Discover The Difference Of Community Banking
Personal Banking • Business Banking • Personal Lending • Commercial Lending
Trust and Wealth Management Services
Serving generations with the financial services they need for 140 years
P.O. Box 59, 2 North Broadway, Lebanon, Ohio 45036
513-932-1414, www.LCNB.com, 800-344-BANK (2265)
2017 Annual Report
Letter to our Shareholders
Dear Shareholders:
The first quarter of 2017 was very busy and that busy
pace continued through the remainder of the year.
We highlighted the new operations center on the
cover of last year’s Annual Report. Nearly eighty
employees re-located to the new building in March.
We also hosted the LCNB
Corp. Annual Meeting in the
new building on April 25th
followed by a ribbon cutting
in May. The 48,000-square
foot building is a proud addi-
tion to downtown Lebanon.
This year’s Annual Meeting
on April 24th at 10:00 a.m.
will again be hosted in the
operations center.
Steve Wilson
We opened a loan production
office in Columbus during
the second quarter of 2017.
That office is a home base for
LCNB National Bank commer-
cial officers that are serving
the Columbus market. As the year progressed LCNB
Corp. and Columbus First Bancorp began discussions
on a merger. Those discussions concluded with an
announcement in late December of LCNB National
Bank agreeing to a merger with Columbus First Bank.
The addition of Columbus First Bank will give LCNB
National Bank a strong presence in Columbus and
expand the product offerings for the Columbus First
Bank customers. Both banks have a culture of provid-
ing a level of service every customer should expect
from their community bank. Although the combined
banks will approach $1.6 billion in total assets, we will
strive to maintain that community bank culture that
has made both banks successful in serving their
customers and communities. John Smiley, currently
President and Chief Lending Officer of Columbus First
Bank, will join LCNB National Bank as Executive Vice
President and Columbus Market President. In addi-
tion, Rhett Huddle, Chairman and Chief Executive
Officer of Columbus First Bank, and another Colum-
bus First Bank board member to be determined will
be appointed to the LCNB Corp. and LCNB National
Bank boards.
In 2017 we experienced sadness with the loss of Becky
Roess who lost her battle with cancer. Becky joined
LCNB National Bank as a trust officer in 2009 and was
Company Headquarters:
2 N. Broadway
P.O. Box 59
Lebanon, OH 45036
(800) 344-2265
Chairman:
Stephen P. Wilson
President & CEO:
Steve P. Foster
Directors:
Spence S. Cropper,
Steve P. Foster,
William H. Kaufman,
Anne E. Krehbiel,
George L. Leasure,
John H. Kochensparger III
Valerie S. Krueckeberg
to succeed Roy McKay, head of the Trust Department,
who was retiring in mid-2017. Mike Miller joined LCNB
National Bank in April to assume the role of head of
Trust with Roy’s retirement.
Last year was another strong year financially for LCNB
National Bank. We finished the year with a strong
return on average assets (ROAA) of
0.99% and a return on average equity
(ROAE) of 8.74%. This compares to a
ROAA of 0.96% and a ROAE of 8.60%
in 2016. Net income was $13 million at
the end of 2017 compared to $12.5
million at the end of 2016. The loan
portfolio grew $29.4 million or 3.6% in
2017. Both the Trust Department and
Investment
Services Department
achieved continued growth in assets
under management during 2017. The
Trust Department grew 19.4% to
$362.5 million in assets under man-
agement and the Investment Services
Department grew 21.4% to $229
million in assets under management.
Steve Foster
Additional statistical data and information on our
financial performance for 2017 is available in the LCNB
Corp. Annual Report on Form 10-K. This report is filed
annually with the Securities and Exchange Commission.
We have enclosed the Form 10-K with the initial mailing
in this report to shareholders and it is available upon
request or from the shareholder information section on
our website, www.LCNB.com or www.lcnbcorp.com.
The Annual Meeting for LCNB Corp. will be Tuesday,
April 24, 2018 at 10:00 a.m. at the Operations Center
located at 105 North Broadway in Lebanon, Ohio.
Proxy material is included with this mailing. Please
review, sign, and return the proxy in the envelope
provided. We would be pleased to have you attend our
annual meeting in person. Thank you for your contin-
ued support.
Stephen P. Wilson
Chairman
Steve P. Foster
President and CEO
Transfer Agent and Registrar:
Computershare, Inc.
Transfer Agent Address:
P.O. Box 43078
Providence, RI 02940
Transfer Agent Telephone:
(800) 942-5909
Office Locations
Butler County
Fairfield
Hamilton
Middletown
Monroe
Oxford
Clermont County
Goshen
Clinton County
Wilmington
Fayette County
Washington Court House
Franklin County
Columbus
Hamilton County
Colerain Township
Loveland
Montgomery County
Brookville
Centerville
Oakwood
Preble County
Eaton (2)
Lewisburg
New Paris
West Alexandria
Ross County
Chillicothe (3)
Frankfort
Warren County
Hunter
Lebanon (5)
Maineville/Hamilton Township
Mason/West Chester
Roachester/Morrow
South Lebanon
Springboro/Franklin
Waynesville
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _______________________ to ______________________
Commission File Number 000-26121
LCNB Corp.
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of incorporation or organization)
31-1626393
(I.R.S. Employer Identification Number)
2 North Broadway, Lebanon, Ohio 45036
(Address of principal executive offices, including Zip Code)
(513) 932-1414
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
None
Name of each exchange on which registered
None
Securities registered pursuant to 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the registrant’s outstanding voting common stock held by nonaffiliates on June 30, 2017,
determined using a per share closing price on that date of $20.00 as quoted on the NASDAQ Capital Market, was
$192,316,000.
As of March 7, 2018, 0 common shares were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement included in the Notice of Annual Meeting of Shareholders to be held April 24, 2018, which
Proxy Statement will be mailed to shareholders within 120 days from the end of the fiscal year ended December 31, 2017 are
incorporated by reference into Part III.
LCNB CORP.
For the Year Ended December 31, 2017
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities.
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL
REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
4
4
15
19
20
22
22
23
23
26
27
38
39
39
40
42
94
94
94
95
95
95
95
95
95
96
97
99
-3-
LCNB CORP. AND SUBSIDIARIES
PART I
Item 1. Business
FORWARD-LOOKING STATEMENTS
Certain statements made in this document regarding LCNB’s financial condition, results of operations, plans, objectives, future
performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933,
as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as
“anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions.
These forward-looking statements reflect management's current expectations based on all information available to management
and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans,
objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ
materially. These factors include, but are not limited to:
the success, impact, and timing of the implementation of LCNB’s business strategies;
1.
2. LCNB’s ability to integrate future acquisitions, including the pending merger with Columbus First Bancorp, Inc., may
be unsuccessful, or may be more difficult, time-consuming or costly than expected;
3. LCNB’s ability to obtain regulatory approvals of the proposed merger of LCNB with Columbus First Bancorp, Inc. on
the proposed
terms and schedule, and approval of the merger by the shareholders of LCNB or Columbus First Bancorp, Inc. may be
unsuccessful;
4. LCNB may incur increased charge-offs in the future;
5. LCNB may face competitive loss of customers;
6. changes in the interest rate environment may have results on LCNB’s operations materially different from those
anticipated by LCNB’s market risk management functions;
7. changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
8. changes in other regulations and government policies affecting bank holding companies and their subsidiaries,
including changes in monetary policies, could negatively impact LCNB’s operating results;
9. LCNB may experience difficulties growing loan and deposit balances;
10. the current economic environment poses significant challenges for us and could adversely affect our financial
condition and results of operations;
11. deterioration in the financial condition of the U.S. banking system may impact the valuations of investments LCNB
has made in the securities of other financial institutions resulting in either actual losses or other than temporary
impairments on such investments; and
12. government intervention in the U.S. financial system, including the effects of recent legislative, tax, accounting and
regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital
ratios of Basel III as adopted by the federal banking authorities and the Tax Cuts and Jobs Act.
Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such
information is provided to assist shareholders and potential investors in understanding current and anticipated financial
operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise
after the date such statements are made.
-4-
LCNB CORP. AND SUBSIDIARIES
DESCRIPTION OF LCNB CORP.'S BUSINESS
General Description
LCNB Corp., an Ohio corporation formed in December 1998, is a financial holding company headquartered in Lebanon,
Ohio. Substantially all of the assets, liabilities and operations of LCNB Corp. are attributable to its wholly-owned subsidiary,
LCNB National Bank (the "Bank"). LCNB Risk Management, Inc., a captive insurance agency, was incorporated in Nevada by
LCNB Corp. during the second quarter 2017. LCNB Corp. and its subsidiaries are herein collectively referred to as “LCNB.”
The predecessor of LCNB Corp., the Bank, was formed as a national banking association in 1877. On May 19, 1999, the Bank
became a wholly-owned subsidiary of LCNB Corp.
On January 11, 2013, LCNB consummated a merger with First Capital Bancshares, Inc. (“First Capital”) in a stock and cash
transaction valued at approximately $20.2 million. Immediately following the merger of First Capital into LCNB, Citizens
National Bank (“Citizens National”), a wholly-owned subsidiary of First Capital, was merged into LCNB National Bank. At
that time, Citizens National’s six full–service offices became offices of LCNB. Three of these offices are located in Chillicothe,
Ohio and one office is located in each of Frankfort, Ohio, Clarksburg, Ohio, and Washington Court House, Ohio. The office in
Clarksburg, Ohio was closed on January 24, 2017.
On January 24, 2014, LCNB purchased all of the outstanding stock of Eaton National Bank & Trust Co. ("Eaton National")
from its holding company, Colonial Banc Corp., in a cash transaction totaling $24.75 million. Upon consummation of the
transaction, Eaton National was merged into the Bank and its five offices became offices of the Bank. Two of these offices are
located in Eaton, Ohio and one office is located in each of New Paris, Ohio, Lewisburg, Ohio, and West Alexandria, Ohio.
On April 30, 2015, LCNB consummated a merger with BNB Bancorp, Inc. (“BNB”) in a stock and cash transaction valued at
approximately $13.5 million. Immediately following the merger of BNB into LCNB, Brookville National Bank ("Brookville
National"), a wholly-owned subsidiary of BNB, was merged into LCNB National Bank. At that time, Brookville National's two
offices, both located in Brookville, Ohio, became offices of LCNB. The office located on Hay Avenue in Brookville was closed
on November 10, 2017.
On December 20, 2017, LCNB and Columbus First Bancorp, Inc. (“CFB”) entered into an Agreement and Plan of Merger
pursuant to which CFB will be merged into LCNB in an all-stock transaction valued at $66.9 million. Immediately following
the merger of CFB into LCNB, Columbus First Bank (“Columbus First”), a wholly-owned subsidiary of CFB, will be merged
into the Bank. Columbus First operates one full-service office in Worthington, Ohio. This office will become a branch of the
Bank after the merger. The transaction is expected to close in the second quarter of 2018, assuming shareholder approval by
LCNB and CFB shareholders and all applicable governmental approvals have been received by that date and all other
conditions precedent to the merger have been satisfied or waived.
The Bank is a full service community bank offering a wide range of commercial and personal banking services. Deposit
services include checking accounts, NOW accounts, savings accounts, Christmas and vacation club accounts, money market
deposit accounts, Lifetime Checking accounts (a senior citizen program), individual retirement accounts, and certificates of
deposit. Additional supportive services include online banking, bill pay, mobile banking and telephone banking. Commercial
customers also have both cash management and remote deposit capture products as potential options. Deposits of the Bank are
insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation (the “FDIC”).
Loan products offered include commercial and industrial loans, commercial and residential real estate loans, agricultural loans,
construction loans, various types of consumer loans, and Small Business Administration loans. The Bank's residential mortgage
lending activities consist primarily of loans for purchasing or refinancing personal residences, home equity lines of credit, and
loans for commercial or consumer purposes secured by residential mortgages. Most fixed-rate residential real estate loans are
sold to the Federal Home Loan Mortgage Corporation with servicing retained. Consumer lending activities include automobile,
boat, home improvement and personal loans.
The Trust and Investment Management Division of the Bank provides complete trust administrative, estate settlement, and
fiduciary services and also offers investment management of trusts, agency accounts, individual retirement accounts, and
foundations/endowments.
-5-
LCNB CORP. AND SUBSIDIARIES
Security brokerage services are offered by the Bank through arrangements with LPL Financial LLC, a registered broker/
dealer. Licensed brokers offer a full range of investment services and products, including financial needs analysis, mutual
funds, securities trading, annuities, and life insurance.
Other services offered include safe deposit boxes, night depositories, cashier's checks, bank-by-mail, ATMs, cash and
transaction services, debit cards, wire transfers, electronic funds transfer, utility bill collections, notary public service, personal
computer-based cash management services, 24 hour telephone banking, PC Internet banking, mobile banking, and other
services tailored for both individuals and businesses.
The Bank is not dependent upon any one significant customer or specific industry. Business is not seasonal to any material
degree.
The address of the main office of the Bank is 2 North Broadway, Lebanon, Ohio 45036; telephone (513) 932-1414.
Primary Market Area
The Bank considers its primary market area to consist of counties where it has a physical presence and neighboring counties,
which includes Southwestern and South Central Ohio. At December 31, 2017, the Bank had:
•
•
•
•
34 offices, including a main office in Warren County, Ohio and branch offices in Warren, Butler, Clinton, Clermont,
Hamilton, Montgomery, Preble, Ross, and Fayette Counties, Ohio,
a loan production office in Franklin County, Ohio,
an Operations Center in Warren County, Ohio,
and 38 ATMs.
Competition
The Bank faces strong competition both in making loans and attracting deposits. The deregulation of the banking industry and
the wide spread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide
interstate banking has created a highly competitive environment for financial services providers. The Bank competes with other
national and state banks, savings and loan associations, credit unions, finance companies, mortgage brokerage firms, realty
companies with captive mortgage brokerage firms, mutual funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries operating in its market and elsewhere, many of whom have substantially larger
financial and managerial resources.
The Bank seeks to minimize the competitive effect of other financial institutions through a community banking approach that
emphasizes direct customer access to the Bank's CEO/President and other officers in an environment conducive to friendly,
informed, and courteous personal services. Management believes that the Bank is well positioned to compete successfully in its
primary market area. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest
rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of
the banking facilities, and, in the case of loans to commercial borrowers, relative lending limits.
The ability to access and use technology is an increasingly competitive factor in the finance services industry. Technology
relating to the delivery of financial services, the security and privacy of customer information, and the processing of
information is evolving rapidly. LCNB must continually make technology investments to remain competitive in the finance
services industry.
Management believes the commitment of the Bank to personal service, innovation, and involvement in the communities and
primary market areas it serves, as well as its commitment to quality community banking service, are factors that contribute to
its competitive advantage.
Supervision and Regulation
LCNB Corp., as a financial holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the
"Act"), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board").
-6-
LCNB CORP. AND SUBSIDIARIES
The Bank is subject to the provisions of the National Bank Act. The Bank is subject to primary supervision, regulation and
examination by the Office of the Comptroller of the Currency (the "OCC"). The Bank is also subject to the rules and regulations
of the Board of Governors of the Federal Reserve System and the FDIC.
LCNB Corp. and the Bank are subject to an extensive array of banking laws and regulations that are intended primarily for the
protection of the Bank's customers and depositors. These laws and regulations govern such areas as permissible activities,
loans and investments, and rates of interest that can be charged on loans and reserves. LCNB and the Bank also are subject to
general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio. Set forth below are brief
descriptions of selected laws and regulations applicable to LCNB and the Bank.
The Financial Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides that a holding company and its controlled
insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of any FDIC assisted
transaction involving an affiliated insured bank or savings association.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the bank regulatory and
funding provisions of the Federal Deposit Insurance Act and several other federal banking statutes. Among its many reforms,
FDICIA, as amended:
1. Required regulatory agencies to take "prompt corrective action" with financial institutions that do not meet minimum
capital requirements;
2. Established five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized,
3.
and critically undercapitalized;
Imposed significant restrictions on the operations of a financial institution that is not rated well-capitalized or
adequately capitalized;
4. Prohibited a depository institution from making any capital distributions, including payments of dividends or paying
any management fee to its holding company, if the institution would be undercapitalized as a result;
Implemented a risk-based premium system;
5.
6. Required an audit committee to be comprised of outside directors;
7. Required a financial institution with more than $500 million in total assets to issue annual, audited financial statements
prepared in conformity with U.S. generally accepted accounting principles; and
8. Required a financial institution with more than $1 billion in total assets to document, evaluate, and report on the
effectiveness of the entity's internal control system and required an independent public accountant to attest to
management's assertions concerning the bank's internal control system.
The members of an audit committee for banks with more than $1 billion in total assets must be independent of
management. FDICIA does not relieve financial institutions that are public companies, such as LCNB, from internal control
reporting and attestation requirements or audit committee independence requirements prescribed by the Sarbanes-Oxley Act of
2002 (see below).
The Gramm-Leach-Bliley Act, which amended the Bank Holding Company Act of 1956 and other banking related laws, was
signed into law on November 12, 1999. The Gramm-Leach-Bliley Act repealed certain sections of the Glass-Steagall Act and
substantially eliminated the barriers separating the banking, insurance, and securities industries. Effective March 11, 2000,
qualifying bank holding companies could elect to become financial holding companies. Financial holding companies have
expanded investment powers, including affiliating with securities and insurance firms and engaging in other activities that are
"financial in nature or incidental to such financial activity," as defined in the act, or "complementary to a financial activity."
The Sarbanes-Oxley Act of 2002 ("SOX") became effective on July 30, 2002. The purpose of SOX is to strengthen accounting
oversight and corporate accountability by enhancing disclosure requirements, increasing accounting and auditor regulation,
creating new federal crimes, and increasing penalties for existing federal crimes. SOX directly impacts publicly traded
companies, certified public accounting firms auditing public companies, attorneys who work for public companies or have
public companies as clients, brokerage firms, investment bankers, and financial analysts who work for brokerage firms or
investment bankers. Key provisions affecting LCNB include:
1. Certification of financial reports by the chief executive officer ("CEO") and the chief financial officer ("CFO"), who
are responsible for designing and monitoring internal controls to ensure that material information relating to the issuer
and its consolidated subsidiaries is made known to the certifying officers by others within the company;
-7-
LCNB CORP. AND SUBSIDIARIES
2.
Inclusion of an internal control report in annual reports that include management's assessment of the effectiveness of a
company's internal control over financial reporting and a report by the company's independent registered public
accounting firm attesting to the effectiveness of internal control over financial reporting;
3. Accelerated reporting of stock trades on Form 4 by directors and executive officers;
4. Disgorgement requirements of incentive pay or stock-based compensation profits received within twelve months of the
release of financial statements if the company is later required to restate those financial statements due to material
noncompliance with any financial reporting requirement that resulted from misconduct;
5. Disclosure in a company's periodic reports stating if it has adopted a code of ethics for its CFO and principal
accounting officer or controller and, if such code of ethics has been implemented, immediate disclosure of any change
in or waiver of the code of ethics;
6. Disclosure in a company's periodic reports stating if at least one member of the audit committee is a "financial expert,"
7.
as that term is defined by the Securities and Exchange Commission (the "SEC"); and
Implementation of new duties and responsibilities for a company's audit committee, including independence
requirements, the direct responsibility to appoint the outside auditing firm and to provide oversight of the auditing
firm's work, and a requirement to establish procedures for the receipt, retention, and treatment of complaints from a
company's employees regarding questionable accounting, internal control, or auditing matters.
In addition, the SEC adopted final rules on September 5, 2002, which rules were amended in December, 2005, requiring
accelerated filing of quarterly and annual reports. Under the amended rules, “large accelerated filers” includes companies with
a market capitalization of $700 million or more and “accelerated filers” includes companies with a market capitalization
between $75 million and $700 million. Large accelerated filers are required to file their annual reports within 60 days of year-
end and quarterly reports within 40 days. Accelerated filers are required to file their annual and quarterly reports within 75 days
and 40 days, respectively. These new accelerated filing deadlines were effective for fiscal years ending on or after December
15, 2005. Under the amended rules, LCNB is considered an accelerated filer.
The Federal Deposit Insurance Reform Act of 2005 and the Federal Deposit Insurance Reform Conforming Amendments Act of
2005 (collectively, the “Deposit Insurance Reform Acts”) were both signed into law during February, 2006. The provisions of
the Deposit Insurance Reform Acts included:
1. Merging the Bank Insurance Fund and the Savings Association Insurance Fund into a new fund called the Deposit
Insurance Fund, effective March 31, 2006;
Increasing insurance coverage for retirement accounts from $100,000 to $250,000, effective April 1, 2006; and
2.
3. Eliminating a 1.25% hard target Designated Reserve Ratio, as defined, and giving the FDIC discretion to set the
Designated Reserve Ratio within a range of 1.15% to 1.50% for any given year.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became effective on July 21,
2010. The Dodd-Frank Act includes provisions that specifically affect financial institutions and other entities providing
financial services and other corporate governance and compensation provisions that will affect most public companies.
The Dodd-Frank Act established a new independent regulatory body within the Federal Reserve System known as the of
Consumer Financial Protection Bureau (the “CFPB”). The CFPB has assumed responsibility for most consumer protection
laws and has broad authority, with certain exceptions, to regulate financial products offered by banks and non-banks. The
CFPB has authority to supervise, examine, and take enforcement actions with respect to depository institutions with more than
$10 billion in assets, non-bank mortgage industry participants, and other CFPB-designated non-bank providers of consumer
financial services. The primary regulator for depository institutions with $10 billion or less in assets will continue to have
primary examination and enforcement authority for these institutions. The regulations enforced, however, will be the
regulations written by the CFPB.
The Dodd-Frank Act directs federal bank regulators to develop new capital requirements for holding companies and depository
institutions that address activities that pose risk to the financial system, such as significant activities in higher risk areas, or
concentrations in assets whose reported values are based on models.
The Dodd-Frank Act permanently raised the FDIC maximum deposit insurance amount to $250,000. In addition, the Dodd-
Frank Act places a floor on the FDIC’s reserve ratio at 1.35% of estimated insured deposits or the comparable percentage of the
assessment base.
-8-
LCNB CORP. AND SUBSIDIARIES
General corporate governance provisions included in the Dodd-Frank Act include expanding executive compensation
disclosures to be included in the annual proxy statement, requiring non-binding shareholder advisory votes on executive
compensation at annual meetings, enhancing independence requirements for compensation committee members and any
advisers used by the compensation committee, and requiring the adoption of certain compensation policies including the
recovery of executive compensation in the event of a financial statement restatement.
Noncompliance with laws and regulations by bank holding companies and banks can lead to monetary penalties and/or an
increased level of supervision or a combination of these two items. Management is not aware of any current significant
instances of noncompliance with laws and regulations and does not anticipate any problems maintaining compliance on a
prospective basis. Recent regulatory inspections and examinations of LCNB and the Bank have not disclosed any significant
instances of noncompliance.
The earnings and growth of LCNB are affected not only by general economic conditions, but also by the fiscal and monetary
policies of the federal government and its agencies, particularly the Federal Reserve Board. Its policies influence the amount of
bank loans and deposits and the interest rates charged and paid thereon and thus have an effect on earnings. The nature of
future monetary policies and the effect of such policies on the future business and earnings of LCNB and the Bank cannot be
predicted.
A substantial portion of LCNB's cash revenues is derived from dividends paid by the Bank. These dividends are subject to
various legal and regulatory restrictions. Generally, dividends are limited to the aggregate of current year retained net income,
as defined, plus the retained net income of the two prior years. In addition, dividend payments may not reduce capital levels
below minimum regulatory guidelines.
Employees
As of December 31, 2017, LCNB employed 310 full-time equivalent employees. LCNB is not a party to any collective
bargaining agreement. Management considers its relationship with its employees to be very good. Employee benefit programs
are considered by management to be competitive with benefit programs provided by other financial institutions and major
employers within LCNB’s market area.
