10-K 1 lcnbform10-k12312018.htm 10-K Document
 
 
 
 
 
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)
Ohio
 
31-1626393
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

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

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

Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of Each Class
 
Name of each exchange on which registered
None
 
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
Accelerated filer
 Non-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 2.  Properties
 
 
PART II
Item 9B.  Other Information
 
 
PART III
 
 
PART IV
 
 


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LCNB CORP. AND SUBSIDIARIES



PART I

Item 1.  Business

FORWARD-LOOKING STATEMENTS

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:
1.
the success, impact, and timing of the implementation of LCNB’s business strategies;
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;
6.
changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
7.
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;
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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LCNB CORP. AND SUBSIDIARIES



Primary Market Area

The Bank considers its primary market area to consist of counties where it has a physical presence and neighboring counties, which includes Southwestern and South Central Ohio. At December 31, 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.
Imposed significant restrictions on the operations of a financial institution that is not rated well-capitalized or adequately capitalized;
4.
Prohibited a depository institution from making any capital distributions, including payments of dividends or paying any management fee to its holding company, if the institution would be undercapitalized as a result; 
5.
Implemented a risk-based premium system;
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;
2.
Inclusion of an internal control report in annual reports that include management's assessment of the effectiveness of a company's internal control over financial reporting and a report by the company's independent registered public accounting firm attesting to the effectiveness of internal control over financial reporting; 
3.
Accelerated reporting of stock trades on Form 4 by directors and executive officers; 
4.
Disgorgement requirements of incentive pay or stock-based compensation profits received within twelve months of the release of financial statements if the company is later required to restate those financial statements due to material noncompliance with any financial reporting requirement that resulted from misconduct;
5.
Disclosure in a company's periodic reports stating if it has adopted a code of ethics for its CFO and principal accounting officer or controller and, if such code of ethics has been implemented, immediate disclosure of any change in or waiver of the code of ethics;
6.
Disclosure in a company's periodic reports stating if at least one member of the audit committee is a "financial expert," as that term is defined by the Securities and Exchange Commission (the "SEC"); and
7.
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;
2.
Increasing insurance coverage for retirement accounts from $100,000 to $250,000, effective April 1, 2006; and
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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LCNB CORP. AND SUBSIDIARIES



STATISTICAL INFORMATION
The following tables and certain tables appearing in Item 7, Management's Discussion and Analysis present additional statistical information about LCNB Corp. and its operations and financial condition. They should be read in conjunction with the consolidated financial statements and related notes and the discussion included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures about Market Risk.

Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential

The table presenting an average balance sheet, interest income and expense, and the resultant average yield for average interest-earning assets and average interest-bearing liabilities is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

The table analyzing changes in interest income and expense by volume and rate is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Investment Portfolio

The following table presents the carrying values of securities for the years indicated:
 
At December 31,
 
2018
 
2017
 
2016
 
(In thousands)
Securities available-for-sale:
 
 
 
 
 
U.S. Treasury notes
$
2,235

 
2,259

 
28,145

U.S. Agency notes
78,340

 
83,261

 
85,400

U.S. Agency mortgage-backed securities
55,610

 
67,153

 
71,047

Municipal securities
102,236

 
122,540

 
132,860

Total securities available-for-sale
238,421

 
275,213

 
317,452

 
 
 
 
 
 
Securities held-to-maturity:
 

 
 

 
 

Municipal securities
29,721

 
32,571

 
41,003

 
 
 
 
 
 
Equity securities with a readily determinable fair value:
 
 
 
 
 
Mutual funds
1,559

 
1,542

 
1,482

Trust preferred securities

 
50

 
48

Equity securities
519

 
568

 
568

Equity securities without a readily determinable fair value:
 
 
 
 
 
Mutual funds
2,000

 
1,000

 
1,000

Equity securities
99

 
99

 
99

Federal Reserve Bank stock
4,653

 
2,732

 
2,732

Federal Home Loan Bank stock
4,845

 
3,638

 
3,638

Total securities
$
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
986

 
970

 
2.08
%
 

 

 
%
Five to ten years
1,292

 
1,265

 
2.06
%
 

 

 
%
After ten years

 

 
%
 

 

 
%
Total U.S. Treasury notes
2,278

 
2,235

 
2.07
%
 

 

 
%
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Agency notes:
 

 
 

 
 

 
 

 
 

 
 

Within one year
5,000

 
4,965

 
1.41
%
 

 

 
%
One to five years
62,000

 
60,385

 
1.96
%
 

 

 
%
Five to ten years
13,708

 
12,990

 
1.96
%
 

 

 
%
After ten years

 

 
%
 

 

 
%
Total U.S. Agency notes
80,708

 
78,340

 
1.93
%
 

 

 
%
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities (1):
 

 
 

 
 

 
 

 
 

 
 

Within one year
9,768

 
9,734

 
2.26
%
 
3,200

 
3,195

 
3.15
%
One to five years
49,885

 
49,474

 
2.82
%
 
3,143

 
3,069

 
2.89
%
Five to ten years
42,336

 
41,378

 
2.91
%
 
7,982

 
7,787

 
3.39
%
After ten years
1,724

 
1,650

 
2.89
%
 
15,396

 
14,973

 
5.80
%
Total Municipal securities
103,713

 
102,236

 
2.81
%
 
29,721

 
29,024

 
4.56
%
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Agency mortgage-backed securities
57,584

 
55,610

 
2.46
%
 

 

 
%
 
 
 
 
 
 
 
 
 
 
 
 
Totals
$
244,283

 
238,421

 
2.43
%
 
29,721

 
29,024

 
4.56
%

(1)
Yields on tax-exempt obligations are computed on a taxable-equivalent basis based upon a 21.0% statutory Federal income tax rate.
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any issuer that exceeded 10% of LCNB's consolidated shareholders' equity at December 31, 2018.

