LCNB Corp
Annual Report 2018

Plain-text annual report

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, 2018 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) (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) Ohio 31-1626393 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 everyInteractive Data File required to be submitted 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 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 ☒ 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, 2018, determined using a per share closing price on that date of $19.70 as quoted on the NASDAQ Capital Market, was $247,700,000.00 . As of March 5, 2019 , 13,308,557 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 23, 2019 , which Proxy Statement will be mailed to shareholders within 120 days from the end of the fiscal year ended December 31, 2018 are incorporated by reference into Part III. LCNB CORP. For the Year Ended December 31, 2018 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 - 3 - 4 4 15 19 20 22 22 23 23 26 27 39 40 40 41 44 98 98 98 99 99 99 99 99 99 100 100 102 Table of Contents Item 1. Business FORWARD-LOOKING STATEMENTS LCNB CORP. AND SUBSIDIARIES PART I Certain statements made in this document regarding LCNB Corp.’s ("LCNB") 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 recent and future acquisitions, including the recent merger with Columbus First Bancorp, Inc., may be unsuccessful, or may be more difficult, time-consuming or costly than expected; 3. LCNB may incur increased loan charge-offs in the future; 4. LCNB may face competitive loss of customers; 5. 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; changes in general economic conditions and increased competition could adversely affect LCNB’s operating results; changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results; 6. 7. 8. LCNB may experience difficulties growing loan and deposit balances; 9. the current economic environment poses significant challenges for us and could adversely affect our financial condition and results of operations; 10. 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; 11. difficulties with technology or data security breaches, including cyberattacks, that could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others; 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. 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. - 4 - Table of Contents LCNB CORP. AND SUBSIDIARIES 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 the 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 the Bank. At that time, Brookville National's two offices, both located in Brookville, Ohio, became offices of the Bank. The office located on Hay Avenue in Brookville was closed on November 10, 2017. On May 31, 2018, LCNB consummated a merger with Columbus First Bancorp, Inc. (“CFB”) in a stock transaction valued at approximately $64.4 million. Immediately following the merger of CFB into LCNB, Columbus First Bank (“Columbus First”), a wholly-owned subsidiary of CFB, was merged into the Bank. At that time, Columbus First's sole office, located in Worthington, Ohio, became an office of the Bank. 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. 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. - 5 - Table of Contents Primary Market Area LCNB CORP. AND SUBSIDIARIES 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, 2018 , the Bank had: • • • • 35 offices, including a main office in Warren County, Ohio and branch offices in Warren, Butler, Clinton, Clermont, Fayette, Franklin, Hamilton, Montgomery, Preble, and Ross 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 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 financial 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 financial 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"). 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 Corp. 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. - 6 - Table of Contents LCNB CORP. AND SUBSIDIARIES 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, and critically undercapitalized; 3. 4. Prohibited a depository institution from making any capital distributions, including payments of dividends or paying any management fee to its holding Imposed significant restrictions on the operations of a financial institution that is not rated well-capitalized or adequately capitalized; 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; 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; 2. 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," as that term is defined by the 7. 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. - 7 - Table of Contents LCNB CORP. AND SUBSIDIARIES 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 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. 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. The Economic Growth, Regulatory Relief, and Consumer Protection Act ("Economic Growth Act") was signed into law on May 24, 2018. It scales back certain requirements of the Dodd-Frank Act and provides other regulatory relief. Certain provisions affecting LCNB include: 1. Reduced reporting requirements on call reports for the first and third quarters of a reporting year for banks with less than $5 billion in total consolidated assets; 2. Extended regulatory examination cycles from twelve to eighteen months for banks with less than $3 billion in total consolidated assets; 3. Requiring federal financial institution regulators to classify all qualifying investment-grade, liquid and readily-marketable municipal securities as level 2B liquid assets under the liquidity coverage ratio rule; 4. Exempting reciprocal deposits from treatment as brokered deposits under the FDIC's brokered deposits rule, up to the lesser of $5 billion or 20% of bank liabilities; and - 8 - Table of Contents LCNB CORP. AND SUBSIDIARIES 5. Simplifying regulatory capital requirements by providing that banks with less than $10 billion in total consolidated assets that meet a to-be-developed community bank leverage ratio of tangible equity to average assets will be deemed to be in compliance with capital and leverage requirements. 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, 2018 , LCNB employed 325 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 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 - Table of Contents STATISTICAL INFORMATION LCNB CORP. AND SUBSIDIARIES 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 Municipal securities Total securities available-for-sale Securities held-to-maturity: Municipal securities Equity securities with a readily determinable fair value: Mutual funds Trust preferred securities Equity securities Equity securities without a readily determinable fair value: Mutual funds Equity securities Federal Reserve Bank stock Federal Home Loan Bank stock Total securities At December 31, 2018 2017 2016 (In thousands) $ 2,235 78,340 55,610 102,236 238,421 2,259 83,261 67,153 122,540 275,213 28,145 85,400 71,047 132,860 317,452 29,721 32,571 41,003 1,559 — 519 2,000 99 4,653 4,845 1,542 50 568 1,000 99 2,732 3,638 1,482 48 568 1,000 99 2,732 3,638 $ 281,817 317,413 368,022 Beginning January 1, 2018, equity securities, including mutual funds and trust preferred securities, are no longer eligible for classification as available-for-sale or held-to-maturity. Equity securities with a readily determinable fair value are carried at fair value, with changes in fair value recognized in other operating income in the consolidated statements of income. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer. - 10 - Table of Contents LCNB CORP. AND SUBSIDIARIES Contractual maturities of securities at December 31, 2018 , were as follows. Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations. Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Yield Amortized Cost Fair Value Yield (Dollars in thousands) 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 $ — 986 1,292 — 2,278 5,000 62,000 13,708 — 80,708 9,768 49,885 42,336 1,724 — 970 1,265 — 2,235 4,965 60,385 12,990 — 78,340 9,734 49,474 41,378 1,650 Total Municipal securities 103,713 102,236 —% $ 2.08% 2.06% —% 2.07% 1.41% 1.96% 1.96% —% 1.93% 2.26% 2.82% 2.91% 2.89% 2.81% — — — — — — — — — — — — — — — — — — — — 3,200 3,143 7,982 15,396 29,721 3,195 3,069 7,787 14,973 29,024 —% —% —% —% —% —% —% —% —% —% 3.15% 2.89% 3.39% 5.80% 4.56% U.S. Agency mortgage-backed securities 57,584 55,610 2.46% — — —% Totals $ 244,283 238,421 2.43% 29,721 29,024 4.56% (1) Yields on tax-exempt obligations are computed on a taxable-equivalent basis based upon a 21.0% 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, 2018 . Loan Portfolio Administration of the lending function is the responsibility of the Chief Lending Officer and certain senior portfolio 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, Chief Trust Officer, Chief Lending Officer, Chief Credit Officer, Loan Operations Officer, credit analysts, and the officers in charge of the commercial, agricultural, and retail loan portfolios. - 11 - Table of Contents LCNB CORP. AND SUBSIDIARIES Many commercial loan officers are authorized to accept loan applications and have various, designated lending limits for the approval of loans. A loan application for an amount outside a particular officer's lending limit needs to be approved by an officer 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 critical 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 the Bank 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: 2018 2017 At December 31, 2016 2015 2014 Amount % Amount % Amount % Amount % Amount % (Dollars in thousands) Commercial and industrial Commercial, secured by real estate Residential real estate Consumer Agricultural Other loans, including deposit overdrafts $ 77,740 6.5% $ 36,057 4.2% $ 41,878 5.1% $ 45,275 5.9% $ 35,424 5.1% 740,647 349,127 17,283 13,297 61.8% 29.1% 1.5% 1.1% 527,947 251,582 17,450 15,194 62.2% 29.6% 2.1% 1.8% 477,275 265,788 19,173 14,802 58.2% 32.5% 2.3% 1.8% 419,633 273,139 18,510 13,479 54.5% 35.4% 2.4% 1.7% 379,141 254,087 18,006 11,472 54.3% 36.4% 2.5% 1.6% 450 —% 539 0.1% 633 0.1% 665 0.1% 680 0.1% 1,198,544 100.0% 848,769 100.0% 819,549 100.0% 770,701 100.0% 698,810 100.0% Deferred origination costs (fees), net 79 Total loans 1,198,623 Less allowance for loan losses 4,046 291 849,060 3,403 254 819,803 3,575 237 770,938 3,129 146 698,956 3,121 Loans, net $ 1,194,577 $ 845,657 $ 816,228 $ 767,809 $ 695,835 As of December 31, 2018 and 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 $129,266,000, or 10.8% of total loans, at December 31, 2018 and $85,853,000, or 10.1% of total loans, at 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 at December 31, 2016, 2015, or 2014. - 12 - Table of Contents LCNB CORP. AND SUBSIDIARIES The following table summarizes the commercial and agricultural loan maturities and sensitivities to interest rate change at December 31, 2018 : 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) 49,309 104,701 677,674 831,684 290,995 491,380 782,375 $ $ $ $ The following table summarizes non-accrual, past-due, and accruing restructured loans for the dates indicated: Non-accrual loans Past-due 90 days or more and still accruing Accruing restructured loans Total Percent to total loans At December 31, 2018 2017 2016 2015 2014 $ $ 2,951 149 10,516 13,616 (Dollars in thousands) 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 1.14% 1.58% 2.13% 2.08% 2.87% 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, 2018 , 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 - Table of Contents LCNB CORP. AND SUBSIDIARIES Allocation of the Allowance for Loan Losses The following table presents the allocation of the allowance for loan loss: 2018 2017 Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount At December 31, 2016 2015 2014 Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount Percent of Loans in Each Category to Total Loans Amount (Dollars in thousands) Commercial and industrial $ 400 6.5% $ 378 4.2% $ 350 5.1% $ 244 5.9% $ 129 5.1% Commercial, secured by real estate Residential real estate Consumer Agricultural Other loans, including deposit overdrafts Total Deposits 2,745 767 87 46 1 61.8% 29.1% 1.5% 1.1% 2,178 717 76 53 62.2% 29.6% 2.1% 1.8% 2,179 885 96 60 58.2% 32.5% 2.3% 1.8% 1,908 854 54 66 54.5% 35.4% 2.4% 1.7% —% 1 0.1% 5 0.1% 3 0.1% 1,990 926 63 11 2 $ 4,046 100.0% $ 3,403 100.0% $ 3,575 100.0% $ 3,129 100.0% $ 3,121 54.3% 36.4% 2.5% 1.6% 0.1% 100.0% 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, 2018 : 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) 11,564 22,534 34,534 66,637 135,269 $ $ 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 - Table of Contents Item 1A. Risk Factors LCNB CORP. AND SUBSIDIARIES 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. Failure to meet regulatory capital requirements could adversely affect LCNB’s business The Bank is subject to regulations requiring it to satisfy minimum capital requirements, see Note 15 - Regulatory Matters of the consolidated financial statements for more information. While management expects that LCNB's capital ratios under Basel III will continue to exceed well capitalized minimum capital requirements, there can be no assurance that such will be the case. If LCNB is unable to meet or exceed applicable minimum capital requirements, it may become subject to supervisory actions including, but not limited to, requirements to raise additional capital or dispose of assets, the loss of its financial holding company status, limitations on its ability to engage in new acquisitions or new activities, or other 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. A decrease in market interest rates may create a refinancing demand for residential fixed-rate mortgage loans, which may cause an increase in gains from sales of mortgage loans if LCNB sells these loans in the secondary market. 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. Banking competition in 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 LCNB's market 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. - 15 - Table of Contents LCNB CORP. AND SUBSIDIARIES 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 LCNB's market areas could adversely affect its financial condition and results of operations. LCNB conducts its operations from offices that are located in nine Southwestern Ohio counties and in Franklin County, Ohio, 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 effects 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. 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. - 16 - Table of Contents LCNB CORP. AND SUBSIDIARIES 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. 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. - 17 - Table of Contents LCNB CORP. AND SUBSIDIARIES 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. FDIC deposit insurance assessments may materially increase in the future. Deposits of LCNB are insured up to statutory limits by the 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 open new branch offices. 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. 