Availability of Financial Information
LCNB files unaudited quarterly financial reports on Form 10-Q, annual financial reports on Form 10-K, current reports on
Form 8-K, and amendments to these reports are filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 with the SEC. Copies of these reports are available free of charge in the shareholder information section of the
Bank's website, www.lcnb.com, as soon as reasonably practicable after they are electronically filed or furnished to the SEC, or
by writing to:
Robert C. Haines II
Executive Vice President, CFO
LCNB Corp.
2 North Broadway
P.O. Box 59
Lebanon, Ohio 45036
Financial reports and other materials filed by LCNB with the SEC may also be read and copied at the SEC's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be
obtained from the SEC by calling 1-800-SEC-0330. The SEC also maintains an internet site (www.sec.gov) that contains
reports, proxy and information statements, and other information regarding registrants that file reports electronically, as LCNB
does.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
LCNB and its subsidiaries do not have any offices located in foreign countries and have no foreign assets, liabilities or related
income and expense for the years presented.
-9-
LCNB CORP. AND SUBSIDIARIES
STATISTICAL INFORMATION
The following tables and certain tables appearing in Item 7, Management's Discussion and Analysis present additional
statistical information about LCNB Corp. and its operations and financial condition. They should be read in conjunction with
the consolidated financial statements and related notes and the discussion included in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures about Market
Risk.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
The table presenting an average balance sheet, interest income and expense, and the resultant average yield for average interest-
earning assets and average interest-bearing liabilities is included in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The table analyzing changes in interest income and expense by volume and rate is included in Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Investment Portfolio
The following table presents the carrying values of securities for the years indicated:
Securities available-for-sale:
U.S. Treasury notes
U.S. Agency notes
U.S. Agency mortgage-backed securities
Certificates of deposit
Municipal securities
Mutual funds
Trust preferred securities
Equity securities
Total securities available-for-sale
Securities held-to-maturity:
Municipal securities
Federal Reserve Bank stock
Federal Home Loan Bank stock
Total securities
2017
At December 31,
2016
(In thousands)
2015
$
2,259
83,261
67,153
—
28,145
85,400
71,047
—
122,540
132,860
2,542
50
667
278,472
2,482
48
677
320,659
72,846
139,889
29,378
249
132,420
2,466
50
680
377,978
32,571
41,003
22,633
2,732
3,638
317,413
$
2,732
3,638
368,032
2,732
3,638
406,981
-10-
LCNB CORP. AND SUBSIDIARIES
Contractual maturities of securities at December 31, 2017, were as follows. Actual maturities may differ from contractual
maturities when issuers have the right to call or prepay obligations.
Amortized
Cost
Available-for-Sale
Fair
Value
Amortized
Cost
Yield
(Dollars in thousands)
Held-to-Maturity
Fair
Value
Yield
U.S. Treasury notes:
Within one year
One to five years
Five to ten years
After ten years
Total U.S. Treasury notes
$
U.S. Agency notes:
Within one year
One to five years
Five to ten years
After ten years
Total U.S. Agency notes
Municipal securities (1):
Within one year
One to five years
Five to ten years
After ten years
Total Municipal securities
U.S. Agency mortgage-backed
securities
Mutual funds
Trust preferred securities
Equity securities
—
—
2,283
—
2,283
998
38,235
45,604
—
84,837
10,224
54,665
54,633
3,640
123,162
68,347
2,586
49
574
—
—
2,259
—
2,259
998
37,805
44,458
—
83,261
10,269
54,648
54,119
3,504
122,540
67,153
2,542
50
667
—% $
—%
2.07%
—%
2.07%
1.40%
1.77%
2.02%
—%
1.90%
3.29%
2.73%
2.94%
2.80%
2.93%
2.17%
2.23%
7.78%
3.59%
—
—
—
—
—
—
—
—
—
—
4,043
4,128
8,415
15,985
32,571
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,047
4,045
8,286
15,972
32,350
—
—
—
—
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
3.15%
2.90%
3.04%
5.81%
4.40%
—%
—%
—%
—%
Totals
$
281,838
278,472
2.40%
32,571
32,350
4.40%
(1) Yields on tax-exempt obligations are computed on a taxable-equivalent basis based upon a 35.0% statutory
Federal income tax rate.
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any
issuer that exceeded 10% of LCNB's consolidated shareholders' equity at December 31, 2017.
Loan Portfolio
Administration of the lending function is the responsibility of the Chief Lending Officer and certain senior lenders. Lenders
perform their duties subject to oversight and policy direction from the Board of Directors and the Loan Committee. The Loan
Committee consists of LCNB’s Chief Executive Officer/President, Chief Financial Officer, Cashier, Chief Lending Officer,
Chief Credit Officer, Loan Operations Officer, Loan Review Officer, Credit Analysis Officer, and the officers in charge of the
commercial, agricultural, and retail loan portfolios.
-11-
LCNB CORP. AND SUBSIDIARIES
Employees authorized to accept loan applications have various, designated lending limits for the approval of loans. A loan
application for an amount outside a particular employee’s lending limit needs to be approved by an employee with a lending
limit sufficient for that loan. Loans secured by residential or commercial real estate require the approval of two individuals
with appropriate lending authority: Chief Executive Officer/President, Chief Lending Officer, Chief Credit Officer, Senior
Vice President ("SVP") of Commercial Lending, SVP of Mortgage Lending, SVP of Consumer Lending, Assistant Vice
President of Secondary Market Lending, or other board-designated lending officers. Board approval is required on any loan
with policy exceptions or that will exceed 50% of the Bank's legal lending limit, rounded down to the previous $100,000, in
aggregate credit to any one borrower or entity, as defined by the OCC in 12 C.F.R § 32.2(b).
Interest rates charged by LCNB vary with degree of risk, type of loan, amount, complexity, repricing frequency and other
relevant factors associated with the loan.
The following table summarizes the distribution of the loan portfolio for the years indicated:
2017
2016
2015
2014
2013
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in thousands)
At December 31,
$ 36,057
4.2% $ 41,878
5.1% $ 45,275
5.9% $ 35,424
5.1% $ 29,337
5.1%
Commercial and
industrial
Commercial, secured
by real estate
Consumer
Agricultural
Other loans,
including deposit
overdrafts
Residential real estate
251,582
29.6% 265,788
32.5% 273,139
35.4% 254,087
36.4% 215,587
527,947
62.2% 477,275
58.2% 419,633
54.5% 379,141
54.3% 314,252
17,450
15,194
2.1%
1.8%
19,173
14,802
2.3%
1.8%
18,510
13,479
2.4%
1.7%
18,006
11,472
2.5%
1.6%
12,643
2,472
54.7%
37.6%
2.2%
0.4%
539
0.1%
633
0.1%
665
0.1%
680
0.1%
91
—%
848,769
100.0% 819,549
100.0% 770,701
100.0% 698,810
100.0% 574,382
100.0%
Deferred origination
costs (fees), net
Total loans
Less allowance for
loan losses
291
849,060
3,403
254
819,803
3,575
237
770,938
3,129
146
698,956
3,121
(28)
574,354
3,588
Loans, net
$ 845,657
$ 816,228
$ 767,809
$ 695,835
$ 570,766
As of December 31, 2017, there were no concentrations of loans exceeding 10% of total loans that are not already disclosed as
a category of loans in the above table, except for loans secured by multifamily properties. Loans secured by multifamily
properties, which are included in the commercial, secured by real estate category in the above table, totaled $85,853,000, or
10.1% of total loans, at December 31, 2017.
-12-
LCNB CORP. AND SUBSIDIARIES
The following table summarizes the commercial and agricultural loan maturities and sensitivities to interest rate change at
December 31, 2017:
Maturing in one year or less
Maturing after one year, but within five years
Maturing beyond five years
Total commercial and agricultural loans
Loans maturing beyond one year:
Fixed rate
Variable rate
Total
Risk Elements
(In thousands)
32,732
$
57,451
489,015
579,198
199,916
346,550
546,466
$
$
$
The following table summarizes non-accrual, past-due, and accruing restructured loans for the dates indicated:
At December 31,
2017
2016
2015
2014
2013
(Dollars in thousands)
Non-accrual loans
Past-due 90 days or more and still
accruing
Accruing restructured loans
Total
Percent to total loans
$
$
2,965
—
10,469
13,434
5,725
23
11,731
17,479
1,723
559
13,723
16,005
5,599
203
14,269
20,071
2,961
250
15,151
18,362
1.58%
2.13%
2.08%
2.87%
3.20%
LCNB is not committed to lend additional funds to debtors whose loans have been modified to provide a reduction or deferral
of principal or interest because of deterioration in the financial position of the borrower.
At December 31, 2017, there were no material additional loans not classified as acquired credit impaired or already disclosed as
non-accrual, accruing restructured, or accruing past due 90 days or more where known information about possible credit
problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present
loan repayment terms.
Summary of Loan Loss Experience
The table summarizing the activity related to the allowance for loan losses is included in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
-13-
LCNB CORP. AND SUBSIDIARIES
Allocation of the Allowance for Loan Losses
The following table presents the allocation of the allowance for loan loss:
At December 31,
2017
2016
2015
2014
2013
Percent
of Loans
in Each
Category
to Total
Loans
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
(Dollars in thousands)
$
378
4.2% $
350
5.1% $
244
5.9% $
129
5.1% $
175
5.1%
2,178
717
76
53
1
—
62.2%
29.6%
2.1%
1.8%
0.1%
—
2,179
885
96
60
5
—
58.2%
32.5%
2.3%
1.8%
0.1%
—
1,908
854
54
66
3
—
54.5%
35.4%
2.4%
1.7%
0.1%
—
1,990
926
63
11
2
—
54.3%
36.4%
2.5%
1.6%
0.1%
—
2,520
826
66
—
1
—
54.7%
37.6%
2.2%
0.4%
—%
—
Commercial and
industrial
Commercial, secured
by real estate
Residential real estate
Consumer
Agricultural
Other loans, including
deposit overdrafts
Unallocated
Total
$ 3,403
100.0% $ 3,575
100.0% $ 3,129
100.0% $ 3,121
100.0% $ 3,588
100.0%
Deposits
The statistical information regarding average amounts and average rates paid for the deposit categories is included in the
"Distribution of Assets, Liabilities and Shareholders' Equity" table included in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
The following table presents the contractual maturity of time deposits of $100,000 or more at December 31, 2017:
Maturity within 3 months
After 3 but within 6 months
After 6 but within 12 months
After 12 months
Return on Equity and Assets
(In thousands)
$
$
4,311
2,830
14,526
44,940
66,607
The statistical information regarding the return on assets, return on equity, dividend payout ratio, and equity to assets ratio is
presented in Item 6, Selected Financial Data.
-14-
LCNB CORP. AND SUBSIDIARIES
Item 1A. Risk Factors
There are risks inherent in LCNB’s operations, many beyond management’s control, which may adversely affect its financial
condition and results from operations and should be considered in evaluating the Company. Credit, market, operational,
liquidity, interest rate and other risks are described elsewhere in this report. Other risk factors may include the items described
below.
New capital requirements could adversely affect LCNB’s capital ratios
On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking
Supervision’s capital guidelines for U.S. bank holding companies as well as state banks that are members of the Federal
Reserve System and savings and loan holding companies (commonly known as Basel III). On July 9, 2013, the OCC adopted
the same rules for national banks and federal savings associations, and the FDIC approved the same provisions, as an interim
final rule, for state nonmember banks and state savings associations.
Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by banks and
savings associations. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common
equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1
capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%.
The phase-in period for the final rules began for LCNB on January 1, 2015, with full compliance with all of the final rules'
requirements phased in over a multi-year schedule through January 1, 2019. While management expects that LCNB's capital
ratios under Basel III will continue to exceed the well capitalized minimum capital requirements, there can be no assurance that
such will be the case. If LCNB is unable to meet or exceed the applicable minimum capital requirements, it may become
subject to supervisory actions ranging in severity from losing its financial holding company status, to being precluded from
making acquisitions or engaging in new activities or becoming subject to informal or formal regulatory enforcement actions.
LCNB’s earnings are significantly affected by market interest rates.
Fluctuations in interest rates may negatively impact LCNB’s profitability. A primary source of income from operations is net
interest income, which is equal to the difference between interest income earned on loans and investment securities and the
interest paid for deposits and other borrowings. These rates are highly sensitive to many factors beyond LCNB’s control,
including general economic conditions, the slope of the yield curve (that is, the relationship between short and long-term
interest rates), and the monetary and fiscal policies of the United States Federal government. LCNB expects the current level of
interest rates and the current slope of the yield curve will cause further downward pressure on its net interest margin.
Increases in general interest rates could have a negative impact on LCNB’s results of operations by reducing the ability of
borrowers to repay their current loan obligations. Some residential real estate mortgage loans, most home equity line of credit
loans, and many of LCNB’s commercial loans have adjustable rates. Borrower inability to make scheduled loan payments due
to a higher loan cost could result in increased loan defaults, foreclosures, and write-offs and may necessitate additions to the
allowance for loan losses. In addition, increases in the general level of interest rates may decrease the demand for new
consumer and commercial loans, thus limiting LCNB’s growth and profitability. A general increase in interest rates may also
result in deposit disintermediation, which is the flow of deposits away from banks and other depository institutions into direct
investments that have the potential for higher rates of return, such as stocks, bonds, and mutual funds. If this occurs, LCNB
may have to rely more heavily on borrowings as a source of funds in the future, which could negatively impact its net interest
margin.
Gains from sales of mortgage loans may experience significant volatility.
Gains from sales of mortgage loans are highly influenced by the level and direction of mortgage interest rates, real estate
activity, and refinancing activity. Current historically low market interest rates created a refinancing demand for residential
fixed-rate mortgage loans. The increased volume of refinancing activity increased gains from sales of mortgage loans as LCNB
sold most of these loans to the Federal Home Loan Mortgage Corporation. An increase in market interest rates may decrease
the demand for refinanced loans and decrease the gains from sales of mortgage loans recognized in LCNB’s consolidated
statements of income. Gains from sales of mortgage loans may also be impacted by changes in LCNB’s strategy to manage its
residential mortgage portfolio. For example, LCNB may occasionally change the proportion of loan originations that are sold in
the secondary market and instead add a greater proportion to its loan portfolio.
-15-
LCNB CORP. AND SUBSIDIARIES
Banking competition in Southwestern and South Central Ohio is intense.
LCNB faces strong competition for deposits, loans, trust accounts, and other services from other banks, savings banks, credit
unions, mortgage brokers, and other financial institutions. Many of LCNB’s competitors include major financial institutions
that have been in business for many years and have established customer bases, numerous branches, and substantially higher
regulatory lending limits. Competitors in the Southwestern and South Central Ohio areas include U.S. Bank, PNC Bank, Fifth
Third Bank, Chase, KeyBank, Park National Bank, Huntington National Bank, and First Financial Bank. In addition, credit
unions are growing larger due to more flexible membership requirement regulations and are offering more financial services
than they legally could in the past.
LCNB also competes with numerous real estate brokerage firms, some owned by realty companies, for residential real estate
mortgage loans. Incentives offered by captive finance companies owned by the major automobile companies have limited the
banking industry’s opportunities for growth in the new automobile loan market. The banking industry now competes with
brokerage firms and mutual fund companies for funds that would have historically been held as bank deposits. Technology has
lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks,
such as automatic transfer and automatic payment systems. Many of these competitors have fewer regulatory constraints and
may have lower cost structures.
If LCNB is unable to attract and retain loan, deposit, brokerage, and trust customers, its growth and profitability levels may be
negatively impacted.
Economic conditions in Southwestern and South Central Ohio could adversely affect LCNB’s financial condition and results of
operations.
LCNB conducts its operations from offices that are located in nine Southwestern and South Central Ohio counties, from which
substantially all of its customer base is drawn. Because of this geographic concentration of operations and customer base,
LCNB's financial performance is heavily influenced by economic conditions in these areas. Any material deterioration in
economic conditions in these markets could have material direct or indirect adverse impacts on LCNB's customers and on
LCNB. Such deterioration could increase the number of customers experiencing financial distress, negatively impacting their
ability to obtain new loans or to repay existing loans. As a result, LCNB may experience increases in the levels of impaired
loans, increased charge-offs, and increased provisions for loan losses. Deteriorating economic conditions may also affect the
ability of depositors to maintain or add to deposit balances and may affect the demand for loans, trust, brokerage, and other
products and services offered by LCNB. Such losses and decreased demand could have material adverse affects on LCNB's
financial position, results of operations, and cash flows.
The allowance for loan losses may be inadequate.
The provision for loan losses is determined by management based upon its evaluation of the amount needed to maintain the
allowance for loan losses at a level considered appropriate in relation to the estimated risk of losses inherent in the portfolio. In
addition to historic charge-off percentages, factors taken into consideration to determine the adequacy of the allowance for loan
losses include the nature, volume, and consistency of the loan portfolio, overall portfolio quality, a review of specific problem
loans, the fair value of any underlying collateral, borrowers’ cash flows, and current economic conditions that may affect
borrowers’ ability to make payments. Increases in the allowance result in an expense for the period. By its nature, the
evaluation is imprecise and requires significant judgment. Actual results may vary significantly from management’s
assumptions. If, as a result of general economic conditions or a decrease in asset quality, management determines that
additional increases in the allowance for loan losses are necessary, LCNB will incur additional expenses.
LCNB’s loan portfolio includes a substantial amount of commercial and industrial loans and commercial real estate loans,
which may have more risks than residential or consumer loans.
LCNB’s commercial and industrial and commercial real estate loans comprise a substantial portion of its total loan portfolio.
These loans generally carry larger loan balances and involve a greater degree of financial and credit risk than home equity,
residential mortgage, or consumer loans. The increased financial and credit risk associated with these types of loans is a result
of several factors, including the concentration of principal in a limited number of loans, the size of loan balances, the effects of
general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these
types of loans.
-16-
LCNB CORP. AND SUBSIDIARIES
The repayment of loans secured by commercial real estate is often dependent upon the successful operation, development, or
sale of the related real estate or commercial business and may, therefore, be subject to adverse conditions in the real estate
market or economy. If the cash flow from operations is reduced, the borrower’s ability to repay the loan may be impaired. In
such cases, LCNB may take one or more actions to protect its financial interest in the loan. Such actions may include
foreclosure on the real estate securing the loan, taking possession of other collateral that may have been pledged as security for
the loan, or modifying the terms of the loan. If foreclosed on, commercial real estate is often unique and may not be as salable
as a residential home.
The fair value of LCNB’s investments could decline.
Most of LCNB’s investment securities portfolio is designated as available-for-sale. Accordingly, unrealized gains and losses,
net of tax, in the estimated fair value of the available-for-sale portfolio is recorded as other comprehensive income, a separate
component of shareholders’ equity. The fair value of LCNB’s investment portfolio may decline, causing a corresponding
decline in shareholders’ equity. Management believes that several factors will affect the fair values of the investment portfolio
including, but not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities
markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve. These and other factors may
impact specific categories of the portfolio differently and the effect any of these factors may have on any specific category of
the portfolio cannot be predicted.
Many state and local governmental authorities have experienced deterioration of financial condition in recent years due to
declining tax revenues, increased demand for services, and various other factors. To the extent LCNB has any municipal
securities in its portfolio from issuers who are experiencing deterioration of financial condition or who may experience future
deterioration of financial condition, the value of such securities may decline and could result in other-than-temporary
impairment charges, which could have an adverse effect on LCNB’s financial condition and results of operations. Additionally,
a general, industry-wide decline in the fair value of municipal securities could significantly affect LCNB’s financial condition
and results of operations.
Changes in income tax laws or interpretations or in accounting standards could materially affect LCNB’s financial condition or
results of operations.
Changes in income tax laws could be enacted, or interpretations of existing income tax laws could change, causing an adverse
effect to LCNB’s financial condition or results of operations. Similarly, new accounting standards may be issued by the
Financial Accounting Standards Board (the “FASB”) or existing standards revised, changing the methods for preparing
financial statements. These changes are not within LCNB’s control and may significantly impact its reported financial condition
and results of operations.
LCNB is subject to environmental liability risk associated with lending activities.
A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank
may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic
substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for
remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur
substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the
affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws
may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an
environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all
potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental
hazard could have a material adverse effect on LCNB’s financial condition and results of operations.
The banking industry is highly regulated.
LCNB is subject to regulation, supervision, and examination by the Federal Reserve Board and the Bank is subject to
regulation, supervision, and examination by the OCC. LCNB and the Bank are also subject to regulation and examination by
the FDIC as the deposit insurer. The CFPB is responsible for most consumer protection laws and has broad authority, with
certain exceptions, to regulate financial products offered by banks. Federal and state laws and regulations govern numerous
matters including, but not limited to, changes in the ownership or control of banks, maintenance of adequate capital,
permissible business operations, maintenance of deposit insurance, protection of customer financial privacy, the level of
reserves held against deposits, restrictions on dividend payments, the making of loans, and the acceptance of deposits. See the
previous section titled “Supervision and Regulation” for more information on this subject.
-17-
LCNB CORP. AND SUBSIDIARIES
Federal regulators may initiate various enforcement actions against a financial institution that violates laws or regulations or
that operates in an unsafe or unsound manner. These enforcement actions may include, but are not limited to, the assessment of
civil money penalties, the issuance of cease-and-desist or removal orders, and the imposition of written agreements.
Proposals to change the laws governing financial institutions are periodically introduced in Congress and proposals to change
regulations are periodically considered by the regulatory bodies. Such future legislation and/or changes in regulations could
increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among
banks, savings associations, credit unions, and other financial institutions. The likelihood of any major changes in the future
and their effects are impossible to predict.
Federal income tax reform could have unforeseen effects on our financial condition and results of operations.
On December 22, 2017, the President of the United States signed into law H.R. 1, originally known as the “Tax Cuts and Jobs
Act.” The Company is still in the process of analyzing the Tax Cuts and Jobs Act and its possible effects on the Company. The
Tax Cuts and Jobs Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent to
21 percent, effective January 1, 2018. There are also provisions that may partially offset the benefit of such rate reduction.
Financial statement impacts include adjustments for, among other things, the re-measurement of deferred tax assets and
liabilities. While there are benefits, there is also substantial uncertainty regarding the details of U.S. Tax Reform. The intended
and unintended consequences of Tax Cuts and Jobs Act on our business and on holders of our common shares is uncertain and
could be adverse. The Company anticipates that the impact of Tax Cuts and Jobs Act may be material to our business, financial
condition and results of operations.
FDIC deposit insurance assessments may materially increase in the future.
Deposits of LCNB are insured up to statutory limits by the Federal Deposit Insurance Corporation (FDIC) and, accordingly,
LCNB and other banks and financial institutions pay quarterly premiums to the FDIC to maintain the Deposit Insurance Fund.
The likelihood and extent of future rate increases are indeterminable.
Future growth and expansion opportunities may contain risks.
From time to time LCNB may seek to acquire other financial institutions or parts of those institutions or may engage in de novo
branch expansion. It may also consider and enter into new lines of business or offer new products or services. Such activities
involve a number of risks, which may include potential inaccuracies in estimates and judgments used to evaluate the expansion
opportunity, diversion of management and employee attention, lack of experience in a new market or product or service, and
difficulties in integrating a future acquisition or introducing a new product or service. There is no assurance that such growth or
expansion activities will be successful or that they will achieve desired profitability levels.
The financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government
policy.
At this time, it is difficult to predict the legislative and regulatory changes that will result from the combination of a new
President of the United States and the first year since 2010 in which both Houses of Congress and the White House have
majority memberships from the same political party. In recent years, however, both the new President and senior members of
the House of Representatives have advocated for significant reduction of financial services regulation, to include amendments
to the Dodd-Frank Act and structural changes to the CFPB. The new Administration and Congress also may cause broader
economic changes due to changes in governing ideology and governing style. New appointments to the Board of Governors of
the Federal Reserve could affect monetary policy and interest rates and changes in fiscal policy could affect broader patterns of
trade and economic growth. Future legislation, regulation, and government policy could affect the banking industry as a whole,
including LCNB's business and results of operations, in ways that are difficult to predict. In addition, LCNB's results of
operations could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or
applied by courts and government agencies.