Loan Portfolio

Administration of the lending function is the responsibility of the Chief Lending Officer and certain senior portfolio lenders. Lenders perform their duties subject to oversight and policy direction from the Board of Directors and the Loan Committee. The Loan Committee consists of LCNB’s Chief Executive Officer, President, Chief Financial Officer, Chief Trust Officer, Chief Lending Officer, Chief Credit Officer, Loan Operations Officer, credit analysts, and the officers in charge of the commercial, agricultural, and retail loan portfolios.






-11-


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:
 
At December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
(Dollars in thousands)
Commercial and industrial
$
77,740

 
6.5
%
 
$
36,057

 
4.2
%
 
$
41,878

 
5.1
%
 
$
45,275

 
5.9
%
 
$
35,424

 
5.1
%
Commercial, secured by real estate
740,647

 
61.8
%
 
527,947

 
62.2
%
 
477,275

 
58.2
%
 
419,633

 
54.5
%
 
379,141

 
54.3
%
Residential real estate
349,127

 
29.1
%
 
251,582

 
29.6
%
 
265,788

 
32.5
%
 
273,139

 
35.4
%
 
254,087

 
36.4
%
Consumer
17,283

 
1.5
%
 
17,450

 
2.1
%
 
19,173

 
2.3
%
 
18,510

 
2.4
%
 
18,006

 
2.5
%
Agricultural
13,297

 
1.1
%
 
15,194

 
1.8
%
 
14,802

 
1.8
%
 
13,479

 
1.7
%
 
11,472

 
1.6
%
Other loans, including deposit overdrafts
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

 
 

 
291

 
 

 
254

 
 

 
237

 
 

 
146

 
 

Total loans
1,198,623

 
 

 
849,060

 
 

 
819,803

 
 

 
770,938

 
 

 
698,956

 
 

Less allowance for loan losses
4,046

 
 

 
3,403

 
 

 
3,575

 
 

 
3,129

 
 

 
3,121

 
 

Loans, net
$
1,194,577

 
 

 
$
845,657

 
 

 
$
816,228

 
 

 
$
767,809

 
 

 
$
695,835

 
 


As of December 31, 2018 and 2017, there were no concentrations of loans exceeding 10% of total loans that are not already disclosed as a category of loans in the above table, except for loans secured by multifamily properties. Loans secured by multifamily properties, which are included in the commercial, secured by real estate category in the above table, totaled $129,266,000, or 10.8% of total loans, at December 31, 2018 and $85,853,000, or 10.1% of total loans, at December 31, 2017. There were no concentrations of loans exceeding 10% of total loans that are not already disclosed as a category of loans in the above table at December 31, 2016, 2015, or 2014.


-12-


LCNB CORP. AND SUBSIDIARIES



The following table summarizes the commercial and agricultural loan maturities and sensitivities to interest rate change at December 31, 2018:
 
(In thousands)
Maturing in one year or less
$
49,309

Maturing after one year, but within five years
104,701

Maturing beyond five years
677,674

Total commercial and agricultural loans
$
831,684

 
 

Loans maturing beyond one year:
 

Fixed rate
$
290,995

Variable rate
491,380

Total
$
782,375


Risk Elements

The following table summarizes non-accrual, past-due, and accruing restructured loans for the dates indicated:
 
At December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(Dollars in thousands)
Non-accrual loans
$
2,951

 
2,965

 
5,725

 
1,723

 
5,599

Past-due 90 days or more and still accruing
149

 

 
23

 
559

 
203

Accruing restructured loans
10,516

 
10,469

 
11,731

 
13,723

 
14,269

Total
$
13,616

 
13,434

 
17,479

 
16,005

 
20,071

Percent to total loans
1.14
%
 
1.58
%
 
2.13
%
 
2.08
%
 
2.87
%
LCNB is not committed to lend additional funds to debtors whose loans have been modified to provide a reduction or deferral of principal or interest because of deterioration in the financial position of the borrower.

At December 31, 2018, there were no material additional loans not classified as acquired credit impaired or already disclosed as non-accrual, accruing restructured, or accruing past due 90 days or more where known information about possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms.

Summary of Loan Loss Experience

The table summarizing the activity related to the allowance for loan losses is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.













