UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-Q

(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
☐
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 001-35292
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 Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, No Par Value
LCNB
NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes         ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes         ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☐
Emerging growth company ☐
 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
☐ Yes         ☒ No
The number of shares outstanding of the issuer's common stock, without par value, as of August 6, 2019 was 12,961,714 shares.
 
 
 
 
 


LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
 
June 30, 2019
 
December 31,
2018
 
 
(Unaudited)
 
ASSETS:
 
 
 
 
Cash and due from banks
 
$
17,234

 
18,310

Interest-bearing demand deposits
 
5,951

 
1,730

Total cash and cash equivalents
 
23,185

 
20,040

Interest-bearing time deposits
 
498

 
996

Investment securities:
 
 

 
 

Equity securities with a readily determinable fair value, at fair value
 
2,246

 
2,078

Equity securities without a readily determinable fair value, at cost
 
2,099

 
2,099

Debt securities, available-for-sale, at fair value
 
198,660

 
238,421

Debt securities, held-to-maturity, at cost
 
33,343

 
29,721

Federal Reserve Bank stock, at cost
 
4,652

 
4,653

Federal Home Loan Bank stock, at cost
 
5,203

 
4,845

Loans, net
 
1,226,149

 
1,194,577

Premises and equipment, net
 
33,013

 
32,627

Operating lease right-of-use assets
 
5,686

 
—

Goodwill
 
59,221

 
59,221

Core deposit and other intangibles, net
 
4,494

 
5,042

Bank owned life insurance
 
29,088

 
28,723

Other assets
 
14,475

 
13,884

TOTAL ASSETS
 
$
1,642,012

 
1,636,927

 
 
 
 
 
LIABILITIES:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing
 
$
335,474

 
322,571

Interest-bearing
 
1,022,485

 
978,348

Total deposits
 
1,357,959

 
1,300,919

Short-term borrowings
 
—

 
56,230

Long-term debt
 
41,986

 
47,032

Operating lease liabilities
 
5,615

 
—

Accrued interest and other liabilities
 
13,480

 
13,761

TOTAL LIABILITIES
 
1,419,040

 
1,417,942

 
 
 
 
 
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; issued 14,095,666 and 14,070,303 shares at June 30, 2019 and December 31, 2018, respectively
 
141,479

 
141,170

Retained earnings
 
99,400

 
94,547

Treasury shares at cost, 1,117,112 and 775,027 shares at June 30, 2019 and December 31, 2018, respectively
 
(17,854
)
 
(12,013
)
Accumulated other comprehensive loss, net of taxes
 
(53
)
 
(4,719
)
TOTAL SHAREHOLDERS' EQUITY
 
222,972

 
218,985

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,642,012

 
1,636,927

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.

The consolidated condensed balance sheet as of December 31, 2018 has been derived from the audited consolidated balance sheet as of that date.

2

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2019
 
2018
 
2019
 
2018
INTEREST INCOME:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
14,662

 
10,703

 
$
29,200

 
20,116

Dividends on equity securities:
 
 
 
 
 
 
 
 
With a readily determinable fair value
 
15

 
16

 
32

 
31

Without a readily determinable fair value
 
16

 
8

 
32

 
15

Interest on debt securities:
 
 
 
 
 
 
 
 
Taxable
 
933

 
934

 
1,802

 
1,865

Non-taxable
 
417

 
680

 
961

 
1,384

Interest on interest-bearing time deposits
 
3

 
2

 
8

 
2

Other investments
 
282

 
195

 
406

 
267

TOTAL INTEREST INCOME
 
16,328

 
12,538

 
32,441

 
23,680

 
 
 
 
 
 
 
 
 
INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Interest on deposits
 
2,464

 
1,096

 
4,750

 
1,967

Interest on short-term borrowings
 
2

 
7

 
221

 
76

Interest on long-term debt
 
272

 
67

 
489

 
81

TOTAL INTEREST EXPENSE
 
2,738

 
1,170

 
5,460

 
2,124

NET INTEREST INCOME
 
13,590

 
11,368

 
26,981

 
21,556

PROVISION (CREDIT) FOR LOAN LOSSES
 
54

 
224

 
(51
)
 
303

NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES
 
13,536

 
11,144

 
27,032

 
21,253

 
 
 
 
 
 
 
 
 
NON-INTEREST INCOME:
 
 

 
 

 
 

 
 

Fiduciary income
 
1,058

 
942

 
2,092

 
1,906

Service charges and fees on deposit accounts
 
1,497

 
1,426

 
2,805

 
2,731

Net gain (loss) from sales of debt securities, available-for-sale
 
1

 
(1
)
 
(17
)
 
(1
)
Bank owned life insurance income
 
183

 
182

 
365

 
368

Gains from sales of loans
 
64

 
97

 
93

 
119

Other operating income
 
195

 
145

 
432

 
304

TOTAL NON-INTEREST INCOME
 
2,998

 
2,791

 
5,770

 
5,427

 
 
 
 
 
 
 
 
 
NON-INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
6,243

 
5,128

 
12,405

 
10,105

Equipment expenses
 
278

 
268

 
544

 
521

Occupancy expense, net
 
744

 
658

 
1,507

 
1,385

State franchise tax
 
436

 
296

 
874

 
599

Marketing
 
297

 
284

 
599

 
416

Amortization of intangibles
 
260

 
188

 
517

 
373

FDIC insurance premiums
 
112

 
99

 
238

 
198

Contracted services
 
475

 
391

 
939

 
706

Other real estate owned
 
48

 
1

 
51

 
3

Merger-related expenses
 
20

 
855

 
87

 
1,613

Other non-interest expense
 
1,920

 
2,543

 
3,772

 
4,341

TOTAL NON-INTEREST EXPENSE
 
10,833

 
10,711

 
21,533

 
20,260

INCOME BEFORE INCOME TAXES
 
5,701

 
3,224

 
11,269

 
6,420

PROVISION FOR INCOME TAXES
 
973

 
486

 
1,914

 
969

NET INCOME
 
$
4,728

 
2,738

 
$
9,355

 
5,451

 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.17

 
0.16

 
$
0.34

 
0.32

Earnings per common share:
 
 

 
 

 
 

 
 

Basic
 
$
0.36

 
0.25

 
$
0.71

 
0.52

Diluted
 
0.36

 
0.25

 
0.71

 
0.52

Weighted average common shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
13,192,691

 
11,099,485

 
13,237,909

 
10,563,030

Diluted
 
13,196,665

 
11,105,014

 
13,241,752

 
10,568,792


The accompanying notes to consolidated condensed financial statements are an integral part of these statements.

3

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
4,728

 
2,738

 
$
9,355

 
5,451

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Net unrealized gain (loss) on available-for-sale securities (net of taxes of $577 and $(145) for the three months ended June 30, 2019 and 2018, respectively, and $1,236 and $(937) for the six months ended June 30, 2018 and 2017, respectively)
 
2,178

 
(544
)
 
4,653

 
(3,523
)
Reclassification adjustment for net realized loss (gain) on sales of available-for-sale securities included in net income (net of taxes of $4 for the six months ended June 30, 2019)
 
(1
)
 
1

 
13

 
1

Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $1 and $2 for the three and six months ended June 30, 2018, respectively)
 
—

 
3

 
—

 
6

  Other comprehensive income (loss), net of tax
 
2,177

 
(540
)
 
4,666

 
(3,516
)
TOTAL COMPREHENSIVE INCOME
 
$
6,905

 
2,198

 
$
14,021

 
1,935


The accompanying notes to consolidated condensed financial statements are an integral part of these statements.