LCNB’s controls and procedures may fail or be circumvented.
Management regularly reviews and updates LCNB’s internal controls, disclosure controls and procedures, and corporate
governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or
circumvention of LCNB’s controls and procedures or failure to comply with regulations related to its controls and procedures
could have a material adverse effect on LCNB’s business, results of operations, and financial condition.
-18-
LCNB CORP. AND SUBSIDIARIES
LCNB’s information systems may experience an interruption or breach in security.
LCNB relies heavily on communications and information systems to conduct its business. Any failure, interruption, or breach in
security of these systems could result in failures or disruptions in LCNB’s customer relationship management, general ledger,
deposit, loan, and other systems. While LCNB has policies and procedures designed to prevent or limit the effect of the failure,
interruption, or security breach of its information systems, there can be no assurance that any such occurrences will not occur
or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of
LCNB’s information systems could damage LCNB’s reputation, result in a loss of customer business, subject LCNB to
additional regulatory scrutiny, or expose LCNB to civil litigation and possible financial liability, any of which could have a
material adverse effect on its financial condition and results of operations.
LCNB continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. LCNB’s future success depends, in part, upon its ability to address customer needs by
using technology to provide products and services that will satisfy customer demands, as well as to create additional
efficiencies in LCNB’s operations. LCNB may not be able to effectively implement new technology-driven products and
services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with
technological change affecting the financial services industry could negatively affect LCNB’s growth, revenue and profit.
Emergence of nonbank alternatives to the financial system.
Consumers may decide not to use banks to complete their financial transactions. Technology and other changes, including the
emergence of “Fintech Companies,” are allowing parties to complete financial transactions through alternative methods that
historically have involved banks. For example, consumers can complete transactions, such as paying bills and/or transferring
funds, directly without the assistance of banks. The process of eliminating banks as intermediaries, known as
“disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income
generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have
a material adverse effect on our financial condition and results of operations.
Risk factors related to LCNB’s trust business.
Competition for trust business is intense. Competitors include other commercial bank and trust companies, brokerage firms,
investment advisory firms, mutual fund companies, accountants, and attorneys.
LCNB’s trust business is directly affected by conditions in the debt and equity securities markets. The debt and equity
securities markets are affected by, among other factors, domestic and foreign economic conditions and the monetary and fiscal
policies of the United States Federal government, all of which are beyond LCNB’s control. Changes in economic conditions
may directly affect the economic performance of the trust accounts in which clients’ assets are invested. A decline in the fair
value of the trust accounts caused by a decline in general economic conditions directly affects LCNB’s trust fee income because
such fees are primarily based on the fair value of the trust accounts. In addition, a sustained decrease in the performance of the
trust accounts or a lack of sustained growth may encourage clients to seek alternative investment options.
The management of trust accounts is subject to the risk of mistaken distributions, poor investment choices, and miscellaneous
other incorrect decisions. Such mistakes may give rise to surcharge actions by beneficiaries, with damages substantially in
excess of the fees earned from management of the accounts.
LCNB’s ability to pay cash dividends is limited.
LCNB is dependent upon the earnings of the Bank for funds to pay dividends on its common shares. The payment of dividends
by LCNB and the Bank is subject to certain regulatory restrictions. As a result, any payment of dividends in the future will be
dependent, in large part, on the ability of LCNB and the Bank to satisfy these regulatory restrictions and on the Bank’s
earnings, capital levels, financial condition, and other factors. Although LCNB’s financial earnings and financial condition
have allowed it to declare and pay periodic cash dividends to shareholders, there can be no assurance that the current dividend
policy or the amount of dividend distributions will continue in the future.
Item 1B. Unresolved Staff Comments
Not applicable
-19-
LCNB CORP. AND SUBSIDIARIES
Item 2. Properties
The Bank conducts its business from the following offices:
Name of Office
Address
County
1. Main Office
2. Auto Bank
3. Barron Street Office
4. Bridge Street Office
5. Brookville Office
6. Centerville Office
7. Chillicothe Office
8. Colerain Township Office
9. Columbus Avenue Office
10. Eaton Office
11. Fairfield Office
12. Frankfort Office
13. Goshen Office
14. Hamilton Office
15. Hunter Office
16. Lewisburg Office
17. Loveland Office
2 North Broadway
Lebanon, Ohio 45036
Silver and Mechanic Streets
Lebanon, Ohio 45036
1697 North Barron Street
Eaton, Ohio 45320
1240 North Bridge Street
Chillicothe, Ohio 45601
Warren
Owned
Warren
Owned
Preble
Leased
Ross
Owned
225 West Upper Lewisburg Salem Road
Brookville, Ohio 45309
Montgomery
Owned
9605 Dayton-Lebanon Pike
Centerville, Ohio 45458
33 West Main Street
Chillicothe, Ohio 45601
3209 West Galbraith Road
Cincinnati, Ohio 45239
730 Columbus Avenue
Lebanon, Ohio 45036
110 West Main Street
Eaton, Ohio 45320
765 Nilles Road
Fairfield, Ohio 45014
Springfield and Main Streets
Frankfort, Ohio 45628
6726 Dick Flynn Blvd.
Goshen, Ohio 45122
794 NW Washington Blvd.
Hamilton, Ohio 45013
3878 State Route 122
Franklin, Ohio 45005
522 South Commerce Street
Lewisburg, Ohio 45338
500 Loveland-Madeira Road
Loveland, Ohio 45140
-20-
Montgomery
Owned
Ross
Owned
Hamilton
Owned
Warren
Owned
Preble
Butler
Ross
Owned
Leased
Owned
Clermont
Owned
Butler
Owned
Warren
Owned
Preble
Owned
Hamilton
Owned
LCNB CORP. AND SUBSIDIARIES
Name of Office
Address
County
18. Maineville Office
19. Mason/West Chester Office
20. Middletown Office
21. Monroe Office
22. New Paris Office
23. Oakwood Office
24. Otterbein Office
25. Oxford Office (1)
26. Rochester/Morrow Office
27. South Lebanon Office
28. Springboro/Franklin Office
29. Warrior Office
7795 South State Route 48
Maineville, Ohio 45039
1050 Reading Road
Mason, Ohio 45040
4441 Marie Drive
Middletown, Ohio 45044
101 Clarence F. Warner Drive
Monroe, Ohio 45050
201 South Washington Street
New Paris, Ohio 45347
2705 Far Hills Avenue
Oakwood, Ohio 45419
Otterbein Retirement Community
State Route 741
Lebanon, Ohio 45036
30 West Park Place
Oxford, Ohio 45056
Route 22-3 at 123
Morrow, Ohio 45152
603 Corwin Nixon Blvd.
South Lebanon, Ohio 45065
525 West Central Avenue
Springboro, Ohio 45066
Lebanon High School
1916 Drake Road
Lebanon, Ohio 45036
Warren
Owned
Warren
Owned
Butler
Butler
Owned
Owned
Preble
Owned
Montgomery
(2)
Warren
Leased
Butler
(2)
Warren
Owned
Warren
Owned
Warren
Owned
Warren
Leased
30. Washington Court House Office
100 Crossings Drive
Washington Court House, Ohio 43160
Fayette
Owned
31. Waynesville Office
32. West Alexandria Office
33. Western Avenue Office
34. Wilmington Office
9 North Main Street
Waynesville, Ohio 45068
55 East Dayton Street
West Alexandria, Ohio 45381
1006 Western Avenue
Chillicothe, Ohio 45601
1243 Rombach Avenue
Wilmington, Ohio 45177
Warren
Owned
Preble
Owned
Ross
Owned
Clinton
Owned
35. Loan Production Office
1500 West Third Ave., Suite 205 & 209
Grandview Heights, Ohio 43212
Franklin
Leased
-21-
LCNB CORP. AND SUBSIDIARIES
Name of Office
Address
County
36. Operations Center
105 North Broadway
Lebanon, Ohio 45036
Warren
Owned
(1)
(2)
Excess space in this office is leased to third parties.
The Bank owns the Oakwood and Oxford office buildings and leases the land.
Item 3. Legal Proceedings
Except for routine litigation incidental to its businesses, LCNB is not a party to any material pending legal proceedings and
none of its property is the subject of any material proceedings.
Item 4. Mine Safety Disclosures
Not Applicable.
-22-
LCNB CORP. AND SUBSIDIARIES
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities.
LCNB had approximately 962 registered holders of its common stock as of December 31, 2017. The number of shareholders
includes banks and brokers who act as nominees, each of whom may represent more than one shareholder. LCNB’s stock
trades on the NASDAQ Capital Market exchange under the symbol “LCNB.”
Trade prices for shares of LCNB Common Stock and cash dividends per share declared and paid are set forth below. The trade
prices shown below are interdealer without retail markups, markdowns, or commissions.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total dividends declared
$
High
24.35
23.90
21.85
22.84
2017
Low
20.80
19.00
18.05
19.40
Dividends
Declared
0.16
0.16
0.16
0.16
0.64
High
17.75
17.24
19.13
25.00
2016
Low
15.51
15.69
15.73
16.55
Dividends
Declared
0.16
0.16
0.16
0.16
0.64
It is expected that LCNB will continue to pay dividends on a similar schedule, to the extent permitted by business and potential
factors beyond management's control.
LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to
its shareholders. National banking law limits the amount of dividends the Bank may pay to the sum of retained net income, as
defined, for the current year plus retained net income for the previous two calendar years. Prior approval from the OCC, the
Bank’s primary regulator, would be necessary for the Bank to pay dividends in excess of this amount. In addition, dividend
payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to
pay anticipated ordinary dividends to LCNB without needing to request approval.
During the period of this report, LCNB did not sell any of its securities that were not registered under the Securities Act.
On April 17, 2001, LCNB's Board of Directors authorized three separate stock repurchase programs, two of which continue to
be in effect – the “Market Repurchase Program and the “Private Sale Repurchase Program.” Any shares purchased will be held
for future corporate purposes.
Under the Market Repurchase Program, LCNB was originally authorized to purchase up to 200,000 shares of its stock through
market transactions with a selected stockbroker. On November 14, 2005, the Board of Directors extended the Market
Repurchase Program by increasing the shares authorized for repurchase to 400,000 total shares. Through December 31, 2017,
290,444 shares have been purchased under this program. No shares were purchased under the Market Repurchase Program
during 2017 and 2016.
The Private Sale Repurchase Program is available to shareholders who wish to sell large blocks of stock at one time. Because
LCNB's common stock is not widely traded, a shareholder releasing large blocks may not be able to readily sell all shares
through normal procedures. Purchases of blocks will be considered on a case-by-case basis and will be made at prevailing
market prices. There is no limit to the number of shares that may be purchased under this program. A total of 466,018 shares
have been purchased under this program since its inception through December 31, 2017. No shares were purchased under the
Private Sale Repurchase Program during 2017 and 2016.
LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for the issuance of up to 200,000
shares of stock-based awards to eligible employees, as determined by the Board of Directors. The awards could be in the form
of stock options, share awards, and/or appreciation rights. The 2002 Plan expired on April 16, 2012. Outstanding, unexercised
options continue to be exercisable in accordance with their terms.
-23-
LCNB CORP. AND SUBSIDIARIES
The 2015 Ownership Incentive Plan (the "2015 Plan") was approved 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. This plan provides for the issuance of up to 450,000 shares and will terminate on April 28, 2025, unless earlier
terminated by the Compensation Committee.
The following table shows information relating to stock options outstanding under the 2002 Plan and 2015 Plan at December
31, 2017:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of
Securities to
be Issued
upon Exercise
of
Outstanding
Options
Weighted
Average
Exercise Price
of
Outstanding
Options
Number of
Securities
Remaining
Available
for Future
Issuance
20,265
—
20,265
$
$
11.42
—
11.42
429,935
—
429,935
-24-
LCNB CORP. AND SUBSIDIARIES
The graph below provides an indicator of cumulative total shareholder returns for LCNB as compared with the NASDAQ
Composite, the SNL Midwest OTC-BB and Pink Sheet Banks, and the SNL Midwest Bank indexes. This graph covers the
period from December 31, 2012 through December 31, 2017. The cumulative total shareholder returns included in the graph
reflect the returns for the shares of common stock of LCNB. The information provided in the graph assumes that $100 was
invested on December 31, 2012 in LCNB common stock, the NASDAQ Composite, and the SNL Midwest Bank Index and that
all dividends were reinvested.
Index
LCNB Corp.
NASDAQ Composite Index
SNL Midwest Bank index
Source: S&P Global Market Intelligence
© 2017
Period Ending
12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017
$
$
$
100.00
100.00
100.00
135.14
140.12
136.91
118.72
160.78
148.84
134.15
171.97
151.10
197.63
187.22
201.89
179.39
242.71
216.95
-25-
LCNB CORP. AND SUBSIDIARIES
Item 6. Selected Financial Data
The following represents selected consolidated financial data of LCNB for the years ended December 31, 2013 through 2017
and are derived from LCNB's consolidated financial statements. Certain prior year data presented in this table have been
reclassified to conform with the current year presentation. This data should be read in conjunction with the consolidated
financial statements and the notes thereto included in Item 8 of this Form 10-K and Management's Discussion and Analysis of
Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk included in
Items 7 and 7A, respectively, of this Form 10-K, and are qualified in their entirety thereby and by other detailed information
elsewhere in this Form 10-K.
Income Statement:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Provision for income taxes
Net income
Dividends per common share
Earnings per common share:
Basic
Diluted
Balance Sheet:
Securities
Loans, net
Total assets
Total deposits
Short-term borrowings
Long-term debt
Total shareholders' equity
$
$
$
$
2017
44,463
3,599
40,864
215
40,649
10,458
33,863
17,244
4,272
12,972
For the Years Ended December 31,
2015
(Dollars in thousands, except per share data)
2014
2016
43,750
3,504
40,246
913
39,333
10,853
33,261
16,925
4,443
12,482
42,659
3,328
39,331
1,366
37,965
10,123
32,392
15,696
4,222
11,474
39,477
3,590
35,887
930
34,957
9,142
30,844
13,255
3,386
9,869
2013
33,497
4,065
29,432
588
28,844
9,090
26,212
11,722
2,942
8,780
0.64
0.64
0.64
0.64
0.64
1.30
1.29
1.26
1.25
1.18
1.17
1.06
1.05
1.12
1.10
317,413
845,657
1,295,638
1,085,821
47,000
303
150,271
368,032
816,228
1,306,799
1,110,905
42,040
598
142,944
406,981
767,809
1,280,531
1,087,160
37,387
5,947
140,108
314,074
695,835
1,108,066
946,205
16,645
11,357
125,695
279,021
570,766
932,338
785,761
8,655
12,102
118,873
Selected Financial Ratios and Other Data:
Return on average assets
Return on average equity
Equity-to-assets ratio
Dividend payout ratio
Net interest margin, fully taxable equivalent
0.99%
8.74%
11.60%
49.23%
3.58%
0.96%
8.60%
10.94%
50.79%
3.51%
0.94%
8.43%
10.94%
54.24%
3.64%
0.88%
8.04%
11.34%
60.38%
3.66%
0.93%
9.02%
12.75%
57.14%
3.57%
Eaton National merged with and into LCNB as of the close of business on January 24, 2014. As of the date of the merger,
LCNB recorded additional loans of $115.9 million and additional deposits of $165.3 million.
BNB merged with and into LCNB as of the close of business on April 30, 2015. As of the date of the merger, LCNB recorded
additional loans of $34.7 million and additional deposits of $99.1 million.
-26-
LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following is management's discussion and analysis of the consolidated financial condition and consolidated results of
operations of LCNB. It is intended to amplify certain financial information regarding LCNB and should be read in conjunction
with the consolidated financial statements and related notes contained in the 2017 Annual Report to Shareholders.
Overview
Net income for 2017 was $12,972,000 (basic and diluted earnings per share of $1.30 and $1.29, respectively), compared to
$12,482,000 (basic and diluted earnings per share of $1.26 and $1.25) in 2016 and $11,474,000 (total basic and diluted earnings
per share of $1.18 and $1.17) in 2015.
The following items significantly affected earnings for the years indicated:
• The completion of a merger with BNB Bancorp, Inc. on April 30, 2015.
•
Impaired loans with a carrying value of approximately $4.5 million were sold during the second quarter 2015,
significantly improving LCNB's loan quality metrics.
• Net gain on sales of securities was significantly greater in 2016 as compared to 2017 and 2015 due primarily to market
rates at the time of the sales. In addition, the amount of securities sold in 2017 was less than the amounts sold in 2016
and 2015.
• Other real estate owned expense was greater in 2016 and 2015 as compared to 2017 because of valuation writedowns
and losses on sales recognized during 2016 and 2015. Other real estate owned properties held during 2017 were
minimal.
• Other non-interest expense for 2017 included $154,000 in organizational costs for LCNB Risk Management, Inc. and
$113,000 in losses from sales of fixed assets, primarily due to the sale of a closed office building.
• Other non-interest expense for 2016 included a $251,000 penalty incurred to pre-pay a Federal Home Loan Bank
borrowing bearing an interest rate of 5.25%. The borrowing was pre-paid to reduce future interest expense.
• As a result of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017, LCNB revalued its net
deferred tax liability position to reflect the reduction in its federal corporate income tax rate from 35% to 21%. This
revaluation resulted in a one-time income tax benefit of approximately $224,000, or $0.02 of basic and diluted
earnings per common share for the year ended December 31, 2017.
Net Interest Income
LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other
investments and interest paid on deposits and other liabilities. The following table presents, for the years indicated, average
balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting
average yields earned or rates paid.
-27-
Federal funds sold
Interest-bearing
demand deposits
Federal Reserve
Bank stock
Federal Home
Loan Bank stock
Investment
securities:
Taxable
Non-taxable (2)
Total earning
assets
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
LCNB CORP. AND SUBSIDIARIES
Average
Outstanding
Balance
2017
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
2016
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
2015
Interest
Earned/
Paid
Average
Yield/
Rate
Years ended December 31,
(Dollars in thousands)
Loans (1)
$
822,452
36,571
4.45% $
792,526
35,600
4.49% $
740,626
35,285
—
7,972
2,732
3,638
—
88
164
182
—%
—
1.10%
12,394
6.00%
5.00%
2,732
3,638
—
59
164
146
—%
452
0.48%
12,245
6.00%
4.01%
2,495
3,638
1
30
152
146
4.76%
0.22%
0.24%
6.09%
4.01%
208,918
143,394
4,328
4,815
2.07%
3.36%
243,559
140,692
4,582
4,862
1.88%
3.46%
245,410
115,215
4,197
4,315
1.71%
3.75%
1,189,106
46,148
3.88%
1,195,541
45,413
3.80%
1,120,081
44,126
3.94%
Non-earning assets
123,800
Allowance for loan
losses
(3,405)
Total assets
$ 1,309,501
112,909
(3,318)
107,919
(2,888)
$ 1,305,132
$ 1,225,112
Savings deposits
$
645,471
594
0.09% $
654,891
652
0.10% $
608,925
545
0.09%
IRA and time
certificates
Short-term
borrowings
Long-term debt
Total interest-
bearing
liabilities
Demand deposits
Other liabilities
Capital
Total
liabilities
and capital
Net interest rate
spread (3)
Net interest income
and net interest
margin on a tax
equivalent basis (4)
Ratio of interest-
earning assets to
interest-bearing
liabilities
205,540
2,784
1.35%
217,228
2,788
1.28%
219,562
2,464
1.12%
23,976
421
875,408
274,855
10,795
148,443
209
12
0.87%
2.85%
17,952
826
38
26
0.21%
3.15%
15,105
6,177
24
295
0.16%
4.78%
3,599
0.41%
890,897
259,060
10,014
145,161
3,504
0.39%
849,769
230,608
8,590
136,145
3,328
0.39%
$ 1,309,501
$ 1,305,132
$ 1,225,112
3.47%
3.41%
3.55%
42,549
3.58%
41,909
3.51%
40,798
3.64%
135.83%
134.20%
131.81%
(1) Includes non-accrual loans if any.
(2) Income from tax-exempt securities is included in interest income on a taxable-equivalent basis. Interest income has been
divided by a factor comprised of the complement of the incremental tax rate of 35.0% for 2017, 34.2% for 2016, and 34%
for 2015.
(3) The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing
liabilities.
(4) The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.
-28-
LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in interest income and expense for each major category of interest-earning assets and
interest-bearing liabilities and the amount of change attributable to volume and rate changes for the years indicated. Changes
not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of
absolute dollar amounts of the changes in each.
For the years ended December 31,
2017 vs. 2016
2016 vs. 2015
Increase (decrease) due to
Rate
Total
Volume
Increase (decrease) due to
Rate
Total
Volume
Interest income attributable to:
Loans (1)
Federal funds sold
Interest-bearing demand deposits
Federal Reserve Bank stock
Federal Home Loan Bank stock
Investment securities:
Taxable
Non-taxable (2)
Total interest income
Interest expense attributable to:
Savings deposits
IRA and time certificates
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
$
$
1,334
—
(27)
—
—
(690)
92
709
(9)
(154)
17
(12)
(158)
867
(In thousands)
971
—
29
—
36
(254)
(47)
735
(58)
(4)
171
(14)
95
640
2,395
(1)
—
14
—
(32)
900
3,276
43
(26)
5
(193)
(171)
3,447
(2,080)
—
29
(2)
—
417
(353)
(1,989)
64
350
9
(76)
347
(2,336)
(363)
—
56
—
36
436
(139)
26
(49)
150
154
(2)
253
(227)
315
(1)
29
12
—
385
547
1,287
107
324
14
(269)
176
1,111
(1) Non-accrual loans, if any, are included in average loan balances.
(2) Change in interest income from non-taxable investment securities is computed based on interest income determined on a
taxable-equivalent yield basis. Interest income has been divided by a factor comprised of the complement of the
incremental tax rate of 35.0% for 2017, 34.2% for 2016, and 34% for 2015.
2017 vs. 2016. Net interest income on a fully tax-equivalent basis for 2017 totaled $42,549,000, an increase of $640,000 from
2016. The increase resulted from an increase in total taxable-equivalent interest income of $735,000, slightly offset by an
increase in total interest expense of $95,000.
The increase in total interest income was due primarily to a $971,000 increase in loan interest income caused by a $29.9 million
increase in average loans, partially offset by a 4 basis point (a basis point equals 0.01%) decrease in the average rate earned on
loans. Partially offsetting the increase in loan interest income was a $254,000 decrease in interest income from taxable
investment securities and a $47,000 decrease in taxable-equivalent interest income from non-taxable investment securities.
Interest income from taxable investment securities decreased due to a $34.6 million decrease in average taxable investment
securities, partially offset by a 19 basis point increase in the average rate earned on these securities. Interest income from non-
taxable investment securities decreased due to a 10 basis point decrease in the average rate earned on these securities, partially
offset by a $2.7 million increase in non-taxable investment securities.
-29-
LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The increase in total interest expense was primarily due to a $171,000 increase in interest paid on short-term borrowings,
partially offset by decreases in interest paid on savings deposits, IRA and time certificates, and long-term debt. Short-term
borrowings increased due to a 66 basis point increase in the average rate paid and, secondarily, due to a $6.0 million increase in
the average balance of borrowings outstanding. Interest paid on savings deposits decreased due to a 1 basis point decrease in
the average rate paid and due to a $9.4 million decrease in average deposits outstanding. IRA and time certificates decreased
due to an $11.7 million decrease in average certificates outstanding, largely offset by a 7 basis point increase in the average rate
paid. Long-term debt decreased primarily due to a $405,000 decrease in average debt outstanding and to a 30 basis point
decrease in the average rate paid.
2016 vs. 2015. Net interest income on a fully tax-equivalent basis for 2016 totaled $41,909,000, an increase of $1,111,000
from 2015. The increase resulted from an increase in total taxable-equivalent interest income of $1,287,000, slightly offset by
an increase in total interest expense of $176,000.
