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
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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%
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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