-13-


LCNB CORP. AND SUBSIDIARIES



Allocation of the Allowance for Loan Losses

The following table presents the allocation of the allowance for loan loss:
 
At December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
Amount
 
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
 
Percent
of Loans
in Each
Category
to Total
Loans
 
Amount
 
Percent
of Loans
in Each
Category
to Total
Loans
 
(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
2,745

 
61.8
%
 
2,178

 
62.2
%
 
2,179

 
58.2
%
 
1,908

 
54.5
%
 
1,990

 
54.3
%
Residential real estate
767

 
29.1
%
 
717

 
29.6
%
 
885

 
32.5
%
 
854

 
35.4
%
 
926

 
36.4
%
Consumer
87

 
1.5
%
 
76

 
2.1
%
 
96

 
2.3
%
 
54

 
2.4
%
 
63

 
2.5
%
Agricultural
46

 
1.1
%
 
53

 
1.8
%
 
60

 
1.8
%
 
66

 
1.7
%
 
11

 
1.6
%
Other loans, including deposit overdrafts
1

 
%
 
1

 
0.1
%
 
5

 
0.1
%
 
3

 
0.1
%
 
2

 
0.1
%
Total
$
4,046

 
100.0
%
 
$
3,403

 
100.0
%
 
$
3,575

 
100.0
%
 
$
3,129

 
100.0
%
 
$
3,121

 
100.0
%

Deposits

The statistical information regarding average amounts and average rates paid for the deposit categories is included in the "Distribution of Assets, Liabilities and Shareholders' Equity" table included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following table presents the contractual maturity of time deposits of $100,000 or more at December 31, 2018:
 
(In thousands)
Maturity within 3 months
$
11,564

After 3 but within 6 months
22,534

After 6 but within 12 months
34,534

After 12 months
66,637

 
$
135,269

Return on Equity and Assets

The statistical information regarding the return on assets, return on equity, dividend payout ratio, and equity to assets ratio is presented in Item 6, Selected Financial Data.

-14-


LCNB CORP. AND SUBSIDIARIES



Item 1A.  Risk Factors

There are risks inherent in LCNB’s operations, many beyond management’s control, which may adversely affect its financial condition and results from operations and should be considered in evaluating the Company. Credit, market, operational, liquidity, interest rate and other risks are described elsewhere in this report. Other risk factors may include the items described below.

Failure to meet regulatory capital requirements could adversely affect LCNB’s business
The Bank is subject to regulations requiring it to satisfy minimum capital requirements, see Note 15 - Regulatory Matters of the consolidated financial statements for more information. While management expects that LCNB's capital ratios under Basel III will continue to exceed well capitalized minimum capital requirements, there can be no assurance that such will be the case. If LCNB is unable to meet or exceed applicable minimum capital requirements, it may become subject to supervisory actions including, but not limited to, requirements to raise additional capital or dispose of assets, the loss of its financial holding company status, limitations on its ability to engage in new acquisitions or new activities, or other informal or formal regulatory enforcement actions.

LCNB’s earnings are significantly affected by market interest rates.
Fluctuations in interest rates may negatively impact LCNB’s profitability.  A primary source of income from operations is net interest income, which is equal to the difference between interest income earned on loans and investment securities and the interest paid for deposits and other borrowings. These rates are highly sensitive to many factors beyond LCNB’s control, including general economic conditions, the slope of the yield curve (that is, the relationship between short and long-term interest rates), and the monetary and fiscal policies of the United States Federal government.  LCNB expects the current level of interest rates and the current slope of the yield curve will cause further downward pressure on its net interest margin.

Increases in general interest rates could have a negative impact on LCNB’s results of operations by reducing the ability of borrowers to repay their current loan obligations.  Some residential real estate mortgage loans, most home equity line of credit loans, and many of LCNB’s commercial loans have adjustable rates.  Borrower inability to make scheduled loan payments due to a higher loan cost could result in increased loan defaults, foreclosures, and write-offs and may necessitate additions to the allowance for loan losses.  In addition, increases in the general level of interest rates may decrease the demand for new consumer and commercial loans, thus limiting LCNB’s growth and profitability.  A general increase in interest rates may also result in deposit disintermediation, which is the flow of deposits away from banks and other depository institutions into direct investments that have the potential for higher rates of return, such as stocks, bonds, and mutual funds.   If this occurs, LCNB may have to rely more heavily on borrowings as a source of funds in the future, which could negatively impact its net interest margin.

Gains from sales of mortgage loans may experience significant volatility.
Gains from sales of mortgage loans are highly influenced by the level and direction of mortgage interest rates, real estate activity, and refinancing activity.  A decrease in market interest rates may create a refinancing demand for residential fixed-rate mortgage loans, which may cause an increase in gains from sales of mortgage loans if LCNB sells these loans in the secondary market.  An increase in market interest rates may decrease the demand for refinanced loans and decrease the gains from sales of mortgage loans recognized in LCNB’s consolidated statements of income.  Gains from sales of mortgage loans may also be impacted by changes in LCNB’s strategy to manage its residential mortgage portfolio. For example, LCNB may occasionally change the proportion of loan originations that are sold in the secondary market and instead add a greater proportion to its loan portfolio.