The increase in taxable-equivalent interest income was due to a $75.5 million increase in total average interest-earning assets,
slightly offset by a 14 basis point decrease in the average rate earned on interest-earning assets. The increase in total average
interest-earning assets reflects an increase of $51.9 million in average loans and a $25.5 million increase in non-taxable
investment securities. The decrease in the average rate earned was primarily due to general decreases in market rates.
Interest expense increased primarily due to a 16 basis point increase in the average rate paid on IRA and time certificates and a
1 basis point increase in the average rate paid on savings deposits, partially offset by a 163 basis point decrease in the rate paid
on long-term debt. The rate variance was partially offset by a $5.4 million decrease in average long-term debt. The decrease in
the average rate paid on long-term debt and the decrease in the average balance of long-term debt was due to the pre-payment
in full during the first quarter of 2016 of a $5.0 million borrowing from the Federal Home Loan Bank of Cincinnati bearing an
interest rate of 5.25%. The borrowing was pre-paid to reduce future interest expense.
-30-
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
LCNB CORP. AND SUBSIDIARIES
Provisions and Allowance for Loan Losses
The following table presents the total loan loss provision and the other changes in the allowance for loan losses for the years
2013 through 2017:
Balance – Beginning of year
$
3,575
3,129
3,121
3,588
3,437
2017
2016
2015
(Dollars in thousands)
2014
2013
Loans charged off:
Commercial and industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other loans, including deposit overdrafts
Total loans charged off
Recoveries:
Commercial and industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other loans, including deposit overdrafts
Total recoveries
Net charge offs
Provision charged to operations
Balance - End of year
—
462
225
90
—
138
915
99
113
140
114
—
62
528
387
215
$
3,403
234
185
127
85
—
119
750
26
98
52
53
—
54
283
467
100
1,133
304
52
67
74
261
573
652
129
—
79
1,730
1,694
7
96
107
60
67
35
372
42
63
40
108
—
44
297
1,358
1,397
119
58
244
181
—
67
669
4
26
31
127
—
44
232
437
913
3,575
1,366
3,129
930
3,121
588
3,588
Ratio of net charge-offs during the period to average
loans outstanding
0.05%
0.06%
0.18%
0.21%
0.08%
Ratio of allowance for loan losses to total loans at
year-end
0.40%
0.44%
0.41%
0.45%
0.62%
Charge-offs for the commercial, secured by real estate category had an elevated balance during 2015 due to the sale of impaired
loans.
Charge-offs and recoveries classified as “Other” include charge-offs and recoveries on checking and NOW account
overdrafts. LCNB charges off such overdrafts when considered uncollectible, but no later than 60 days from the date first
overdrawn.
LCNB continuously reviews the loan portfolio for credit risk through the use of its lending and loan review
functions. Independent loan reviews analyze specific loans, providing validation that credit risks are appropriately identified
and reported to the Loan Committee and Board of Directors. In addition, the Board of Directors’ Audit Committee receives
loan review reports throughout each year. New credits meeting specific criteria are analyzed prior to origination and are
reviewed by the Loan Committee and Board of Directors.
-31-
LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Inputs from all of the Bank’s credit risk identification processes are used by management to analyze and validate the adequacy
and methodology of the allowance quarterly. The analysis includes two basic components: specific allocations for individual
loans and general loss allocations for pools of loans based on average historic loss ratios for the sixty preceding months
adjusted for identified economic and other risk factors. Due to the number, size, and complexity of loans within the loan
portfolio, there is always a possibility of inherent undetected losses.
Non-Interest Income
A comparison of non-interest income for 2017, 2016, and 2015 is as follows:
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
Increase (Decrease)
Fiduciary income
Service charges and fees on deposit accounts
$
3,473
5,236
Net gains on sales of securities
Bank owned life insurance income
Net gains from sales of loans
Other operating income
Total non-interest income
(In thousands)
3,286
5,008
1,082
746
244
487
3,262
4,920
495
625
343
478
233
867
166
483
10,458
10,853
10,123
187
228
(849)
121
(78)
(4)
(395)
24
88
587
121
(99)
9
730
Reasons for material increases and decreases include:
•
•
Fiduciary income increased during 2017 due to an increase in assets managed and to fee adjustments.
Service charges and fees on deposit accounts increased during 2017 due to fee adjustments on certain services and
greater customer utilization of various services.
• Comparing 2017 to 2016, net gains on sales of securities were less during 2017 primarily due to a lower volume of
sales. Comparing 2016 to 2015, net gains were greater in 2016 primarily due to market rates at the times of the sales.
• Comparing 2017 to 2016, bank owned life insurance income was greater for 2017 primarily due to mortality benefits
received during the second quarter. Comparing 2016 to 2015, income was greater for 2016 primarily due to $4 million
of new policies purchased during the first quarter 2016.
• Comparing 2017 to 2016, net gains from sales of loans was less for 2017 primarily due to a lower volume of loans
sold. Comparing 2016 to 2015, net gains were less, even though a higher volume of loans were sold during 2016, due
to market pricing at the times of the sales.
-32-
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
LCNB CORP. AND SUBSIDIARIES
Non-Interest Expense
A comparison of non-interest expense for 2017, 2016, and 2015 is as follows:
Salaries and employee benefits
Equipment expenses
Occupancy expense, net
State financial institutions tax
Marketing
Amortization of intangibles
FDIC premiums
ATM expense
Computer maintenance and supplies
Telephone expense
Contracted services
Other real estate owned
Merger-related expenses
Other non-interest expense
Total non-interest expense
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
Increase (Decrease)
$
18,585
1,172
2,613
1,137
873
751
423
572
882
735
1,255
10
118
4,737
33,863
(In thousands)
17,593
1,257
2,307
1,001
720
700
598
698
782
707
842
489
643
4,055
32,392
18,215
1,048
2,271
1,114
696
753
547
721
790
746
1,033
624
—
4,703
33,261
370
124
342
23
177
(2)
(124)
(149)
92
(11)
222
(614)
118
34
602
622
(209)
(36)
113
(24)
53
(51)
23
8
39
191
135
(643)
648
869
Reasons for material increases and decreases include:
•
Salaries and employee benefits were 2.0% greater in 2017 than in 2016 and 2016 was 3.5% greater than in 2015. The
increase for 2017 was primarily due to salary and wage increases, an increase in the number of employees, and an
increase in health insurance costs, partially offset by a net decrease in pension expenses. The increase for 2016 was
primarily due to salary and wage increases and employees retained from the acquisition of BNB Bancorp, Inc. on April
30, 2015, partially offset by a net decrease in pension expenses. The number of full-time equivalent employees was
310 at December 31, 2017, 282 at December 31, 2016, and 280 at December 31, 2015.
• Comparing 2017 to 2016, equipment expenses increased primarily due to increased depreciation expense on furniture
and equipment purchased for the new Operations Center. Comparing 2016 to 2015, equipment expenses decreased
primarily due to a decrease in depreciation expense.
• Occupancy expense for 2017 increased primarily due to increased depreciation on bank premises and, secondarily, to
increased maintenance-related expenses, both primarily due to the new Operations Center.
• Marketing expense increased in 2017 primarily due to expanded use of television and digital methods of advertising.
•
FDIC premiums decreased in 2017 primarily due to a change in the calculation method used to determine periodic
premiums.
• ATM expense for 2017 decreased primarily due to a change in the ATM network that processes PIN-based
transanctions.
• Contracted services for 2017 increased largely due to fees paid to professional placement services firms, enhanced
utilization of loan review specialists, fees related to an after-hours call answering service, and costs related to moving
departments from the Main Office to the Operations Center. The increase in 2016 reflects increased use of outside
professionals in general.
• Other real estate owned expense decreased during 2017 because other real estate owned property held during the year
was minimal.
• Merger-related expenses for 2015 related to the acquisition of BNB Bancorp. Inc. Merger-related expenses for 2017
relate to the pending acquisition of Columbus First Bancorp, Inc.
• Other non-interest expense for 2017 included $154,000 in organizational costs for LCNB Risk Management, Inc. and
$113,000 in losses from sales of fixed assets, primarily due to the sale of a closed office building. Other non-interest
expense for 2016 included a $251,000 penalty incurred during the first quarter 2016 to pre-pay a Federal Home Loan
Bank borrowing. The borrowing bore an interest rate of 5.25% and was paid off to reduce future interest expense.
-33-
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
LCNB CORP. AND SUBSIDIARIES
Income Taxes
LCNB's effective tax rates for the years ended December 31, 2017, 2016, and 2015 were 24.8%, 26.3%, and 26.9%,
respectively. The difference between the statutory rate of 35% for 2017, 34.2% for 2016, and 34.0% for 2015 and the effective
tax rate is primarily due to tax-exempt interest income, tax-exempt earnings from bank owned life insurance, and tax credits
and losses related to investments in affordable housing tax credit limited partnerships. The statutory rate for 2017 and 2016 is
higher because LCNB's taxable income increased into the next tax bracket.
As a result of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017, LCNB revalued its net deferred tax
liability position to reflect the reduction in its federal corporate income tax rate from 35% to 21%. This revaluation resulted in a
one-time income tax benefit of approximately $224,000, or $0.02 of basic and diluted earnings per common share for the year
ended December 31, 2017.
Assets
Total cash and cash equivalents were $6.5 million greater at December 31, 2017 than at December 31, 2016 primarily due to
shrinkage in the investment securities portfolios and an increase in short-term borrowings, partially offset by growth in the loan
portfolio and shrinkage in total deposits.
Available-for-sale and held-to-maturity investment securities at December 31, 2017 were respectively $42.2 million less and
$8.4 million less than at December 31, 2016. Management used the decrease in investment funds to fund loan growth, to fund
deposit shrinkage, and to maintain liquidity.
Net loans at year-end 2017 were $29.4 million greater than at year-end 2016, primarily due to a $50.7 million increase in the
commercial, secured by real estate loans. This increase was partially offset by a $5.8 million decrease in commercial and
industrial loans, a $14.2 million decrease in residential real estate loans, and a $1.7 million decrease in consumer loans. The
increase in the loan portfolio does not reflect $7.5 million of residential fixed-rate real estate loans that were originated and sold
to the Federal Home Loan Mortgage Corporation during 2017.
Net premises and equipment at December 31, 2017 was $4.7 million greater than at December 31, 2016 primarily due to
construction costs for the new Operations Center in Lebanon, Ohio.
Liabilities
Total deposits at December 31, 2017 were $25.1 million less than at December 31, 2016. Part of the decrease can be attributed
to growth in two off-balance sheet investment alternatives offered by LCNB. Assets managed by LCNB Investment Services, a
brokerage partnership with LPL Financial LLC, grew from $188.7 million at December 31, 2016 to $229.0 at December 31,
2017. In addition, LCNB introduced a new product during 2017 that sweeps funds from larger balance LCNB deposits into
multiple smaller balance, FDIC-insured deposits at other banks.
Short-term borrowings at December 31, 2017 were $5.0 million greater than at December 31, 2016. The additional borrowings
were used for liquidity purposes.
Liquidity
Liquidity is the ability to have funds available at all times to meet the commitments of LCNB. These commitments may
include paying dividends to shareholders, funding new loans for borrowers, funding withdrawals by depositors, paying general
and administrative expenses, and funding capital expenditures. Sources of liquidity include growth in deposits, principal
payments received on loans, proceeds from the sale of loans, the sale or maturation of investment securities, cash generated by
operating activities, and the ability to borrow funds. Management closely monitors the level of liquid assets available to meet
ongoing funding requirements. It is management's intent to maintain adequate liquidity so that sufficient funds are readily
available at a reasonable cost. LCNB experienced no liquidity or operational problems during the past year as a result of
current liquidity levels.
The liquidity of LCNB is enhanced by the fact that 85.1% of total deposits at December 31, 2017 were "core" deposits. Core
deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000.
-34-
LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquid assets include cash and cash equivalents, federal funds sold and securities available-for-sale. Except for investments in
the stock of the Federal Reserve Bank and the Federal Home Loan Bank of Cincinnati (“FHLB”) and certain local municipal
securities, all of LCNB's investment portfolio is classified as "available-for-sale" and can be readily sold to meet liquidity
needs, subject to certain pledging commitments for public funds, repurchase agreements, and other requirements. At December
31, 2017, LCNB's liquid assets amounted to $303.9 million or 23.5% of total assets, compared to $339.5 million or 26.0% of
total assets at December 31, 2016. The ratio for 2017 is less than 2016 because of a decrease in securities available-for-sale.
An additional source of funding is borrowings from the FHLB. Long-term advances totaling $303,000 and short-term advances
totaling $47.0 million were outstanding at December 31, 2017. Total remaining available borrowing capacity with the FHLB,
including short-term advances, at December 31, 2017 was approximately $56.3 million. One of the factors limiting availability
of FHLB borrowings is a bank’s ownership of FHLB stock. LCNB could increase its available borrowing capacity by
purchasing more FHLB stock.
Besides short-term FHLB advances, short-term borrowings may include federal funds purchased and advances from lines of
credit with two other financial institutions. At December 31, 2017, LCNB could borrow up to $30 million through the lines of
credit and up to $10 million under a federal funds arrangements with another financial institution.
Commitments to extend credit at December 31, 2017 totaled $150.7 million, including standby letters of credit totaling
$294,000, and are more fully described in Note 14 - Commitments and Contingent Liabilities to LCNB's consolidated financial
statements. Since many commitments to extend credit may expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
The following table provides information concerning LCNB's contractual obligations at December 31, 2017:
Total
1 year
or less
Payments due by period
Over 3
Over 1
through 5
through 3
years
years
More than
5 years
Short-term borrowings
Long-term debt obligations
Operating lease obligations
Estimated pension plan contribution for 2018
Funding commitments for affordable housing tax
credit limited partnerships
Estimated capital expenditure obligations
Certificates of deposit:
$100,000 and over
Other time certificates
Total
$
47,000
47,000
(In thousands)
—
303
4,459
224
2,257
40
248
321
224
784
40
55
450
—
856
—
—
—
325
—
213
—
66,607
125,292
246,182
$
21,667
42,787
113,071
29,243
54,939
85,543
15,264
25,773
41,575
—
—
3,363
—
404
—
433
1,793
5,993
The following table provides information concerning LCNB's commitments at December 31, 2017:
Commitments to extend credit
Unused lines of credit
Standby letters of credit
Total
Amount of Commitment Expiration Per Period
Total
Amounts
Committed
1 year
or less
Over 1
through 3
years
Over 3
through 5
years
More than
5 years
(In thousands)
22,861
52,094
294
75,249
—
39,044
—
39,044
—
17,659
—
17,659
—
18,775
—
18,775
$
22,861
127,572
294
$
150,727
-35-
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
LCNB CORP. AND SUBSIDIARIES
Capital Resources
LCNB and the Bank are required by banking regulators to meet certain minimum levels of capital adequacy. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a material effect on LCNB's and the Bank's financial statements. These minimum levels are expressed
in the form of certain ratios. Capital is separated into Tier 1 capital (essentially shareholders' equity less goodwill and other
intangibles) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). Common
Equity Tier 1 Capital is the sum of common stock, related surplus, and retained earnings, net of treasury stock, accumulated
other comprehensive income, and other adjustments. The first three ratios, which are based on the degree of credit risk in the
Bank's assets, provide for weighting assets based on assigned risk factors and include off-balance sheet items such as loan
commitments and stand-by letters of credit. Information summarizing the regulatory capital of LCNB and the Bank at
December 31, 2017 and 2016 and corresponding regulatory minimum requirements is included in Note 15 - Regulatory Matters
of the consolidated financial statements.
The FDIC, the insurer of deposits in financial institutions, has adopted a risk-based insurance premium system based in part on
an institution's capital adequacy. Under this system, a depository institution is required to pay successively higher premiums
depending on its capital levels and its supervisory rating by its primary regulator. It is management's intention to maintain
sufficient capital to permit the Bank to maintain a "well capitalized" designation (the FDIC's highest rating).
On April 17, 2001, LCNB's Board of Directors authorized three separate stock repurchase programs, two of which continue to
be in effect – the “Market Repurchase Program” and the “Private Sale Repurchase Program.” Any shares purchased will be
held for future corporate purposes.
Under the Market Repurchase Program, LCNB was originally authorized to purchase up to 200,000 shares of its stock, as
restated for a 100% stock dividend issued in May, 2007, through market transactions with a selected stockbroker. On
November 14, 2005, the Board of Directors extended the Market Repurchase Program by increasing the shares authorized for
repurchase to 400,000 total shares, as restated for a stock dividend. Through December 31, 2017, 290,444 shares, as restated
for the stock dividend, had been purchased under this program. No shares were purchased under this program during 2017.
The Private Sale Repurchase Program is available to shareholders who wish to sell large blocks of stock at one time. Because
LCNB's stock is not widely traded, a shareholder releasing large blocks may not be able to readily sell all shares through
normal procedures. Purchases of blocks will be considered on a case-by-case basis and will be made at prevailing market
prices. A total of 466,018 shares, as restated for the stock dividend, had been purchased under this program at December 31,
2017. No shares were purchased under this program during 2017.
LCNB established an Ownership Incentive Plan during 2002 that allowed for stock-based awards to eligible employees. Under
the plan, awards could be in the form of stock options, share awards, and/or appreciation rights. The plan provided for the
issuance of up to 200,000 shares, as restated for a stock dividend. The 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 approved 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.
Critical Accounting Policies
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the
principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that
management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectibility
of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that
may affect the borrowers' ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
-36-
LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The allowance consists of specific and general components. The specific component relates to loans that are classified as
doubtful, substandard, or special mention. For such loans an allowance is established when the discounted cash flows or
collateral value is lower than the carrying value of that loan. The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the
volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and
borrower financial statement exceptions.
Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses
inherent in the current loan portfolio.
Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the acquisition method of accounting, which requires
that assets acquired and liabilities assumed be measured at their fair values at the acquisition date. Acquired loans are reviewed
to determine if there is evidence of deterioration in credit quality since inception and if it is probable that LCNB will be unable
to collect all amounts due under the contractual loan agreements. The analysis includes expected prepayments and estimated
cash flows including principal and interest payments at the date of acquisition. The amount in excess of the estimated future
cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the
loan is accreted into interest income over the remaining life of the loan (accretable yield). LCNB records these loans on the
acquisition date at their net realizable value. Thus, an allowance for estimated future losses is not established on the acquisition
date. Subsequent to the date of acquisition, expected future cash flows on loans acquired are updated and any losses or
reductions in estimated cash flows which arise subsequent to the date of acquisition are reflected as a charge through the
provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a
prospective basis over the remaining life of the loan. Due to the number, size, and complexity of loans within the acquired loan
portfolio, there is always a possibility of inherent undetected losses.
Accounting for Intangibles. LCNB’s intangible assets at December 31, 2017 are composed primarily of goodwill and core
deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded
from sales of fixed-rate mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights
acquired through the acquisition of Eaton National Bank & Trust Co. Goodwill is not subject to amortization, but is reviewed
annually for impairment. Core deposit intangibles are being amortized on a straight line basis over their respective estimated
weighted average lives. Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage
servicing rights and the loans based on their estimated fair values. Capitalized mortgage servicing rights are amortized to loan
servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.
Fair Value Accounting for Investment Securities. Securities classified as available-for-sale are carried at estimated fair
value. Unrealized gains and losses, net of taxes, are reported as accumulated other comprehensive income or loss in
shareholders’ equity. Fair value is estimated using market quotations for U.S. Treasury and equity investments. Fair value for
the majority of the remaining available-for-sale securities is estimated using the discounted cash flow method for each security
with discount rates based on rates observed in the market.
-37-
LCNB CORP. AND SUBSIDIARIES
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk for LCNB is primarily interest rate risk. LCNB attempts to mitigate this risk through asset/liability management
strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. LCNB does
not use derivatives such as interest rate swaps, caps or floors to hedge this risk. LCNB has not entered into any market risk
instruments for trading purposes.
The Bank's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity
Analysis (IRSA) and Economic Value of Equity (EVE) analysis for measuring and managing interest rate risk. The IRSA
model is used to estimate the effect on net interest income during a one-year period of instantaneous and sustained movements
in interest rates, also called interest rate shocks, of 100, 200, and 300 basis points. Management considers the results of any
significant downward scenarios to not be meaningful in the current interest rate environment. The base projection uses a
current interest rate scenario. As shown below, the December 31, 2017 IRSA indicates that an increase in interest rates at all
shock levels will have a positive effect on net interest income. The changes in net interest income for all rate assumptions are
within LCNB’s acceptable ranges.
Rate Shock Scenario in
Basis Points
Up 300
Up 200
Up 100
Base
Amount
(In thousands)
46,728
$
45,975
45,239
44,532
$ Change in
Net Interest
Income
% Change in
Net Interest
Income
2,196
1,443
707
—
4.93%
3.24%
1.59%
—%
IRSA shows the effect on net interest income during a one-year period only. A more long-range model is the EVE analysis,
which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash
outflows for interest-bearing liabilities for the same rate shocks. As shown below, the December 31, 2017 EVE analysis
indicates that an increase in interest rates would have a negative effect on the EVE for all shock levels. The changes in the
EVE for all rate assumptions are within LCNB’s acceptable ranges.
Rate Shock Scenario in
Basis Points
Up 300
Up 200
Up 100
Base
Amount
(In thousands)
151,988
$
152,730
152,384
154,472
$ Change in
EVE
% Change in
EVE
(2,484)
(1,742)
(2,088)
—
(1.61)%
(1.13)%
(1.35)%
— %
The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as
being indicative of future operating results. Assumptions used, including the nature and timing of interest rate levels, yield
curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment
or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure
future net interest income or equity. Furthermore, the models do not reflect actions that borrowers, depositors, and management
may take in response to changing economic conditions and interest rate levels.
-38-
LCNB CORP. AND SUBSIDIARIES
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
LCNB Corp. (“LCNB”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial
statements included in this annual report. Management of LCNB and its subsidiaries is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15f. LCNB’s
internal control over financial reporting is a process designed under the supervision of LCNB’s Chief Executive Officer and the
Chief Financial Officer. The purpose is to provide reasonable assurance to the Board of Directors regarding the reliability of
financial reporting and the preparation of LCNB’s consolidated financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
Management maintains internal controls over financial reporting. The internal controls contain control processes and actions are
taken to correct deficiencies as they are identified. The internal controls are evaluated on an ongoing basis by LCNB’s
management and Audit Committee. Even effective internal controls, no matter how well designed, have inherent limitations –
including the possibility of circumvention or overriding of controls – and therefore can provide only reasonable assurance with
respect to financial statement preparation. Also, because of changes in conditions, internal control effectiveness may vary over
time.
Management assessed LCNB’s internal controls as of December 31, 2017, in relation to criteria for effective internal control
over financial reporting described in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based on this assessment, management believes that, as of December 31,
2017, LCNB’s internal control over financial reporting met the criteria.
BKD LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of LCNB’s
internal control over financial reporting as of December 31, 2017.
Submitted by:
LCNB Corp.
/s/ Steve P. Foster
Steve P. Foster
Chief Executive Officer & President
March 8, 2018
/s/ Robert C. Haines II
Robert C. Haines II
Executive Vice President &
Chief Financial Officer
March 8, 2018
-39-
LCNB CORP. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Shareholders
LCNB Corp.
Lebanon, Ohio
BKD TO PROVIDE
/s/ BKD, LLP
BKD, LLP
Indianapolis, Indiana
March 8, 2018
-40-
LCNB CORP. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Shareholders
LCNB Corp.