4

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
 
 
Common Shares Outstanding
 
Common Stock
 
Retained
Earnings
 
Treasury
Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Shareholders'
Equity
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
 
13,314,148

 
$
141,349

 
96,912

 
(12,013
)
 
(2,230
)
 
224,018

Net income
 
 

 
 

 
4,728

 
 

 
 

 
4,728

Other comprehensive income, net of taxes
 
 
 
 

 
 

 
 

 
2,177

 
2,177

Dividend Reinvestment and Stock Purchase Plan
 
6,491

 
109

 
 
 
 

 
 

 
109

Treasury shares purchased
 
(342,085
)
 
 
 
 
 
(5,841
)
 
 
 
(5,841
)
Compensation expense relating to restricted stock
 
—

 
21

 
 
 
 
 
 
 
21

Common stock dividends, $0.17 per share
 
 

 
 

 
(2,240
)
 
 

 
 

 
(2,240
)
Balance at June 30, 2019
 
12,978,554

 
$
141,479

 
99,400

 
(17,854
)
 
(53
)
 
222,972

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
13,295,276

 
$
141,170

 
94,547

 
(12,013
)
 
(4,719
)
 
218,985

Net income
 
 

 
 

 
9,355

 
 

 
 

 
9,355

Other comprehensive income, net of taxes
 
 
 
 

 
 

 
 

 
4,666

 
4,666

Dividend Reinvestment and Stock Purchase Plan
 
12,859

 
218

 
 
 
 

 
 

 
218

Treasury shares purchased
 
(342,085
)
 
 
 
 
 
(5,841
)
 
 
 
(5,841
)
Compensation expense relating to restricted stock
 
12,504

 
91

 
 
 
 
 
 
 
91

Common stock dividends, $0.34 per share
 
 

 
 

 
(4,502
)
 
 

 
 

 
(4,502
)
Balance at June 30, 2019
 
12,978,554

 
$
141,479

 
99,400

 
(17,854
)
 
(53
)
 
222,972

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2018
 
10,041,152

 
$
77,159

 
88,933

 
(11,665
)
 
(5,843
)
 
148,584

Net income
 
 

 
 

 
2,738

 
 

 
 

 
2,738

Other comprehensive loss, net of taxes
 
 

 
 

 
 

 
 

 
(540
)
 
(540
)
Dividend Reinvestment and Stock Purchase Plan
 
5,023

 
98

 
 

 
 

 
 

 
98

Stock issued for acquisition of Columbus First Bancorp, Inc.
 
3,253,060

 
63,598

 
 
 
 
 
 
 
63,598

Compensation expense relating to restricted stock
 
—

 
15

 
 
 
 
 
 
 
15

Common stock dividends, $0.16 per share
 
 

 
 

 
(2,127
)
 
 

 
 

 
(2,127
)
Balance at June 30, 2018
 
13,299,235

 
$
140,870

 
89,544

 
(11,665
)
 
(6,383
)
 
212,366

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
10,023,059

 
$
76,977

 
87,301

 
(11,665
)
 
(2,342
)
 
150,271

Cumulative effect of changes in accounting principles (1)
 
 
 
 
 
525

 
 
 
(525
)
 
—

Balance at December 31, 2017, as adjusted
 
10,023,059

 
$
76,977

 
87,826

 
(11,665
)
 
(2,867
)
 
150,271

Net income
 
 

 
 

 
5,451

 
 

 
 

 
5,451

Other comprehensive loss, net of taxes
 
 

 
 

 
 

 
 

 
(3,516
)
 
(3,516
)
Dividend Reinvestment and Stock Purchase Plan
 
9,851

 
191

 
 

 
 

 
 

 
191

Stock issued for acquisition of Columbus First Bancorp, Inc.
 
3,253,060

 
63,598

 
 
 
 
 
 
 
63,598

Exercise of stock options
 
2,631

 
33

 
 
 
 
 
 

 
33

Compensation expense relating to restricted stock
 
10,634

 
71

 
 
 
 
 
 
 
71

Common stock dividends, $0.32 per share
 
 

 
 

 
(3,733
)
 
 

 
 

 
(3,733
)
Balance at June 30, 2018
 
13,299,235

 
$
140,870

 
89,544

 
(11,665
)
 
(6,383
)
 
212,366

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Represents the impact of adopting Accounting Standards Update No. 2018-02 and No. 2016-01.

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.

5

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended 
 June 30,
 
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
9,355

 
5,451

Adjustments to reconcile net income to net cash flows from operating activities:
 
 

 
 

Depreciation, amortization, and accretion
 
1,594

 
2,019

Provision (credit) for loan losses
 
(51
)
 
303

Deferred income tax provision (benefit)
 
237

 
63

Increase in cash surrender value of bank owned life insurance
 
(365
)
 
(368
)
Realized gain from equity securities
 
(147
)
 
(11
)
Realized loss from sales of debt securities, available-for-sale
 
17

 
1

Realized loss from sales of premises and equipment
 
2

 
42

Impairment charge recognized on premises and equipment
 
—

 
645

Realized loss from sales and impairment of other real estate owned and repossessed assets
 
47

 
—

Origination of mortgage loans for sale
 
(4,475
)
 
(3,554
)
Realized gains from sales of loans
 
(93
)
 
(119
)
Proceeds from sales of mortgage loans
 
4,527

 
3,628

Compensation expense related to restricted stock
 
91

 
71

Changes in:
 
 

 
 

Accrued income receivable
 
(331
)
 
97

Other assets
 
(619
)
 
(541
)
Other liabilities
 
(1,539
)
 
(1,374
)
TOTAL ADJUSTMENTS
 
(1,105
)
 
902

NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
 
8,250

 
6,353

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of equity securities
 
332

 
65

Proceeds from sales of debt securities, available-for-sale
 
50,302

 
3,343

Proceeds from maturities and calls of debt securities:
 
 
 
 
Available-for-sale
 
7,116

 
8,876

Held-to-maturity
 
2,411

 
3,271

Purchases of equity securities
 
(352
)
 
(1,081
)
Purchases of debt securities:
 
 
 
 
Available-for-sale
 
(12,301
)
 
—

Held-to-maturity
 
(6,033
)
 
(2,310
)
Proceeds from maturities of interest-bearing time deposits
 
498

 
498

Proceeds from redemption of Federal Reserve Bank stock
 
1

 
—

Purchase of Federal Home Loan Bank stock
 
(358
)
 
—

Net increase in loans
 
(31,126
)
 
(25,504
)
Purchases of premises and equipment
 
(1,227
)
 
(288
)
Proceeds from sale of premises and equipment
 
2

 
16

Net cash received from acquisition of Columbus First Bancorp, Inc.
 