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. LCNB’s information systems may experience an interruption, cyberattack, or other breach in security. LCNB relies heavily on communications and information systems to conduct its business. Although significant resources are devoted to maintaining and regularly updating LCNB's data systems, there can be no assurance that these security measures will provide absolute security. Any failure, interruption, cyberattack, or other 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, cyberattack, or other 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, cyberattacks, or other security breaches of LCNB’s information systems could significantly disrupt LCNB's operations, allow misappropriation of LCNB's confidential information, allow misappropriation of customer confidential information, damage LCNB’s reputation, result in a loss of customer business, subject LCNB to additional regulatory scrutiny, or expose LCNB to significant 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 non-bank 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. - 18 - Table of Contents LCNB CORP. AND SUBSIDIARIES 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 - Table of Contents 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 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 Preble Ross Owned Leased 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 Montgomery Owned Ross Leased Hamilton Owned Warren Preble Butler Ross Owned Owned Leased Owned Clermont Owned Butler Warren Preble Owned Owned Owned 17. Loveland Office 500 Loveland-Madeira Road Loveland, Ohio 45140 Hamilton Owned - 20 - Table of Contents LCNB CORP. AND SUBSIDIARIES Name of Office Address County 18. Maineville Office 7795 South State Route 48 Maineville, Ohio 45039 Warren Owned 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 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 30. Washington Court House Office 100 Crossings Drive Washington Court House, Ohio 43160 31. Waynesville Office 32. West Alexandria Office 33. Western Avenue Office 34. Wilmington Office 35. Worthington 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 6877 North High Street Worthington, Ohio 43085 Warren Butler Butler Preble Owned Owned Owned Owned Montgomery (2) Warren Leased Butler Warren Warren Warren Warren Fayette Warren Preble Ross Clinton (2) Owned Owned Owned Leased Owned Owned Owned Owned Owned Franklin Leased - 21 - Table of Contents LCNB CORP. AND SUBSIDIARIES Name of Office Address County 36. Loan Production Office 1500 West Third Ave., Suite 205 & 209 Grandview Heights, Ohio 43212 Franklin Leased 37. Operations Center 105 North Broadway Lebanon, Ohio 45036 Warren (3) (1) (2) (3) Excess space in this office is leased to third parties. The Bank owns the Oakwood and Oxford office buildings and leases the land. The Bank leases the Operations Center from the Warren County Port Authority. Upon expiration of the lease in 2027, the Bank has the option to purchase the property for $1.00. 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 - Table of Contents 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 1,044 registered holders of its common stock as of December 31, 2018. 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.” 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, 2018, 290,444 shares have been purchased under this program. No shares were purchased under the Market Repurchase Program during 2018. 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 487,418 shares have been purchased under this program since its inception through December 31, 2018. The following table sets forth information relating to private sale repurchases during the three months ended December 31, 2018, which were the only shares repurchased during 2018: Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs October 2018 November 2018 December 2018 — 21,400 — — 16.2766 — — Not applicable 21,400 Not applicable — Not applicable 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. 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. - 23 - Table of Contents LCNB CORP. AND SUBSIDIARIES The following table shows information relating to stock options outstanding under the 2002 Plan and 2015 Plan at December 31, 2018 : Equity compensation plans approved by security holders: Plan Category 2002 Plan 2015 Plan Equity compensation plans not approved by security holders Total - 24 - 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 13,278 $ — — 13,278 $ 11.98 — — 11.98 — 419,301 — 419,301 Table of Contents 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, 2013 through December 31, 2018. 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, 2013 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 © 2019 Period Ending 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 $ $ $ 100.00 100.00 100.00 87.85 114.75 108.71 99.27 122.74 110.36 146.24 133.62 147.46 132.74 173.22 158.46 101.93 168.30 135.31 - 25 - Table of Contents Item 6. Selected Financial Data LCNB CORP. AND SUBSIDIARIES The following represents selected consolidated financial data of LCNB for the years ended December 31, 2014 through 2018 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 For the Years Ended December 31, 2018 2017 2016 2015 2014 (Dollars in thousands, except per share data) $ $ $ 54,594 6,425 48,169 923 47,246 11,050 40,502 17,794 2,949 14,845 44,463 3,599 40,864 215 40,649 10,458 33,863 17,244 4,272 12,972 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 0.65 0.64 0.64 0.64 0.64 1.24 1.24 1.30 1.29 1.26 1.25 1.18 1.17 1.06 1.05 $ 282,813 1,194,577 1,636,927 1,300,919 56,230 47,032 218,985 317,413 845,657 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 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 1.00% 7.90% 13.38% 52.42% 3.63% 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% 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. CFB merged with and into LCNB as of the close of business on May 31, 2018. As of the date of the merger, LCNB recorded additional loans of $284.0 million, additional deposits of $244.4 million, and additional long-term debt of $22.9 million. - 26 - Table of Contents 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 2018 Annual Report to Shareholders. Overview Net income for 2018 was $14,845,000 (basic and diluted earnings per share of $1.24), compared to $12,972,000 (basic and diluted earnings per share of $1.30 and $1.29, respectively) in 2017 and $12,482,000 (basic and diluted earnings per share of $1.26 and $1.25, respectively) in 2016. The following items significantly affected earnings for the years indicated: CFB merged with and into LCNB Corp. on May 31, 2018. Expenses related to the merger with CFB totaled $2,123,000 during 2018. Net gain on sales of securities was significantly greater in 2016 as compared to 2018 and 2017 primarily due to market rates at the time of the sales. • • • • • • Other real estate owned expense was greater in 2016 as compared to 2018 and 2017 because of valuation impairment recognized during 2016. Other non-interest expense for 2018 included $575,000 in net losses from sales of fixed assets, primarily due to losses incurred in the sale of two office buildings. 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. The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, lowered LCNB's federal corporate income tax rate from 34% to 21%, beginning in 2018. In addition, LCNB revalued its net deferred tax liability position at the end of 2017 to reflect the reduction in its federal corporate income tax rate and 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 - Table of Contents LCNB CORP. AND SUBSIDIARIES Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Average Outstanding Balance 2018 Interest Earned/ Paid Average Yield/ Rate Average Outstanding Balance 2017 Interest Earned/ Paid Average Yield/ Rate Average Outstanding Balance 2016 Interest Earned/ Paid Average Yield/ Rate Years ended December 31, $ 1,038,159 47,489 4.57% $ (Dollars in thousands) 36,571 822,452 4.45% $ 136 58 196 259 104 3,666 3,400 55,308 2.63% 1.45% 6.00% 5.96% 2.75% 2.22% 2.76% 4.11% 88 — 164 182 89 4,239 4,815 46,148 7,972 — 2,732 3,638 3,249 205,669 143,394 1,189,106 123,800 (3,405) 1.10% —% 6.00% 5.00% 2.74% 2.06% 3.36% 3.88% $ 1,309,501 $ 1,305,132 1,332 4,421 311 361 6,425 0.19% $ 1.74% 2.23% 2.15% 0.66% 645,471 205,540 23,976 421 875,408 274,855 10,795 148,443 594 2,784 209 12 3,599 0.09% $ 1.35% 0.87% 2.85% 0.41% 654,891 217,228 17,952 826 890,897 259,060 10,014 145,161 792,526 12,394 — 2,732 3,638 3,230 240,329 140,692 1,195,541 112,909 (3,318) 35,600 59 — 164 146 115 4,467 4,862 45,413 652 2,788 38 26 3,504 4.49% 0.48% —% 6.00% 4.01% 3.56% 1.86% 3.46% 3.80% 0.10% 1.28% 0.21% 3.15% 0.39% $ 1,488,941 $ 1,309,501 $ 1,305,132 3.45% 3.47% 3.41% 48,883 3.63% 42,549 3.58% 41,909 3.51% 138.37% 135.83% 134.20% Includes non-accrual loans if any. 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 21% for 2018 and 34% for 2017 and 2016. (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 - 5,164 4,008 3,268 4,346 3,782 165,300 123,135 1,347,162 145,601 (3,822) 1,488,941 689,322 253,524 13,967 16,789 973,602 315,229 12,195 187,915 $ $ Loans (1) Interest-bearing demand deposits Interest-bearing time deposits Federal Reserve Bank stock Federal Home Loan Bank stock Investment securities: Equity securities Debt securities, taxable Debt securities, non- taxable (2) Total earning assets Non-earning assets Allowance for loan losses Total assets Savings deposits 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 (1) (2) Table of Contents 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, 2018 vs. 2017 Increase (decrease) due to 2017 vs. 2016 Increase (decrease) due to Volume Rate Total Volume Rate Total (In thousands) Interest income attributable to: Loans (1) $ 9,840 1,078 10,918 1,334 (363) Interest-bearing demand deposits Interest-bearing time deposits Federal Reserve Bank stock Federal Home Loan Bank stock Investment securities: Equity securities Debt securities, taxable Debt securities, 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 (40) 58 32 39 15 (878) (627) 8,439 43 734 (116) 353 1,014 7,425 $ 88 — — 38 — 305 (788) 721 695 903 218 (4) 1,812 (1,091) 48 58 32 77 15 (573) (1,415) 9,160 738 1,637 102 349 2,826 6,334 (27) — — — 1 (684) 92 716 (9) (154) 17 (12) (158) 874 56 — — 36 (27) 456 (139) 19 (49) 150 154 (2) 253 (234) 971 29 — — 36 (26) (228) (47) 735 (58) (4) 171 (14) 95 640 (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 21% for 2018 and 34% for 2017 and 2016. 2018 vs. 2017. Net interest income on a fully tax-equivalent basis for 2018 totaled $48,883,000, an increase of $6,334,000 from 2017. The increase resulted from an increase in total taxable-equivalent interest income of $9,160,000, partially offset by an increase in total interest expense of $2,826,000. The increase in total interest income was due primarily to a $10,918,000 increase in loan interest income caused by a $215.7 million increase in average loans and secondarily to a 12 basis point (a basis point equals 0.01%) increase in the average rate earned on loans. Loans obtained through the merger with CFB were a significant component of the increase in average loans. Partially offsetting the increase in loan interest income was a $573,000 decrease in interest income from taxable debt securities and a $1,415,000 decrease in taxable-equivalent interest income from non-taxable debt securities. Interest income from taxable investment securities decreased due to a $40.4 million decrease in average taxable investment securities, partially offset by a 16 basis point increase in the average rate earned on these securities. Interest income from non-taxable investment securities decreased due to a $20.3 million decrease in average non-taxable debt securities and to a 60 basis point decrease in the average rate earned on these securities. One of the reasons for the 60 basis point decrease in the average rate earned on non-taxable debt securities was the decrease in the federal corporate tax rate to 21%, which decreased the effective yield earned on these securities. Decreases in debt securities were invested in the loan portfolio and used to pay down short-term borrowings. - 29 - Table of Contents 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 $738,000 increase in interest paid on savings deposits and to a $1,637,000 increase in interest paid on IRA and time certificates. Interest paid on savings deposits increased due to a 10 basis point increase in the average rate paid and to a $43.8 million increase in average balances outstanding. Interest paid on IRA and time certificates increased due to a 39 basis point increase in the average rate paid and to a $48.0 million increase in average balances outstanding. Increases in average rates paid was primarily due to increases in market rates. Deposits obtained through the merger with CFB were a significant component of the increases in savings deposits and IRA and time certificates. 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 decrease in the average rate earned on loans. Partially offsetting the increase in loan interest income was a $228,000 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 20 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. 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. - 30 - Table of Contents LCNB CORP. AND SUBSIDIARIES Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 2014 through 2018: Balance – Beginning of year $ 3,403 3,575 3,129 3,121 3,588 2018 2017 2016 2015 2014 (Dollars in thousands) 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 $ — — 145 234 135 462 225 90 234 185 127 85 — — — 179 693 1 239 71 13 138 915 99 113 140 114 119 750 26 98 52 53 — — — 89 413 280 923 4,046 62 528 387 215 3,403 54 283 467 913 3,575 100 1,133 304 52 67 74 261 573 652 129 — 79 1,730 1,694 7 96 107 60 67 35 372 1,358 1,366 3,129 42 63 40 108 — 44 297 1,397 930 3,121 Ratio of net charge-offs during the period to average loans outstanding 0.03% 0.05% 0.06% 0.18% 0.21% Ratio of allowance for loan losses to total loans at year-end 0.34% 0.40% 0.44% 0.41% 0.45% 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 - Table of Contents 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 2018, 2017, and 2016 is as follows: Fiduciary income $ Service charges and fees on deposit accounts Net gains (losses) on sales of securities Bank owned life insurance income Net gains from sales of loans Other operating income Total non-interest income Reasons for material increases and decreases include: 2018 2017 2016 2018 vs. 2017 2017 vs. 2016 Increase (Decrease) 3,958 5,590 (8) 738 223 549 3,473 5,236 233 867 166 483 (In thousands) 3,286 5,008 1,082 746 244 487 11,050 10,458 10,853 485 354 (241) (129) 57 66 592 187 228 (849) 121 (78) (4) (395) • • • • Fiduciary income increased during 2018 due to an increase in assets managed. 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 2018 primarily due to fees earned from an Insured Cash Sweep (ICS®) product that was introduced during the second quarter 2017 and from an increase in debit card income. Debit card income benefited from more cards outstanding due to the merger with CFB and greater depositor utilization of the cards. Service charges and fees on deposit accounts increased during 2017 due to fee adjustments on certain services and greater customer utilization of various services. Net gains (losses) on sales of securities were less during 2017 and 2018 as compared to 2016 primarily due to a lower volume of sales. Bank owned life insurance income was greater in 2017 primarily due to mortality benefits. No mortality benefits were received in 2018 or 2016. - 32 - Table of Contents LCNB CORP. AND SUBSIDIARIES Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Non-Interest Expense A comparison of non-interest expense for 2018, 2017, and 2016 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 2018 2017 2016 2018 vs. 2017 2017 vs. 2016 Increase (Decrease) $ 21,279 18,585 18,215 2,694 (In thousands) 1,138 2,861 1,197 1,119 922 419 580 990 649 1,547 20 2,123 5,658 1,172 2,613 1,137 873 751 423 572 882 735 1,255 10 118 4,737 1,048 2,271 1,114 696 753 547 721 790 746 1,033 624 — 4,703 40,502 33,863 33,261 (34) 248 60 246 171 (4) 8 108 (86) 292 10 2,005 921 6,639 370 124 342 23 177 (2) (124) (149) 92 (11) 222 (614) 118 34 602 Reasons for material increases and decreases include: • • • Salaries and employee benefits were 14.5% greater in 2018 than in 2017 and 2017 was 2.0% greater than in 2016. The increases for both years were primarily due to salary and wage increases, newly hired employees, and increased health insurance costs, partially offset by net decreases in pension expenses. CFB employees retained and increased incentive payments were also factors during 2018. The number of full-time equivalent employees was 325 at December 31, 2018, 310 at December 31, 2017, and 282 at December 31, 2016. Equipment expenses were greater during 2018 and 2017 as compared to 2016 primarily due to depreciation expense on furniture and equipment purchased for the new Operations Center, which went into service during March 2017. Occupancy expense for 2018 increased primarily due to increased branch rental expense and increased depreciation of bank premises. The increase in branch rental expense primarily reflects rent paid for the new Worthington Office, previously the CFB office. 