Lebanon, Ohio
BKD TO PROVIDE
/s/ BKD, LLP
BKD, LLP
Indianapolis, Indiana
March 8, 2018
-41-
LCNB CORP. AND SUBSIDIARIES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 31,
(Dollars in thousands)
ASSETS:
Cash and due from banks
Interest-bearing demand deposits
Total cash and cash equivalents
Investment securities:
Available-for-sale, at fair value
Held-to-maturity, at cost
Federal Reserve Bank stock, at cost
Federal Home Loan Bank stock, at cost
Loans, net
Premises and equipment, net
Goodwill
Core deposit and other intangibles
Bank owned life insurance
Other assets
TOTAL ASSETS
LIABILITIES:
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Long-term debt
Accrued interest and other liabilities
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Preferred shares - no par value, authorized 1,000,000 shares, none outstanding
Common shares - no par value; authorized 19,000,000 shares at December 31, 2017 and
2016; issued 10,776,686 and 10,751,652 shares at December 31, 2017 and 2016,
respectively
Retained earnings
Treasury shares at cost, 753,627 shares at December 31, 2017 and 2016
Accumulated other comprehensive loss, net of taxes
TOTAL SHAREHOLDERS' EQUITY
$
$
$
2017
2016
21,159
4,227
25,386
18,378
487
18,865
278,472
32,571
2,732
3,638
845,657
34,927
30,183
3,799
27,985
10,288
1,295,638
283,212
802,609
1,085,821
47,000
303
12,243
1,145,367
—
—
320,659
41,003
2,732
3,638
816,228
30,244
30,183
4,582
27,307
11,358
1,306,799
271,332
839,573
1,110,905
42,040
598
10,312
1,163,855
—
—
76,977
87,301
(11,665)
(2,342)
150,271
76,490
80,736
(11,665)
(2,617)
142,944
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
1,295,638
1,306,799
The accompanying notes to consolidated financial statements are an integral part of these statements.
-42-
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
(Dollars in thousands, except per share data)
2017
2016
2015
INTEREST INCOME:
Interest and fees on loans
Interest on investment securities:
Taxable
Non-taxable
Other investments
TOTAL INTEREST INCOME
INTEREST EXPENSE:
Interest on deposits
Interest on short-term borrowings
Interest on long-term debt
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
PROVISION FOR LOAN LOSSES
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
NON-INTEREST INCOME:
Fiduciary income
Service charges and fees on deposit accounts
Net gains on sales of securities
Bank owned life insurance income
Net gains from sales of loans
Other operating income
TOTAL NON-INTEREST INCOME
NON-INTEREST EXPENSE:
Salaries and employee benefits
Equipment expenses
Occupancy expense, net
State financial institutions tax
Marketing
Amortization of intangibles
FDIC premiums
ATM expense
Computer maintenance and supplies
Telephone expense
Contracted services
Other real estate owned
Merger-related expenses
Other non-interest expense
TOTAL NON-INTEREST EXPENSE
INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
Earnings per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
36,571
4,328
3,130
434
44,463
3,378
209
12
3,599
40,864
215
40,649
3,473
5,236
233
867
166
483
10,458
18,585
1,172
2,613
1,137
873
751
423
572
882
735
1,255
10
118
4,737
33,863
17,244
4,272
12,972
1.30
1.29
$
$
35,600
4,582
3,199
369
43,750
3,440
38
26
3,504
40,246
913
39,333
3,286
5,008
1,082
746
244
487
10,853
18,215
1,048
2,271
1,114
696
753
547
721
790
746
1,033
624
—
4,703
33,261
16,925
4,443
12,482
1.26
1.25
35,285
4,197
2,848
329
42,659
3,009
24
295
3,328
39,331
1,366
37,965
3,262
4,920
495
625
343
478
10,123
17,593
1,257
2,307
1,001
720
700
598
698
782
707
842
489
643
4,055
32,392
15,696
4,222
11,474
1.18
1.17
10,005,575
10,012,511
9,948,057
9,976,370
9,704,965
9,811,467
The accompanying notes to consolidated financial statements are an integral part of these statements.
-43-
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(Dollars in thousands)
Net income
Other comprehensive income (loss):
2017
2016
2015
$
12,972
12,482
11,474
Net unrealized gain (loss) on available-for-sale securities (net of tax
expense (benefit) of $285, $(1,242), and $(169) for 2017, 2016, and 2015,
respectively)
585
(2,390)
(329)
Reclassification adjustment for net realized gain on sale of available-for-
sale securities included in net income (net of tax expense of $81, $370,
and $168 for 2017, 2016 and 2015, respectively)
(152)
(712)
(327)
Change in nonqualified pension plan unrecognized net gain (loss) and
unrecognized prior service cost (net of tax expense (benefit) of $(53),
$128, and $55 for 2017, 2016, and 2015, respectively)
(158)
249
107
Other comprehensive income (loss)
275
(2,853)
(549)
TOTAL COMPREHENSIVE INCOME
$
13,247
9,629
10,925
SUPPLEMENTAL INFORMATION:
COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS), NET OF TAX, AS OF YEAR-END:
Net unrealized gain (loss) on securities available-for-sale
Net unfunded liability for nonqualified pension plan
Balance at year-end
$
$
(2,200)
(142)
(2,342)
(2,633)
16
(2,617)
469
(233)
236
The accompanying notes to consolidated financial statements are an integral part of these statements.
-44-
Total
Shareholders'
Equity
125,695
11,474
(549)
390
9,063
152
13
19
90
(6,239)
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31,
(Dollars in thousands, except share data)
Common
Shares
Outstanding
Common
Shares
9,311,318
$
67,181
Retained
Earnings
69,394
11,474
Treasury
Shares
(11,665)
Accumulated
Other
Comprehensive
Income (Loss)
785
(549)
Balance, December 31, 2014
Net income
Other comprehensive income (loss), net of taxes
Dividend Reinvestment and Stock Purchase Plan
Acquisition of BNB Bancorp, Inc.
Exercise of stock options
Excess tax benefit on exercise and forfeiture of stock
options
Compensation expense relating to stock options
24,610
560,132
13,449
390
9,063
152
13
19
90
Compensation expense relating to restricted stock
16,038
Common stock dividends, $0.64 per share
Balance, December 31, 2015
9,925,547
76,908
Net income
Other comprehensive income (loss), net of taxes
Dividend Reinvestment and Stock Purchase Plan
Repurchase of stock warrants
Exercise of stock options
Excess tax benefit on exercise and forfeiture of stock
options and vesting of restricted common stock
Compensation expense relating to stock options
21,088
51,390
Compensation expense relating to restricted stock
—
Common stock dividends, $0.64 per share
379
(1,545)
592
61
5
90
Balance, December 31, 2016
9,998,025
76,490
Net income
Other comprehensive income (loss), net of taxes
Dividend Reinvestment and Stock Purchase Plan
Exercise of stock options
Compensation expense relating to stock options
Compensation expense relating to restricted stock
Common stock dividends, $0.64 per share
17,609
3,398
4,027
360
51
1
75
Balance, December 31, 2017
10,023,059
$
76,977
(6,239)
74,629
12,482
(6,375)
80,736
12,972
(6,407)
87,301
(11,665)
236
140,108
(2,853)
12,482
(2,853)
379
(1,545)
592
61
5
90
(6,375)
(11,665)
(2,617)
142,944
275
12,972
275
360
51
1
75
(6,407)
(11,665)
(2,342)
150,271
The accompanying notes to consolidated financial statements are an integral part of these statements.
-45-
LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Dollars in thousands)
2017
2016
2015
$
12,972
12,482
11,474
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash flows from operating activities-
Depreciation, amortization and accretion
Provision for loan losses
Impact of Tax Cuts and Jobs Act on Accumulated Other Comprehensive Income
Deferred income tax provision (benefit)
Increase in cash surrender value of bank owned life insurance
Bank owned life insurance death benefits in excess of cash surrender value
Realized gain on sales of securities available-for-sale
Realized loss (gain) on sale of premises and equipment
Realized loss from sale and write-downs of other real estate owned and repossessed
assets
Origination of mortgage loans for sale
Realized gains from sales of loans
Proceeds from sales of loans
Penalty for prepayment of long-term debt
Compensation expense related to stock options
Compensation expense related to restricted stock
Changes in:
Income receivable
Other assets
Other liabilities
TOTAL ADJUSTMENTS
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale
Proceeds from maturities and calls of investment securities:
Available-for-sale
Held-to-maturity
Purchases of investment securities:
Available-for-sale
Held-to-maturity
Purchase of Federal Reserve Bank stock
Proceeds from sale of impaired loans
Net increase in loans
Purchase of bank owned life insurance
Proceeds from bank owned life insurance death benefits
Proceeds from sales of other real estate owned and repossessed assets
Additions to other real estate owned
Purchases of premises and equipment
Proceeds from sales of premises and equipment
Net cash acquired from (paid for) acquisition
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits
Net increase in short-term borrowings
Principal payments on long-term debt
Penalty for prepayment of long-term debt
Proceeds from issuance of common stock
Repurchase of stock warrants
Proceeds from exercise of stock options
Excess tax benefit from exercise of stock options and vesting of restricted common stock
Cash dividends paid on common stock
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest
Income taxes
$
$
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITY:
Transfer from loans to other real estate owned and repossessed assets
The accompanying notes to consolidated financial statements are an integral part of these statements.
-46-
3,308
215
486
1,254
(760)
(107)
(233)
113
3
(7,513)
(166)
7,588
—
1
75
(4)
(269)
1,172
5,163
18,135
43,246
25,012
14,057
(27,012)
(5,625)
—
—
(29,692)
—
189
971
—
(6,617)
272
—
14,801
(25,084)
4,960
(295)
—
41
—
51
—
(6,088)
(26,415)
6,521
18,865
25,386
3,577
2,185
974
2,557
913
—
928
(746)
—
(1,082)
33
534
(11,217)
(244)
11,353
251
5
90
(216)
(791)
634
3,002
15,484
92,455
84,529
6,640
(124,934)
(25,010)
—
—
(48,153)
(4,000)
—
526
(182)
(9,450)
63
—
(27,516)
23,745
4,653
(5,349)
(251)
52
(1,545)
592
61
(6,048)
15,910
3,878
14,987
18,865
3,542
4,420
32
2,997
1,366
—
(58)
(625)
—
(495)
(1)
378
(7,725)
(343)
7,809
—
19
90
(160)
(3,302)
1,815
1,765
13,239
97,981
29,700
3,515
(163,859)
(3,413)
(256)
4,559
(42,530)
—
—
245
(20)
(504)
22
8,993
(65,567)
41,822
20,742
(5,410)
—
66
—
152
13
(5,915)
51,470
(858)
15,845
14,987
3,396
4,820
79
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LCNB Corp. (the "Company" or “LCNB”), an Ohio corporation formed in December 1998, is a financial holding company
whose principal activity is the ownership of LCNB National Bank (the "Bank"). The Bank was founded in 1877 and provides
full banking services, including trust and brokerage services, to customers primarily in Southwestern and South Central Ohio.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany
accounts and transactions are eliminated in consolidation. The accounting and reporting policies of the Company conform with
U.S. generally accepted accounting principles and with general practices in the banking industry.
Certain prior period data presented in the financial statements have been reclassified to conform with the current year
presentation. These reclassifications had no effect on net income.
USE OF ESTIMATES
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.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash, balances due from banks, federal funds sold, and
interest-bearing demand deposits with original maturities of twelve months or less. Deposits with other banks routinely have
balances greater than FDIC insured limits. Management considers the risk of loss to be very low with respect to such deposits.
INVESTMENT SECURITIES
Certain municipal debt securities that management has the positive intent and ability to hold to maturity are classified as “held-
to-maturity” and recorded at amortized cost. Securities not classified as held-to-maturity are classified as “available-for-sale”
and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive
income, a separate component of shareholders’ equity. Amortization of premiums and accretion of discounts are recognized as
adjustments to interest income using the level-yield method. Realized gains or losses from the sale of securities are recorded on
the trade date and are computed using the specific identification method.
Declines in the fair value of securities below their cost that are deemed to be other-than-temporarily impaired, and for which the
Company does not intend to sell the securities and it is not more likely than not that the securities will be sold before the
anticipated recovery of the impairment, are separated into losses related to credit factors and losses related to other factors. The
losses related to credit factors are recognized in earnings and losses related to other factors are recognized in other
comprehensive income. In estimating other than temporary impairment losses, management considers the length of time and
the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the
intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value. The Company's consolidated statements of income as of December 31, 2017, 2016, and 2015, do not
reflect any such impairment.
Federal Home Loan Bank ("FHLB") stock is an equity interest in the Federal Home Loan Bank of Cincinnati. It can be sold
only at its par value of $100 per share and only to the FHLB or to another member institution. In addition, the equity
ownership rights are more limited than would be the case for a public company because of the oversight role exercised by the
Federal Housing Finance Agency in the process of budgeting and approving dividends. Federal Reserve Bank stock is similarly
restricted in marketability and value. Both investments are carried at cost, which is their par value.
FHLB and Federal Reserve Bank stock are both subject to minimum ownership requirements by member banks. The required
investments in common stock are based on predetermined formulas.
-47-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS
The Company’s loan portfolio includes most types of commercial and industrial loans, commercial loans secured by real estate,
residential real estate loans, consumer loans, agricultural loans and other types of loans. Most of the properties collateralizing
the loan portfolio are located within the Company’s market area.
Loans are stated at the principal amount outstanding, net of unearned income, deferred origination fees and costs, and the
allowance for loan losses. Interest income is accrued on the unpaid principal balance. The delinquency status of a loan is based
on contractual terms and not on how recently payments have been received. Generally, a loan is placed on non-accrual status
when it is classified as impaired or there is an indication that the borrower’s cash flow may not be sufficient to make payments
as they come due, unless the loan is well secured and in the process of collection. Subsequent cash receipts on non-accrual
loans are recorded as a reduction of principal and interest income is recorded once principal recovery is reasonably
assured. The current year's accrued interest on loans placed on non-accrual status is charged against earnings. Previous years'
accrued interest is charged against the allowance for loan losses. Non-accrual loans are returned to accrual status when, in the
opinion of management, the financial position of the borrower indicates there is no longer a reasonable doubt as to the timely
collection of interest or principal.
Loan origination fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of
loan yields. These amounts are being amortized over the lives of the related loans.
In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments
to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are
funded. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses.
Loans acquired from 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. Management
estimates the cash flows expected to be collected at acquisition using a third-party risk model, which incorporates the estimate
of key assumptions, such as default rates, severity, and prepayment speeds.
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 current
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.
-48-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against
the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Consumer loans are
charged off when they reach 120 days past due. Subsequent recoveries, if any, are credited to the allowance.
The provision for loan losses is determined by management based upon its evaluation of the amount needed to maintain the
allowance for loan losses at a level considered appropriate in relation to the estimated risk of losses inherent in the
portfolio. Current methodology used by management to estimate the allowance takes into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, historic categorical
trends, current delinquency levels as related to historical levels, portfolio growth rates, changes in composition of the portfolio,
the current economic environment, as well as current allowance adequacy in relation to the portfolio. Management is cognizant
that reliance on historical information coupled with the cyclical nature of the economy, including credit cycles, affects the
allowance. Management considers all of these factors prior to making any adjustments to the allowance due to the subjectivity
and imprecision involved in allocation methodology. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are specifically
reviewed for impairment. For such loans, an allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers
loans not specifically reviewed for impairment and homogeneous loan pools, such as residential real estate and consumer
loans. The general component is measured for each loan category separately based on each category’s average of historical loss
experience over a trailing sixty month period, adjusted for qualitative factors. Such qualitative factors may include current
economic conditions if different from the five-year historical loss period, trends in underperforming loans, trends in volume and
terms of loan categories, concentrations of credit, and trends in loan quality.
A loan is considered impaired when management believes, based on current information and events, it is probable that the Bank
will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan
agreement. An impaired loan is measured by the present value of expected future cash flows using the loan's effective interest
rate. An impaired collateral-dependent loan may be measured based on collateral value. Smaller-balance homogeneous loans,
including residential mortgage and consumer installment loans, that are not evaluated individually are collectively evaluated for
impairment.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on both the straight-line
and accelerated methods over the estimated useful lives of the assets, generally 15 to 40 years for premises and 3 to 10 years for
equipment. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Costs incurred for maintenance and repairs are expensed as incurred. Premises and
equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of a
particular asset may not be recoverable.
OTHER REAL ESTATE OWNED
Other real estate owned includes properties acquired through foreclosure. Such property is held for sale and is initially
recorded at fair value, less costs to sell, establishing a new cost basis. Fair value is primarily based on a property appraisal
obtained at the time of transfer and any periodic updates that may be obtained thereafter. The allowance for loan losses is
charged for any write down of the loan’s carrying value to fair value at the date of transfer. Any subsequent reductions in fair
value and expenses incurred from holding other real estate owned are charged to other non-interest expense. Costs, excluding
interest, relating to the improvement of other real estate owned are capitalized. Gains and losses from the sale of other real
estate owned are included in other non-interest expense.
-49-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is the excess of the purchase price over the fair value of the net identifiable assets acquired in a business
combination. Goodwill is not amortized, but is instead subject to an annual review for impairment.
Mortgage servicing rights on originated mortgage loans that have been sold are initially recorded at their estimated fair
values. Mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated
servicing income. Such assets are periodically evaluated as to the recoverability of their carrying value.
The Company’s other intangible assets relate to core deposits acquired from business combinations. These intangible assets are
amortized on a straight-line basis over their estimated useful lives. Management evaluates whether events or circumstances
have occurred that indicate the remaining useful life or carrying value of the amortizing intangible should be revised.
BANK OWNED LIFE INSURANCE
The Company has purchased life insurance policies on certain officers of the Company. The Company is the beneficiary of
these policies and has recorded the estimated cash surrender value in other assets in the consolidated balance sheets. Income on
the policies, based on the increase in cash surrender value and any incremental death benefits, is included in other non-interest
income in the consolidated statements of income.
AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIP
LCNB has elected to account for its investment in an affordable housing tax credit limited partnership using the proportional
amortization method described in FASB ASU 2014-01, "Investments - Equity Method and Joint Ventures (Topic 323):
Accounting for Investments in Qualified Affordable Housing Projects (A Consensus of the FASB Emerging Issues Task
Force)." Under the proportional amortization method, an investor amortizes the initial cost of the investment to income tax
expense in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the
income statement as a component of income tax expense. The investment in the limited partnership is included in other assets
and the unfunded amount is included in accrued interest and other liabilities in LCNB's consolidated balance sheets.
FAIR VALUE MEASUREMENTS
Accounting guidance establishes a fair value hierarchy to prioritize the inputs to valuation techniques used to measure fair
value. A financial instrument’s level within the hierarchy is based on the lowest level of input that is significant to the fair value
measurement. The three broad input levels are:
• 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; and
• Level 3 - inputs that are unobservable for the asset or liability.
Accounting guidance permits, but does not require, companies to measure many financial instruments and certain other items at
fair value. The decision to elect the fair value option is made individually for each instrument and is irrevocable once
made. Changes in fair value for the selected instruments are recorded in earnings. The Company did not select any financial
instruments for the fair value election in 2017 or 2016.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred and are recorded as a marketing expense, a component of non-interest expense.
PENSION PLANS
Eligible employees of the Company hired before 2009 participate in a multiple-employer qualified noncontributory defined
benefit retirement plan. This plan is accounted for as a multi-employer plan because assets contributed by an employer are not
segregated in a separate account or restricted to provide benefits only to employees of that employer.
Citizens National had a qualified noncontributory, defined benefit pension plan, which has been assumed by the Company, that
covers eligible employees hired before May 1, 2005. This is a single employer plan.
-50-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
TREASURY STOCK
Common shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the weighted average
method.
STOCK OPTIONS AND RESTRICTED STOCK AWARD PLANS
The cost of employee services received in exchange for stock option grants is the grant-date fair value of the award estimated
using an option-pricing model. The compensation cost for restricted stock awards is based on the market price of the
Company's common stock at the date of grant multiplied by the number of shares granted that are expected to vest. The
estimated cost is recognized on a straight-line basis over the period the employee is required to provide services in exchange for
the award, usually the vesting period. The Company uses a Black-Scholes pricing model and related assumptions for
estimating the fair value of stock option grants and a five-year vesting period for stock options and restricted stock.
INCOME TAXES
Deferred income taxes are determined using the asset and liability method of accounting. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of temporary differences between the book and tax basis of the
various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
Management analyzes material tax positions taken in any income tax return for any tax jurisdiction and determines the
likelihood of the positions being sustained in a tax examination. A tax position is recognized as a benefit only if it is “more
likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
EARNINGS PER SHARE
Basic earnings per share allocated to common shareholders is calculated using the two-class method and is computed by
dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is adjusted for the dilutive effects of stock based compensation and warrants and is
calculated using the two-class method or the treasury stock method. The diluted average number of common shares
outstanding has been increased for the assumed exercise of stock based compensation and warrants with the proceeds used to
purchase treasury shares at the average market price for the period.
RECENT ACCOUNTING PRONOUNCEMENTS
From time to time the FASB issues an Accounting Standards Update ("ASU") to communicate changes to Generally Accepted
Accounting Principles ("GAAP"). 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:
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.
Guidance in ASU No. 2014-09 has been clarified by the following ASUs:
• ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)"
• ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing"
• ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical
Expedients"
• ASU No. 2016-20, "Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements"
-51-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As extended by ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," ASU
No. 2014-09 and the clarifying ASUs are 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 updates. Earlier
adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting
periods within that reporting period. LCNB's revenue is comprised of net interest income, which is explicitly excluded from
the scope of ASU No. 2014-09, and non-interest income. LCNB management has finalized its assessment of the update's affect
on non-interest income and has determined that the amendments in ASU No. 2014-09 will not result in a material change from
current accounting. Changes to related disclosures are still being analyzed.
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 did not have a material impact on
LCNB's results of operations or financial position.
ASU No. 2016-02, "Leases (Topic 842)"
ASU No. 2016-02 was issued in February 2016 and requires a lessee to recognize in the statement of financial position a
liability to make lease payments ("the lease liability") and a right-of-use asset representing its right to use the underlying asset
for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising
from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as
defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the
underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease
payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments.
A lessee shall classify a lease as a finance lease if it meets any of five listed criteria:
1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
3. The lease term is for the major part of the remaining economic life of the underlying asset.
4. The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds
substantially all of the fair value of the underlying asset.
5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end
of the lease term.
-52-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
For finance leases, a lessee shall recognize in the statement of comprehensive income interest on the lease liability separately
from amortization of the right-of-use asset. Amortization of the right-of-use asset shall be on a straight-line basis, unless
another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future
economic benefits. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease and shall
recognize a single lease cost on a straight-line basis over the lease term. For leases with a term of 12 months or less, a lessee is
permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If
a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease
term.
The amendments in this update are to be applied using a modified retrospective approach, as defined, and are effective for
public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018.
Early application is permitted. LCNB estimates that it will recognize discounted right of use assets and lease liabilities totaling
approximately $5 million for the leases disclosed in Note 8 - Leases. This projection is based on various assumptions,
including the level of interest rates and no significant increases in leasing activity, that may change between now and the
effective date.
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.
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. While LCNB's Loan Committee expects that the
implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, it is continuing to evaluate the
potential impact on LCNB's results of operations and financial position. The Loan Committee is currently analyzing its data
collection efforts, pool segmentation, and reporting mechanisms to prepare for adoption of this ASU. The financial statement
impact of this new standard cannot be reasonably estimated at this time.
-53-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment"
ASU No. 2017-04 was issued in January 2017 and applies to public and other entities that have goodwill reported in their
financial statements. To simplify the subsequent measurement of goodwill, this ASU eliminates Step 2 from the goodwill
impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine
the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, following
the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business
combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is an
SEC filer should adopt the amendments in this update on a prospective basis for its annual or any interim goodwill impairment
tests in fiscal years beginning after December 15, 2019. Adoption of ASU No. 2017-04 is not expected to have a material
impact on LCNB's results of operations or financial position.
ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost"
ASU No. 2017-07 was issued in March 2017 and applies to all employers that offer to their employees defined benefit pension
plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715. The amendments in this
update require that an employer report the service cost component in the same line item or items as other compensation costs
arising from services rendered by the pertinent employees during the period. The other components of net benefit cost, as
defined, are required to be presented in the income statement separately from the service cost component and outside a subtotal
of income from operations, if one is presented. If a separate line item or items are not used, the line item or items used in the
income statement to present the other components of net benefit cost must be disclosed. The amendments in ASU No. 2017-07
are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within
those annual periods. The amendments in this update are to be applied retrospectively for the presentation of the service cost
component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income
statement. Adoption of ASU No. 2017-07 is not expected to have a material impact on LCNB's results of operations or financial
position.
ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting"
ASU No. 2017-09 was issued in May 2017 and applies to any entity that changes the terms or conditions of a share-based
payment award. The amendments in this update provide that an entity would not apply modification accounting under the
guidance in Topic 718 if the fair value, vesting conditions, and classification of the awards are the same immediately before and
after the modification. The amendments are to be applied prospectively and are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including
adoption in any interim period. Adoption of ASU No. 2017-09 is not expected to have a material impact on LCNB's results of
operations or financial position.
ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities"
ASU No. 2017-12 was issued in August 2017 and applies to any entity that elects to apply hedge accounting in accordance with
current generally accepted accounting principles. The amendments in this update better align an entity’s risk management
activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance
for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and
refine hedge accounting for both nonfinancial and financial risk components. The amendments are effective for public business
entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is
permitted. LCNB does not currently own any instruments within the scope of ASU No. 2017-12 and its adoption is not
expected to have a material impact on its results of operations or financial position.
-54-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income"
ASU No. 2018-02 was issued in February 2018 and addresses a narrow-scope financial reporting issue that arose as a
consequence of the passage of H.R. 1, originally known as the “Tax Cuts and Jobs Act.” GAAP requires adjustment of deferred
tax assets and liabilities for the effect of a change in tax laws or rates with the effect to be included in income from continuing
operations in the reporting period that includes the enactment date. This guidance is applicable even in situations in which the
related income tax effects of items in accumulated other comprehensive income were originally recognized in other
comprehensive income rather than in income from continuing operations. As a consequence, the tax effects of items within
accumulated other comprehensive income, referred to as stranded tax effects in the update, do not reflect the appropriate tax
rate. The amendments in ASU No. 2018-02 allow a reclassification from accumulated other comprehensive income to retained
earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act. Because the amendments only relate to the
reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a
change in tax laws or rates be included in income from continuing operations is not affected. ASU No. 2018-02 is effective for
all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is
permitted, including adoption in any interim period. LCNB intends to early adopt ASU No. 2018-02 as of January 1, 2018
[CONFIRM].
NOTE 2 – ACQUISITIONS (UNAUDITED)
On December 20, 2017, LCNB and Columbus First Bancorp, Inc. (“CFB”) entered into an Agreement and Plan of Merger
(“Merger Agreement”) pursuant to which CFB will merge with and into LCNB in an all-stock transaction. Immediately
following the merger of CFB into LCNB, Columbus First Bank, a wholly-owned subsidiary of CFB, will be merged into
theBank. Columbus First Bank operates from one full-service office located in Worthington, Ohio. Subject to customary
regulatory approvals, LCNB and CFB shareholder approvals, and other conditions set forth in the definitive merger agreement,
the transaction is anticipated to close in the second quarter of 2018. At that time, Columbus First Bank's office will become a
branch of the Bank.
Under the terms of the Merger Agreement, which has been unanimously approved by the Board of Directors of each company,
the shareholders of CFB will be entitled to receive two LCNB common shares for each outstanding CFB common share. Any
unexercised stock options of CFB will be canceled in exchange for a cash payment. Based on LCNB's closing share price of
$18.50 as of February 28, 2018, the transaction is valued at $37.00 for each CFB share or approximately $58.8 million in
aggregate. As of February 28, 2018, Columbus First has 1,589,516 shares outstanding, as well as 65,724 options with a
weighted average strike price of $14.06 per share.
The acquisition will be accounted for in accordance with applicable accounting guidance. Accordingly, the assets and liabilities
of CFB will be recorded at their estimated fair values at the acquisition date. The excess of the estimated fair value of LCNB
common shares issued over the net fair values of the assets acquired, including identifiable intangible assets and liabilities
assumed, will be recorded as goodwill. The results of operations will be included in the consolidated income statement from the
date of the acquisition. Goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be
charged to expense at the time of impairment.
The estimated fair values of the assets and liabilities have not yet been determined. The recorded amounts reflected on the
historic financial records of CFB as of December 31, 2017 include total assets of approximately $330.4 million, consisting
primarily of net loans of $279.7 million and interest-bearing deposits of $36.5 million. Recorded liabilities totaling
approximately $297.7 million consisted primarily of deposits totaling $259.3 million.
-55-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 2 – ACQUISITIONS (UNAUDITED) (Continued)
Selected, consolidated pro-forma information, which is based on preliminary estimates and is subject to change upon
completion of the merger, for the year ended December 31, 2017 is as follows (in thousands,except per share data):
Income Statement:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Provision for income taxes
Net income
Earnings per common share:
Basic
Diluted
Balance Sheet:
Interest-earning deposits
Securities
Loans, net
Total assets
Total deposits
Total shareholders' equity
$
$
$
$
58,236
6,564
51,672
410
51,262
11,864
41,931
21,195
5,568
15,627
1.19
1.18
35,343
318,610
1,126,591
1,658,473
1,345,122
210,328
-56-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and fair value of available-for-sale investment securities at December 31 are summarized as follows (in
thousands):
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
2017
Investment Securities Available-for-Sale:
U.S. Treasury notes
U.S. Agency notes
U.S. Agency mortgage-backed securities
Municipal securities:
Non-taxable
Taxable
Mutual funds
Trust preferred securities
Equity securities
Investment Securities Held-to-Maturity:
Municipal securities:
Non-taxable
Taxable
2016
Investment Securities Available-for-Sale:
U.S. Treasury notes
U.S. Agency notes
U.S. Agency mortgage-backed securities
Municipal securities:
Non-taxable
Taxable
Mutual funds
Trust preferred securities
Equity securities
Investment Securities Held-to-Maturity:
Municipal securities:
Non-taxable
Taxable
—
57
33
343
175
2
1
97
708
101
—
101
41
150
89
574
220
—
—
55
1,129
56
—
56
24
1,633
1,227
1,018
122
46
—
4
2,259
83,261
67,153
102,174
20,366
2,542
50
667
4,074
278,472
227
95
322
76
1,848
1,444
1,623
85
45
1
10
5,132
352
217
569
28,745
3,605
32,350
28,145
85,400
71,047
113,015
19,845
2,482
48
677
320,659
30,719
9,771
40,490
2,283
84,837
68,347
102,849
20,313
2,586
49
574
281,838
28,871
3,700
32,571
28,180
87,098
72,402
114,064
19,710
2,527
49
632
324,662
31,015
9,988
41,003
$
$
$
$
$
$
$
$
-57-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 3 - INVESTMENT SECURITIES (Continued)
Information concerning securities with gross unrealized losses at December 31, 2017 and 2016, aggregated by length of time
that individual securities have been in a continuous loss position, is as follows (in thousands):
Less Than Twelve Months
Unrealized
Losses
Fair
Value
Twelve Months or More
Unrealized
Losses
Fair
Value
2017
Investment Securities Available-for-Sale:
U.S. Treasury notes
U.S. Agency notes
U.S. Agency mortgage-backed securities
Municipal securities:
Non-taxable
Taxable
Mutual funds
Trust preferred securities
Equity securities
Investment Securities Held-to-Maturity:
Municipal securities:
Non-taxable
Taxable
2016
Investment Securities Available-for-Sale:
U.S. Treasury notes
U.S. Agency notes
U.S. Agency mortgage-backed securities
Municipal securities:
Non-taxable
Taxable
Mutual funds
Trust preferred securities
Equity securities
Investment Securities Held-to-Maturity:
Municipal securities:
Non-taxable
Taxable
$
$
$
$
$
$
$
$
2,259
33,651
24,433
36,348
11,068
—
—
119
107,878
9,824
—
9,824
16,076
69,784
64,564
72,867
9,721
1,205
49
201
234,467
20,429
8,030
28,459
24
344
142
315
114
—
—
2
941
133
—
133
76
1,848
1,310
1,621
82
37
1
10
4,985
251
217
468
—
44,560
41,080
24,197
1,032
1,519
—
17
112,405
3,542
3,205
6,747
—
—
3,518
451
450
277
—
—
4,696
2,564
—
2,564
—
1,289
1,085
703
8
46
—
2
3,133
94
95
189
—
—
134
2
3
8
—
—
147
101
—
101
Management has determined that the unrealized losses at December 31, 2017 are primarily due to fluctuations in market interest
rates and do not reflect credit quality deterioration of the securities. Because the Company does not have the intent to sell the
investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their
amortized cost, the Company does not consider these investments to be other-than-temporarily impaired.
-58-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 3 - INVESTMENT SECURITIES (Continued)
Contractual maturities of investment securities at December 31, 2017 were as follows (in thousands). Actual maturities may differ
from contractual maturities when issuers have the right to call or prepay obligations.
Due within one year
Due from one to five years
Due from five to ten years
Due after ten years
U.S. Agency mortgage-backed securities
Mutual funds
Trust preferred securities
Equity securities
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
11,222
92,900
102,520
3,640
210,282
68,347
2,586
49
574
11,267
92,453
100,836
3,504
208,060
67,153
2,542
50
667
4,043
4,128
8,415
15,985
32,571
—
—
—
—
4,047
4,045
8,286
15,972
32,350
—
—
—
—
$
281,838
278,472
32,571
32,350
Investment securities with a market value of $108,751,000 and $149,990,000 at December 31, 2017 and 2016, respectively,
were pledged to secure public deposits and for other purposes required or permitted by law.
Certain information concerning the sale of investment securities available-for-sale for the years ended December 31 was as
follows (in thousands):
Proceeds from sales
Gross realized gains
Gross realized losses
NOTE 4 - LOANS
Major classifications of loans at December 31 were as follows (in thousands):
2017
2016
2015
$
43,246
247
14
92,455
1,103
21
97,981
627
132
Commercial and industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other loans, including deposit overdrafts
Deferred origination costs, net
Less allowance for loan losses
Loans-net
-59-
2017
$ 36,057
527,947
251,582
17,450
15,194
539
848,769
291
849,060
3,403
2016
41,878
477,275
265,788
19,173
14,802
633
819,549
254
819,803
3,575
$ 845,657
816,228
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
Non-accrual, past-due, and accruing restructured loans at December 31 were as follows (dollars in thousands):
Non-accrual loans:
Commercial and industrial
Commercial, secured by real estate
Agricultural
Residential real estate
Total non-accrual loans
Past-due 90 days or more and still accruing
Total non-accrual and past-due 90 days or more and still accruing
Accruing restructured loans
Total
2017
2016
$
—
2,183
178
604
2,965
—
2,965
—
4,312
334
1,079
5,725
23
5,748
10,469
$ 13,434
11,731
17,479
Percentage of total non-accrual and past-due 90 days or more and still accruing to total loans
0.35%
0.70%
Percentage of total non-accrual, past-due 90 days or more and still accruing, and accruing restructured
loans to total loans
1.58%
2.13%
Interest income that would have been recorded during 2017 and 2016 if loans on non-accrual status at December 31, 2017 and
2016 had been current and in accordance with their original terms was approximately $202,000 and $220,000, respectively.
The Company is not committed to lend additional funds to debtors whose loans have been modified to provide a reduction or
deferral of principal or interest because of deterioration in the financial position of the borrower.
-60-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
The allowance for loan losses and recorded investment in loans for the years ended December 31 were as follows (in
thousands):
Commercial
& Industrial
Commercial,
Secured by
Real Estate
Residential
Real Estate
Consumer
Agricultural
Other
Total
December 31, 2017
Allowance for loan losses:
Balance, beginning of year
Provision charged to expenses
Losses charged off
Recoveries
Balance, end of year
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired credit impaired loans
Balance, end of year
Loans:
$
$
$
$
350
(71)
—
99
378
8
370
—
378
2,179
348
(462)
113
2,178
146
2,032
—
2,178
885
(83)
(225)
140
717
29
688
—
717
96
(44)
(90)
114
76
8
68
—
76
5
60
(7)
72
— (138)
62
—
1
53
—
53
—
53
—
1
—
1
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired credit impaired loans
Balance, end of year
$
303
34,792
1,008
$ 36,103
11,289
512,259
4,048
527,596
1,351
248,674
2,024
252,049
47
17,516
—
17,563
December 31, 2016
Allowance for loan losses:
Balance, beginning of year
Provision charged to expenses
Losses charged off
Recoveries
Balance, end of year
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired credit impaired loans
Balance, end of year
Loans:
$
$
$
$
244
314
(234)
26
350
9
341
—
350
1,908
358
(185)
98
2,179
55
1,832
292
2,179
854
106
(127)
52
885
100
785
—
885
54
74
(85)
53
96
13
83
—
96
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired credit impaired loans
Balance, end of year
$
337
41,466
98
$ 41,901
12,580
458,059
6,305
476,944
1,518
262,266
2,471
266,255
52
19,192
17
19,261
334
14,475
—
14,809
-61-
177
15,033
—
137
— 402
539
15,210
3
66
(6)
67
— (119)
54
—
5
60
—
60
—
60
—
5
—
5
—
178
455
633
3,575
215
(915)
528
3,403
191
3,212
—
3,403
13,167
828,411
7,482
849,060
3,129
913
(750)
283
3,575
177
3,106
292
3,575
14,821
795,636
9,346
819,803
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
December 31, 2015
Allowance for loan losses:
Balance, beginning of year
Provision charged to expenses
Losses charged off
Recoveries
Balance, end of year
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired credit impaired loans
Balance, end of year
Commercial
& Industrial
Commercial,
Secured by
Real Estate
Residential
Real Estate
Consumer
Agricultural
Other
Total
$
$
$
$
129
208
(100)
7
244
9
235
—
244
1,990
955
(1,133)
96
1,908
306
1,602
—
1,908
926
125
(304)
107
854
48
806
—
854
63
(17)
(52)
60
54
—
54
—
54
11
55
(67)
67
66
—
66
—
66
2
40
(74)
35
3
—
3
—
3
3,121
1,366
(1,730)
372
3,129
363
2,766
—
3,129
The risk characteristics of LCNB's material loan portfolio segments were 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% to 80% maximum loan to appraised value ratio, depending upon borrower occupancy.
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.”
-62-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the
value of the collateral. LCNB requires private mortgage insurance for first mortgage loans that have a loan to appraised value
ratio of greater than 80%.
Consumer Loans. LCNB’s portfolio of consumer loans generally includes secured and unsecured loans to individuals for
household, family and other personal expenditures. Secured loans include loans to fund the purchase of automobiles,
recreational vehicles, boats, and similar acquisitions. Consumer loans made by LCNB generally have fixed rates and terms
ranging up to 72 months, depending upon the nature of the collateral, size of the loan, and other relevant factors.
Consumer loans generally have higher interest rates, but pose additional risks of collectibility 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.
The Company 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 the Company 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.
-63-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
An analysis of the Company’s loan portfolio by credit quality indicators at December 31 is as follows (in thousands):
Pass
OAEM
Substandard
Doubtful
Total
December 31, 2017
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
December 31, 2016
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
$
$
$
35,683
506,833
250,039
17,522
14,233
539
824,849
41,178
443,781
261,839
19,182
13,311
633
176
2,180
—
—
—
—
244
18,583
2,010
41
977
—
2,356
21,855
304
5,479
442
—
—
—
419
27,684
3,974
79
1,498
—
33,654
$
779,924
6,225
—
—
—
—
—
—
—
—
—
—
—
—
—
—
36,103
527,596
252,049
17,563
15,210
539
849,060
41,901
476,944
266,255
19,261
14,809
633
819,803
The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis.
No significant changes were made to either during the past year.
-64-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
A loan portfolio aging analysis at December 31 is as follows (in thousands):
30-59
Days
Past Due
60-89
Days
Past Due
Greater
Than
90 Days
Total
Past Due
Current
Total
Loans
Receivable
December 31, 2017
Commercial & industrial
Commercial, secured by real
estate
Residential real estate
Consumer
Agricultural
Other
Total
December 31, 2016
Commercial & industrial
Commercial, secured by real
estate
Residential real estate
Consumer
Agricultural
Other
Total
$
$
$
$
—
124
362
29
—
82
597
19
99
686
59
125
115
1,103
—
—
135
2
—
—
137
—
69
80
16
—
—
165
—
598
496
—
177
—
1,271
—
127
727
3
—
—
857
—
36,103
36,103
722
993
31
177
82
2,005
526,874
251,056
17,532
15,033
457
847,055
527,596
252,049
17,563
15,210
539
849,060
19
41,882
41,901
295
1,493
78
125
115
2,125
476,649
264,762
19,183
14,684
518
817,678
476,944
266,255
19,261
14,809
633
819,803
Total
Loans
Greater
Than
90 Days
and
Accruing
—
—
—
—
—
—
—
—
—
20
3
—
—
23
-65-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
Impaired loans for the years ended December 31 were as follows (in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
December 31, 2017
With no related allowance recorded:
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
With an allowance recorded:
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
Total:
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
$
$
$
$
$
$
1,015
12,677
2,822
6
177
402
1,100
13,608
3,516
6
177
554
17,099
18,961
296
2,660
553
41
—
—
301
2,660
572
41
—
—
3,550
3,574
1,311
15,337
3,375
47
177
402
20,649
1,401
16,268
4,088
47
177
554
22,535
—
—
—
—
—
—
—
8
146
29
8
—
—
191
8
146
29
8
—
—
191
685
14,113
3,216
20
269
441
88
1,068
546
2
12
55
18,744
1,771
311
2,739
596
43
—
—
3,689
996
16,852
3,812
63
269
441
22,433
18
45
19
3
—
—
85
106
1,113
565
5
12
55
1,856
-66-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
December 31, 2016
With no related allowance recorded:
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
With an allowance recorded:
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
Total:
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
$
$
109
14,195
3,238
26
334
455
263
15,522
4,286
27
334
629
18,357
21,061
326
4,690
751
43
—
—
326
4,946
751
43
—
—
5,810
6,066
435
18,885
3,989
69
334
455
24,167
589
20,468
5,037
70
334
629
27,127
—
—
—
—
—
—
—
9
347
100
13
—
—
469
9
347
100
13
—
—
469
998
15,274
3,736
37
392
481
20,918
341
4,194
651
43
—
—
5,229
1,339
19,468
4,387
80
392
481
26,147
151
1,140
369
29
136
77
1,902
19
257
36
3
—
—
315
170
1,397
405
32
136
77
2,217
-67-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
December 31, 2015
With no related allowance recorded:
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
With an allowance recorded:
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
Total:
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other
Total
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
$
$
1,467
18,575
4,092
106
81
510
24,831
370
4,007
864
—
—
—
5,241
1,837
22,582
4,956
106
81
510
30,072
206
2,229
453
25
487
82
3,482
21
114
37
—
—
—
172
227
2,343
490
25
487
82
3,654
Of the interest income recognized on impaired loans during 2017, 2016, and 2015, approximately $28,000, $51,000, and
$96,000, respectively, were recognized on a cash basis. The Company continued to accrue interest on certain loans classified as
impaired during 2017, 2016, and 2015 because they were restructured or considered well secured and in the process of
collection.
-68-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
Loan modifications that were classified as troubled debt restructurings during the years ended December 31 were as follows
(dollars in thousands):
2017
2016
2015
Number
of
Loans
Pre-
Modification
Recorded
Balance
Post-
Modification
Recorded
Balance
Number
of
Loans
Pre-
Modification
Recorded
Balance
Post-
Modification
Recorded
Balance
Number
of
Loans
Pre-
Modification
Recorded
Balance
Post-
Modification
Recorded
Balance
Commercial and
industrial
Commercial,
secured by real
estate
Residential real
estate
Consumer
— $
— $
—
1
1
2
$
—
18
14
32
$
—
—
9
14
23
— $
— $
—
— $
— $
4
6
3
2,142
2,215
139
39
139
39
1
7
2
75
217
9
13
$
2,320
$
2,393
10
$
301
$
—
74
221
9
304
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. Post-
modification balances of newly restructured troubled debt by type of modification for the years ended December 31 were as
follows (in thousands):
Term
Modification
Rate
Modification
Interest Only
Principal
Forgiveness
Combination
Total
Modifications
December 31, 2017
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Total
December 31, 2016
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Total
December 31, 2015
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Total
$
$
$
$
$
$
—
—
—
14
14
—
1,539
38
—
1,577
—
74
221
9
304
—
—
—
—
—
—
—
47
28
75
—
—
—
—
—
—
—
—
—
—
—
304
—
—
304
—
—
—
—
—
—
—
9
—
9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
372
54
11
437
—
—
—
—
—
—
—
9
14
23
—
2,215
139
39
2,393
—
74
221
9
304
LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring.
-69-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 4 - LOANS (Continued)
There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the
years ended December 31, 2016, and 2015. Two commercial, secured by real estate loans to the same borrower totaling
$1,236,000 that were modified during the fourth quarter 2016 subsequently defaulted in February 2017.
All troubled debt restructurings are considered impaired loans. The allowance for loan loss on such restructured loans is based
on the present value of future expected cash flows.
Approximately $21,000 of impaired loans without a valuation allowance at December 31, 2017 consisted of loans that were
modified during 2017 and were determined to be troubled debt restructurings. None of the impaired loans restructured during
2017 had a valuation allowance at December 31, 2017. Approximately $881,000 of impaired loans without a valuation
allowance and $1,168,000 of impaired loans with a valuation allowance at December 31, 2016 consisted of loans that were
modified during 2016 and were determined to be troubled debt restructurings.
Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation and other investors are not included in
the accompanying consolidated balance sheets. The unpaid principal balances of those loans at December 31, 2017, 2016 and
2015 were approximately $92,818,000, $100,982,000, and $111,837,000, respectively.
Mortgage servicing right assets are included in core deposit and other intangibles in the consolidated balance
sheets. Amortization of mortgage servicing rights is an adjustment to loan servicing income, which is included with other
operating income in the consolidated statements of income. Activity in the mortgage servicing rights portfolio during the years
ended December 31 was as follows (in thousands):
Balance, beginning of year
Amount capitalized to mortgage servicing rights
Amortization of mortgage servicing rights
Balance, end of year
NOTE 5 - ACQUIRED CREDIT IMPAIRED LOANS
2017
2016
2015
$
$
428
91
(123)
396
488
109
(169)
428
591
78
(181)
488
The following table provides, as of December 31, the major classifications of loans acquired that are accounted for in
accordance with FASB ASC 310-30 (in thousands):
Commercial & industrial
Commercial, secured by real estate
Residential real estate
Consumer
Agricultural
Other loans, including deposit overdrafts
Less allowance for loan losses
Loans, net
2017
2016
$
$
1,008
4,048
2,024
—
—
402
7,482
—
7,482
98
6,305
2,471
17
—
455
9,346
292
9,054
-70-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
(Continued)
NOTE 5 - ACQUIRED CREDIT IMPAIRED LOANS (continued)
The following table provides the outstanding balance and related carrying amount for acquired impaired loans at December 31
(in thousands):
Outstanding balance
Carrying amount
2017
2016
$
9,065
7,482
12,289
9,346
Activity during 2017 and 2016 for the accretable discount related to acquired impaired loans is as follows (in thousands):
Accretable discount, beginning of year
Accretable discount acquired during period
Reclass from nonaccretable discount to accretable discount
Less disposals
Less accretion
Accretable discount, end of year
NOTE 6 – OTHER REAL ESTATE OWNED
2017
2016
$
$
1,080
—
564
(170)
(805)
669
1,503
—
423
(5)
(841)
1,080
Other real estate owned includes property acquired through foreclosure or deed-in-lieu of foreclosure and are included in other
assets in the consolidated balance sheets. Changes in other real estate owned were as follows (in thousands):
Balance, beginning of year
Additions
Reductions due to sales
Reductions due to valuation write downs
Balance, end of year
2017
2016
$
$
—
974
(974)
—
—
846
214
(484)
(576)
—
The total recorded investment in residential consumer mortgage loans secured by residential real estate that was in the process
of foreclosure at December 31, 2017 was $185,000.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows (in thousands):
Land
Buildings
Equipment
Construction in progress
Total
Less accumulated depreciation
Premises and equipment, net
2017
2016
$
$
8,190
31,965
15,648
120
55,923
20,996
34,927
8,277
21,400
13,065
7,362
50,104
19,860
30,244
Depreciation charged to expense was, $1,549,000 in 2017, $1,210,000 in 2016, and $1,427,000 in 2015.