Banking competition in Ohio is intense.
LCNB faces strong competition for deposits, loans, trust accounts, and other services from other banks, savings banks, credit unions, mortgage brokers, and other financial institutions.  Many of LCNB’s competitors include major financial institutions that have been in business for many years and have established customer bases, numerous branches, and substantially higher regulatory lending limits. Competitors in LCNB's market areas include U.S. Bank, PNC Bank, Fifth Third Bank, Chase, KeyBank, Park National Bank, Huntington National Bank, and First Financial Bank. In addition, credit unions are growing larger due to more flexible membership requirement regulations and are offering more financial services than they legally could in the past.


-15-


LCNB CORP. AND SUBSIDIARIES



LCNB also competes with numerous real estate brokerage firms, some owned by realty companies, for residential real estate mortgage loans.  Incentives offered by captive finance companies owned by the major automobile companies have limited the banking industry’s opportunities for growth in the new automobile loan market.  The banking industry now competes with brokerage firms and mutual fund companies for funds that would have historically been held as bank deposits.  Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.  Many of these competitors have fewer regulatory constraints and may have lower cost structures.

If LCNB is unable to attract and retain loan, deposit, brokerage, and trust customers, its growth and profitability levels may be negatively impacted.

Economic conditions in LCNB's market areas could adversely affect its financial condition and results of operations.
LCNB conducts its operations from offices that are located in nine Southwestern Ohio counties and in Franklin County, Ohio, from which substantially all of its customer base is drawn. Because of this geographic concentration of operations and customer base, LCNB's financial performance is heavily influenced by economic conditions in these areas. Any material deterioration in economic conditions in these markets could have material direct or indirect adverse impacts on LCNB's customers and on LCNB. Such deterioration could increase the number of customers experiencing financial distress, negatively impacting their ability to obtain new loans or to repay existing loans. As a result, LCNB may experience increases in the levels of impaired loans, increased charge-offs, and increased provisions for loan losses. Deteriorating economic conditions may also affect the ability of depositors to maintain or add to deposit balances and may affect the demand for loans, trust, brokerage, and other products and services offered by LCNB. Such losses and decreased demand could have material adverse effects on LCNB's financial position, results of operations, and cash flows.

The allowance for loan losses may be inadequate.
The provision for loan losses is determined by management based upon its evaluation of the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the estimated risk of losses inherent in the portfolio.  In addition to historic charge-off percentages, factors taken into consideration to determine the adequacy of the allowance for loan losses include the nature, volume, and consistency of the loan portfolio, overall portfolio quality, a review of specific problem loans, the fair value of any underlying collateral, borrowers’ cash flows, and current economic conditions that may affect borrowers’ ability to make payments.  Increases in the allowance result in an expense for the period.   By its nature, the evaluation is imprecise and requires significant judgment.  Actual results may vary significantly from management’s assumptions.  If, as a result of general economic conditions or a decrease in asset quality, management determines that additional increases in the allowance for loan losses are necessary, LCNB will incur additional expenses.
LCNB’s loan portfolio includes a substantial amount of commercial and industrial loans and commercial real estate loans, which may have more risks than residential or consumer loans.
LCNB’s commercial and industrial and commercial real estate loans comprise a substantial portion of its total loan portfolio. These loans generally carry larger loan balances and involve a greater degree of financial and credit risk than home equity, residential mortgage, or consumer loans. The increased financial and credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans, the size of loan balances, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans.

The repayment of loans secured by commercial real estate is often dependent upon the successful operation, development, or sale of the related real estate or commercial business and may, therefore, be subject to adverse conditions in the real estate market or economy. If the cash flow from operations is reduced, the borrower’s ability to repay the loan may be impaired. In such cases, LCNB may take one or more actions to protect its financial interest in the loan.  Such actions may include foreclosure on the real estate securing the loan, taking possession of other collateral that may have been pledged as security for the loan, or modifying the terms of the loan.  If foreclosed on, commercial real estate is often unique and may not be as salable as a residential home.






-16-


LCNB CORP. AND SUBSIDIARIES



The fair value of LCNB’s investments could decline.
Most of LCNB’s investment securities portfolio is designated as available-for-sale.  Accordingly, unrealized gains and losses, net of tax, in the estimated fair value of the available-for-sale portfolio is recorded as other comprehensive income, a separate component of shareholders’ equity. The fair value of LCNB’s investment portfolio may decline, causing a corresponding decline in shareholders’ equity.  Management believes that several factors will affect the fair values of the investment portfolio including, but not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve. These and other factors may impact specific categories of the portfolio differently and the effect any of these factors may have on any specific category of the portfolio cannot be predicted.

Many state and local governmental authorities have experienced deterioration of financial condition in recent years due to declining tax revenues, increased demand for services, and various other factors. To the extent LCNB has any municipal securities in its portfolio from issuers who are experiencing deterioration of financial condition or who may experience future deterioration of financial condition, the value of such securities may decline and could result in other-than-temporary impairment charges, which could have an adverse effect on LCNB’s financial condition and results of operations.  Additionally, a general, industry-wide decline in the fair value of municipal securities could significantly affect LCNB’s financial condition and results of operations.