—

 
12,896

NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
9,265

 
(218
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase in deposits
 
57,040

 
50,027

Net decrease in short-term borrowings
 
(56,230
)
 
(57,000
)
Proceeds from long-term debt
 
—

 
6,000

Principal payments on long-term debt
 
(5,055
)
 
(2,138
)
Proceeds from issuance of common stock
 
27

 
23

Treasury shares purchased
 
(5,841
)
 
—

Proceeds from exercise of stock options
 
—

 
33

Cash dividends paid on common stock
 
(4,311
)
 
(3,565
)
NET CASH FLOWS USED IN FINANCING ACTIVITIES
 
(14,370
)
 
(6,620
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
 
3,145

 
(485
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
20,040

 
25,386

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
23,185

 
24,901

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
5,161

 
2,314

Income taxes paid
 
963

 
500


The accompanying notes to consolidated condensed financial statements are an integral part of these statements.

6

LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation
 
Basis of Presentation
The accompanying unaudited interim consolidated condensed financial statements include LCNB Corp. ("LCNB") and its wholly-owned subsidiaries: LCNB National Bank (the "Bank") and LCNB Risk Management, Inc., its captive insurance company. All material intercompany transactions and balances are eliminated in consolidation.

The unaudited interim consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (the "SEC").  Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods, as required by Regulation S-X, Rule 10-01.

The consolidated condensed balance sheet as of December 31, 2018 has been derived from the audited consolidated balance sheet as of that date.

Certain prior period data presented in the financial statements have been reclassified to conform with the current year presentation.

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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 .  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2018 Annual Report on Form 10-K filed with the SEC.

Accounting Changes
ASU No. 2016-02, "Leases (Topic 842)"
ASU No. 2016-02 was issued in February 2016 and was adopted by LCNB as of January 1, 2019. It 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.

7
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 1 - Basis of Presentation (continued)


LCNB adopted this update using a modified retrospective approach, as defined, and elected not to restate comparable prior periods. The update provides for a number of practical expedients that can be used to simplify the transition to the new standard. LCNB elected a package of practical expedients that allowed it to not reassess whether an existing contract is or contains a lease, to not reassess previous lease classifications, and to not reassess initial direct costs. LCNB also elected a practical expedient that allowed it to use hindsight when determining lease terms. LCNB did not elect a practical expedient that would have allowed it to not reassess certain land easements, as this expedient was not applicable to it.

LCNB has adopted an accounting policy election to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. Lease expense for such leases will generally be recognized on a straight-line basis over the lease term.

Revenue Recognition
Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers" 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 condensed 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.


Note 2 – Acquisition

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. 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 stock for each outstanding CFB common share. Unexercised stock options of CFB were canceled in exchange for a cash payment.


8
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 – Acquisition (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)
$
63,598

 
—

 
63,598

Cash paid to cancel share based payment awards
783

 
—

 
783

 
64,381

 
—

 
64,381

 
 
 
 
 
 
Identifiable Assets Acquired:
 
 
 
 
 
Cash and cash equivalents
13,679

 
—

 
13,679

Interest-bearing time deposits
10,350

 
—

 
10,350

Federal Home Loan Bank stock
1,207

 
—

 
1,207

Loans, net
282,748

 
(615
)
 
282,133

Loans held for sale, net
1,819

 
—

 
1,819

Premises and equipment
102

 
—

 
102

Core deposit intangible
2,089

 
88

 
2,177

Other real estate owned
35

 
—

 
35

Deferred income taxes
—

 
352

 
352

Other assets
2,022

 
(658
)
 
1,364

Total identifiable assets acquired
314,051

 
(833
)
 
313,218

 
 
 
 
 
 
Liabilities Assumed:
 
 
 
 
 
Deposits
245,036

 
(606
)
 
244,430

Short-term borrowings
10,000

 
—

 
10,000

Long-term debt
22,920

 
23

 
22,943

Deferred income taxes
200

 
(200
)
 
—

Other liabilities
491

 
11

 
502

Total liabilities assumed
278,647

 
(772
)
 
277,875

 
 
 
 
 
 
Total Identifiable Net Assets Acquired
35,404

 
(61
)
 
35,343

 
 
 
 
 
 
Goodwill resulting from merger
$
28,977

 
61

 
29,038


As permitted by ASC 805-10-25, Business Combinations, the above estimated amounts could 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 were recognized in the period the adjustment was identified. This adjustment period closed on May 31, 2019. There were no revisions during the first and second quarters of 2019.

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.

9
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 – Acquisition (continued)


The core deposit intangible will be amortized over the estimated weighted average economic life of the various core deposit types, which is approximately seven years.

Direct costs related to the acquisition were expensed as incurred and are recorded as a merger-related expense in the consolidated condensed statements of income.

CFB's results of operations are included in the consolidated condensed statements of income from May 31, 2018, the effective date of the merger.


Note 3 - Investment Securities
 
The amortized cost and estimated fair value of equity and debt securities at June 30, 2019 and December 31, 2018 are summarized as follows (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
June 30, 2019
 
 
 
 
 
 
 
Debt Securities, Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
2,275

 
28

 
—

 
2,303

U.S. Agency notes
77,915

 
204

 
292

 
77,827

U.S. Agency mortgage-backed securities
62,283

 
297

 
441

 
62,139

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
39,927

 
131

 
155

 
39,903

Taxable
16,215

 
284

 
11

 
16,488

 
$
198,615

 
944

 
899

 
198,660

 
 
 
 
 
 
 
 
Debt Securities, Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
$
26,065

 
105

 
30

 
26,140

Taxable
7,278

 
125

 
—

 
7,403

 
$
33,343

 
230

 
30

 
33,543

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Debt Securities, Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
2,278

 
—

 
43

 
2,235

U.S. Agency notes
80,708

 
—

 
2,368

 
78,340

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

 
7

 
1,981

 
55,610

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
86,059

 
77

 
1,422

 
84,714

Taxable
17,654

 
102

 
234

 
17,522

 
$
244,283

 
186

 
6,048

 
238,421

 
 
 
 
 
 
 
 
Debt Securities, Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
$
26,021

 
84

 
635

 
25,470

Taxable
3,700

 
—

 
146

 
3,554

 
$
29,721

 
84

 
781

 
29,024


10
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 - Investment Securities (continued)


Information concerning debt securities with gross unrealized losses at June 30, 2019 and December 31, 2018 , aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
 
Less than Twelve Months
 
Twelve Months or Greater
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2019
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
—

 
—

 
—

 
—

U.S. Agency notes
—

 
—

 
39,413

 
292

U.S. Agency mortgage-backed securities
69

 
—

 
32,554

 
441

Municipal securities:
 

 
 

 
 
 
 
Non-taxable
—

 
—

 
21,330

 
155

Taxable
—

 
—

 
4,553

 
11

 
$
69

 
—

 
97,850

 
899

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
72

 
—

 
3,490

 
30

  Taxable
—

 
—

 
—

 
—

 
$
72

 
—

 
3,490

 
30

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
—

 
—

 
2,235

 
43

U.S. Agency notes
4,988

 
7

 
73,351

 
2,361

U.S. Agency mortgage-backed securities
137

 
—

 
55,217

 
1,981

Municipal securities:
 

 
 

 
 

 
 
Non-taxable
14,264

 
49

 
58,211

 
1,373

Taxable
—

 
—

 
14,407

 
234

 
$
19,389

 
56

 
203,421

 
5,992

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
366

 
1

 
18,588

 
634

  Taxable
400

 
1

 
3,154

 
145

 
$
766

 
2

 
21,742

 
779


Management has determined that the unrealized losses at June 30, 2019 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.