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 2018 primarily due to promotion costs for new checking products introduced in 2018, increased marketing activities in • • • • the Columbus area, and expanded used of television, radio, and digital methods of advertising. Marketing expense increased in 2017 primarily due to expanded use of television and digital methods of advertising. FDIC premiums were lower in 2018 and 2017 as compared to 2016 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 transactions. Computer maintenance and supplies increased in 2017 and 2018 due to increased technology and software related expenditures designed to offer technological convenience to customers, to protect the integrity of its data systems and software, and to protect the confidentiality of customer information. Contracted services increased in 2018 due to additional fees paid for loan and deposit system upgrades and improvements and to general price increases on other contracted services. 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. - 33 - Table of Contents LCNB CORP. AND SUBSIDIARIES Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Other real estate owned expense was greater in 2016 primarily due to impairment charges recognized on a commercial property. • • Merger-related expenses for 2018 and 2017 are due to the acquisition of CFB and are primarily comprised of various professional fees, costs to prepare • and distribute the proxy statement/prospectus, and costs to merge CFB's data system into LCNB's system. Other non-interest expense for 2018 included $575,000 in net losses from sales of fixed assets, primarily due to the sale of two office buildings. 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. Income Taxes LCNB's effective tax rates for the years ended December 31, 2018, 2017, and 2016 were 16.6%, 24.8%, and 26.3%, respectively. The difference between the statutory rates of 21% for 2018 and 34% for 2017 and 2016 and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships. 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 34% 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 assets at December 31, 2018 were $341.3 million greater than at December 31, 2017 primarily due to the merger with CFB. The carrying values of loans, deposits, and long-term debt were significantly influenced by this merger. See Note 2 - Acquisitions (Unaudited) to the consolidated financial statements for a description of the merger and a summary of the estimated fair values of CFB's assets and liabilities added to LCNB's balance sheet. Interest-bearing time deposits of $996,000 at December 31, 2018 were obtained through the merger with CFB. The original amount at May 31, 2018 was $10.4 million and LCNB has not been renewing the time deposits as they mature. This line item represents certificates of deposit with individual balances of less than $250,000 invested in various financial institutions. Equity securities without a readily determinable fair value increased $1.0 million, from $1.1 million at December 31, 2017 to $2.1 million at December 31, 2018. The increase represents an additional investment in a mutual fund. Available-for-sale and held-to-maturity debt securities at December 31, 2018 were respectively $36.8 million less and $2.9 million less than at December 31, 2017. Management used the decrease in investment funds to fund loan growth and to maintain liquidity. Federal Reserve Bank stock at December 31, 2018 was $1.9 million greater than at December 31, 2017 due to additional stock purchased. Federal Home Loan Bank stock at December 31, 2018 was $1.2 million greater than at December 31, 2017. The additional stock was obtained through the merger with CFB. Net loans at December 31, 2018 were $348.9 million greater than at December 31, 2017. The merger with CFB added approximately $282.1 million to LCNB's loan portfolio at the merger date. The balance of the increase is due to organic growth. Net premises and equipment at December 31, 2018 was $2.3 million less than at December 31, 2017 primarily due to the sale of two office buildings. - 34 - Table of Contents LCNB CORP. AND SUBSIDIARIES Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Goodwill at December 31, 2018 was $29.0 million greater than at December 31, 2017 due to goodwill recorded from the merger with CFB. Core deposit and other intangibles at December 31, 2018 was $1.3 million greater than at December 31, 2017 primarily due to a $2.1 million core deposit intangible recorded from the merger with CFB, partially offset by amortization of intangibles. Liabilities and Shareholders' Equity Total deposits at December 31, 2018 were $215.1 million greater than at December 31, 2017. The merger with CFB added approximately $244.4 million of deposits to LCNB's balance sheet as of the merger date. Of the remaining net decrease, approximately $10.2 million was due to public fund deposits by local government entities. Public fund deposits can be relatively volatile due to seasonal tax collections and the financial needs of the local entities. Historically, public fund deposits tend to be at their lowest balances at year-ends. Short-term borrowings at December 31, 2018 were $9.2 million greater than at December 31, 2017. The additional borrowings were used for liquidity purposes. Long-term debt at December 31, 2018 was $46.7 million greater than at December 31, 2017. LCNB borrowed $31.0 million from the FHLB during 2018 and assumed $22.9 million of long-term debt from CFB. These additions were partially offset by payoffs of matured debt. The borrowings were used to fund loan growth and for general liquidity purposes. Total shareholders' equity at December 31, 2018 was $68.7 million greater than at December 31, 2017 primarily due to common stock issued to CFB shareholders, which had a closing date fair value of $63.6 million. Liquidity LCNB Corp. depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. National banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years. Prior approval from the Office of the Comptroller of the Currency, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval. The Bank is not aware of any reasons why it would not receive such approval, if required. Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, as well as meeting LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, short-term line of credit arrangements totaling $40.0 million with two correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios. Total remaining borrowing capacity with the Federal Home Loan Bank at December 31, 2018 was approximately $45.7 million. One of the factors limiting remaining borrowing capacity is ownership of FHLB stock. LCNB could increase its borrowing capacity by purchasing additional FHLB stock. In addition, additional borrowings of approximately $35.8 million were available through the line of credit arrangements at quarter-end. Management closely monitors the level of liquid assets available to meet ongoing funding needs. It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost. LCNB experienced no liquidity or operational problems as a result of current liquidity levels. Commitments to extend credit at December 31, 2018 totaled $245.8 million, including standby letters of credit totaling $1,080,000, 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. - 35 - Table of Contents LCNB CORP. AND SUBSIDIARIES Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The following table provides information concerning LCNB's contractual obligations at December 31, 2018 : Short-term borrowings Long-term debt obligations Operating lease obligations Estimated pension plan contribution for 2019 Funding commitments for affordable housing tax credit limited partnerships Estimated capital expenditure obligations Certificates of deposit: $100,000 and over Other time certificates Total Total 1 year or less Payments due by period Over 1 through 3 years (In thousands) Over 3 through 5 years More than 5 years $ $ 56,230 47,032 4,868 160 3,372 185 135,269 161,601 408,717 56,230 6,052 449 160 1,024 185 68,632 67,458 — 30,980 761 — 1,462 — 48,461 68,132 200,190 149,796 — 10,000 400 — 316 — 17,780 24,205 52,701 — — 3,258 — 570 — 396 1,806 6,030 The following table provides information concerning LCNB's commitments at December 31, 2018 : Total Amounts Committed 1 year or less Amount of Commitment Expiration Per Period Over 1 through 3 years (In thousands) Over 3 through 5 years More than 5 years $ $ 28,015 216,727 1,080 245,822 28,015 73,815 1,080 102,910 — 68,937 — 68,937 — 22,052 — 22,052 — 51,923 — 51,923 Commitments to extend credit Unused lines of credit Standby letters of credit Total 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 the Bank at December 31, 2018 and 2017 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, which is the FDIC's highest rating. - 36 - Table of Contents LCNB CORP. AND SUBSIDIARIES Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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, 2018 , 290,444 shares, as restated for the stock dividend, had been purchased under this program. No shares were purchased under this program during 2018 . 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 487,418 shares, as restated for the stock dividend, had been purchased under this program at December 31, 2018 , with 21,400 shares having been purchased during 2018 . 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 collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 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. - 37 - Table of Contents LCNB CORP. AND SUBSIDIARIES Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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, 2018 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 and Columbus First Bancorp, Inc. 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 Debt Securities. Debt 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 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. - 38 - Table of Contents 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 downward scenarios of more than 100 basis points 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, 2018 IRSA indicates that an increase in interest rates at all shock levels will have a positive effect on net interest income and a decrease in interest rates at all shock levels will have a negative 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 400 Up 300 Up 200 Up 100 Base Down 100 Amount (In thousands) $ Change in Net Interest Income % Change in Net Interest Income $ 60,699 59,918 59,104 58,328 57,542 56,873 3,157 2,376 1,562 786 — (669) 5.49 % 4.13 % 2.71 % 1.37 % — % (1.16)% 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, 2018 EVE analysis indicates that an increase or decrease in interest rates would have a positive 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 Amount (In thousands) $ Change in EVE % Change in EVE Up 400 Up 300 Up 200 Up 100 Base Down 100 $ 221,236 222,913 223,365 221,683 217,599 218,042 3,637 5,314 5,766 4,084 — 443 1.67% 2.44% 2.65% 1.88% —% 0.20% 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. - 39 - Table of Contents 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, 2018 , 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, 2018 , 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, 2018 . Submitted by: LCNB Corp. /s/ Steve P. Foster Steve P. Foster Chief Executive Officer March 6, 2019 /s/ Robert C. Haines II Robert C. Haines II Executive Vice President & Chief Financial Officer March 6, 2019 - 40 - Table of Contents LCNB CORP. AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors and Audit Committee LCNB Corp. Lebanon, Ohio Opinion on the Internal Control Over Financial Reporting We have audited LCNB Corp.’s (Company) internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company and our report dated March 6, 2019 , expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. - 41 - Table of Contents LCNB CORP. AND SUBSIDIARIES Definitions and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. /s/ BKD, LLP BKD, LLP Cincinnati, Ohio March 6, 2019 - 42 -     Table of Contents LCNB CORP. AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors and Audit Committee LCNB Corp. Lebanon, Ohio Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of LCNB Corp. (the “Company”) as of December 31, 2018 and 2017 , the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2018 , and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017 , and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018 , in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2019 , expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BKD, LLP BKD, LLP We have served as the Company’s auditor since 2014. Cincinnati, Ohio March 6, 2019 - 43 - Table of Contents 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 Interest-bearing time deposits Investment securities: Equity securities with a readily determinable fair value, at fair value Equity securities without a readily determinable fair value, at cost Debt securities, available-for-sale, at fair value Debt securities, 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, 2018 and 2017; issued 14,070,303 and 10,776,686 shares at December 31, 2018 and 2017, respectively Retained earnings Treasury shares at cost, 775,027 and 753,627 shares at December 31, 2018 and 2017, respectively Accumulated other comprehensive loss, net of taxes TOTAL SHAREHOLDERS' EQUITY $ $ $ 2018 2017 18,310 1,730 20,040 996 2,078 2,099 238,421 29,721 4,653 4,845 1,194,577 32,627 59,221 5,042 28,723 13,884 21,159 4,227 25,386 — 2,160 1,099 275,213 32,571 2,732 3,638 845,657 34,927 30,183 3,799 27,985 10,288 1,636,927 1,295,638 322,571 978,348 1,300,919 56,230 47,032 13,761 283,212 802,609 1,085,821 47,000 303 12,243 1,417,942 1,145,367 — — 141,170 94,547 (12,013) (4,719) 218,985 — — 76,977 87,301 (11,665) (2,342) 150,271 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,636,927 1,295,638 The accompanying notes to consolidated financial statements are an integral part of these statements. - 44 - Table of Contents INTEREST INCOME: Interest and fees on loans Dividends on equity securities: With a readily determinable fair value Without a readily determinable fair value Interest on debt 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 (losses) 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 LCNB CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, (Dollars in thousands, except per share data) 2018 2017 2016 $ 47,489 36,571 35,600 65 39 3,666 2,686 649 54,594 5,753 311 361 6,425 48,169 923 47,246 3,958 5,590 (8) 738 223 549 11,050 21,279 1,138 2,861 1,197 1,119 922 419 580 990 649 1,547 