Changes in income tax laws or interpretations or in accounting standards could materially affect LCNB’s financial condition or results of operations.
Changes in income tax laws could be enacted, or interpretations of existing income tax laws could change, causing an adverse effect to LCNB’s financial condition or results of operations. Similarly, new accounting standards may be issued by the Financial Accounting Standards Board (the “FASB”) or existing standards revised, changing the methods for preparing financial statements. These changes are not within LCNB’s control and may significantly impact its reported financial condition and results of operations. 

LCNB is subject to environmental liability risk associated with lending activities.
A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on LCNB’s financial condition and results of operations.

The banking industry is highly regulated.
LCNB is subject to regulation, supervision, and examination by the Federal Reserve Board and the Bank is subject to regulation, supervision, and examination by the OCC.   LCNB and the Bank are also subject to regulation and examination by the FDIC as the deposit insurer.  The CFPB is responsible for most consumer protection laws and has broad authority, with certain exceptions, to regulate financial products offered by banks.  Federal and state laws and regulations govern numerous matters including, but not limited to, changes in the ownership or control of banks, maintenance of adequate capital, permissible business operations, maintenance of deposit insurance, protection of customer financial privacy, the level of reserves held against deposits, restrictions on dividend payments, the making of loans, and the acceptance of deposits.  See the previous section titled “Supervision and Regulation” for more information on this subject.

Federal regulators may initiate various enforcement actions against a financial institution that violates laws or regulations or that operates in an unsafe or unsound manner.  These enforcement actions may include, but are not limited to, the assessment of civil money penalties, the issuance of cease-and-desist or removal orders, and the imposition of written agreements.


-17-


LCNB CORP. AND SUBSIDIARIES



Proposals to change the laws governing financial institutions are periodically introduced in Congress and proposals to change regulations are periodically considered by the regulatory bodies.  Such future legislation and/or changes in regulations could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.  The likelihood of any major changes in the future and their effects are impossible to predict.

FDIC deposit insurance assessments may materially increase in the future.
Deposits of LCNB are insured up to statutory limits by the FDIC and, accordingly, LCNB and other banks and financial institutions pay quarterly premiums to the FDIC to maintain the Deposit Insurance Fund. The likelihood and extent of future rate increases are indeterminable.

Future growth and expansion opportunities may contain risks.
From time to time LCNB may seek to acquire other financial institutions or parts of those institutions or may open new branch offices.  It may also consider and enter into new lines of business or offer new products or services.  Such activities involve a number of risks, which may include potential inaccuracies in estimates and judgments used to evaluate the expansion opportunity, diversion of management and employee attention, lack of experience in a new market or product or service, and difficulties in integrating a future acquisition or introducing a new product or service.  There is no assurance that such growth or expansion activities will be successful or that they will achieve desired profitability levels.

LCNB’s controls and procedures may fail or be circumvented.
Management regularly reviews and updates LCNB’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of LCNB’s controls and procedures or failure to comply with regulations related to its controls and procedures could have a material adverse effect on LCNB’s business, results of operations, and financial condition.

LCNB’s information systems may experience an interruption, cyberattack, or other breach in security.
LCNB relies heavily on communications and information systems to conduct its business. Although significant resources are devoted to maintaining and regularly updating LCNB's data systems, there can be no assurance that these security measures will provide absolute security. Any failure, interruption, cyberattack, or other breach in security of these systems could result in failures or disruptions in LCNB’s customer relationship management, general ledger, deposit, loan, and other systems. While LCNB has policies and procedures designed to prevent or limit the effect of the failure, interruption, cyberattack, or other security breach of its information systems, there can be no assurance that any such occurrences will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, cyberattacks, or other security breaches of LCNB’s information systems could significantly disrupt LCNB's operations, allow misappropriation of LCNB's confidential information, allow misappropriation of customer confidential information, damage LCNB’s reputation, result in a loss of customer business, subject LCNB to additional regulatory scrutiny, or expose LCNB to significant civil litigation and possible financial liability, any of which could have a material adverse effect on its financial condition and results of operations.

LCNB continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. LCNB’s future success depends, in part, upon its ability to address customer needs by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in LCNB’s operations. LCNB may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could negatively affect LCNB’s growth, revenue and profit.

Emergence of non-bank alternatives to the financial system.
Consumers may decide not to use banks to complete their financial transactions. Technology and other changes, including the emergence of “Fintech Companies,” are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can complete transactions, such as paying bills and/or transferring funds, directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.


-18-


LCNB CORP. AND SUBSIDIARIES



Risk factors related to LCNB’s trust business.
Competition for trust business is intense.  Competitors include other commercial bank and trust companies, brokerage firms, investment advisory firms, mutual fund companies, accountants, and attorneys.

LCNB’s trust business is directly affected by conditions in the debt and equity securities markets.  The debt and equity securities markets are affected by, among other factors, domestic and foreign economic conditions and the monetary and fiscal policies of the United States Federal government, all of which are beyond LCNB’s control.  Changes in economic conditions may directly affect the economic performance of the trust accounts in which clients’ assets are invested.  A decline in the fair value of the trust accounts caused by a decline in general economic conditions directly affects LCNB’s trust fee income because such fees are primarily based on the fair value of the trust accounts.  In addition, a sustained decrease in the performance of the trust accounts or a lack of sustained growth may encourage clients to seek alternative investment options.