-71-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 8 - LEASES
Some of the Bank's branches, telephone equipment, and other equipment are leased under agreements expiring at various dates
through 2050. These leases are accounted for as operating leases. The leases generally provide for renewal options and most
require periodic changes in rental amounts based on various indices. Minimum annual rentals for non-cancelable leases at
December 31, 2017 that have terms in excess of one year were as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$
$
321
243
207
161
164
3,363
4,459
Rental expense for all leased branches and equipment was approximately $569,000 in 2017, $545,000 in 2016, and $542,000 in
2015.
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS
There were no changes in goodwill during 2017 and 2016.
Other intangible assets in the consolidated balance sheets at December 31, 2017 and 2016 were as follows (in thousands):
2017
2016
Gross
Intangible
Assets
Accumulated
Amortization
Net
Intangible
Assets
Gross
Intangible
Assets
Accumulated
Amortization
Net
Intangible
Assets
Core deposit intangibles
Mortgage servicing rights
Total
$
$
6,458
1,279
7,737
3,055
883
3,938
3,403
396
3,799
6,458
1,188
7,646
2,304
760
3,064
The estimated aggregate future amortization expense for each of the next five years for intangible assets remaining as of
December 31, 2017 is as follows (in thousands):
2018
2019
2020
2021
2022
$
4,154
428
4,582
848
829
815
800
789
NOTE 10 - AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIPS
LCNB is a limited partner in limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing
Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of the investments 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 partnerships include the
identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.
-72-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 10 - AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIPS (continued)
The following table presents the balances of LCNB's affordable housing tax credit investment and related unfunded
commitment at December 31 (in thousands):
Affordable housing tax credit investment
Less amortization
Net affordable housing tax credit investment
Unfunded commitment
2017
2016
$
$
$
3,000
231
2,769
2,257
2,000
93
1,907
1,617
LCNB expects to fund the unfunded commitment over ten years.
The following table presents other information relating to LCNB's affordable housing tax credit investment for the years
indicated (in thousands):
Tax credits and other tax benefits recognized
Tax credit amortization expense included in provision for income taxes
Year ended December 31,
2017
2016
2015
$
180
138
103
81
14
12
NOTE 11 - TIME DEPOSITS
Contractual maturities of time deposits at December 31, 2017 were as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
$
$
64,454
34,893
49,289
32,370
8,667
2,226
191,899
The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2017 and 2016 was $17,759,000
and $22,410,000, respectively.
-73-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 12 - BORROWINGS
Funds borrowed from the FHLB at December 31 by year of maturity were as follows (dollars in thousands):
December 31, 2017
2018
2019
Total
December 31, 2016
2017
2018
2019
Total
Outstanding
Balance
Average
Rate
$
$
$
$
248
55
303
295
248
55
598
2.82%
2.82%
2.82%
2.82%
2.82%
2.82%
2.82%
All advances from the FHLB are secured by a blanket pledge of the Company’s 1-4 family first lien mortgage loans in the
amount of approximately $217 million and $229 million at December 31, 2017 and 2016, respectively. Additionally, the
Company was required to hold minimum levels of FHLB stock, based on the outstanding borrowings. Total remaining
borrowing capacity, including short-term borrowing arrangements, at December 31, 2017 was approximately $56.3
million. One of the factors limiting remaining borrowing capacity is ownership of FHLB stock. The Company could increase
its remaining borrowing capacity by purchasing additional FHLB stock.
Short-term borrowings at December 31 were as follows (dollars in thousands):
Line of credit
FHLB short-term advance
Repurchase agreements
2017
2016
Amount
Rate
Amount
Rate
$
$
—
47,000
—
47,000
—% $
1.43%
—%
1.43% $
—
25,000
17,040
42,040
—%
0.63%
0.10%
0.42%
At December 31, 2017, the Company had short-term borrowing arrangements with three financial institutions and the Federal
Home Loan Bank of Cincinnati ("FHLB"). The first arrangement is a short-term line of credit for a maximum amount of $10
million at the interest rate in effect at the time of the borrowing. The second arrangement provides that the Company can
borrow up to $10 million in federal funds at the interest rate in effect at the time of the borrowing. The third arrangement is a
short-term line of credit for a maximum amount of $20 million at an interest rate equal to the lending institution’s federal funds
rate plus a spread of 50 basis points.
The Company has two short-term borrowing arrangements with the FHLB - a Cash Management Advance arrangement and a
Repo Advance arrangement. Under the terms of the Cash Management Advance program, the Company can borrow up to
$65.3 million in short-term advances, subject to total remaining borrowing capacity limitations. The Company has the option
of selecting a variable rate of interest for up to 90 days or a fixed rate of interest for up to 30 days. This agreement expires on
August 24, 2018. Under the Repo Advance program, the Company can borrow up to $65.3 million in advances, subject to total
remaining borrowing capacity limitations, with terms ranging from one day to one year. Prepayment is not permitted. This
agreement expires on December 12, 2018. The interest rate for both the Cash Management Advance and Repo Advance
programs is the published rate in effect at the time of the advance.
-74-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
(Continued)
NOTE 12 - BORROWINGS (continued)
The repurchase agreements product was discontinued in August 2017. Repurchase agreements were an option customers could
use in managing their cash positions and matured the next business day after issuance. Repurchase agreements at December 31,
2016 were fully secured by U.S. Agency notes and such collateral securities were held by the Federal Reserve Bank. The
maximum amount of outstanding agreements at any month-end during 2017 and 2016 totaled $16,320,000 and $18,715,000,
respectively. The average balance through August 2017 was $10,515,000 and the average balance for 2016 was $13,891,000.
As of December 31, 2016, approximately $3.1 million of the now discontinued repurchase agreements outstanding were held
by a company owned by a member of the Company’s Board of Directors.
NOTE 13 - INCOME TAXES
The provision for federal income taxes consists of (in thousands):
Income taxes currently payable
Deferred income tax provision (benefit)
Provision for income taxes
2017
2016
2015
$
$
3,018
1,254
4,272
3,515
928
4,443
4,280
(58)
4,222
A reconciliation between the statutory income tax and the Company's effective tax rate follows:
Statutory tax rate
Increase (decrease) resulting from -
Tax exempt interest
Tax exempt income on bank owned life insurance
Other – net
Effective tax rate
2017
2016
2015
35.0 %
34.2 %
34.0 %
(6.2)%
(1.8)%
(2.2)%
24.8 %
(6.3)%
(1.5)%
(0.1)%
26.3 %
(6.0)%
(1.4)%
0.3 %
26.9 %
-75-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 13 - INCOME TAXES (continued)
Deferred tax assets and liabilities, included with Other Assets in the Consolidated Balance Sheets, at December 31 consist of
the following (in thousands):
2017
2016
Deferred tax assets:
Allowance for loan losses
Net unrealized losses on investment securities available-for-sale
Fair value adjustment on loans acquired from merger with First Capital
Write-down of other real estate owned
Pension and deferred compensation
Other
Deferred tax liabilities:
Depreciation of premises and equipment
Net unrealized gains on investment securities available-for-sale
Amortization of intangibles
Prepaid expenses
Deferred loan fees
FHLB stock dividends
Fair value adjustment on securities acquired from merger with First Capital
Net deferred tax (liabilities) assets
$
$
715
707
238
—
760
471
2,891
(1,672)
—
(1,030)
(210)
(1)
(216)
(9)
(3,138)
(247)
1,223
1,369
592
—
1,157
546
4,887
(1,332)
—
(1,567)
—
(2)
(351)
(19)
(3,271)
1,616
As of December 31, 2017 and 2016 there were no unrecognized tax benefits and the Company does not anticipate the total
amount of unrecognized tax benefits will significantly change within the next twelve months. There were no amounts
recognized for interest and penalties in the consolidated statements of income for the three-year period ended December 31,
2017.
The Company is no longer subject to examination by federal tax authorities for years before 2014.
The Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017. Among other changes, the Tax Act reduces the US
Federal corporate tax rate from 35% to 21%. At December 31, 2017, the Company has substantially completed its accounting
for the tax effects of enactment of the Tax Act. For deferred tax assets and liabilities, amounts were remeasured based on the
rates expected to reverse in the future, which is now 21%. The Company continues to analyze certain aspects of the Tax Act
and further refinements are possible, which could potentially affect the measurement of these balances or potentially give rise to
new deferred tax amounts, although LCNB management does not expect these adjustments to materially impact its financial
statements.
NOTE 14 - 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. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is
represented by the contract amount of those instruments.
-76-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 14 - 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 December 31 were as follows (in
thousands):
Commitments to extend credit:
Commercial loans
Other loans:
Fixed rate
Adjustable rate
Unused lines of credit:
Fixed rate
Adjustable rate
Unused overdraft protection amounts on demand and NOW accounts
Standby letters of credit
2017
2016
$
18,964
10,350
2,747
1,150
20,984
90,147
16,441
294
150,727
$
4,425
1,044
9,731
80,222
17,123
657
123,552
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 or agreement. 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.
The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, is based on management’s credit evaluation of the borrower. Collateral held varies, but
may include accounts receivable; inventory; property, plant and equipment; residential realty; and income-producing
commercial properties.
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 December 31, 2017 totaled approximately $40,000.
The Company and the Bank 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 LCNB's consolidated financial position or results of operations.
NOTE 15 - REGULATORY MATTERS
The Federal Reserve Act requires depository institutions to maintain cash reserves with the Federal Reserve Bank. In 2017 and
2016, the Bank maintained average reserve balances of $7,924,000 and $10,903,000, respectively. The reserve balances at
December 31, 2017 and 2016 were $1,422,000 and $4,313,000, respectively.
-77-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 15 - REGULATORY MATTERS (continued)
The principal source of income and funds for LCNB Corp. is dividends paid by the Bank. The payment of dividends is subject
to restriction by regulatory authorities. For 2018, the restrictions generally limit dividends to the aggregate of net income for
the year 2018 plus the net earnings retained for 2017 and 2016. In addition, dividend payments may not reduce capital levels
below minimum regulatory guidelines. At December 31, 2017, approximately $12,409,000 of the Bank’s earnings retained was
available for dividends in 2018 under this guideline. Dividends in excess of these limitations would require the prior approval
of the Comptroller of the Currency.
The Company (consolidated) and the Bank must meet certain minimum capital requirements set by federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary
actions by regulators that, if undertaken, could have a material effect on the Company's and Bank's financial statements. The
Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about
components, risk weightings, and other factors.
A new rule requiring a Capital Conservation Buffer began phase-in on January 1, 2016 and will be fully implemented at the
beginning of 2019. Under the fully-implemented rule, a financial institution will need to maintain a Capital Conservation
Buffer composed of Common Equity Tier 1 Capital of at least 2.5% above its minimum risk-weighted capital requirements to
avoid limitations on its ability to make capital distributions, including dividend payments to shareholders and certain
discretionary bonus payments to executive officers. A financial institution with a buffer below 2.5% will be subject to
increasingly stringent limitations on capital distributions as the buffer approaches zero.
For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:
Minimum
Requirement
with Capital
Conservation
Buffer for
2017
To Be
Considered
Well-
Capitalized
Minimum
Requirement
Ratio of Common Equity Tier 1 Capital to risk-weighted assets
Ratio of tier 1 capital to risk-weighted assets
Ratio of total capital (tier 1 capital plus tier 2 capital) to risk-weighted assets
Leverage ratio (tier 1 capital to adjusted quarterly average total assets)
4.5%
6.0%
8.0%
4.0%
5.75%
7.25%
9.25%
N/A
6.5%
8.0%
10.0%
5.0%
As of the most recent notification from their regulators, the Company and Bank were categorized as "well-capitalized" under
the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since
the last notification that would change the Bank's category.
-78-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 15 - REGULATORY MATTERS (continued)
A summary of the regulatory capital of the Consolidated Company and Bank at December 31 follows (dollars in thousands):
Regulatory Capital:
Shareholders' equity
Goodwill and other intangible assets
Accumulated other comprehensive (income) loss
Tier 1 risk-based capital
Eligible allowance for loan losses
Total risk-based capital
Capital Ratios:
2017
2016
Consolidated
Company
Bank
Consolidated
Company
Bank
$
150,271
(32,906)
2,828
120,193
3,403
$
123,596
148,163
(32,906)
2,859
118,116
3,403
121,519
142,944
(32,676)
2,617
112,885
3,575
116,460
141,325
(32,676)
2,605
111,254
3,575
114,829
Common Equity Tier 1 Capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
13.29%
13.29%
13.07%
13.07%
13.00%
13.00%
12.82%
12.82%
Total capital (tier 1 capital plus tier 2 capital) to risk-
weighted assets
Leverage ratio (tier 1 capital to adjusted quarterly
average total assets)
13.66%
13.45%
13.41%
13.24%
9.51%
9.36%
8.81%
8.69%
LCNB Corp. filed a Registration Statement on Form S-3 with the SEC on July 27, 2011 to register 400,000 shares for use in its
Amended and Restated Dividend Reinvestment and Stock Purchase Plan (the “Amended Plan”). Formerly LCNB purchased
the shares needed for its Dividend and Stock Purchase Plan in the secondary market. Under the Amended Plan, LCNB has the
option of purchasing shares in the secondary market, using treasury shares, or issuing new shares.
NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) for 2017 and 2016 were as follows (in thousands):
Balance at beginning of year
Before reclassifications
Reclassifications
Balance at end of year
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
$
(2,633)
585
(152)
(2,200)
$
2017
Changes in
Pension
Plan Assets
and Benefit
Obligations
16
(158)
—
(142)
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
469
(2,390)
(712)
(2,633)
2016
Changes in
Pension
Plan Assets
and Benefit
Obligations
(233)
249
—
16
Total
(2,617)
427
(152)
(2,342)
Total
236
(2,141)
(712)
(2,617)
-79-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(Continued)
NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE INCOME (continued)
Reclassifications out of accumulated other comprehensive income (loss) during 2017 and 2016 and the affected line items in the
consolidated statements of income were as follows (in thousands):
Realized gain on sales of securities
Less provision for income taxes
Reclassification adjustment, net of taxes
NOTE 17 - RETIREMENT PLANS
2017
2016
Affected Line Item in the
Consolidated Statements of Income
$
$
233
81
152
1,082 Net gain on sale of securities
370 Provision for income taxes
712
Prior to January 1, 2009, the Company had a single-employer qualified noncontributory defined benefit retirement plan that
covered substantially all regular full-time employees. Effective January 1, 2009, the Company redesigned the plan and merged
it into a multiple-employer plan, which is accounted for as a multi-employer plan because assets contributed by an employer are
not segregated in a separate account or restricted to provide benefits only to employees of that employer. Employees hired on
or after January 1, 2009 are not eligible to participate in this plan.
Effective February 1, 2009, the Company amended the plan to reduce benefits for those whose age plus vesting service equaled
less than 65 at that date. Also effective February 1, 2009, an enhanced 401(k) plan was made available to those hired on or
after January 1, 2009 and to those who received benefit reductions from the amendments to the noncontributory defined benefit
retirement plan. Employees hired on or after January 1, 2009 receive a 50% employer match on their contributions into the
401(k) plan, up to a maximum company contribution of 3% of each individual employee’s annual compensation. Employees
who received a benefit reduction under the retirement plan amendments receive an automatic contribution of 5% or 7% of
annual compensation, depending on the sum of an employee’s age and vesting service, into the 401(k) plan, regardless of the
contributions made by the employees. This contribution is made annually and these employees will not receive any employer
matches to their 401(k) contributions.
Certain information pertaining to the qualified noncontributory defined benefit retirement plan is as follows:
Legal name
Pentegra Defined Benefit Plan for Financial Institutions
Plan's employer identification number
13-5645888
Plan number
333
The plan is at least 80% funded as of July 1, 2017 and 2016. A funding improvement or rehabilitation plan has not been
implemented, nor has a surcharge been paid to the plan. The Company’s contributions to the qualified noncontributory defined
benefit retirement plan do not represent more than 5% of total contributions to the plan.
Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to
salaries and employee benefits in the consolidated statements of income for the years ended December 31 were as follows (in
thousands):
Qualified noncontributory defined benefit retirement plan
401(k) plan
2017
2016
2015
$
1,054
374
969
359
984
346
The Company expects a minimum contribution of $224,000 to the qualified noncontributory defined benefit retirement plan in
2018. The Company expects to contribute $426,000 to the 401(k) plan in 2018.
-80-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 17 - RETIREMENT PLANS (continued)
Citizens National had a qualified noncontributory defined benefit pension plan which covered employees hired before May 1,
2005. The Company assumed this plan at the time of the merger. At December 31, 2017, the amount of the liability for this
plan was $128,000, representing the funded status of the plan.
The Bank has a benefit plan which permits eligible officers to defer a portion of their compensation. The deferred
compensation balance, which accrues interest at 8% annually, is distributable in cash after retirement or termination of
employment. The amount of such deferred compensation liability at December 31, 2017 and 2016 was 3,406,000 and
$3,407,000, respectively.
The Bank also has supplemental income plans which provide certain employees an amount based on a percentage of average
compensation, payable in accordance with individually defined schedules upon retirement. The projected benefit obligation
included in other liabilities for the supplemental income plans at December 31, 2017 and 2016 is $1,249,000 and $1,284,000,
respectively. The average discount rate used to determine the present value of the obligations was approximately 5.2% in 2017
and 5.2% in 2016. The service cost associated with the plans was $0 for 2017, $0 for 2016, and $183,000 for 2015. Interest
costs were $62,000, $63,000, and $56,000 for 2017, 2016, and 2015, respectively.
The deferred compensation plan and supplemental income plans are nonqualified and unfunded. Participation in each plan is
limited to a select group of management.
Effective February 1, 2009, the Company established a nonqualified defined benefit retirement plan, which is also unfunded,
for certain highly compensated employees. 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 years ended December
31 are summarized as follows (in thousands):
Service cost
Interest cost
Amortization of unrecognized (gain) loss
Net periodic pension cost
2017
2016
2015
$
$
—
69
16
85
41
78
168
287
38
68
171
277
A reconciliation of changes in the projected benefit obligation of the nonqualified defined benefit retirement plan at December 31
follows (in thousands):
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) or loss
Benefits paid
Projected benefit obligation at end of year
2017
2016
2015
$
$
1,727
—
69
238
(63)
1,971
1,843
41
78
(209)
(26)
1,727
1,741
38
68
10
(14)
1,843
Amounts recognized in other liabilities in the consolidated balance sheets for the nonqualified defined benefit retirement plan at
December 31, 2017 and 2016 were 1,971,000 and $1,727,000, respectively.
The accumulated benefit obligation for the nonqualified defined benefit retirement plan at December 31, 2017 and 2016 was
1,971,000 and $1,727,000, respectively.
-81-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 17 - RETIREMENT PLANS (continued)
Amounts recognized in accumulated other comprehensive income, net of tax, at December 31 for the nonqualified defined benefit
retirement plan consists of (in thousands):
Net actuarial (gain)/loss
Past service cost
2017
2016
2015
$
$
141
—
141
(16)
—
(16)
233
—
233
The estimated unrecognized net actuarial gain that will be amortized from accumulated other comprehensive income into net
periodic benefit cost during 2018 for the nonqualified defined benefit retirement plan is $13,000.
Key weighted-average assumptions used to determine the benefit obligation and net periodic pension costs for the nonqualified
defined benefit retirement plan for the years ended December 31 were as follows:
Benefit obligation:
Discount rate
Salary increase rate
Net periodic pension cost:
Discount rate
Salary increase rate
Amortization period in years
2017
2016
2015
3.60%
2.00%
4.14%
2.00%
1
4.14%
2.00%
4.34%
2.00%
1
4.34%
2.00%
3.95%
2.00%
1.98
The nonqualified defined benefit retirement plan is not funded. Therefore no contributions will be made in 2018. Estimated
future benefit payments reflecting expected future service for the years ended after December 31, 2017 are (in thousands):
2018
2019
2020
2021
2022
2023-2027
$
130
130
130
130
130
633
NOTE 18 - 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 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 approved 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.
-82-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 18 - STOCK-BASED COMPENSATION (continued)
LCNB has not granted stock options since 2012. Option awards 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 December 31, 2017 were as follows:
Outstanding Stock Options
Exercisable Stock Options
Exercise
Price Range
Number
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
$9.00 - 10.99
$11.00 - 12.99
$17.00 - 18.99
$
4,356
15,909
—
20,265
9.00
12.08
—
11.42
1.1
2.6
0.0
2.3
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
9.00
12.08
—
11.42
1.1
2.6
0.0
2.3
Number
$
4,356
15,909
—
20,265
The following table summarizes stock option activity for the years indicated:
Outstanding at January 1,
Granted
Exercised
Expired
Outstanding at December 31,
Exercisable at December 31,
2017
2016
2015
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
12.17
—
14.94
17.88
11.42
11.42
83,861
$
—
(51,390)
(7,802)
24,669
22,924
12.39
—
11.53
18.76
12.17
12.13
99,810
$
—
(13,449)
(2,500)
83,861
75,072
12.16
—
11.31
9.00
12.39
12.40
Options
24,669
—
(3,398)
(1,006)
20,265
20,265
The following table provides information related to stock options exercised during the years indicated (in thousands):
Intrinsic value of options exercised
Cash received from options exercised
Tax benefit realized from options exercised
2017
2016
2015
$
25
51
5
288
592
59
67
152
13
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 December 31, 2017 that were “in the money” (market price greater than exercise price)
was $183,000. The aggregate intrinsic value at that date for only the options that were exercisable was $183,000. The
aggregate intrinsic value for options outstanding at December 31, 2016 that were in the money was $273,000 and the aggregate
intrinsic value at that date for only the options that were exercisable was $255,000. The intrinsic value changes based on
changes in the market value of the Company’s stock.
Total expense related to options included in salaries and wages in the consolidated statements of income for the years ended
December 31, 2017, 2016, and 2015 was $1,000, $5,000, and $19,000, respectively. The related tax benefit for 2017, 2016, and
2015 was $0, $2,000, and $6,000, respectively. Compensation costs related to option awards were recognized in full during the
first quarter 2017.
-83-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 18 - STOCK-BASED COMPENSATION (continued)
Restricted stock awards granted under the 2015 Plan were as follows:
Outstanding at January 1,
Granted
Vested
Forfeited
Outstanding at December 31,
2017
2016
Weighted
Average
Grant Date
Fair Value
15.47
22.60
16.73
—
16.44
Shares
8,624
4,027
(3,834)
—
8,817
$
$
Weighted
Average
Grant Date
Fair Value
15.47
—
15.47
—
15.47
Shares
16,038
—
(7,414)
—
8,624
$
$
Total expense related to restricted stock awards included in salaries and wages in the consolidated statements of income for the
years ended December 31, 2017 and 2016 was $75,000 and $90,000, respectively. The related tax benefit for the years ended
December 31, 2017 and 2016 was $26,000 and $31,000, respectively. Unrecognized compensation expense for restricted stock
awards was $84,000 at December 31, 2017 and is expected to be recognized over a period of 4.2 years.
NOTE 19 - EARNINGS PER SHARE
LCNB has granted restricted stock awards with non-forfeitable dividend rights, which are considered participating securities.