11
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 - Investment Securities (continued)


Contractual maturities of debt securities at June 30, 2019 were as follows (in thousands).  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due within one year
$
14,317

 
14,308

 
2,535

 
2,538

Due from one to five years
80,797

 
80,884

 
7,074

 
7,150

Due from five to ten years
39,508

 
39,626

 
8,517

 
8,535

Due after ten years
1,710

 
1,703

 
15,217

 
15,320

 
136,332

 
136,521

 
33,343

 
33,543

U.S. Agency mortgage-backed securities
62,283

 
62,139

 
—

 
—

 
$
198,615

 
198,660

 
33,343

 
33,543


Debt securities with a market value of $141,307,000 and $106,568,000 at June 30, 2019 and December 31, 2018 , respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

Certain information concerning the sale of debt securities, available-for-sale, for the three and six months ended June 30, 2019 and 2018 was as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Proceeds from sales
$
28,496

 
3,343

 
50,302

 
3,343

Gross realized gains
70

 
7

 
128

 
7

Gross realized losses
69

 
8

 
145

 
8


Realized gains or losses from the sale of securities are computed using the specific identification method.

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 condensed 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 June 30, 2019 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 June 30, 2019 and December 31, 2018 are summarized as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Mutual funds
$
1,356

 
1,324

 
1,651

 
1,559

Equity securities
781

 
922

 
471

 
519

Total equity securities with a readily determinable fair value
$
2,137

 
2,246

 
2,122

 
2,078







12
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 3 - Investment Securities (continued)


Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the six months ended June 30, 2019 and 2018 is as follows (in thousands):
 
Six Months Ended 
 June 30,
 
2019
 
2018
Net gains recognized
$
147

 
11

Less net realized gains (losses) on equity securities sold
(6
)
 
23

Unrealized gains (losses) recognized and still held at period end
$
153

 
(12
)


Note 4 - Loans
 
Major classifications of loans at June 30, 2019 and December 31, 2018 are as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Commercial and industrial
$
79,513

 
77,740

Commercial, secured by real estate
793,863

 
740,647

Residential real estate
326,029

 
349,127

Consumer
19,649

 
17,283

Agricultural
10,843

 
13,297

Other loans, including deposit overdrafts
373

 
450

  Loans, gross
1,230,270

 
1,198,544

Deferred origination costs (fees), net
(9
)
 
79

  Loans, net of deferred origination costs (fees)
1,230,261

 
1,198,623

Less allowance for loan losses
4,112

 
4,046

Loans, net
$
1,226,149

 
1,194,577


Non-accrual, past-due, and accruing restructured loans as of June 30, 2019 and December 31, 2018 are as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Non-accrual loans:
 
 
 
Commercial and industrial
$
22

 
—

Commercial, secured by real estate
2,078

 
1,767

Residential real estate
862

 
1,007

Consumer
—

 
—

Agricultural
—

 
177

Total non-accrual loans
2,962

 
2,951

Past-due 90 days or more and still accruing
24

 
149

Total non-accrual and past-due 90 days or more and still accruing
2,986

 
3,100

Accruing restructured loans
8,088

 
10,516

Total
$
11,074

 
13,616






13
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Loans (continued)


The allowance for loan losses for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
Three Months Ended June 30, 2019
Balance, beginning of period
$
451

 
2,858

 
693

 
77

 
41

 
6

 
4,126

Provision (credit) charged to expenses
46

 
(131
)
 
107

 
9

 
(3
)
 
26

 
54

Losses charged off
—

 
(7
)
 
(35
)
 
(10
)
 
—

 
(43
)
 
(95
)
Recoveries
—

 
—

 
8

 
5

 
—

 
14

 
27

Balance, end of period
$
497

 
2,720

 
773

 
81

 
38

 
3

 
4,112

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
Balance, beginning of year
$
400

 
2,745

 
767

 
87

 
46

 
1

 
4,046

Provision (credit) charged to expenses
97

 
(74
)
 
(88
)
 
(22
)
 
(8
)
 
44

 
(51
)
Losses charged off
—

 
(7
)
 
(68
)
 
(10
)
 
—

 
(74
)
 
(159
)
Recoveries
—

 
56

 
162

 
26

 
—

 
32

 
276

Balance, end of period
$
497

 
2,720

 
773

 
81

 
38

 
3

 
4,112

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
Balance, beginning of period
$
393

 
2,143

 
869

 
78

 
44

 
2

 
3,529

Provision (credit) charged to expenses
14

 
189

 
—

 
(1
)
 
8

 
14

 
224

Losses charged off
—

 
—

 
(192
)
 
(10
)
 
—

 
(30
)
 
(232
)
Recoveries
—

 
51

 
13

 
3

 
—

 
15

 
82

Balance, end of period
$
407

 
2,383

 
690

 
70

 
52

 
1

 
3,603

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
Balance, beginning of year
$
378

 
2,178

 
717

 
76

 
53

 
1

 
3,403

Provision (credit) charged to expenses
29

 
58

 
186

 
7

 
(1
)
 
24

 
303

Losses charged off
—

 
(29
)
 
(227
)
 
(21
)
 
—

 
(61
)
 
(338
)
Recoveries
—

 
176

 
14

 
8

 
—

 
37

 
235

Balance, end of period
$
407

 
2,383

 
690

 
70

 
52

 
1

 
3,603


14
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Loans (continued)


A breakdown of the allowance for loan losses and the loan portfolio by loan segment at June 30, 2019 and December 31, 2018 are as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
31

 
2

 
220

 
—

 
—

 
—

 
253

Collectively evaluated for impairment
466

 
2,718

 
553

 
81

 
38

 
3

 
3,859

Acquired credit impaired loans
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance, end of period
$
497

 
2,720

 
773

 
81

 
38

 
3

 
4,112

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
271

 
11,537

 
1,417

 
32

 
—

 
—

 
13,257

Collectively evaluated for impairment
78,200

 
776,239

 
322,105

 
19,738

 
10,861

 
73

 
1,207,216

Acquired credit impaired loans
1,092

 
5,485

 
2,911

 
—

 
—

 
300

 
9,788

Balance, end of period
$
79,563

 
793,261

 
326,433

 
19,770

 
10,861

 
373

 
1,230,261

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
10

 
3

 
49

 
—

 
—

 
—

 
62

Collectively evaluated for impairment
390

 
2,742

 
718

 
87

 
46

 
1

 
3,984

Acquired credit impaired loans
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance, end of period
$
400

 
2,745

 
767

 
87

 
46

 
1

 
4,046

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
268

 
15,101

 
1,558

 
36

 
177

 
—

 
17,140

Collectively evaluated for impairment
76,609

 
718,709

 
344,751

 
17,363

 
13,135

 
114

 
1,170,681

Acquired credit impaired loans
922

 
6,315

 
3,229

 
—

 
—

 
336

 
10,802

Balance, end of period
$
77,799

 
740,125

 
349,538

 
17,399

 
13,312

 
450

 
1,198,623



15
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Loans (continued)


The risk characteristics of LCNB's material loan portfolio segments are as follows:

Commercial and Industrial Loans. LCNB’s commercial and industrial loan portfolio consists of loans for various purposes, including loans to fund working capital requirements (such as inventory and receivables financing) and purchases of machinery and equipment.  LCNB offers a variety of commercial and industrial loan arrangements, including term loans, balloon loans, and lines of credit.  Most commercial and industrial loans have a fixed rate, with maturities ranging from one 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, hotels, 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 properties.  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.”

Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral.  LCNB generally requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80% .
Consumer Loans.   LCNB’s portfolio of consumer loans generally includes secured and unsecured loans to individuals for household, family and other personal expenditures.  Secured loans include loans to fund the purchase of automobiles, recreational vehicles, boats, and similar acquisitions. Consumer loans made by LCNB generally have fixed rates and terms ranging up to 72 months, depending upon the nature of the collateral, size of the loan, and other relevant factors.

Consumer loans generally have higher interest rates, but pose additional risks of collectibility and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation.  The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.

Agricultural Loans.   LCNB’s portfolio of agricultural loans includes loans for financing agricultural production and 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.

16
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Loans (continued)


LCNB uses a risk-rating system to quantify loan quality.  A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends.  The categories used are:

•
Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.
•
Other Assets Especially Mentioned ("OAEM") – loans in this category are currently protected but are potentially weak. These loans constitute a risk but not to the point of justifying a classification of substandard.  The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.
•
Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected.
•
Doubtful – loans classified in this category have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
A breakdown of the loan portfolio by credit quality indicators at June 30, 2019 and December 31, 2018 is as follows (in thousands):
 
Pass
 
OAEM
 
Substandard
 
Doubtful
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
77,989

 
44

 
1,530

 
—

 
79,563

Commercial, secured by real estate
776,835

 
748

 
15,678

 
—

 
793,261

Residential real estate
324,256

 
—

 
2,177

 
—

 
326,433

Consumer
19,748

 
—

 
22

 
—

 
19,770

Agricultural
10,861

 
—

 
—

 
—

 
10,861

Other
373

 
—

 
—

 
—

 
373

Total
$
1,210,062

 
792

 
19,407

 
—

 
1,230,261

 
 
 
 
 
 
 
 
 
 
December 31, 2018
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
74,530

 
89

 
3,180

 
—

 
77,799

Commercial, secured by real estate
718,233

 
768

 
21,124

 
—

 
740,125

Residential real estate
344,432

 
—

 
5,106

 
—

 
349,538

Consumer
17,381

 
—

 
18

 
—

 
17,399

Agricultural
13,116

 
—

 
196

 
—

 
13,312

Other
450

 
—

 
—

 
—

 
450

Total
$
1,168,142

 
857

 
29,624

 
—

 
1,198,623















17
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Loans (continued)


A loan portfolio aging analysis at June 30, 2019 and December 31, 2018 is as follows (in thousands):
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
90 Days
Past Due
 
Total
Past Due
 
Current
 
Total Loans
Receivable
 
Total Loans Greater Than
90 Days and
Accruing
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
—

 
—

 
31

 
31

 
79,532

 
79,563

 
9

Commercial, secured by real estate
66

 
—

 
284

 
350

 
792,911

 
793,261

 
—

Residential real estate
395

 
35

 
494

 
924

 
325,509

 
326,433

 
—

Consumer
7

 
—

 
15

 
22

 
19,748

 
19,770

 
15

Agricultural
—

 
—

 
—

 
—

 
10,861

 
10,861

 
—

Other
73

 
—

 
—

 
73

 
300

 
373

 
—

Total
$
541

 
35

 
824

 
1,400

 
1,228,861

 
1,230,261

 
24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
626

 
173

 
—

 
799

 
77,000

 
77,799

 
—

Commercial, secured by real estate
347

 
141

 
347

 
835

 
739,290

 
740,125

 
—

Residential real estate
905

 
536

 
1,046

 
2,487

 
347,051

 
349,538

 
149

Consumer
14

 
—

 
—

 
14

 
17,385

 
17,399

 
—

Agricultural
19

 
—

 
178

 
197

 
13,115

 
13,312

 
—

Other
114

 
—

 
—

 
114

 
336

 
450

 
—

Total
$
2,025

 
850

 
1,571

 
4,446

 
1,194,177

 
1,198,623

 
149


Impaired loans, including acquired credit impaired loans, at June 30, 2019 and December 31, 2018 are as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
1,094

 
1,630

 
—

 
926

 
1,457

 
—

Commercial, secured by real estate
16,879

 
17,993

 
—

 
21,266

 
22,451

 
—

Residential real estate
3,504

 
4,086

 
—

 
4,122

 
4,872

 
—

Consumer
12

 
12

 
—

 
13

 
13

 
—

Agricultural
—

 
—

 
—

 
177

 
177

 
—

Other
300

 
434

 
—

 
336

 
475

 
—

Total
$
21,789

 
24,155

 
—

 
26,840

 
29,445

 
—

 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 

 
 

 
 

Commercial & industrial
$
269

 
274

 
31

 
264

 
269

 
10

Commercial, secured by real estate
143

 
144

 
2

 
150

 
150

 
3

Residential real estate
824

 
853

 
220

 
665

 
684

 
49

Consumer
20

 
20

 
—

 
23

 
23

 
—

Agricultural
—

 
—

 
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

 
—

 
—

Total
$
1,256

 
1,291

 
253

 
1,102

 
1,126

 
62

 
 
 
 
 
 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
 

 
 

 
 

Commercial & industrial
$
1,363

 
1,904

 
31

 
1,190

 
1,726

 
10

Commercial, secured by real estate
17,022

 
18,137

 
2

 
21,416

 
22,601

 
3

Residential real estate
4,328

 
4,939

 
220

 
4,787

 
5,556

 
49

Consumer
32

 
32

 
—

 
36

 
36

 
—

Agricultural
—

 
—

 
—

 
177

 
177

 
—

Other
300

 
434

 
—

 
336

 
475

 
—

Total
$
23,045

 
25,446

 
253

 
27,942

 
30,571

 
62


18
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Loans (continued)


The following presents information related to the average recorded investment and interest income recognized on impaired loans, including acquired credit impaired loans, for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
2019
 
2018
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Three Months Ended June 30,
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial & industrial
$
851

 
8

 
741

 
15

Commercial, secured by real estate
17,250

 
330

 
15,281

 
193

Residential real estate
3,652

 
52

 
2,934

 
49

Consumer
12

 
—

 
10

 
—

Agricultural
—

 
—

 
178

 
—

Other
322

 
9

 
391

 
11

Total
$
22,087

 
399

 
19,535

 
268

 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
Commercial & industrial
$
267