The management of trust accounts is subject to the risk of mistaken distributions, poor investment choices, and miscellaneous other incorrect decisions.  Such mistakes may give rise to surcharge actions by beneficiaries, with damages substantially in excess of the fees earned from management of the accounts.

LCNB’s ability to pay cash dividends is limited.
LCNB is dependent upon the earnings of the Bank for funds to pay dividends on its common shares.  The payment of dividends by LCNB and the Bank is subject to certain regulatory restrictions.  As a result, any payment of dividends in the future will be dependent, in large part, on the ability of LCNB and the Bank to satisfy these regulatory restrictions and on the Bank’s earnings, capital levels, financial condition, and other factors.  Although LCNB’s financial earnings and financial condition have allowed it to declare and pay periodic cash dividends to shareholders, there can be no assurance that the current dividend policy or the amount of dividend distributions will continue in the future.


Item 1B. Unresolved Staff Comments

Not applicable.

-19-


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 North Broadway
Lebanon, Ohio  45036
 
Warren
 
Owned
 
 
 
 
 
 
 
 
 
2.
 
Auto Bank
 
Silver and Mechanic Streets
Lebanon, Ohio  45036
 
Warren
 
Owned
 
 
 
 
 
 
 
 
 
3.
 
Barron Street Office
 
1697 North Barron Street
Eaton, Ohio  45320
 
Preble
 
Leased
 
 
 
 
 
 
 
 
 
4.
 
Bridge Street Office
 
1240 North Bridge Street
Chillicothe, Ohio  45601
 
Ross
 
Owned
 
 
 
 
 
 
 
 
 
5.
 
Brookville Office
 
225 West Upper Lewisburg Salem Road Brookville, Ohio 45309
 
Montgomery
 
Owned
 
 
 
 
 
 
 
 
 
6.
 
Centerville Office
 
9605 Dayton-Lebanon Pike
Centerville, Ohio 45458
 
Montgomery
 
Owned
 
 
 
 
 
 
 
 
 
7.
 
Chillicothe Office
 
33 West Main Street
Chillicothe, Ohio  45601
 
Ross
 
Leased
 
 
 
 
 
 
 
 
 
8.
 
Colerain Township Office
 
3209 West Galbraith Road
Cincinnati, Ohio 45239
 
Hamilton
 
Owned
 
 
 
 
 
 
 
 
 
9.
 
Columbus Avenue Office
 
730 Columbus Avenue
Lebanon, Ohio  45036
 
Warren
 
Owned
 
 
 
 
 
 
 
 
 
10.
 
Eaton Office
 
110 West Main Street
Eaton, Ohio  45320
 
Preble
 
Owned
 
 
 
 
 
 
 
 
 
11.
 
Fairfield Office
 
765 Nilles Road
Fairfield, Ohio  45014
 
Butler
 
Leased
 
 
 
 
 
 
 
 
 
12.
 
Frankfort Office
 
Springfield and Main Streets
Frankfort, Ohio  45628
 
Ross
 
Owned
 
 
 
 
 
 
 
 
 
13.
 
Goshen Office
 
6726 Dick Flynn Blvd.
Goshen, Ohio  45122
 
Clermont
 
Owned
 
 
 
 
 
 
 
 
 
14.
 
Hamilton Office
 
794 NW Washington Blvd.
Hamilton, Ohio  45013
 
Butler
 
Owned
 
 
 
 
 
 
 
 
 
15.
 
Hunter Office
 
3878 State Route 122
Franklin, Ohio  45005
 
Warren
 
Owned
 
 
 
 
 
 
 
 
 
16.
 
Lewisburg Office
 
522 South Commerce Street
Lewisburg, Ohio  45338
 
Preble
 
Owned
 
 
 
 
 
 
 
 
 
17.
 
Loveland Office
 
500 Loveland-Madeira Road Loveland, Ohio 45140
 
Hamilton
 
Owned
 
 
 
 
 
 
 
 
 



-20-


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
 
1050 Reading Road
Mason, Ohio  45040
 
Warren
 
Owned
 
 
 
 
 
 
 
 
 
20.
 
Middletown Office
 
4441 Marie Drive
Middletown, Ohio  45044
 
Butler
 
Owned
 
 
 
 
 
 
 
 
 
21.
 
Monroe Office
 
101 Clarence F. Warner Drive
Monroe, Ohio  45050
 
Butler
 
Owned
 
 
 
 
 
 
 
 
 
22.
 
New Paris Office
 
201 South Washington Street
New Paris, Ohio  45347
 
Preble
 
Owned
 
 
 
 
 
 
 
 
 
23.
 
Oakwood Office
 
2705 Far Hills Avenue
Oakwood, Ohio  45419
 
Montgomery
 
(2)
 
 
 
 
 
 
 
 
 
24.
 
Otterbein Office
 
Otterbein Retirement Community
State Route 741
Lebanon, Ohio  45036
 
Warren
 
Leased
 
 
 
 
 
 
 
 
 
25.
 
Oxford Office (1)
 
30 West Park Place
Oxford, Ohio  45056
 
Butler
 
(2)
 
 
 
 
 
 
 
 
 
26.
 