Accordingly, earnings per share is computed using the two-class method as required by FASB ASC 260-10-45. Basic earnings
per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of
common shares outstanding during the period, which excludes the participating securities. 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.
-84-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 19 - EARNINGS PER SHARE (continued)
Earnings per share for the years ended December 31 were calculated as follows (in thousands, except share and per share data):
Net income
Less allocation of earnings and dividends to participating securities
$
Net income allocated to common shareholders
2017
2016
2015
12,972
7
12,965
12,482
13
12,469
11,474
—
11,474
Weighted average common shares outstanding, gross
10,011,358
9,958,300
9,704,965
Less average participating securities
Weighted average number of shares outstanding used in the calculation of
basic earnings per common share
5,783
10,243
—
10,005,575
9,948,057
9,704,965
Add dilutive effect of:
Stock options
Stock warrants
6,936
—
10,765
17,548
17,174
89,328
Adjusted weighted average number of shares outstanding used in the
calculation of diluted earnings per common share
10,012,511
9,976,370
9,811,467
Earnings per common share:
Basic
Diluted
$
1.30
1.29
1.26
1.25
1.18
1.17
Options to purchase 12,962 shares of common stock at a weighted average price of $18.41 per share were outstanding at
December 31, 2015 and 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 prices of the common shares. There were no such options at December 31,
2017 or 2016.
NOTE 20 - RELATED PARTY TRANSACTIONS
LCNB has entered into related party transactions with various directors and executive officers. Management believes these
transactions do not involve more than a normal risk of collectibility or present other unfavorable features. The following table
provides a summary of the loan activity for these officers and directors for the years ended December 31 (in thousands):
Beginning balance
New loans and advances
Change in composition of related parties
Reductions
Ending Balance
2017
2016
$
$
1,447
669
—
(246)
1,870
1,091
64
506
(214)
1,447
Deposits from executive officers, directors and related interests of such persons held by the Company at December 31, 2017
and 2016 amounted to $5,698,000 and $4,618,000, respectively.
-85-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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. Methods and significant
assumptions used to estimate fair value are as follows:
•
•
•
Fair value for U.S. Treasury notes are determined based on market quotations (level 1).
Fair values for the other debt securities are 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.
Fair value for trust preferred and equity securities are determined based on market quotations (level 1). These
securities are not priced by the pricing service.
• LCNB has investments in five mutual funds. These investments are not priced by the pricing service. Investments in
two of the mutual funds are measured at fair value using net asset values ("NAV") per share as a practical expedient
and are not required to be classified in the fair value hierarchy. These funds can be redeemed at any time at their
current NAVs. Two other mutual funds are traded in active markets and their fair values are based on market
quotations (level 1). The investment in the remaining mutual fund, which 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.
-86-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table summarizes the valuation of LCNB’s assets recorded at fair value by input levels as of December 31 (in
thousands):
December 31, 2017
Recurring fair value measurements:
Investment securities available-for-sale:
U.S. Treasury notes
U.S. Agency notes
U.S. Agency mortgage-backed securities
Municipal securities:
Non-taxable
Taxable
Mutual funds
Mutual funds measured at net asset value (a)
Trust preferred securities
Equity securities
Total recurring fair value measurements
Nonrecurring fair value measurements:
Impaired loans
December 31, 2016
Recurring fair value measurement:
Investment securities available-for-sale:
U.S. Treasury notes
U.S. Agency notes
U.S. Agency mortgage-backed securities
Municipal securities:
Non-taxable
Taxable
Mutual funds
Mutual funds measured at net asset value (a)
Trust preferred securities
Equity securities
Total recurring fair value measurements
Nonrecurring fair value measurements:
Impaired loans
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)
$
$
$
$
$
$
2,259
83,261
67,153
102,174
20,366
1,023
1,519
50
667
278,472
2,259
—
—
—
—
23
50
667
2,999
—
83,261
67,153
102,174
20,366
1,000
—
—
273,954
—
—
—
—
—
—
—
—
—
3,359
—
—
3,359
28,145
85,400
71,047
113,015
19,845
1,000
1,482
48
677
320,659
28,145
—
—
—
—
—
48
677
28,870
—
85,400
71,047
113,015
19,845
1,000
—
—
290,307
—
—
—
—
—
—
—
—
—
5,340
—
—
5,340
(a)
In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share practical expedient have
not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value
hierarchy to the amounts presented in the Consolidated Balance Sheets.
-87-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value
measurements at December 31, 2017 and 2016 (dollars in thousands):
2017
Impaired loans
2016
Impaired loans
Fair Value
Valuation Technique
Unobservable Inputs
High
Low
Weighted
Average
Range
$
3,359
Estimated sales price
Adjustments for comparable properties,
discounts to reflect current market conditions
Not applicable
Discounted cash flows
Discount rate
8.25 % 3.25 %
6.27 %
$
5,340
Estimated sales price
Adjustments for comparable properties,
discounts to reflect current market conditions
Not applicable
Discounted cash flows
Discount rate
8.25 % 4.50 %
5.56 %
-88-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Carrying amounts and estimated fair values of financial instruments as of December 31 were as follows (in thousands):
2017
FINANCIAL ASSETS:
Cash and cash equivalents
Investment securities, held-to-maturity
Federal Reserve Bank stock
Federal Home Loan Bank stock
Loans, net
Accrued interest receivable
FINANCIAL LIABILITIES:
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
2016
FINANCIAL ASSETS:
Cash and cash equivalents
Investment securities, held-to-maturity
Federal Reserve Bank stock
Federal Home Loan Bank stock
Loans, net
Accrued interest receivable
FINANCIAL LIABILITIES:
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
$
$
Carrying
Amount
Fair
Value
25,386
32,571
2,732
3,638
845,657
3,511
25,386
32,350
2,732
3,638
813,368
3,511
1,085,821
47,000
303
329
1,087,086
47,000
307
329
18,865
41,003
2,732
3,638
816,228
3,559
18,865
40,490
2,732
3,638
799,791
3,559
1,110,905
42,040
598
307
1,113,187
42,040
614
307
Fair Value Measurements at the End of
the Reporting Period Using
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
25,386
—
2,732
3,638
—
—
894,046
47,000
—
—
18,865
—
2,732
3,638
—
—
896,147
42,040
—
—
—
—
—
—
—
3,511
193,040
—
307
329
—
—
—
—
—
3,559
217,040
—
614
307
—
32,350
—
—
813,368
—
—
—
—
—
—
40,490
—
—
799,791
—
—
—
—
—
The fair values of off-balance-sheet financial instruments such as loan commitments and letters of credit are based on fees
currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of
such instruments were not material at December 31, 2017 and 2016.
-89-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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 the Company. 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 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.
-90-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 22 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain quarterly results for the years ended December 31, 2017 and 2016 (dollars in thousands,
except per share data):
Three Months Ended
March 31
June 30
Sep. 30
Dec. 31
2017
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
Total non-interest income
Total non-interest expenses
Income before income taxes
Provision for income taxes
Net income
Earnings per common share:
Basic
Diluted
2016
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
Total non-interest income
Total non-interest expenses
Income before income taxes
Provision for income taxes
Net income
Earnings per common share:
Basic
Diluted
10,934
861
10,073
222
9,851
2,790
8,611
4,030
1,027
3,003
0.30
0.30
11,008
883
10,125
396
9,729
2,750
8,468
4,011
1,043
2,968
0.30
0.29
11,055
908
10,147
(12)
10,159
2,659
8,672
4,146
1,040
3,106
11,610
953
10,657
(10)
10,667
2,579
8,612
4,634
1,017
3,617
0.31
0.31
0.37
0.36
10,895
885
10,010
372
9,638
2,846
8,593
3,891
995
2,896
0.29
0.29
11,226
887
10,339
55
10,284
2,615
7,908
4,991
1,337
3,654
0.37
0.37
$
10,864
877
9,987
15
9,972
2,430
7,968
4,434
1,188
3,246
0.32
0.32
$
$
$
10,621
849
9,772
90
9,682
2,642
8,292
4,032
1,068
2,964
0.30
0.30
$
$
-91-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 23 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for LCNB Corp., parent company only, follows (in thousands):
Condensed Balance Sheets:
December 31,
Assets:
Cash on deposit with subsidiary
Investment securities available-for-sale, at fair value
Investment in subsidiaries
Other assets
Total assets
Liabilities
Shareholders' equity
Total liabilities and shareholders' equity
Condensed Statements of Income
Year ended December 31,
Income:
Dividends from subsidiaries
Interest and dividends
Net gain on sales of securities
Total income
Total expenses
Income before income tax expense/benefit and equity in undistributed
income of subsidiaries
Income tax benefit
Equity in undistributed income of subsidiaries
Net income
2017
2016
$
$
$
$
308
919
148,850
194
150,271
491
893
141,325
235
142,944
—
—
150,271
150,271
142,944
142,944
2017
2016
2015
$
6,800
36
14
6,850
1,290
5,560
380
7,032
12,972
$
7,300
38
8
7,346
1,014
6,332
336
5,814
12,482
5,400
58
254
5,712
1,016
4,696
250
6,528
11,474
-92-
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Continued)
NOTE 23 - PARENT COMPANY FINANCIAL INFORMATION (continued)
Condensed Statements of Cash Flows
Year ended December 31,
Cash flows from operating activities:
Net income
Adjustments for non-cash items -
Increase in undistributed income of subsidiaries
Other, net
Net cash flows provided by operating activities
Cash flows from investing activities:
Purchases of securities available-for-sale
Proceeds from maturities of securities available-for-sale
Proceeds from sales of available-for-sale securities
Investments in subsidiaries
Cash paid for business acquisition
Net cash flows provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Repurchase of stock warrants
Cash dividends paid on common stock
Other
Net cash flows used in financing activities
Net change in cash
Cash at beginning of year
Cash at end of year
2017
2016
2015
$
12,972
12,482
11,474
(7,032)
84
6,024
(5,814)
126
6,794
(54)
50
43
(250)
—
(211)
360
—
(6,407)
51
(5,996)
(183)
491
308
$
(177)
55
173
—
—
51
379
(1,545)
(6,375)
653
(6,888)
(43)
534
491
(6,528)
42
4,988
(215)
—
1,217
—
(3,757)
(2,755)
390
—
(6,239)
165
(5,684)
(3,451)
3,985
534
-93-
LCNB CORP. AND SUBSIDIARIES
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
An evaluation of the effectiveness of LCNB’s internal controls over financial reporting was carried out under the supervision
and with the participation of LCNB’s management, including the Chief Executive Officer and Chief Financial Officer. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that LCNB’s disclosure controls and
procedures were effective as of the end of the period covered by this annual report.
Internal Control Over Financial Reporting
Information required by this item is set forth in the “Report of Management’s Assessment of Internal Control over Financial
Reporting” and the “Report of Independent Registered Public Accounting Firm” included in Item 8 of this 2017 Annual Report
on Form 10-K.
Changes in Internal Control over Financial Reporting
During the fourth quarter 2017, there were no changes in LCNB's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.
Item 9B. Other Information
None.
-94-
LCNB CORP. AND SUBSIDIARIES
PART III
Portions of the Company’s Definitive Proxy Statement (the “Proxy Statement”) included in the Notice of Annual Meeting of
Shareholders to be held April 24, 2018, which Proxy Statement will be mailed to shareholders within 120 days from the end of
the fiscal year ended December 31, 2017, are incorporated by reference into Part III.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item concerning the Executive Officers and Directors of the Registrant is incorporated herein
by reference under the caption "Directors and Executive Officers" of the Proxy Statement.
The information required by this item concerning the Audit Committee and Code of Business Conduct and Ethics is
incorporated herein by reference under the captions "Board of Directors Meetings and Committees," "Audit Committee
Report," and "Code of Ethics" of the Proxy Statement.
The information required by this item concerning Section 16(a) Beneficial Ownership Reporting Compliance is incorporated
herein by reference under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the proxy Statement.
Item 11. Executive Compensation
The information contained in the Proxy Statement under the captions "Board of Directors Meetings and Committees"
"Compensation Committee Interlocks and Insider Participation" "Equity Compensation Plan Information," "Compensation of
Executive Officers," and "Compensation Committee Report on Executive Compensation" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information contained in the Proxy Statement under the captions "Market Price of Stock and Dividend Data" and "Voting
Securities and Principal Holders" is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information contained in the Proxy Statement under the captions "Election of Directors," "Directors and Executive
Officers," "Board of Directors Meetings and Committees," and "Certain Relationships and Related Transactions" is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information contained in the Proxy Statement under the captions "Independent Registered Accounting Firm" and "Board of
Directors Meetings and Committees" is incorporated herein by reference.
-95-
LCNB CORP. AND SUBSIDIARIES
PART IV
-96-
LCNB CORP. AND SUBSIDIARIES
Item 15. Exhibits, Financial Statement Schedules
(a)1.
Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2017 and 2016.
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016, and 2015.
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016, and 2015.
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2017, 2016, and 2015.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015.
Notes to Consolidated Financial Statements
2.
3.
Financial Statement Schedules – None
Exhibits required by Item 601 Regulation S-K.
(a) Exhibit No.
2.1
2.2
2.3
2.4
3.1
3.2
10.1
10.2
10.3
10.5
10.7
14.1
14.2
Exhibit Description
Agreement and Plan of Merger dated as of October 9, 2012 by and between LCNB Corp. and First
Capital Bancshares, Inc. – incorporated by reference to the Registrant's Form 8-K filed on October
9, 2012, Exhibit 2.1.
Stock Purchase Agreement between LCNB Corp. and Colonial Banc Corp. dated as of October 28,
2013 - incorporated by reference to the Registrant's Current Report on Form 8-K filed on October
28, 2013, Exhibit 2.1.
Agreement and Plan of Merger dated as of December 29, 2014 by and between LCNB Corp. and
BNB Bancorp, Inc., - incorporated by reference to the Registrant's Current Report on Form 8-K
filed on January 2, 2015, Exhibit 2.1.
Agreement and Plan of Merger dated as of December 20, 2017 by and between LCNB Corp. and
Columbus First Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on
Form 8-K filed on December 21, 2017, Exhibit 2.1.
Amended and Restated Articles of Incorporation of LCNB Corp., as amended – incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2010, Exhibit 3.1.
Code of Regulations of LCNB Corp. - Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).
LCNB Corp. Ownership Incentive Plan - incorporated by reference to Registrant's Form DEF 14A
Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A (000-26121).
LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to Registrant's Form DEF
14A Proxy Statement pursuant to Section 14(a), dated March 13, 2015, Exhibit A (001-35292).
Form of Option Grant Agreement under the LCNB Corp. Ownership Incentive Plan - incorporated
by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, Exhibit
10.2.
Nonqualified Executive Retirement Plan – incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2009, Exhibit 10.4.
Form of Restricted Share Grant Agreement under the LCNB Corp. 2015 Ownership Incentive Plan
- incorporated by reference to Registrant's 2015 Form 10-K, Exhibit 10.7.
LCNB Corp. Code of Business Conduct and Ethics - incorporated by reference to Registrant's
2003 Form 10-K, Exhibit 14.1.
LCNB Corp. Code of Ethics for Senior Financial Officers - Incorporated by reference to
Registrant's 2003 Form 10-K, Exhibit 14.2.
-97-
LCNB CORP. AND SUBSIDIARIES
(a) Exhibit No.
21
LCNB Corp. subsidiaries.
Exhibit Description
23.1
31.1
31.2
32
101
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002.
The following financial information from LCNB Corp.’s Annual Report on Form 10-K for the year
ended December 31, 2017 is formatted in Extensible Business Reporting Language: (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated
Statements of Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity,
(v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial
Statements, tagged as blocks of text.
-98-
LCNB CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
LCNB Corp.
(Registrant)
/s/ Steve P. Foster
Steve P. Foster
Chief Executive Officer & President
March 8, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ Steve P. Foster
Steve P. Foster
Chief Executive Officer, President, & Director
(Principal Executive Officer)
March 8, 2018
/s/ Robert C. Haines II
Robert C. Haines II
Executive Vice President & Chief Financial
Officer (Principal Financial and Accounting
Officer)
March 8, 2018
/s/ Stephen P. Wilson
Stephen P. Wilson
Chairman of the Board of Directors
March 8, 2018
/s/ Spencer S. Cropper
Spencer S. Cropper
Director
March 8, 2018
/s/ William H. Kaufman
William H. Kaufman
Director
March 8, 2018
/s/ Anne E. Krehbiel
Anne E. Krehbiel
Director
March 8, 2018
/s/ John H. Kochensparger III
John H. Kochensparger III
Director
March 8, 2018
/s/ Valerie S. Krueckeberg
Valerie S. Krueckeberg
Director
March 8, 2018
/s/ George L. Leasure
George L. Leasure
Director
March 8, 2018
-99-
EXHIBIT 21
LCNB CORP. SUBSIDIARIES
LCNB National Bank, a national banking association, organized under the laws of the United
States, and headquartered in Lebanon, Ohio.
LCNB Risk Management, Inc., organized under the laws of the State of Nevada, and
headquartered in Las Vegas, Nevada.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the registration statements on Form S-8 (No. 333-103801)
dated March 13, 2003, Form S-3 (No. 333-175806) dated July 27, 2011, Form S-3 (No. 333-190072)
dated July 22, 2013, Form S-3 (No. 333-190577) dated August 13, 2013 and From S-4 (No. 333-202224)
dated March 9, 2015 of LCNB Corp. of our reports dated March 8, 2018 on the consolidated financial
statements and internal control over financial reporting of LCNB Corp., which reports appear in this
Annual Report on Form 10-K for the year ended December 31, 2017.
/s/ BKD, LLP
BKD, LLP
Indianapolis, Indiana
March 8, 2018
CERTIFICATIONS
EXHIBIT 31.1
In connection with the Annual Report of LCNB Corp. on Form 10-K for the period ending December 31, 2017, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, Steve P. Foster, Chief Executive Officer &
President of LCNB Corp., certify, that:
1)
I have reviewed this annual report on Form 10-K of LCNB Corp.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations, and cash flows of the registrant as of,
and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize, and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
/s/ Steve P. Foster
Steve P. Foster
Chief Executive Officer & President
March 8, 2018
CERTIFICATIONS
EXHIBIT 31.2
In connection with the Annual Report of LCNB Corp. on Form 10-K for the period ending December 31, 2017, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert C. Haines II, Executive Vice President &
Chief Financial Officer of LCNB Corp., certify, that:
1)
I have reviewed this annual report on Form 10-K of LCNB Corp.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations, and cash flows of the registrant as of,
and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize, and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
/s/ Robert C. Haines II
Robert C. Haines II
Executive Vice President &
Chief Financial Officer
March 8, 2018
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of LCNB Corp. (the "Company") on Form 10-K for the period ending December 31,
2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Steve P. Foster, Chief
Executive Officer and President, and Robert C. Haines II, Executive Vice President and Chief Financial Officer, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of our
knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Steve P. Foster
Steve P. Foster
Chief Executive Officer and President
/s/ Robert C. Haines II
Robert C. Haines II
Executive Vice President and
Chief Financial Officer
Date: March 8, 2018
We also hosted the LCNB
Corp. Annual Meeting in the
new building on April 25th
followed by a ribbon cutting
in May. The 48,000-square
foot building is a proud addi-
tion to downtown Lebanon.
This year’s Annual Meeting
on April 24th at 10:00 a.m.
will again be hosted in the
operations center.
We opened a loan production
office in Columbus during
the second quarter of 2017.
That office is a home base for
LCNB National Bank commer-
cial officers that are serving
return on average assets (ROAA) of
0.99% and a return on average equity
(ROAE) of 8.74%. This compares to a
ROAA of 0.96% and a ROAE of 8.60%
in 2016. Net income was $13 million at
the end of 2017 compared to $12.5
million at the end of 2016. The loan
portfolio grew $29.4 million or 3.6% in
2017. Both the Trust Department and
Investment
Services Department
achieved continued growth in assets
under management during 2017. The
Trust Department grew 19.4% to
$362.5 million in assets under man-
agement and the Investment Services
Department grew 21.4% to $229
million in assets under management.
Letter to our Shareholders
Dear Shareholders:
to succeed Roy McKay, head of the Trust Department,
who was retiring in mid-2017. Mike Miller joined LCNB
The first quarter of 2017 was very busy and that busy
National Bank in April to assume the role of head of
pace continued through the remainder of the year.
Trust with Roy’s retirement.
We highlighted the new operations center on the
cover of last year’s Annual Report. Nearly eighty
Last year was another strong year financially for LCNB
employees re-located to the new building in March.
National Bank. We finished the year with a strong
Company Headquarters:
2 N. Broadway
P.O. Box 59
Lebanon, OH 45036
(800) 344-2265
Chairman:
Stephen P. Wilson
President & CEO:
Steve P. Foster
Directors:
Spence S. Cropper,
Steve P. Foster,
William H. Kaufman,
Anne E. Krehbiel,
George L. Leasure,
John H. Kochensparger III
Valerie S. Krueckeberg
Steve Wilson
Steve Foster
the Columbus market. As the year progressed LCNB
Additional statistical data and information on our
Corp. and Columbus First Bancorp began discussions
financial performance for 2017 is available in the LCNB
on a merger. Those discussions concluded with an
Corp. Annual Report on Form 10-K. This report is filed
announcement in late December of LCNB National
annually with the Securities and Exchange Commission.
Bank agreeing to a merger with Columbus First Bank.
We have enclosed the Form 10-K with the initial mailing
The addition of Columbus First Bank will give LCNB
in this report to shareholders and it is available upon
National Bank a strong presence in Columbus and
request or from the shareholder information section on
expand the product offerings for the Columbus First
our website, www.LCNB.com or www.lcnbcorp.com.
Bank customers. Both banks have a culture of provid-
ing a level of service every customer should expect
The Annual Meeting for LCNB Corp. will be Tuesday,
from their community bank. Although the combined
April 24, 2018 at 10:00 a.m. at the Operations Center
banks will approach $1.6 billion in total assets, we will
located at 105 North Broadway in Lebanon, Ohio.
strive to maintain that community bank culture that
Proxy material is included with this mailing. Please
has made both banks successful in serving their
review, sign, and return the proxy in the envelope
customers and communities. John Smiley, currently
provided. We would be pleased to have you attend our
President and Chief Lending Officer of Columbus First
annual meeting in person. Thank you for your contin-
Bank, will join LCNB National Bank as Executive Vice
ued support.
President and Columbus Market President. In addi-
tion, Rhett Huddle, Chairman and Chief Executive
Officer of Columbus First Bank, and another Colum-
bus First Bank board member to be determined will
be appointed to the LCNB Corp. and LCNB National
Bank boards.
In 2017 we experienced sadness with the loss of Becky
Roess who lost her battle with cancer. Becky joined
LCNB National Bank as a trust officer in 2009 and was
Stephen P. Wilson
Chairman
Steve P. Foster
President and CEO
Transfer Agent and Registrar:
Computershare, Inc.
Transfer Agent Address:
P.O. Box 43078
Providence, RI 02940
Transfer Agent Telephone:
(800) 942-5909
Office Locations
Butler County
Fairfield
Hamilton
Middletown
Monroe
Oxford
Clermont County
Goshen
Clinton County
Wilmington
Fayette County
Washington Court House
Franklin County
Columbus
Hamilton County
Colerain Township
Loveland
Montgomery County
Brookville
Centerville
Oakwood
Preble County
Eaton (2)
Lewisburg
New Paris
West Alexandria
Ross County
Chillicothe (3)
Frankfort
Warren County
Hunter
Lebanon (5)
Maineville/Hamilton Township
Mason/West Chester
Roachester/Morrow
South Lebanon
Springboro/Franklin
Waynesville
Discover The Difference Of Community Banking
Personal Banking • Business Banking • Personal Lending • Commercial Lending
Trust and Wealth Management Services
Serving generations with the financial services they need for 140 years
P.O. Box 59, 2 North Broadway, Lebanon, Ohio 45036
513-932-1414, www.LCNB.com, 800-344-BANK (2265)
2017 Annual Report