20 2,123 5,658 40,502 17,794 2,949 63 26 4,239 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 66 49 4,467 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 NET INCOME Earnings per common share: Basic Diluted Weighted average common shares outstanding: Basic Diluted The accompanying notes to consolidated financial statements are an integral part of these statements. - 45 - $ $ 14,845 12,972 12,482 1.24 1.24 1.30 1.29 1.26 1.25 11,935,350 11,942,253 10,005,575 10,012,511 9,948,057 9,976,370 Table of Contents Net income Other comprehensive income (loss): LCNB CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, (Dollars in thousands) 2018 2017 2016 $ 14,845 12,972 12,482 Net unrealized gain (loss) on available-for-sale securities (net of tax expense (benefit) of $(516), $285, and $(1,242) for 2018, 2017, and 2016, respectively) (1,939) 585 (2,390) Reclassification adjustment for net realized gain on sale of available-for- sale securities included in net income (net of tax expense (benefit) of $(2), $81, and $370 for 2018, 2017 and 2016, respectively) 6 (152) (712) Change in nonqualified pension plan unrecognized net gain (loss) and unrecognized prior service cost (net of tax expense (benefit) of $21, $(53), and $128 for 2018, 2017, and 2016, respectively) 81 (158) 249 Other comprehensive income (loss) (1,852) 275 (2,853) TOTAL COMPREHENSIVE INCOME SUPPLEMENTAL INFORMATION: COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX, AS OF YEAR-END: Net unrealized loss on securities available-for-sale Net unfunded benefit (liability) for nonqualified pension plan Balance at year-end $ $ $ The accompanying notes to consolidated financial statements are an integral part of these statements. - 46 - 12,993 13,247 9,629 (4,631) (88) (4,719) (2,200) (142) (2,342) (2,633) 16 (2,617) Table of Contents LCNB CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the years ended December 31, (Dollars in thousands, except share data) Balance, December 31, 2015 Net income Other comprehensive 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 Compensation expense relating to stock options Compensation expense relating to restricted stock Common stock dividends, $0.64 per share Balance, December 31, 2016 Net income Other comprehensive income, 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 Balance, December 31, 2017 Common Shares Outstanding Common Shares 9,925,547 $ 76,908 21,088 51,390 — 379 (1,545) 592 61 5 90 9,998,025 76,490 17,609 3,398 4,027 360 51 1 75 10,023,059 76,977 Cumulative effect of changes in accounting principles (1) Balance at December 31, 2017, as adjusted 10,023,059 76,977 Net income Other comprehensive loss, net of taxes Dividend Reinvestment and Stock Purchase Plan 22,936 416 Stock issued for acquisition of Columbus First Bancorp, Inc. 3,253,060 63,598 Exercise of stock options Repurchase of common stock Compensation expense relating to restricted stock Common stock dividends, $0.65 per share 6,987 (21,400) 10,634 72 107 Balance, December 31, 2018 13,295,276 $ 141,170 Retained Earnings 74,629 12,482 Treasury Shares Accumulated Other Comprehensive Income (Loss) (11,665) 236 (2,853) Total Shareholders' Equity 140,108 12,482 (2,853) 379 (1,545) 592 61 5 90 (6,375) (6,375) 80,736 12,972 (6,407) 87,301 525 87,826 14,845 (8,124) 94,547 (11,665) (2,617) 142,944 275 12,972 275 360 51 1 75 (6,407) (11,665) (2,342) 150,271 (11,665) (525) (2,867) — 150,271 (1,852) (348) 14,845 (1,852) 416 63,598 72 (348) 107 (8,124) (12,013) (4,719) 218,985 (1) Represents the impact of adopting Accounting Standards Update No. 2018-02 and No. 2016-01. See Note 1 of the consolidated financial statements for more information. The accompanying notes to consolidated financial statements are an integral part of these statements. - 47 - Table of Contents LCNB CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, (Dollars in thousands) 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) loss from equity securities Realized (gain) loss from sales of debt securities available-for-sale Realized loss from sale of premises and equipment Realized loss from sale and impairment 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: Accrued income receivable Other assets Other liabilities TOTAL ADJUSTMENTS NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of equity securities Proceeds from sales of debt securities available-for-sale Proceeds from maturities and calls of debt securities: Available-for-sale Held-to-maturity Purchases of equity securities Purchases of debt securities: Available-for-sale Held-to-maturity Proceeds from maturities of interest-bearing time deposits Purchase of Federal Reserve Bank stock Net increase in loans Purchase of bank owned life insurance Proceeds from bank owned life insurance mortality 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 received from acquisition of Columbus First Bancorp, Inc. NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 2018 2017 2016 $ 14,845 12,972 12,482 4,073 923 — 228 (738) — 73 8 575 14 (8,924) (223) 9,033 — — 107 215 (1,811) 1,344 4,897 19,742 127 8,545 24,249 6,281 (1,118) — (3,431) 9,354 (1,921) (65,842) — — 21 — (600) 651 12,896 (10,788) 3,308 215 486 1,478 (760) (107) (15) (218) 113 3 (7,513) (166) 7,588 — 1 75 (4) (269) 948 5,163 18,135 43 43,203 25,012 14,057 (80) (26,932) (5,625) — — (29,692) — 189 971 — (6,617) 272 — 14,801 2,557 913 — 928 (746) — (8) (1,074) 33 534 (11,217) (244) 11,353 251 5 90 (216) (791) 634 3,002 15,484 173 92,282 84,529 6,640 (204) (124,730) (25,010) — — (48,153) (4,000) — 526 (182) (9,450) 63 — (27,516) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits Net increase (decrease) in short-term borrowings Proceeds from long-term debt Principal payments on long-term debt Penalty for prepayment of long-term debt Proceeds from issuance of common stock Repurchase 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 $ (29,332) (770) 31,000 (7,214) — 65 (348) — 72 — (7,773) (14,300) (5,346) 25,386 20,040 (25,084) 4,960 — (295) — 41 — — 51 — (6,088) (26,415) 6,521 18,865 25,386 LCNB CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the years ended December 31, (Dollars in thousands) 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 LCNB purchased all of the common stock of Columbus First Bancorp, Inc. on May 31, 2018. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired Less common stock issued Less cash paid for the common stock Liabilities assumed The accompanying notes to consolidated financial statements are an integral part of these statements. - 48 - 2018 2017 2016 3,577 2,185 974 $ 5,908 1,950 244 342,256 63,598 783 277,875 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 Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 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 Ohio and Franklin County Ohio and contiguous areas. 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. Debt 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, 2018 , 2017 , and 2016 , do not reflect any such impairment. Beginning January 1, 2018, equity securities are measured at fair value with changes in fair value recognized in net income. 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. - 49 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. 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. 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 collectability 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. - 50 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. Land is stated at cost. 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. 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. - 51 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 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 Accounting Standards Update ("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, including loans and debt securities, 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 2018 or 2017 . Beginning January 1, 2018, equity securities are required to be measured at fair value with changes in fair value recognized in net income. 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. TREASURY STOCK Common shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the weighted average method. - 52 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. REVENUE RECOGNITION Accounting Standards Codification 606, "Revenue from Contracts with Customers" ("ASC 606") 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. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC 606. The adoption of ASC 606 did not result in a change to the accounting for any of LCNB's revenue streams that are within the scope of the amendments. Revenue-generating activities that are within the scope of ASC 606 and that are presented as non-interest income in LCNB's consolidated statements of income include: • • Fiduciary income - this includes periodic fees due from trust and investment services customers for managing the customers' financial assets. Fees are generally charged on a quarterly or annual basis and are recognized ratably throughout the period, as the services are provided on an ongoing basis. Service charges and fees on deposit accounts - these include general service fees charged for deposit account maintenance and activity and transaction- based fees charged for certain services, such as debit card, wire transfer, or overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services. 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. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ASU No. 2014-09 was issued in May 2014 and was adopted by LCNB as of January 1, 2018. It 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. Adoption did not have a material impact on LCNB's results of operations or financial position. - 53 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 was adopted by LCNB as of January 1, 2018. It 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. Adoption of ASU No. 2016-01 did not have a material impact on LCNB's results of operations or financial position. Upon adoption on January 1, 2018, LCNB reclassified net unrealized gain on equity securities, net of taxes, of $33,000 from accumulated other comprehensive income into retained earnings. Before adoption, equity securities were included with investment securities, available for sale in the consolidated balance sheets and dividends received were included in interest on investment securities, taxable in the consolidated statements of income. After adoption, equity securities are separate line items in the consolidated balance sheets and the consolidated statements of income. Changes in the fair value of equity securities are included in other operating income in the consolidated statements of income. 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 was adopted by LCNB as of January 1, 2018. It 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 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 did not 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 was adopted by LCNB on January 1, 2018. It 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. Adoption of ASU No. 2017-09 did not have a material impact on LCNB's results of operations or financial position. - 54 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and LCNB early adopted the ASU as of January 1, 2018. ASU No. 2018-02 addresses a narrow-scope financial reporting issue that arose as a consequence of the passage of H.R. 1, known as the “Tax Cuts and Jobs Act.” Generally Accepted Accounting Principles 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. Upon adoption, LCNB reclassified stranded tax effects of $492,000 into retained earnings as of January 1, 2018. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE ASU No. 2016-02, "Leases (Topic 842)" ASU No. 2016-02 was issued in February 2016 and requires a lessee to recognize in the statement of financial position a liability to make lease payments ("the lease liability") and a right-of-use asset representing its right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments. A lessee shall classify a lease as a finance lease if it meets any of five listed criteria: 1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. 2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. 3. The lease term is for the major part of the remaining economic life of the underlying asset. 4. The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset. 5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. For finance leases, a lessee shall recognize in the statement of 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. As of January 1, 2019, LCNB recognized discounted right of use assets and lease liabilities totaling approximately $5.9 million for the leases disclosed in Note 8 - Leases. - 55 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 has completed analyzing its data collection efforts and is currently analyzing its 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. 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. - 56 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" ASU No. 2018-13 was issued in August 2018 and applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update modify fair value disclosure requirements, including the deletion, modification, and addition of certain targeted disclosures. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the update and delay adoption of the additional disclosures until the effective date. The amendments are to be applied on a retrospective basis to all periods presented upon adoption, except for certain amendments described in the update that are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. Adoption of ASU No. 2018-13 will not have a material impact on LCNB's results of operations or financial position. ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans" ASU No. 2018-14 was issued in August 2018. The amendments in this update modify disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including the deletion, modification, and addition of certain targeted disclosures. The amendments are effective for public business entities for fiscal years beginning after December 15, 2020. Early adoption is permitted. The amendments are to be applied on a retrospective basis to all periods presented upon adoption. Adoption of ASU No. 2018-14 will not have a material impact on LCNB's results of operations or financial position. ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ASU No. 2018-15 was issued in August 2018 and applies to entities that are a customer in a hosting arrangement, as defined, that is accounted for as a service contract. The amendments in this update require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Capitalized implementation costs are to be expensed over the term of the hosting arrangement. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Adoption of ASU No. 2018-15 is not expected to have a material impact on LCNB's results of operations or financial position. NOTE 2 – ACQUISITIONS 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 merged with and into LCNB on May 31, 2018. LCNB entered into this transaction with the expectation that it would be accretive to income and expand its presence in the Columbus market area. Immediately following the merger of CFB into LCNB, Columbus First Bank, a wholly-owned subsidiary of CFB, merged into the Bank. Columbus First Bank operated from one full-service office located in Worthington, Ohio. That office became a branch of the Bank after the merger. Under the terms of the Merger Agreement, the shareholders of CFB received two shares of LCNB common shares for each outstanding CFB common share. Unexercised stock options of CFB were canceled in exchange for a cash payment. - 57 - Table of Contents NOTE 2 – ACQUISITIONS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) The merger with CFB was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at their estimated fair values as of the merger date. The estimated fair values reported in LCNB's Form 10-Q for the quarterly period ended June 30, 2018 were preliminary, as the pricing study had not been finalized at that time. The following table summarizes the preliminary balances at June 30, 2018, revisions to the preliminary balances, and the balances at December 31, 2018 (in thousands): June 30, 2018 Fair Value Adjustments December 31, 2018 Consideration Paid: Common shares issued (3,253,060 shares issued at $19.55 per share) Cash paid to cancel share based payment awards Identifiable Assets Acquired: Cash and cash equivalents Interest-bearing time deposits Federal Home Loan Bank stock Loans, net Loans held for sale, net Premises and equipment Core deposit intangible Other real estate owned Deferred income taxes Other assets Total identifiable assets acquired Liabilities Assumed: Deposits Short-term borrowings Long-term debt Deferred income taxes Other liabilities Total liabilities assumed Total Identifiable Net Assets Acquired Goodwill resulting from merger 63,598 783 64,381 13,679 10,350 1,207 282,748 1,819 102 2,089 35 — 2,022 314,051 245,036 10,000 22,920 200 491 278,647 35,404 28,977 — — — — — — (615) — — 88 — 352 (658) (833) (606) — 23 (200) 11 (772) (61) 61 63,598 783 64,381 13,679 10,350 1,207 282,133 1,819 102 2,177 35 352 1,364 313,218 244,430 10,000 22,943 — 502 277,875 35,343 29,038 As permitted by ASC No. 805-10-25, Business Combinations, the above estimated amounts may be adjusted up to one year after the closing date of the acquisition to reflect any new information obtained about facts and circumstances existing at the acquisition date. Any changes in the estimated fair values will be recognized in the period the adjustment is identified. The amount of goodwill recorded reflects LCNB's expansion in the Columbus market and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable on LCNB's financial records and will not be deductible for tax purposes. 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. - 58 - Table of Contents NOTE 2 – ACQUISITIONS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) The core deposit intangible will be amortized over the estimated weighted average economic life of the various core deposit types. Direct costs related to the acquisition were expensed as incurred and are recorded as a merger-related expense in the consolidated statements of income. CFB's results of operations are included in the consolidated statements of income from the date of the merger. The amount of CFB's revenue (net interest income plus non-interest income) and net income, excluding merger-related expenses, included in LCNB's consolidated condensed statement of income for the year ended December 31, 2018 were as follows (in thousands): Total revenue Net income $ 6,972 3,896 The following table presents unaudited pro forma information as if the merger with CFB had occurred on January 1, 2016 (in thousands). This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of the core deposit intangible, and related income tax effects. It does not include merger and data conversion costs. The pro forma information does not necessarily reflect the results of operations that would have occurred had the merger with CFB occurred in 2016. In particular, expected operational cost savings are not reflected in the pro forma amounts. Total revenue Net income Basic earnings per common share Diluted earnings per common share 2018 2017 2016 $ 64,558 17,858 1.22 1.22 63,779 15,852 1.20 1.19 61,602 14,407 1.09 1.09 - 59 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 3 - INVESTMENT SECURITIES The amortized cost and estimated fair value of equity and debt securities at December 31 are summarized as follows (in thousands): Amortized Cost Unrealized Gains Unrealized Losses Fair Value 2018 Debt Securities Available-for-Sale: U.S. Treasury notes U.S. Agency notes U.S. Agency mortgage-backed securities Municipal securities: Non-taxable Taxable Debt Securities Held-to-Maturity: Municipal securities: Non-taxable Taxable 2017 Equity Securities with a Readily Determinable Fair Value: Mutual funds Trust preferred securities Equity securities Debt Securities Available-for-Sale: U.S. Treasury notes U.S. Agency notes U.S. Agency mortgage-backed securities Municipal securities: Non-taxable Taxable Debt Securities Held-to-Maturity: Municipal securities: Non-taxable Taxable $ $ $ $ $ $ $ $ $ $ 2,278 80,708 57,584 86,059 17,654 244,283 26,021 3,700 29,721 1,586 49 475 2,110 2,283 84,837 68,347 102,849 20,313 278,629 28,871 3,700 32,571 - 60 - — — 7 77 102 186 84 — 84 2 1 97 100 — 57 33 343 175 608 101 — 101 43 2,368 1,981 1,422 234 6,048 635 146 781 46 — 4 50 24 1,633 1,227 1,018 122 4,024 227 95 322 2,235 78,340 55,610 84,714 17,522 238,421 25,470 3,554 29,024 1,542 50 568 2,160 2,259 83,261 67,153 102,174 20,366 275,213 28,745 3,605 32,350 Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 3 - INVESTMENT SECURITIES (Continued) Information concerning debt securities with gross unrealized losses at December 31, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands): 2018 Available-for-Sale: U.S. Treasury notes U.S. Agency notes U.S. Agency mortgage-backed securities Municipal securities: Non-taxable Taxable Held-to-Maturity: Municipal securities: Non-taxable Taxable 2017 Available-for-Sale: U.S. Treasury notes U.S. Agency notes U.S. Agency mortgage-backed securities Municipal securities: Non-taxable Taxable Held-to-Maturity: Municipal securities: Non-taxable Taxable Less Than Twelve Months Twelve Months or More Fair Value Unrealized Losses Fair Value Unrealized Losses $ $ $ $ $ $ $ $ — 4,988 137 14,264 — 19,389 366 400 766 2,259 33,651 24,433 36,348 11,068 107,759 9,824 — 9,824 — 7 — 49 — 56 1 1 2 24 344 142 315 114 939 133 — 133 2,235 73,351 55,217 58,211 14,407 203,421 18,588 3,154 21,742 — 44,560 41,080 24,197 1,032 110,869 3,542 3,205 6,747 43 2,361 1,981 1,373 234 5,992 634 145 779 — 1,289 1,085 703 8 3,085 94 95 189 Management has determined that the unrealized losses at December 31, 2018 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. - 61 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 3 - INVESTMENT SECURITIES (Continued) Contractual maturities of debt securities at December 31, 2018 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 Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value $ $ 14,768 112,871 57,336 1,724 186,699 57,584 244,283 14,699 110,829 55,633 1,650 182,811 55,610 238,421 3,200 3,143 7,982 15,396 29,721 — 29,721 3,195 3,069 7,787 14,973 29,024 — 29,024 Debt securities with a market value of $106,568,000 and $108,751,000 at December 31, 2018 and 2017 , respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Certain information concerning the sale of equity and debt securities available-for-sale for the years ended December 31 was as follows (in thousands): Proceeds from sales Gross realized gains Gross realized losses 2018 2017 2016 $ 8,545 21 29 43,246 247 14 92,455 1,103 21 Beginning January 1, 2018, equity securities with a readily determinable fair value are carried at fair value, with changes in fair value recognized in other operating income in the consolidated statements of income. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer. LCNB was not aware of any impairment or observable price change adjustments that needed to be made at December 31, 2018 on its investments in equity securities without a readily determinable fair value. The amortized cost and estimated fair value of equity securities with a readily determinable fair value at December 31 are summarized as follows (in thousands): Mutual funds Trust preferred securities Equity securities Total equity securities with a readily determinable fair value 2018 2017 Amortized Cost Fair Value Amortized Cost Fair Value $ $ 1,651 — 471 2,122 1,559 — 519 2,078 1,586 49 475 2,110 1,542 50 568 2,160 Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the year ended December 31, 2018 was as follows (in thousands): Net losses recognized Less net realized gains on equity securities sold Unrealized losses recognized and still held at period end - 62 - $ $ (73) 20 (93) Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 4 - LOANS Major classifications of loans at December 31 were as follows (in thousands): 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 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 Residential real estate Agricultural 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 2018 2017 $ 77,740 740,647 349,127 17,283 13,297 450 36,057 527,947 251,582 17,450 15,194 539 1,198,544 848,769 79 1,198,623 4,046 $ 1,194,577 291 849,060 3,403 845,657 2018 2017 $ — 1,767 1,007 177 2,951 149 3,100 10,516 $ 13,616 — 2,183 604 178 2,965 — 2,965 10,469 13,434 Percentage of total non-accrual and past-due 90 days or more and still accruing to total loans 0.26% 0.35% Percentage of total non-accrual, past-due 90 days or more and still accruing, and accruing restructured loans to total loans 1.14% 1.58% Interest income that would have been recorded during 2018 and 2017 if loans on non-accrual status at December 31, 2018 and 2017 had been current and in accordance with their original terms was approximately $187,000 and $202,000 , 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. - 63 - Table of Contents NOTE 4 - LOANS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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 2018 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: Individually evaluated for impairment Collectively evaluated for impairment Acquired credit impaired loans Balance, end of year 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: Individually evaluated for impairment Collectively evaluated for impairment Acquired credit impaired loans Balance, end of year $ $ $ $ $ $ $ $ $ $ $ $ 378 21 — 1 400 10 390 — 400 2,178 473 (145) 239 2,745 3 2,742 — 2,745 717 213 (234) 71 767 49 718 — 767 76 133 (135) 13 87 — 87 — 87 53 (7) — — 46 — 46 — 46 1 90 (179) 89 1 — 1 — 1 3,403 923 (693) 413 4,046 62 3,984 — 4,046 268 15,101 1,558 36 177 76,609 718,709 344,751 17,363 13,135 922 6,315 3,229 — — 77,799 740,125 349,538 17,399 13,312 — 114 336 450 17,140 1,170,681 10,802 1,198,623 350 (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 60 (7) — — 53 — 53 — 53 303 11,289 1,351 47 177 34,792 1,008 36,103 512,259 248,674 17,516 15,033 4,048 2,024 — — 527,596 252,049 17,563 15,210 - 64 - 5 72 (138) 62 1 — 1 — 1 — 137 402 539 3,575 215 (915) 528 3,403 191 3,212 — 3,403 13,167 828,411 7,482 849,060 Table of Contents NOTE 4 - LOANS (Continued) 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 LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) Commercial & Industrial Commercial, Secured by Real Estate Residential Real Estate Consumer Agricultural Other Total $ $ $ $ 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 66 (6) — — 60 — 60 — 60 3 67 (119) 54 5 — 5 — 5 3,129 913 (750) 283 3,575 177 3,106 292 3,575 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 fixed rate, with maturities ranging from one year to ten years . 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 four-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. The majority 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 and all guarantors, and other factors. Commercial real estate loans are generally originated with a 75% to 85% 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 four-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 or less 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.” - 65 - Table of Contents NOTE 4 - LOANS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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 collectability and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation. The borrower’s ability to repay is of primary importance in the underwriting of consumer loans. Agricultural Loans. LCNB’s portfolio of agricultural loans includes loans for financing agricultural production or for financing the purchase of equipment used in the production of agricultural products. LCNB’s agricultural loans are generally secured by farm machinery, livestock, crops, vehicles, or other agricultural- related collateral. 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. - 66 - Table of Contents NOTE 4 - LOANS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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 2018 Commercial & industrial Commercial, secured by real estate Residential real estate Consumer Agricultural Other Total 2017 Commercial & industrial Commercial, secured by real estate Residential real estate Consumer Agricultural Other Total $ $ $ $ 74,530 718,233 344,432 17,381 13,116 450 1,168,142 35,683 506,833 250,039 17,522 14,233 539 824,849 89 768 — — — — 857 176 2,180 — — — — 3,180 21,124 5,106 18 196 — 29,624 244 18,583 2,010 41 977 — 2,356 21,855 — — — — — — — — — — — — — — 77,799 740,125 349,538 17,399 13,312 450 1,198,623 36,103 527,596 252,049 17,563 15,210 539 849,060 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. - 67 - Table of Contents NOTE 4 - LOANS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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 2018 Commercial & industrial Commercial, secured by real estate Residential real estate Consumer Agricultural Other Total 2017 Commercial & industrial Commercial, secured by real estate Residential real estate Consumer Agricultural Other Total $ $ $ $ 626 347 905 14 19 114 2,025 — 124 362 29 — 82 597 173 141 536 — — — 850 — — 135 2 — — 137 — 347 1,046 — 178 — 799 835 2,487 14 197 114 77,000 739,290 347,051 17,385 13,115 336 77,799 740,125 349,538 17,399 13,312 450 1,571 4,446 1,194,177 1,198,623 — 598 496 — 177 — — 722 993 31 177 82 36,103 526,874 251,056 17,532 15,033 457 36,103 527,596 252,049 17,563 15,210 539 1,271 2,005 847,055 849,060 - 68 - Total Loans Greater Than 90 Days and Accruing — — 149 — — — 149 — — — — — — — Table of Contents NOTE 4 - LOANS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) Impaired loans, including acquired credit 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 2018 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 $ $ $ $ $ $ 926 21,266 4,122 13 177 336 1,457 22,451 4,872 13 177 475 26,840 29,445 264 150 665 23 — — 269 150 684 23 — — 1,102 1,126 1,190 21,416 4,787 36 177 336 1,726 22,601 5,556 36 177 475 27,942 30,571 - 69 - — — — — — — — 10 3 49 — — — 62 10 3 49 — — — 62 945 17,353 3,580 32 177 379 22,466 279 153 583 24 — — 1,039 1,224 17,506 4,163 56 177 379 23,505 71 1,136 258 3 — 41 1,509 17 11 37 1 — — 66 88 1,147 295 4 — 41 1,575 Table of Contents NOTE 4 - LOANS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) 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 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized $ $ $ $ $ $ 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 1,401 16,268 4,088 47 177 554 20,649 22,535 - 70 - — — — — — — — 8 146 29 8 — — 191 8 146 29 8 — — 191 685 14,113 3,216 20 269 441 18,744 311 2,739 596 43 — — 3,689 996 16,852 3,812 63 269 441 22,433 88 1,068 546 2 12 55 1,771 18 45 19 3 — — 85 106 1,113 565 5 12 55 1,856 Table of Contents NOTE 4 - LOANS (Continued) 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 LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) Average Recorded Investment Interest Income Recognized $ $ $ $ $ $ 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 Of the interest income recognized on impaired loans during 2018 , 2017 , and 2016 , approximately $89,000 , $28,000 , and $51,000 , respectively, were recognized on a cash basis. The Company continued to accrue interest on certain loans classified as impaired during 2018 , 2017 , and 2016 because they were restructured or considered well secured and in the process of collection. From time to time, the terms of certain loans are modified as troubled debt restructurings ("TDRs") where concessions are granted to borrowers experiencing financial difficulties. The modification of the terms of such loans may have included one, or a combination of, the following: a temporary or permanent reduction of the stated interest rate of the loan, an increase in the stated rate of interest lower than the current market rate for new debt with similar risk, forgiveness of principal, an extension of the maturity date, or a change in the payment terms. - 71 - Table of Contents NOTE 4 - LOANS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) Loan modifications that were classified as troubled debt restructurings during the years ended December 31 were as follows (dollars in thousands): 2018 2017 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 Totals — $ — 3 1 4 $ — $ — 505 1 506 $ — — 505 1 506 — $ — 1 1 2 $ — $ — 18 14 32 $ — — 9 14 23 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 2018 Commercial & industrial Commercial, secured by real estate Residential real estate Consumer Total 2017 Commercial & industrial Commercial, secured by real estate Residential real estate Consumer Total $ $ $ $ — — 380 — 380 — — — 14 14 — — — — — — — — — — — — — — — — — — — — — — — — — — — 9 — 9 — — 125 1 126 — — — — — — — 505 1 506 — — 9 14 23 LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring. There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the years ended December 31, 2018 and 2016 . 