements (continued)
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.
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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 16 – Recent Accounting Pronouncements (continued)
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.
|
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.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 16 – Recent Accounting Pronouncements (continued)
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.
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. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for ASU No. 2014-09. Adoption of ASU No. 2016-08 is not expected to have a material impact on LCNB's results of operation or financial position.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 16 – Recent Accounting Pronouncements (continued)
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.
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.
|
The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for ASU No. 2014-09. Adoption of ASU No. 2016-10 is not expected to have a material impact on LCNB's results of operation or financial position.
ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients"
ASU No. 2016-12 was issued in May 2016 and affects the guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is not yet effective. The amendments clarify the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, the timing for measuring customer payments that are not in cash, and disclosure requirements by firms using the retrospective method of adoption. The amendments provide a practical expedient for recognizing revenue from contracts that have been modified prior to the transition period to the new standard. ASU No. 2016-12 also says a contract should be considered complete if all, or substantially all, of its revenue has been collected prior to making the transition to the new standard. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements for ASU No. 2014-09. Adoption of ASU No. 2016-12 is not expected to have a material impact on LCNB's results of operation or financial position.
ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
ASU No. 2016-13 was issued in June 2016 and, once effective, will significantly change current guidance for recognizing impairment of financial instruments. Current guidance requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU No. 2016-13 replaces the incurred loss impairment methodology with a new methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to inform credit loss estimates. The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. Additional disclosures are required.
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Note 16 – Recent Accounting Pronouncements (continued)
ASU No. 2016-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Under the new guidance, entities will determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Any credit loss will be recognized as an allowance for credit losses on available-for-sale debt securities rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings rather than as interest income over time, as currently required.
ASU No. 2016-13 eliminates the current accounting model for purchased credit impaired loans and debt securities. Instead, purchased financial assets with credit deterioration will be recorded gross of estimated credit losses as of the date of acquisition and the estimated credit losses amounts will be added to the allowance for credit losses. Thereafter, entities will account for additional impairment of such purchased assets using the models listed above.
ASU No. 2016-13 will take effect for U.S. Securities and Exchange Commission (SEC) filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. LCNB management is currently evaluating the financial statement impact of adopting the new guidance.
LCNB CORP. AND SUBSIDIARIES