 
4

 
283

 
4

Commercial, secured by real estate
144

 
2

 
154

 
3

Residential real estate
796

 
—

 
566

 
7

Consumer
21

 
—

 
23

 
—

Agricultural
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

Total
$
1,228

 
6

 
1,026

 
14

 
 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
 
Commercial & industrial
$
1,118

 
12

 
1,024

 
19

Commercial, secured by real estate
17,394

 
332

 
15,435

 
196

Residential real estate
4,448

 
52

 
3,500

 
56

Consumer
33

 
—

 
33

 
—

Agricultural
—

 
—

 
178

 
—

Other
322

 
9

 
391

 
11

Total
$
23,315

 
405

 
20,561

 
282

 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial & industrial
$
876

 
9

 
805

 
25

Commercial, secured by real estate
17,830

 
527

 
15,166

 
389

Residential real estate
3,719

 
108

 
2,950

 
97

Consumer
13

 
1

 
15

 
1

Agricultural
—

 
—

 
178

 
—

Other
327

 
18

 
394

 
22

Total
$
22,765

 
663

 
19,508

 
534

 
 
 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

 
 

Commercial & industrial
$
264

 
8

 
288

 
9

Commercial, secured by real estate
147

 
3

 
155

 
6

Residential real estate
762

 
10

 
571

 
15

Consumer
21

 
—

 
24

 
—

Agricultural
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

Total
$
1,194

 
21

 
1,038

 
30

 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

Commercial & industrial
$
1,140

 
17

 
1,093

 
34

Commercial, secured by real estate
17,977

 
530

 
15,321

 
395

Residential real estate
4,481

 
118

 
3,521

 
112

Consumer
34

 
1

 
39

 
1

Agricultural
—

 
—

 
178

 
—

Other
327

 
18

 
394

 
22

Total
$
23,959

 
684

 
20,546

 
564



19
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Loans (continued)


Of the interest income recognized on impaired loans during the six months ended June 30, 2019 and 2018 , approximately $11,000 and $20,000 , respectively, were recognized on a cash basis.

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.

Loan modifications that were classified as TDRs during the three and six months ended June 30, 2019 and 2018 were as follows:
 
2019
 
2018
 
Number
of
Loans
 
Pre-Modification Recorded Balance
 
Post-Modification Recorded Balance
 
Number of Loans
 
Pre-Modification Recorded Balance
 
Post-Modification Recorded Balance
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
—

 
$
—

 
—

 
—

 
$
—

 
—

Commercial, secured by real estate
—

 
—

 
—

 
—

 
—

 
—

Residential real estate
—

 
—

 
—

 
—

 
—

 
—

Consumer
—

 
—

 
—

 
—

 
—

 
—

Total
—

 
$
—

 
—

 
—

 
$
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 

 
 
 
 

 
 

 
 

Commercial and industrial
—

 
$
—

 
—

 
—

 
$
—

 
—

Commercial, secured by real estate
2

 
258

 
258

 
—

 
—

 
—

Residential real estate
2

 
54

 
54

 
—

 
—

 
—

Consumer
—

 
—

 
—

 
—

 
—

 
—

Total
4

 
$
312

 
312

 
—

 
$
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the six months ended June 30, 2019 and 2018 and that remained in default at period end.

Information concerning loans that were modified during the six months ended June 30, 2019 and 2018 and that were determined to be troubled debt restructurings follows (in thousands):
 
2019
 
2018
Impaired loans without a valuation allowance at the end of the period
$
312

 
—

Impaired loans with a valuation allowance at the end of the period
—

 
—


Mortgage loans sold to and serviced for investors are not included in the accompanying consolidated condensed balance sheets.  The unpaid principal balances of those loans at June 30, 2019 and December 31, 2018 were approximately $88,444,000 and $97,685,000 , respectively.




20
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 4 – Loans (continued)


The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at June 30, 2019 was $375,000 .


Note 5 - Acquired Credit Impaired Loans

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 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.



21
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 5 – Acquired Credit Impaired Loans (continued)


The following table provides at June 30, 2019 and December 31, 2018 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):
 
June 30, 2019
 
December 31, 2018
Acquired from First Capital Bancshares, Inc.
 
 
 
Commercial & industrial
$
9

 
13

Commercial, secured by real estate
807

 
818

Residential real estate
684

 
911

Other loans, including deposit overdrafts
—

 
—

  Loans, gross
1,500

 
1,742

Less allowance for loan losses
—

 
—

  Loans, net
$
1,500

 
1,742

 
 
 
 
Acquired from Eaton National Bank & Trust Co.
 
 
 
Commercial & industrial
$
752

 
503

Commercial, secured by real estate
861

 
1,547

Residential real estate
744

 
784

Other loans, including deposit overdrafts
300

 
336

  Loans, gross
2,657

 
3,170

Less allowance for loan losses
—

 
—

  Loans, net
$
2,657

 
3,170

 
 
 
 
Acquired from BNB Bancorp, Inc.
 
 
 
Commercial & industrial
$
—

 
—

Commercial, secured by real estate
1,346

 
1,396

Residential real estate
110

 
158

Other loans, including deposit overdrafts
—

 
—

  Loans, gross
1,456

 
1,554

Less allowance for loan losses
—

 
—

  Loans, net
$
1,456

 
1,554

 
 
 
 
Acquired from Columbus First Bancorp, Inc.
 
 
 
Commercial & industrial
$
331

 
406

Commercial, secured by real estate
2,471

 
2,554

Residential real estate
1,373

 
1,376

Other loans, including deposit overdrafts
—

 
—

  Loans, gross
4,175

 
4,336

Less allowance for loan losses
—

 
—

  Loans, net
$
4,175

 
4,336

 
 
 
 
Total
 
 
 
Commercial & industrial
$
1,092

 
922

Commercial, secured by real estate
5,485

 
6,315

Residential real estate
2,911

 
3,229

Other loans, including deposit overdrafts
300

 
336

Loans, gross
9,788

 
10,802

Less allowance for loan losses
—

 
—

  Loans, net
$
9,788

 
10,802


22
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 5 – Acquired Credit Impaired Loans (continued)


The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):
 
June 30, 2019
 
December 31, 2018
Outstanding balance
$
12,142

 
13,371

Carrying amount
9,788

 
10,802


Activity during the three and six months ended June 30, 2019 and 2018 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Accretable discount at beginning of period
$
719

 
635

 
743

 
669

Reclassification from nonaccretable discount to accretable discount
59

 
—

 
59

 
—

Disposals
—

 
—

 
1

 
—

Accretion
(152
)
 
(2
)
 
(177
)
 
(36
)
Accretable discount at end of period
$
626

 
633

 
626

 
633



Note 6 - Affordable Housing Tax Credit Limited Partnership

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 investments and related unfunded commitments at June 30, 2019 and December 31, 2018 (in thousands):
 
June 30,
2019
 
December 31,
2018
Affordable housing tax credit investment
$
5,000

 
5,000

Less amortization
583

 
492

Net affordable housing tax credit investment
$
4,417

 
4,508

 
 
 
 
Unfunded commitment
$
2,993

 
3,372


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 condensed balance sheets.