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. Information concerning the post-modification balances of loans that were modified during the year ended December 31 and that were determined to be troubled debt restructurings follows (in thousands): Impaired loans without a valuation allowance at the end of the period Impaired loans with a valuation allowance at the end of the period - 72 - 2018 2017 380 126 — 23 Table of Contents NOTE 4 - LOANS (Continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) 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, 2018 and 2017 were approximately $97,685,000 and $92,818,000 , 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 obtained through a merger Amount capitalized to mortgage servicing rights Amortization of mortgage servicing rights Balance, end of year NOTE 5 - ACQUIRED CREDIT IMPAIRED LOANS 2018 2017 2016 $ $ 396 91 113 (125) 475 428 — 91 (123) 396 488 — 109 (169) 428 Loans acquired through mergers are recorded at fair value with no carryover of the acquired entity's previously established allowance for loan losses. The excess of expected cash flows over the estimated fair value of acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows result in the recognition of additional interest income over the then-remaining contractual lives of the loans. Impaired loans acquired are accounted for under FASB Accounting Standards Codification ("ASC") 310-30. Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and updated loan-to-value information. The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference. The interest component of the cash flows expected to be collected is referred to as the accretable yield and is recognized as interest income over the remaining contractual life of the loan using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses. Subsequent improvements in expected cash flows will result in a reclassification from the nonaccretable difference to the accretable yield. The following table provides certain information at the acquisition date on loans acquired from CFB, not including loans considered to be impaired (in thousands): Contractually required principal at acquisition Less fair value adjustment Fair value of acquired loans Contractual cash flows not expected to be collected - 73 - 281,639 1,801 279,838 1,905 Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 5 - ACQUIRED CREDIT IMPAIRED LOANS (continued) The following table provides details at the acquisition date on acquired impaired loans obtained through the merger with CFB that are accounted for in accordance with FASB ASC 310-30 (in thousands): Contractually required principal at acquisition Less contractual cash flows not expected to be collected (nonaccretable difference) Expected cash flows at acquisition Less interest component of expected cash flows (accretable discount) Fair value of acquired impaired loans - 74 - 4,989 906 4,083 151 3,932 Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 5 - ACQUIRED CREDIT IMPAIRED LOANS (continued) 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): Acquired from First Capital Bancshares, Inc. Commercial & industrial Commercial, secured by real estate Residential real estate Other loans, including deposit overdrafts Total Acquired from Eaton National Bank & Trust Co. Commercial & industrial Commercial, secured by real estate Residential real estate Other loans, including deposit overdrafts Total Acquired from BNB Bancorp, Inc. Commercial & industrial Commercial, secured by real estate Residential real estate Other loans, including deposit overdrafts Total Acquired from Columbus First Bancorp, Inc. Commercial & industrial Commercial, secured by real estate Residential real estate Other loans, including deposit overdrafts Total Total Commercial & industrial Commercial, secured by real estate Residential real estate Other loans, including deposit overdrafts Total 2018 2017 13 818 911 — 20 848 947 — 1,742 1,815 503 1,547 784 336 3,170 — 1,396 158 — 1,554 406 2,554 1,376 — 4,336 922 6,315 3,229 336 10,802 988 1,699 892 402 3,981 — 1,501 185 — 1,686 1,008 4,048 2,024 402 7,482 $ $ $ $ $ $ $ $ $ $ The following table provides the outstanding balance and related carrying amount for acquired impaired loans at December 31 (in thousands): Outstanding balance Carrying amount - 75 - 2018 2017 $ 13,371 10,802 9,065 7,482 Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 5 - ACQUIRED CREDIT IMPAIRED LOANS (continued) Activity during 2018 and 2017 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 2018 2017 669 151 4 — (81) 743 1,080 — 564 (170) (805) 669 $ $ 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 Additions due to merger Reductions due to sales Balance, end of year 2018 2017 $ $ — 244 35 (35) 244 — 974 — (974) — The total recorded investment in residential consumer mortgage loans secured by residential real estate that was in the process of foreclosure at December 31, 2018 was $322,000 . 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 Depreciation charged to expense was $1,776,000 in 2018 , $1,549,000 in 2017 , and $1,210,000 in 2016 . - 76 - 2018 2017 $ $ 8,000 30,903 16,089 142 55,134 22,507 32,627 8,190 31,965 15,648 120 55,923 20,996 34,927 Table of Contents NOTE 8 - LEASES LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) 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, 2018 that have terms in excess of one year were as follows (in thousands): 2019 2020 2021 2022 2023 Thereafter Total $ $ 449 412 349 212 188 3,258 4,868 Rental expense for all leased branches and equipment was approximately $519,000 in 2018 , $569,000 in 2017 , and $545,000 in 2016 . NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS The following table shows the changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 (in thousands): Balance, beginning of year Additions from acquisitions Balance, end of year 2018 2017 $ $ 30,183 $ 29,038 30,183 — 59,221 $ 30,183 Other intangible assets in the consolidated balance sheets at December 31, 2018 and 2017 were as follows (in thousands): Gross Intangible Assets 2018 Accumulated Amortization Net Intangible Assets Gross Intangible Assets 2017 Accumulated Amortization Core deposit intangibles Mortgage servicing rights Total $ $ 8,544 1,483 10,027 3,977 1,008 4,985 4,567 475 5,042 6,458 1,279 7,737 3,055 883 3,938 Net Intangible Assets 3,403 396 3,799 The estimated aggregate future amortization expense for each of the next five years for intangible assets remaining as of December 31, 2018 is as follows (in thousands): 2019 2020 2021 2022 2023 $ 1,154 1,140 1,123 546 487 - 77 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) 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. 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 2018 2017 5,000 492 4,508 3,000 231 2,769 3,372 2,257 $ $ $ The net affordable housing tax credit investment is included in other assets and the unfunded commitment is included in accrued interest and other liabilities in the Consolidated Balance Sheets. LCNB expects to fund the unfunded commitment over eleven 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 $ 267 261 180 138 103 81 Year ended December 31, 2018 2017 2016 NOTE 11 - TIME DEPOSITS Contractual maturities of time deposits at December 31, 2018 were as follows (in thousands): 2019 2020 2021 2022 2023 Thereafter $ 136,090 78,968 37,625 34,513 7,472 2,202 $ 296,870 The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2018 and 2017 was $39,361,000 and $17,759,000 , respectively. - 78 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 12 - BORROWINGS Funds borrowed from the FHLB at December 31 by year of maturity were as follows (dollars in thousands): 2018 2019 2020 2021 2022 2023 Total 2017 2018 2019 Total Outstanding Balance Average Rate $ $ $ $ 6,052 18,988 11,992 5,000 5,000 47,032 248 55 303 1.74% 2.40% 2.42% 2.97% 3.02% 2.45% 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 $303 million and $217 million at December 31, 2018 and 2017 , 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, 2018 was approximately $45.7 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 2018 2017 Amount Rate Amount Rate $ $ 4,230 52,000 56,230 3.00% $ 2.48% 2.52% $ — 47,000 47,000 —% 1.43% 1.43% At December 31, 2018 , the Company had short-term borrowing arrangements with two 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 is a short-term line of credit for a maximum amount of $30 million at an interest rate equal to the lending institution’s federal funds rate plus a spread of 50 basis points. Under the terms of the Cash Management Advance program with the FHLB, the Company can borrow up to $81.2 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. The interest rate is the published rate in effect at the time of the advance. This agreement expires on August 28, 2019 . - 79 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 13 - INCOME TAXES The provision for federal income taxes consists of (in thousands): Income taxes currently payable Revaluation of net deferred tax liability Deferred income tax provision (benefit) Provision for income taxes 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 Revaluation of net deferred tax liability Captive insurance premium income Other – net Effective tax rate 2018 2017 2016 $ $ 2,721 — 228 2,949 3,018 (224) 1,478 4,272 3,515 — 928 4,443 2018 2017 2016 21.0 % 34.0 % 34.0 % (3.1)% (0.9)% — % (0.9)% 0.5 % 16.6 % (6.0)% (1.7)% (1.3)% (0.9)% 0.7 % 24.8 % (6.3)% (1.5)% — % — % 0.1 % 26.3 % Deferred tax assets and liabilities, included in the Consolidated Balance Sheets with other assets in 2018 and accrued interest and other liabilities in 2017, consist of the following at December 31 (in thousands): 2018 2017 Deferred tax assets: Allowance for loan losses Net unrealized losses on investment securities available-for-sale Fair value adjustment on loans acquired from mergers Deferred compensation Other Deferred tax liabilities: Depreciation of premises and equipment Amortization of intangibles Prepaid expenses Deferred loan fees FHLB stock dividends Fair value adjustment on securities acquired from mergers Net deferred tax (liabilities) assets - 80 - $ $ 849 1,240 723 706 432 3,950 (1,551) (1,499) (243) (1) (216) (6) (3,516) 434 715 707 238 760 471 2,891 (1,672) (1,030) (210) (1) (216) (9) (3,138) (247) Table of Contents NOTE 13 - INCOME TAXES (continued) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) As of December 31, 2018 and 2017 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, 2018 . The Company is no longer subject to examination by federal tax authorities for years before 2015. The Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017. Among other changes, the Tax Act reduced the US Federal corporate tax rate from 35% to 21%. At December 31, 2017, the Company had 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 21%. 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. 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 2018 2017 $ 23,978 18,964 2,961 1,077 31,446 169,031 16,249 1,080 245,822 $ 2,747 1,150 20,984 90,147 16,441 294 150,727 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. - 81 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued) 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, 2018 totaled approximately $185,000 . 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 2018 and 2017 , the Bank maintained average reserve balances of $4,982,000 and $7,924,000 , respectively. The reserve balances at December 31, 2018 and 2017 were $1,433,000 and $1,422,000 , respectively. 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 2019 , the restrictions generally limit dividends to the aggregate of net income for the year 2019 plus the net earnings retained for 2018 and 2017 . In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. At December 31, 2018 , approximately $21,379,000 of the Bank’s earnings retained was available for dividends in 2019 under this guideline. Dividends in excess of these limitations would require the prior approval of the Comptroller of the Currency. 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 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 was 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: 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) - 82 - Minimum Requirement Minimum Requirement with Capital Conservation Buffer for 2018 To Be Considered Well-Capitalized 4.5% 6.0% 8.0% 4.0% 6.375% 7.875% 9.875% N/A 6.5% 8.0% 10.0% 5.0% Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 15 - REGULATORY MATTERS (continued) As of the most recent notification from its regulators, the Bank was 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. A summary of the regulatory capital of the Bank at December 31 follows (dollars in thousands): Regulatory Capital: Shareholders' equity Goodwill and other intangible assets Accumulated other comprehensive loss Tier 1 risk-based capital Eligible allowance for loan losses Total risk-based capital Capital Ratios: Common Equity Tier 1 Capital to risk-weighted assets Tier 1 capital to risk-weighted assets Total capital (tier 1 capital plus tier 2 capital) to risk-weighted assets Leverage ratio (tier 1 capital to adjusted quarterly average total assets) 2018 2017 215,395 (63,788) 4,719 156,326 4,046 160,372 12.65% 12.65% 12.98% 9.96% 148,163 (32,906) 2,859 118,116 3,403 121,519 13.07% 13.07% 13.45% 9.36% 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 2018 and 2017 were as follows (in thousands): Balance at beginning of year Cumulative effect of changes in accounting principles Balance at beginning of period, as adjusted Before reclassifications Reclassifications Balance at end of year Unrealized Gains and Losses on Available-for- Sale Securities $ (2,200) (498) (2,698) (1,939) 6 (4,631) $ 2018 Changes in Pension Plan Assets and Benefit Obligations Unrealized Gains and Losses on Available-for- Sale Securities 2017 Changes in Pension Plan Assets and Benefit Obligations Total (2,342) (2,633) 16 (525) (2,867) (1,858) 6 (4,719) — (2,633) 585 (152) (2,200) — 16 (158) — (142) (142) (27) (169) 81 — (88) - 83 - Total (2,617) — (2,617) 427 (152) (2,342) LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE INCOME (continued) Reclassifications out of accumulated other comprehensive income (loss) during 2018 and 2017 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 2018 2017 Affected Line Item in the Consolidated Statements of Income $ $ (8) (2) (6) 233 Net gain on sale of securities 81 Provision for income taxes 152 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 Plan's employer identification number Plan number Pentegra Defined Benefit Plan for Financial Institutions 13-5645888 333 The plan is at least 80% funded as of July 1, 2018 and 2017 . 