Rochester/Morrow Office
 
Route 22-3 at 123
Morrow, Ohio  45152
 
Warren
 
Owned
 
 
 
 
 
 
 
 
 
27.
 
South Lebanon Office
 
603 Corwin Nixon Blvd.
South Lebanon, Ohio  45065
 
Warren
 
Owned
 
 
 
 
 
 
 
 
 
28.
 
Springboro/Franklin Office
 
525 West Central Avenue
Springboro, Ohio  45066
 
Warren
 
Owned
 
 
 
 
 
 
 
 
 
29.
 
Warrior Office
 
Lebanon High School
1916 Drake Road
Lebanon, Ohio  45036
 
Warren
 
Leased
 
 
 
 
 
 
 
 
 
30.
 
Washington Court House Office
 
100 Crossings Drive
Washington Court House, Ohio  43160
 
Fayette
 
Owned
 
 
 
 
 
 
 
 
 
31.
 
Waynesville Office
 
9 North Main Street
Waynesville, Ohio  45068
 
Warren
 
Owned
 
 
 
 
 
 
 
 
 
32.
 
West Alexandria Office
 
55 East Dayton Street
West Alexandria, Ohio  45381
 
Preble
 
Owned
 
 
 
 
 
 
 
 
 
33.
 
Western Avenue Office
 
1006 Western Avenue
Chillicothe, Ohio  45601
 
Ross
 
Owned
 
 
 
 
 
 
 
 
 
34.
 
Wilmington Office
 
1243 Rombach Avenue
Wilmington, Ohio  45177
 
Clinton
 
Owned
 
 
 
 
 
 
 
 
 
35.
 
Worthington Office
 
6877 North High Street
Worthington, Ohio  43085
 
Franklin
 
Leased
 
 
 
 
 
 
 
 
 

-21-


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)
Excess space in this office is leased to third parties.
(2)
The Bank owns the Oakwood and Oxford office buildings and leases the land.
(3)
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-


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

 

 

 
Not applicable
November 2018
21,400

 
16.2766

 
21,400

 
Not applicable
December 2018

 

 

 
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-


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:
Plan Category
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
Equity compensation plans approved by security holders:
 
 
 
 
 
2002 Plan
13,278

 
$
11.98

 

2015 Plan

 

 
419,301

Equity compensation plans not approved by security holders

 

 

Total
13,278

 
$
11.98

 
419,301




-24-


LCNB CORP. AND SUBSIDIARIES



The graph below provides an indicator of cumulative total shareholder returns for LCNB as compared with the NASDAQ Composite, the SNL Midwest OTC-BB and Pink Sheet Banks, and the SNL Midwest Bank indexes.  This graph covers the period from December 31, 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.

chart-d4e36b60bcb7560b93fa02.jpg
 
 
Period Ending
 
Index
12/31/2013

12/31/2014

12/31/2015

12/31/2016

12/31/2017

12/31/2018

LCNB Corp.
$
100.00

87.85

99.27

146.24

132.74

101.93

NASDAQ Composite Index
$
100.00

114.75

122.74

133.62

173.22

168.30

SNL Midwest Bank index
$
100.00

108.71

110.36

147.46

158.46

135.31

 
 
 
 
 
 
 
Source: S&P Global Market Intelligence
© 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


-25-


LCNB CORP. AND SUBSIDIARIES



Item 6.  Selected Financial Data
The following represents selected consolidated financial data of LCNB for the years ended December 31, 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.
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(Dollars in thousands, except per share data)
Income Statement:
 

 
 

 
 

 
 

 
 

Interest income
$
54,594

 
44,463

 
43,750

 
42,659

 
39,477

Interest expense
6,425

 
3,599

 
3,504

 
3,328

 
3,590

Net interest income
48,169

 
40,864

 
40,246

 
39,331

 
35,887

Provision for loan losses
923

 
215

 
913

 
1,366

 
930

Net interest income after provision for loan losses
47,246

 
40,649

 
39,333

 
37,965

 
34,957

Non-interest income
11,050

 
10,458

 
10,853

 
10,123

 
9,142

Non-interest expenses
40,502

 
33,863

 
33,261

 
32,392

 
30,844

Income before income taxes
17,794

 
17,244

 
16,925

 
15,696

 
13,255

Provision for income taxes
2,949

 
4,272

 
4,443

 
4,222

 
3,386

Net income
$
14,845

 
12,972

 
12,482

 
11,474

 
9,869

 
 
 
 
 
 
 
 
 
 
Dividends per common share
$
0.65

 
0.64

 
0.64

 
0.64

 
0.64

 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

 
 

Basic
1.24

 
1.30

 
1.26

 
1.18

 
1.06

Diluted
1.24

 
1.29

 
1.25

 
1.17

 
1.05

 
 
 
 
 
 
 
 
 
 
Balance Sheet:
 

 
 

 
 

 
 

 
 

Securities
$
282,813

 
317,413

 
368,032

 
406,981

 
314,074

Loans, net
1,194,577

 
845,657

 
816,228

 
767,809

 
695,835

Total assets
1,636,927

 
1,295,638

 
1,306,799

 
1,280,531

 
1,108,066

Total deposits
1,300,919

 
1,085,821

 
1,110,905

 
1,087,160

 
946,205

Short-term borrowings
56,230

 
47,000

 
42,040

 
37,387

 
16,645

Long-term debt
47,032

 
303

 
598

 
5,947

 
11,357

Total shareholders' equity
218,985

 
150,271

 
142,944

 
140,108

 
125,695

 
 