LCNB expects to fund the unfunded commitment over 11 years .







23
LCNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 6 – Affordable Housing Tax Credit Limited Partnership (continued)

The following table presents other information relating to LCNB's affordable housing tax credit investments for the six months ended June 30, 2019 and 2018 (in thousands):
 
2019
 
2018
Tax credits and other tax benefits recognized
$
168

 
112

Tax credit amortization expense included in provision for income taxes
91

 
112



Note 7 – Borrowings

Borrowings at June 30, 2019 and December 31, 2018 are as follows (dollars in thousands):
 
June 30, 2019
 
December 31, 2018
 
Amount
 
Rate

 
Amount
 
Rate
Line of credit
$
—

 
—
%
 
$
4,230

 
3.00
%
FHLB short-term advances
—

 
—
%
 
52,000

 
2.48
%
FHLB long-term advances
41,986

 
2.54
%
 
47,032

 
2.45
%
 
$
41,986

 
2.54
%
 
$
103,262

 
2.49
%

All advances from the Federal Home Loan Bank ("FHLB") of Cincinnati, both long-term and short-term, are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $283 million and $303 million at June 30, 2019 and December 31, 2018 , respectively.  Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings. Total remaining borrowing capacity at June 30, 2019 was approximately $87.4 million. One of the factors limiting remaining borrowing capacity is ownership of FHLB stock. LCNB could increase its remaining borrowing capacity by purchasing additional FHLB stock.


Note 8 - Leases

LCNB has capitalized operating leases for its Otterbein, Fairfield, Barron Street , and Worthington offices, for the land at its Oxford and Oakwood offices, and for certain office equipment. The Oakwood lease has a remaining term of seventeen years with options to renew for six additional periods of five years each. The Oxford lease has a remaining term of forty-one years with no renewal options. The other leases have remaining terms of less than one year up to six years , some of which contain options to renew the leases for additional five -year periods.

Right-of-use assets represent LCNB's right to use the underlying assets for their lease terms and lease liabilities represent the obligation to make lease payments. They are recognized using the present value of lease payments over the lease terms. The discount rate is LCNB's incremental borrowing rate for periods similar to the respective lease terms. LCNB management is reasonably certain that it will exercise the renewal options for the offices named above and these additional terms have been included in the calculation of the right-of-use assets and the lease liabilities. The lease for the Fairfield office is for a period of one year and LCNB management has elected the short-term measurement and recognition exception permitted by ASC 842 and has not calculated a right-of-use asset or lease liability for this office.









24
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 8 – Leases (continued)


Lease expenses for offices are included in the consolidated condensed statements of income in occupancy expense, net and lease expenses for equipment are included in equipment expenses. Components of lease expense for the three and six months ended June 30, 2019 are as follows (in thousands):
 
Three Months
 
Six Months
Operating lease expense
$
140

 
280

Short-term lease expense
14

 
26

Variable lease expense
3

 
5

Other
(2
)
 
3

Total lease expense
$
155

 
314


Other information related to leases at June 30, 2019 were as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
260

Right-of-use assets obtained in exchange for new operating lease liabilities
$
5,615

Weighted average remaining lease term in years for operating leases
39 years

Weighted average discount rate for operating leases
3.62
%


Note 9 – Income Taxes

A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Statutory tax rate
21.0
 %
 
21.0
 %
 
21.0
 %
 
21.0
 %
Increase (decrease) resulting from:
 

 
 

 
 

 
 

Tax exempt interest
(1.5
)%
 
(4.3
)%
 
(1.7
)%
 
(4.4
)%
Tax exempt income on bank owned life insurance
(0.7
)%
 
(1.2
)%
 
(0.7
)%
 
(1.2
)%
Captive insurance premium income
(0.9
)%
 
(1.3
)%
 
(0.9
)%
 
(1.0
)%
Other, net
(0.8
)%
 
0.9
 %
 
(0.7
)%
 
0.7
 %
Effective tax rate
17.1
 %
 
15.1
 %
 
17.0
 %
 
15.1
 %


Note 10 - Commitments and Contingent Liabilities
 
LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.

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.


25
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 10 – Commitments and Contingent Liabilities (continued)


LCNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  

Financial instruments whose contract amounts represent off-balance-sheet credit risk at June 30, 2019 and December 31, 2018 are as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Commitments to extend credit:
 
 
 
Commercial loans
$
69,497

 
23,978

Other loans
 

 
 

Fixed rate
3,491

 
2,961

Adjustable rate
1,868

 
1,077

Unused lines of credit:
 

 
 

Fixed rate
7,186

 
31,446

Adjustable rate
142,961

 
169,031

Unused overdraft protection amounts on demand and NOW accounts
16,332

 
16,249

Standby letters of credit
883

 
1,080

Total commitments
$
242,218

 
245,822


Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Unused lines of credit include amounts not drawn on line of credit loans.  Commitments to extend credit and unused lines of credit generally have fixed expiration dates or other termination clauses.

LCNB evaluates each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower.  Collateral held varies, but may include accounts receivable, inventory, residential realty, income-producing commercial property, agricultural property, and property, plant, and equipment.

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.  

Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB's offices, purchases of furniture and equipment, and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of June 30, 2019 totaled approximately $3,752,000 .

Management believes that LCNB has sufficient liquidity to fund its lending and capital expenditure commitments.

LCNB and its subsidiaries are parties to various claims and proceedings arising in the normal course of business.  Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated financial position or results of operations.

26
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)




Note 11 – Accumulated Other Comprehensive Income (Loss)
 
Changes in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Changes in Pension Plan Assets and Benefit Obligations
 
Total
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Changes in Pension Plan Assets and Benefit Obligations
 
Total
2019
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
(2,142
)
 
(88
)
 
$
(2,230
)
 
(4,631
)
 
(88
)
 
(4,719
)
Before reclassifications
2,178

 
—

 
2,178

 
4,653

 
—

 
4,653

Reclassifications
(1
)
 
—

 
(1
)
 
13

 
—

 
13

Balance at end of period
$
35

 
$
(88
)
 
$
(53
)
 
35

 
(88
)
 
(53
)
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 

 
 

 
 

Balance at beginning of period
$
(5,677
)
 
$
(166
)
 
$
(5,843
)
 
(2,200
)
 
(142
)
 
(2,342
)
Cumulative effect of changes in accounting principles
—

 
—

 
—

 
(498
)
 
(27
)
 
(525
)
Balance at beginning of period, as adjusted
(5,677
)
 
(166
)
 
(5,843
)
 
(2,698
)
 
(169
)
 
(2,867
)
Before reclassifications
(544
)
 
3

 
(541
)
 
(3,523
)
 
6

 
(3,517
)
Reclassifications
1

 
—

 
1

 
1

 
—

 
1

Balance at end of period
$
(6,220
)
 
$
(163
)
 
$
(6,383
)
 
(6,220
)
 
(163
)
 
(6,383
)