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 2018 2017 2016 $ 1,048 457 1,054 374 969 359 The Company expects a minimum contribution of $ 160,000 to the qualified noncontributory defined benefit retirement plan in 2019 . - 84 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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, 2018 , the amount of the liability for this plan was $99,000 , 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, 2018 and 2017 was $3,364,000 and $3,406,000 , 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, 2018 and 2017 is $1,092,000 and $1,249,000 , respectively. The average discount rate used to determine the present value of the obligations was approximately 5.2% in 2018 and 5.2% in 2017 . The service cost associated with the plans was $0 for 2018 , $0 for 2017 , and $0 for 2016 . Interest costs were $59,000 , $62,000 , and $63,000 for 2018 , 2017 , and 2016 , 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 2018 2017 2016 $ $ — 69 16 85 — 69 — 69 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 2018 2017 2016 1,971 1,727 — 69 (86) (54) — 69 238 (63) 1,900 1,971 $ $ 41 78 168 287 1,843 41 78 (209) (26) 1,727 Amounts recognized in other liabilities in the consolidated balance sheets for the nonqualified defined benefit retirement plan at December 31, 2018 and 2017 were $1,900,000 and $1,971,000 , respectively. The accumulated benefit obligation for the nonqualified defined benefit retirement plan at December 31, 2018 and 2017 was $1,900,000 and $1,971,000 , respectively. - 85 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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 2018 2017 2016 $ $ 88 88 141 141 (16) (16) The estimated unrecognized net actuarial gain that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2019 for the nonqualified defined benefit retirement plan is $16,000 . 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 2018 2017 2016 4.22% 2.00% 3.60% 2.00% 1.00 3.60% 2.00% 4.14% 2.00% 1.00 4.14% 2.00% 4.34% 2.00% 1.00 The nonqualified defined benefit retirement plan is not funded. Therefore no contributions will be made in 2019 . Estimated future benefit payments reflecting expected future service for the years ended after December 31, 2018 are (in thousands): 2019 2020 2021 2022 2023 2024-2028 $ 132 132 132 132 132 641 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 of common stock. 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 newly issued shares. - 86 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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, 2018 were as follows: Outstanding Stock Options Exercisable Stock Options Exercise Price Range $11.00 - 12.99 Number 13,278 13,278 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price 11.98 11.98 Number 13,278 13,278 2.1 2.1 Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) 11.98 11.98 2.1 2.1 The following table summarizes stock option activity for the years indicated: 2018 Weighted Average Exercise Price Aggregate Intrinsic Value (in thousands) (1) 11.42 10.34 — 11.98 $ 42 2017 Weighted Average Exercise Price Aggregate Intrinsic Value (in thousands) (1) 12.17 14.94 17.88 11.42 $ 183 Options 24,669 $ (3,398) (1,006) 20,265 Options 20,265 (6,987) — 13,278 Options 83,861 $ (51,390) (7,802) 24,669 Outstanding at January 1, Exercised Expired Outstanding at December 31, Exercisable at December 31, (1) Aggregate Intrinsic Value is defined as the amount by which the current market value of the underlying stock exceeds the exercise price of the option. 42 20,265 11.42 13,278 11.98 183 22,924 2016 Weighted Average Exercise Price Aggregate Intrinsic Value (in thousands) (1) 12.39 11.53 18.76 12.17 $ 12.13 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 2018 2017 2016 $ 50 72 7 25 51 5 273 255 288 592 59 Total expense related to options included in salaries and wages in the consolidated statements of income for the years ended December 31, 2018 , 2017 , and 2016 was $0 , $1,000 , and $5,000 , respectively. The related tax benefit for 2018 , 2017 , and 2016 was $0 , $0 , and $2,000 , respectively. Compensation costs related to option awards were recognized in full during the first quarter 2017. Restricted stock awards granted under the 2015 Plan were as follows: Outstanding at January 1, Granted Vested Forfeited Outstanding at December 31, 2018 2017 2016 Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Shares 8,817 $ 10,634 (2,493) — 16,958 $ 16.44 19.20 17.38 — 18.94 8,624 $ 4,027 (3,834) — 8,817 $ 15.47 22.60 16.73 — 16.44 16,038 $ — (7,414) — 8,624 $ 15.47 — 15.47 — 15.47 - 87 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 18 - STOCK-BASED COMPENSATION (continued) Total expense related to restricted stock awards included in salaries and wages in the consolidated statements of income for the years ended December 31, 2018 , 2017 , and 2016 was $107,000 , $75,000 , and $90,000 respectively. The related tax benefit for the years ended December 31, 2018 , 2017 , and 2016 was $23,000 , $26,000 , and $31,000 , respectively. Unrecognized compensation expense for restricted stock awards was $181,000 at December 31, 2018 and is expected to be recognized over a period of 4.1 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. 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 Weighted average common shares outstanding, gross Less average participating securities Weighted average number of shares outstanding used in the calculation of basic earnings per common share Add dilutive effect of: Stock options Stock warrants Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share Earnings per common share: Basic Diluted $ $ 2018 2017 2016 14,845 18 14,827 12,972 7 12,965 12,482 13 12,469 11,950,360 10,011,358 15,010 5,783 9,958,300 10,243 11,935,350 10,005,575 9,948,057 6,903 — 6,936 — 10,765 17,548 11,942,253 10,012,511 9,976,370 1.24 1.24 1.30 1.29 1.26 1.25 Options to purchase 12,962 shares of common stock at a weighted average price of $18.41 per share were outstanding at December 31, 2016 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, 2018 or 2017 . - 88 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) 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 2018 2017 $ $ 1,870 419 1,052 (903) 2,438 1,447 669 — (246) 1,870 Deposits from executive officers, directors and related interests of such persons held by the Company at December 31, 2018 and 2017 amounted to $2,849,000 and $5,698,000 , respectively. NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset. Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels: • • Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date. Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data. • Level 3 – inputs that are unobservable for the asset or liability. Equity Securities With a Readily Determinable Fair Value Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the consolidated statements of income. Fair values for trust preferred and equity securities are determined based on market quotations (level 1). LCNB has invested in two mutual funds that are traded in active markets and their fair values are based on market quotations (level 1). Investments in another two mutual funds are measured at fair value using net asset values ("NAV") and are considered level 1 because the NAVs are determined and published and are the basis for current transactions. Debt Securities, Available-for-Sale 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 (loss). LCNB utilizes a pricing service for determining the fair values of its debt 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). - 89 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) • 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. Assets Recorded at Fair Value on a Nonrecurring Basis 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. These inputs are considered to be level 3. Other real estate owned is adjusted to fair value, less costs to sell, 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. Other repossessed assets are valued at estimated sales prices, less costs to sell. The inputs for real estate owned and other repossessed assets are considered to be level 3. - 90 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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): 2018 Recurring fair value measurements: Equity securities with a readily determinable fair value: Equity securities Mutual funds Mutual funds measured at net asset value Debt securities available-for-sale: U.S. Treasury notes U.S. Agency notes U.S. Agency mortgage-backed securities Municipal securities: Non-taxable Taxable Total recurring fair value measurements Nonrecurring fair value measurements: Impaired loans Other real estate owned and repossessed assets Total nonrecurring fair value measurements 2017 Recurring fair value measurement: Equity securities with a readily determinable fair value: Trust preferred securities Equity securities Mutual funds Mutual funds measured at net asset value Debt securities available-for-sale: U.S. Treasury notes U.S. Agency notes U.S. Agency mortgage-backed securities Municipal securities: Non-taxable Taxable 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) $ $ $ $ $ $ $ 519 39 1,520 2,235 78,340 55,610 84,714 17,522 240,499 1,039 244 1,283 50 568 23 1,519 2,259 83,261 67,153 102,174 20,366 277,373 519 39 1,520 2,235 — — — — 4,313 — — — 50 568 23 1,519 2,259 — — — — 4,419 — — — — 78,340 55,610 84,714 17,522 236,186 — — — — — — — — 83,261 67,153 102,174 20,366 272,954 — — — — — — — — — 1,039 244 1,283 — — — — — — — — — — 3,359 — — 3,359 - 91 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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, 2018 and 2017 (dollars in thousands): Fair Value Valuation Technique Unobservable Inputs High Low Weighted Average Range 2018 Impaired loans $ 45 Estimated sales price Adjustments for comparable properties, discounts to reflect current market conditions 994 Discounted cash flows Discount rate Other real estate owned 244 Estimated sales price Adjustments for comparable properties, discounts to reflect current market conditions Not applicable 8.25% Not applicable 4.50% 6.86% 2017 Impaired loans $ 1,753 Estimated sales price Adjustments for comparable properties, discounts to reflect current market conditions 1,606 Discounted cash flows Discount rate Not applicable 8.25% 3.25% 6.27% - 92 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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): 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) Carrying Amount Fair Value $ $ 20,040 29,721 4,653 4,845 20,040 29,024 4,653 4,845 1,194,577 1,183,041 4,317 4,317 20,040 — 4,653 4,845 — — 1,300,919 1,301,298 56,230 47,032 690 56,230 48,255 690 1,004,057 56,230 — — 25,386 32,571 2,732 3,638 25,386 32,350 2,732 3,638 845,657 813,368 3,511 3,511 1,085,821 1,087,086 47,000 47,000 303 329 307 329 25,386 — 2,732 3,638 — — 894,046 47,000 — — — — — — — 4,317 297,241 — 48,255 690 — — — — — 3,511 193,040 — 307 329 — 29,024 — — 1,183,041 — — — — — — 32,350 — — 813,368 — — — — — 2018 FINANCIAL ASSETS: Cash and cash equivalents Debt 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 2017 FINANCIAL ASSETS: Cash and cash equivalents Debt 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 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, 2018 and 2017 . - 93 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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. Equity securities without a readily determinable fair value Equity securities without a readily determinable fair value are measured at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer. Debt securities, held-to-maturity Fair values for debt 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 The estimated fair value of loans as of December 31, 2018 follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The fair value calculation at that date discounted estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors. The fair value estimate shown as of December 31, 2017 used an “entry price” approach. The fair value calculation for that date discounted estimated future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Consequently, the fair value disclosures for December 31, 2018 and 2017 are not directly comparable. 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. - 94 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (Continued) NOTE 22 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth certain quarterly results for the years ended December 31, 2018 and 2017 (dollars in thousands, except per share data): 2018 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 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 $ $ $ $ $ $ March 31 June 30 Sep. 30 Dec. 31 Three Months Ended 11,142 954 10,188 79 10,109 2,636 9,549 3,196 483 2,713 12,538 1,170 11,368 224 11,144 2,791 10,711 3,224 486 2,738 15,070 1,967 13,103 659 12,444 2,921 10,317 5,048 847 4,201 15,844 2,334 13,510 (39) 13,549 2,702 9,925 6,326 1,133 5,193 0.27 0.27 0.25 0.25 0.32 0.32 0.40 0.40 10,864 877 9,987 15 9,972 2,430 7,968 4,434 1,188 3,246 10,934 861 10,073 222 9,851 2,790 8,611 4,030 1,027 3,003 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 0.32 0.32 0.30 0.30 0.31 0.31 0.37 0.36 - 95 - Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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 Other income 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 $ - 96 - 2018 2017 715 816 216,830 624 218,985 308 919 148,850 194 150,271 — — 218,985 218,985 150,271 150,271 $ $ $ $ 2018 2017 2016 $ 10,383 6,800 7,300 35 — (66) 36 14 — 10,352 6,850 1,668 1,290 8,684 341 5,820 14,845 5,560 380 7,032 12,972 38 8 — 7,346 1,014 6,332 336 5,814 12,482 Table of Contents LCNB CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018 (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 equity securities Proceeds from sales of equity securities Investments in subsidiaries Cash paid for business acquisition, net of cash received Net cash flows provided by (used in) investing activities Cash flows from financing activities: Proceeds from issuance of common stock Payments to repurchase 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 2018 2017 2016 $ 14,845 12,972 12,482 (5,820) (383) 8,642 (90) 107 — (268) (251) 416 (348) — (8,124) 72 (7,984) 407 308 715 (7,032) 84 6,024 (54) 93 (250) — (211) 360 — — (6,407) 51 (5,996) (183) 491 308 (5,814) 126 6,794 (177) 228 — — 51 379 — (1,545) (6,375) 653 (6,888) (43) 534 491 $ - 97 - Table of Contents 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 2018 Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting During the fourth quarter 2018 , 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. - 98 - Table of Contents 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 23, 2019 , which Proxy Statement will be mailed to shareholders within 120 days from the end of the fiscal year ended December 31, 2018 , 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. - 99 - Table of Contents LCNB CORP. AND SUBSIDIARIES Item 15. Exhibits, Financial Statement Schedules (a)1. Financial Statements PART IV REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 2018 and 2017. Consolidated Statements of Income for the Years Ended December 31, 2018, 2017, and 2016. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016. Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2018, 2017, and 2016. Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016. Notes to Consolidated Financial Statements 2. 3. Financial Statement Schedules – None Exhibits required by Item 601 Regulation S-K. (a) Exhibit No . Exhibit Description 2.1 2.2 2.3 2.4 3.1 3.2 10.1 10.2 10.3 10.5 10.7 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. (This document represents the Amended and Restated Articles of Incorporation of LCNB Corp. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, 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. 14.1 LCNB Corp. Code of Business Conduct and Ethics. - 100 - Table of Contents LCNB CORP. AND SUBSIDIARIES (a) Exhibit No . Exhibit Description 21 23 31.1 31.2 32 101 LCNB Corp. subsidiaries. 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, 2018 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. - 101 - Table of Contents 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 March 6, 2019 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 & Director (Principal Executive Officer) March 6, 2019 /s/ Robert C. Haines II Robert C. Haines II, Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) March 6, 2019 /s/ Spencer S. Cropper Spencer S. Cropper Chairman of the Board of Directors March 6, 2019 /s/ Eric J. Meilstrup Eric J. Meilstrup, President & Director March 6, 2019 /s/ Mary E. Bradford Mary E Bradford, Director March 6, 2019 Stephen P. Wilson, Director March 6, 2019 /s/ William G. Huddle William G. Huddle, Director March 6, 2019 /s/ Michael J Johrendt Michael J. Johrendt, Director March 6, 2019 /s/ William H. Kaufman William H. Kaufman, Director March 6, 2019 /s/ John H. Kochensparger III John H. Kochensparger III, Director March 6, 2019 /s/ Anne E. Krehbiel Anne E. Krehbiel, Director March 6, 2019 /s/ Valerie S. Krueckeberg Valerie S. Krueckeberg, Director March 6, 2019 - 102 - Exhibit 14.1 LCNB Corp. Code of Business Conduct and Ethics The reputation and integrity of LCNB Corp. (together with its subsidiaries, the “ Company ”) are valuable assets that are vital to the Company’s success. Each employee of the Company, including each of the Company’s officers and directors, is responsible for conducting the Company’s business in a manner that demonstrates a commitment to the highest standards of integrity. The purposes of this Code of Business Conduct and Ethics (the “ Code ”) are to focus officers, directors and employees on areas of ethical risk, provide guidance to help such individuals recognize and deal with ethical issues, provide mechanisms for them to report unethical conduct and foster among employees a culture of honesty and accountability. No code of conduct can replace the thoughtful behavior of an ethical employee. Accordingly, dishonest or unethical conduct or conduct that is illegal will constitute a violation of this Code, regardless of whether the Code specifically addresses such conduct. This Code is not intended to create any contract (express or implied) with you, including without limitation any employment contract, or to constitute any promise that your employment will not be terminated except for cause. Depending upon a person’s particular position with the Company, some of the provisions of this Code will not be applicable to every person. Officers, directors and employees should be aware that other Company policies, as well as applicable laws, rules and regulations, may govern their actions in addition to this Code, and you should read this Code in conjunction with all of the Company’s other policy statements, including, for example, the Company’s Insider Trading Policy. 1. Introduction . 1.1 The Board of Directors of LCNB Corp. has adopted this Code in order to: (a) interest; promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of (b) promote full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission (the “ SEC ”) and in other public communications made by the Company; (c) promote compliance with applicable governmental laws, rules and regulations; (d) promote the protection of Company assets, including corporate opportunities and confidential information; (e) promote fair dealing practices; (f) deter wrongdoing; and (g) ensure accountability for adherence to the Code. (g) 1.2 All directors, officers and employees are required to be familiar with the Code, comply with its provisions and report any suspected violations as described below in Section 10, Reporting and Enforcement. 2. Honest and Ethical Conduct . 2.1 The Company’s policy is to promote high standards of integrity by conducting its affairs honestly and ethically. 2.2 Each director, officer and employee must act with integrity and observe the highest ethical standards of business conduct in his or her dealings with the Company’s customers, suppliers, partners, service providers, competitors, employees and anyone else with whom he or she has contact in the course of performing his or her job. 3. Conflicts of Interest . 3.1 A conflict of interest occurs when an individual’s private interest (or the interest of a member of his or her family) interferes, or even appears to interfere, with the interests of the Company as a whole. A conflict of interest can arise when an employee, officer or director (or a member of his or her family) takes actions or has interests that may make it difficult to perform his or her work for the Company objectively and effectively. Conflicts of interest also arise when an employee, officer or director (or a member of his or her family) receives improper personal benefits as a result of his or her position in the Company. 3.2 Whether or not a conflict of interest exists or will exist can be unclear. Conflicts of interest should be avoided unless specifically authorized as described in Section 3.3. 3.3 Persons other than directors and executive officers who have questions about a potential conflict of interest or who become aware of an actual or potential conflict should discuss the matter with, and seek a determination and prior authorization or approval from, their supervisor or the Chief Operating Officer. A supervisor may not authorize or approve conflict of interest matters or make determinations as to whether a problematic conflict of interest exists without first providing the Chief Operating Officer with a written description of the activity and seeking the Chief Operating Officer’s written approval. If the supervisor is himself involved in the potential or actual conflict, the matter should instead be discussed directly with the Chief Compliance Officer. Directors and executive officers must seek determinations and prior authorizations or approvals of potential conflicts of interest exclusively from the Audit Committee of the Board of Directors of the Company (the “Audit Committee”). 4. Compliance . 4.1 Employees, officers and directors should comply, both in letter and spirit, with all applicable laws, rules and regulations in the cities, states and countries in which the Company operates. 4.2 Although not all employees, officers and directors are expected to know the details of all applicable laws, rules and regulations, it is important to know enough to determine when to seek advice from appropriate personnel. Questions about compliance should be addressed to the Chief Operating Officer. With the approval of the Audit Committee, a director may also seek guidance from the Company’s outside legal counsel. 4.3 No director, officer or employee may purchase or sell any Company securities while in possession of material non- public information regarding the Company, nor may any director, officer or employee purchase or sell another company’s securities while in possession of material non-public information regarding that company. It is against Company policies and illegal for any director, officer or employee to use material non-public information regarding the Company or any other company to: (a) obtain profit for himself or herself; or (b) directly or indirectly “tip” others who might make an investment decision on the basis of that information. 5. Disclosure . 5.1 The Company’s periodic reports and other documents filed with the SEC, including all financial statements and other financial information, must comply with applicable federal securities laws and SEC rules. 5.2 Each director, officer and employee who contributes in any way to the preparation or verification of the Company’s financial statements and other financial information must ensure that the Company’s books, records and accounts are accurately maintained. Each director, officer and employee must cooperate fully with the Company’s accounting and internal audit departments, as well as the Company’s independent public accountants and legal counsel. 5.3 Each director, officer and employee who is involved in the Company’s disclosure process must: (a) be familiar with and comply with the Company’s disclosure controls and procedures and its internal control over financial reporting; and (b) take all necessary steps to ensure that all filings with the SEC and all other public communications about the financial and business condition of the Company provide full, fair, accurate, timely and understandable disclosure. 6. Protection and Proper Use of Company Assets . 6.1 All directors, officers and employees should protect the Company’s assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company’s profitability and are prohibited. 6.2 All Company assets should be used only for legitimate business purposes. Any suspected incident of fraud or theft should be reported for investigation immediately. 6.3 The obligation to protect Company assets includes the Company’s proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks, and copyrights, as well as business and marketing plans, engineering and manufacturing ideas, designs, databases, records and any non-public financial data or reports. Unauthorized use or distribution of this information is prohibited and could also be illegal and result in civil or criminal penalties. 7. Corporate Opportunities . All directors, officers and employees owe a duty to the Company to advance its interests when the opportunity arises. Directors, officers and employees are prohibited from taking for themselves personally (or for the benefit of friends or family members) opportunities that are discovered through the use of Company assets, property, information or position. Directors, officers and employees may not use Company assets, property, information or position for personal gain (including gain of friends or family members). In addition, no director, officer or employee may compete with the Company. 8. Confidentiality . Directors, officers and employees should maintain the confidentiality of information entrusted to them by the Company or by its customers, suppliers or partners, except when disclosure is expressly authorized or is required or permitted by law. Confidential information includes all non-public information (regardless of its source) that might be of use to the Company’s competitors or harmful to the Company or its customers, suppliers or partners if disclosed. 9. Fair Dealing . Each director, officer and employee must deal fairly with the Company’s customers, suppliers, partners, service providers, competitors, employees and anyone else with whom he or she has contact in the course of performing his or her job. No director, officer or employee may take unfair advantage of anyone through manipulation, concealment, abuse or privileged information, misrepresentation of facts or any other unfair dealing practice. 10. Reporting and Enforcement . 10.1 Reporting and Investigation of Violations. (a) Actions prohibited by this Code involving directors or executive officers must be reported to the Audit Committee. (b) Actions prohibited by this Code involving anyone other than a director or executive officer must be reported to the reporting person’s supervisor or the Chief Operating Officer. (c) After receiving a report of an alleged prohibited action, the Audit Committee, the relevant supervisor or the Chief Compliance Officer must promptly take all appropriate actions necessary to investigate. (d) All directors, officers and employees are expected to cooperate in any internal investigation of misconduct. 10.2 Enforcement. (a) The Company must ensure prompt and consistent action against violations of this Code. (b) If, after investigating a report of an alleged prohibited action by a director or executive officer, the Audit Committee determines that a violation of this Code has occurred, the Audit Committee will report such determination to the Board of Directors. (c) If, after investigating a report of an alleged prohibited action by any other person, the relevant supervisor or Chief Operating Officer determines that a violation of this Code has occurred, the supervisor or Chief Operating Officer will report such determination to the Board of Directors. (d) Upon receipt of a determination that there has been a violation of this Code, the Board of Directors will take such preventative or disciplinary action as it deems appropriate, including, but not limited to, reassignment, demotion, dismissal and, in the event of criminal conduct or other serious violations of the law, notification of appropriate governmental authorities. 10.3 Waivers. (a) The Board of Directors may, in its discretion, waive any violation of this Code. (b) Any waiver for a director or an executive officer shall be disclosed as required by SEC and NASDAQ rules. 10.4 Prohibition on Retaliation. The Company does not tolerate acts of retaliation against any director, officer or employee who makes a good faith report of known or suspected acts of misconduct or other violations of this Code. THERE ARE MANY OTHER POLICIES THAT ARE VERY IMPORTANT TO THE COMPANY AND ITS OPERATIONS. NOTHING IN THIS CODE OF BUSINESS CONDUCT AND ETHICS SHALL RELIEVE ANY PERSON FROM COMPLYING WITH ANY OTHER APPLICABLE POLICY OF THE COMPANY. Approved by the Board of Directors on January 21, 2019. LCNB CORP. SUBSIDIARIES EXHIBIT 21 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. Consent of Independent Registered Public Accounting Firm EXHIBIT 23 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. 333-212599) dated July 20, 2016 and Form S-4 (No. 333-223119) dated March 6, 2018 of LCNB Corp. of our reports dated March 6, 2019 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, 2018. /s/ BKD, LLP BKD, LLP Cincinnati, Ohio March 6, 2019   In connection with the Annual Report of LCNB Corp. on Form 10-K for the period ending December 31, 2018 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steve P. Foster, Chief Executive Officer of LCNB Corp., certify, that: CERTIFICATIONS EXHIBIT 31.1 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 March 6, 2019 In connection with the Annual Report of LCNB Corp. on Form 10-K for the period ending December 31, 2018 , 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: CERTIFICATIONS EXHIBIT 31.2 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 6, 2019 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32 In connection with the Annual Report of LCNB Corp. (the "Company") on Form 10-K for the period ending December 31, 2018 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 /s/ Robert C. Haines II Robert C. Haines II Executive Vice President and Chief Financial Officer Date: March 6, 2019 

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