 
 
 
 
 
 
 
 
Selected Financial Ratios and Other Data:
 

 
 

 
 

 
 

 
 

Return on average assets
1.00
%
 
0.99
%
 
0.96
%
 
0.94
%
 
0.88
%
Return on average equity
7.90
%
 
8.74
%
 
8.60
%
 
8.43
%
 
8.04
%
Equity-to-assets ratio
13.38
%
 
11.60
%
 
10.94
%
 
10.94
%
 
11.34
%
Dividend payout ratio
52.42
%
 
49.23
%
 
50.79
%
 
54.24
%
 
60.38
%
Net interest margin, fully taxable equivalent
3.63
%
 
3.58
%
 
3.51
%
 
3.64
%
 
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-

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-

LCNB CORP. AND SUBSIDIARIES

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)


 
Years ended December 31,
 
2018
 
2017
 
2016
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
(Dollars in thousands)
Loans (1)
$
1,038,159

 
47,489

 
4.57
%
 
$
822,452

 
36,571

 
4.45
%
 
$
792,526

 
35,600

 
4.49
%
Interest-bearing demand deposits
5,164

 
136

 
2.63
%
 
7,972

 
88

 
1.10
%
 
12,394

 
59

 
0.48
%
Interest-bearing time deposits
4,008

 
58

 
1.45
%
 

 

 
%
 

 

 
%
Federal Reserve Bank stock
3,268

 
196

 
6.00
%
 
2,732

 
164

 
6.00
%
 
2,732

 
164

 
6.00
%
Federal Home  Loan Bank stock
4,346

 
259

 
5.96
%
 
3,638

 
182

 
5.00
%
 
3,638

 
146

 
4.01
%
Investment securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Equity securities
3,782

 
104

 
2.75
%
 
3,249

 
89

 
2.74
%
 
3,230

 
115

 
3.56
%
Debt securities, taxable
165,300

 
3,666

 
2.22
%
 
205,669

 
4,239

 
2.06
%
 
240,329

 
4,467

 
1.86
%
Debt securities, non-taxable (2)
123,135

 
3,400

 
2.76
%
 
143,394

 
4,815

 
3.36
%
 
140,692

 
4,862

 
3.46
%
Total earning assets
1,347,162

 
55,308

 
4.11
%
 
1,189,106

 
46,148

 
3.88
%
 
1,195,541

 
45,413

 
3.80
%
Non-earning assets
145,601

 
 

 
 

 
123,800

 
 

 
 

 
112,909

 
 

 
 

Allowance for loan losses
(3,822
)
 
 

 
 

 
(3,405
)
 
 

 
 

 
(3,318
)
 
 

 
 

Total assets
$
1,488,941

 
 

 
 

 
$
1,309,501

 
 

 
 

 
$
1,305,132

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
689,322

 
1,332

 
0.19
%
 
$
645,471

 
594

 
0.09
%
 
$
654,891

 
652

 
0.10
%
IRA and time certificates
253,524

 
4,421

 
1.74
%
 
205,540

 
2,784

 
1.35
%
 
217,228

 
2,788

 
1.28
%
Short-term borrowings
13,967

 
311

 
2.23
%
 
23,976

 
209

 
0.87
%
 
17,952

 
38

 
0.21
%
Long-term debt
16,789

 
361

 
2.15
%
 
421

 
12

 
2.85
%
 
826

 
26

 
3.15
%
Total interest-bearing liabilities
973,602

 
6,425

 
0.66
%
 
875,408

 
3,599

 
0.41
%
 
890,897

 
3,504

 
0.39
%
Demand deposits
315,229

 
 

 
 

 
274,855

 
 

 
 

 
259,060

 
 

 
 

Other liabilities
12,195

 
 

 
 

 
10,795

 
 

 
 

 
10,014

 
 

 
 

Capital
187,915

 
 

 
 

 
148,443

 
 

 
 

 
145,161

 
 

 
 

Total  liabilities  and capital
$
1,488,941

 
 

 
 

 
$
1,309,501

 
 

 
 

 
$
1,305,132

 
 

 
 

Net interest rate spread  (3)
 

 
 

 
3.45
%
 
 

 
 

 
3.47
%
 
 

 
 

 
3.41
%
Net interest income and net interest margin on a tax equivalent basis (4)
 

 
48,883

 
3.63
%
 
 

 
42,549

 
3.58
%
 
 

 
41,909

 
3.51
%
Ratio of interest-earning assets to interest-bearing liabilities
138.37
%
 
 

 
 

 
135.83
%
 
 

 
 

 
134.20
%
 
 

 
 

(1)
Includes non-accrual loans if any.
(2)
Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 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-

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
 
2017 vs. 2016
 
Increase (decrease) due to
 
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
)
 
971

Interest-bearing demand deposits
(40
)
 
88

 
48

 
(27
)
 
56

 
29

Interest-bearing time deposits