Reclassifications out of accumulated other comprehensive income (loss) during the three and six months ended June 30, 2019 and 2018 and the affected line items in the consolidated condensed statements of income are as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
Affected Line Item in the Consolidated Condensed Statements of Income
 
2019
 
2018
 
2019
 
2018
 
Realized gain (loss) from sales of debt securities, available-for-sale
$
1

 
(1
)
 
(17
)
 
(1
)
 
Net gain (loss) from sales of debt securities, available-for-sale
Income tax benefit
—

 
—

 
(4
)
 
—

 
Provision for income taxes
Reclassification adjustment, net of taxes
$
1

 
(1
)
 
(13
)
 
(1
)
 
 


Note 12 – Retirement Plans
 
LCNB participates in a noncontributory defined benefit multi-employer retirement plan that covers substantially all regular full-time employees hired before January 1, 2009. Employees hired before this date who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5% or 7% of their annual compensation, depending on the sum of an employee's age and vesting service, into their defined contribution plans (401(k) plans), regardless of the contributions made by the employees.  These contributions are made annually and these employees do not receive any employer matches to their 401(k) contributions.

Employees hired on or after January 1, 2009 receive a 50% employer match on their contributions into the 401(k) plan, up to a maximum LCNB contribution of 3% of each individual employee's annual compensation.  

27
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 12 – Retirement Plans (continued)


Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three and six -month periods ended June 30, 2019 and 2018 are as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Qualified noncontributory defined benefit retirement plan
$
259

 
264

 
515

 
525

401(k) plan
121

 
107

 
264

 
217


Certain highly compensated former employees participate in a nonqualified defined benefit retirement plan.  The nonqualified plan ensures that participants receive the full amount of benefits to which they would have been entitled under the noncontributory defined benefit retirement plan in the absence of limits on benefit levels imposed by certain sections of the Internal Revenue Code. This plan is limited to the original participants and no new participants have been added.

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three and six months ended June 30, 2019 and 2018 are summarized as follows (in thousands):
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
—

 
—

 
—

 
—

Interest cost
 
19

 
17

 
37

 
34

Amortization of unrecognized net loss
 
—

 
4

 
—

 
8

Net periodic pension cost
 
$
19

 
21

 
37

 
42


Amounts recognized in accumulated other comprehensive income (loss), net of tax, at June 30, 2019 and December 31, 2018 for the nonqualified defined benefit retirement plan consists of (in thousands):
 
June 30, 2019
 
December 31, 2018
Net actuarial loss
$
—

 
88

Past service cost
—

 
—

  Total recognized, net of tax
$
—

 
88



Note 13 – Stock Based Compensation
 
LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for stock-based awards to eligible employees, as determined by the Board of Directors.  The awards were made in the form of stock options, share awards, and/or appreciation rights.  The 2002 Plan provided for the issuance of up to 200,000 shares of common stock. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continue to be exercisable in accordance with their terms.

The 2015 Ownership Incentive Plan (the "2015 Plan") was ratified by LCNB's shareholders at the annual meeting on April 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450,000 shares 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.


28
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 13 – Stock Based Compensation (continued)

LCNB has not granted stock option awards since 2012. Options granted to date under the 2002 Plan vest ratably over a five -year period and expire ten years after the date of grant. Stock options outstanding at June 30, 2019 were as follows:
 
 
Outstanding Stock Options
 
Exercisable Stock Options
Exercise Price Range
 
Number
 
Weighted Average
Exercise
Price
 
Weighted Average Remaining Contractual
Life (Years)
 
Number
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual
Life (Years)
$11.00 - $12.99
 
13,278

 
11.98

 
1.6
 
13,278

 
11.98

 
1.6

The following table summarizes stock option activity for the periods indicated:
 
Six Months Ended June 30,
 
2019
 
2018
 
Options
 
Weighted Average Exercise
Price
 
Aggregate Intrinsic Value (in thousands) (1)
 
Options
 
Weighted Average Exercise
Price
 
Aggregate Intrinsic Value (in thousands) (1)
Outstanding, January 1,
13,278

 
$
11.98

 
 
 
20,265

 
$
11.42

 
 
Granted
—

 
—

 
 
 
—

 
—

 
 
Exercised
—

 
—

 
 
 
(2,631
)
 
12.55

 
 
Expired
—

 
—

 
 
 
—

 
—

 
 
Outstanding, June 30,
13,278

 
11.98

 
93

 
17,634

 
11.25

 
149

Exercisable, June 30,
13,278

 
11.98

 
93

 
17,634

 
11.25

 
149

(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.

The following table provides information related to stock options exercised during the periods indicated (in thousands):
 
Six Months Ended June 30,
 
2019
 
2018
Intrinsic value of options exercised
$
—

 
17

Cash received from options exercised
—

 
33

Tax benefit realized from options exercised
—

 
2


No compensation costs related to option awards were recognized during 2018 or 2019.














29
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 13 – Stock Based Compensation (continued)

Restricted stock awards granted under the 2015 Plan were as follows:
 
2019
 
2018
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
Outstanding, January 1,
16,958

 
$
18.94

 
8,817

 
$
16.44

Granted
12,504

 
16.95

 
10,634

 
19.20

Vested
(2,795
)
 
20.01

 
(669
)
 
22.60

Forfeited
—

 
—

 
—

 
—

Outstanding, June 30,
26,667

 
$
17.89

 
18,782

 
$
17.78


The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Restricted stock expense
$
21

 
15

 
91

 
71

Tax effect
4

 
3

 
19

 
15


Unrecognized compensation expense for restricted stock awards was $302,000 at June 30, 2019 and is expected to be recognized over a period of 4.8 years .


Note 14 – Earnings per Common 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 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.  

30
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 – Earnings per Common Share (continued)


Earnings per share for the three and six months ended June 30, 2019 and 2018 were calculated as follows (dollars in thousands, except share and per share data):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
4,728

 
2,738

 
9,355

 
5,451

Less allocation of earnings and dividends to participating securities
9

 
3

 
17

 
7

Net income allocated to common shareholders
$
4,719

 
2,735

 
9,338

 
5,444

 
 
 
 
 
 
 


Weighted average common shares outstanding, gross
13,216,922

 
11,114,745

 
13,262,140

 
10,578,290

Less average participating securities
24,231

 
15,260

 
24,231

 
15,260

Weighted average number of shares outstanding used in the calculation of basic earnings per common share
13,192,691

 
11,099,485

 
13,237,909

 
10,563,030

Add dilutive effect of:
 

 
 

 
 

 
 

Stock options
3,974

 
5,529

 
3,843

 
5,762

Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share
13,196,665

 
11,105,014

 
13,241,752

 
10,568,792

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.36

 
0.25

 
$
0.71

 
0.52

Diluted
0.36

 
0.25

 
0.71

 
0.52


There were no anti-dilutive stock options outstanding at June 30, 2019 or 2018 .


Note 15 - Fair Value Measurements
 
LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset.  Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:
•
Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
•
Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets,  quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
•
Level 3 – inputs that are unobservable for the asset or liability.








31
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 15 - Fair Value Measurements (continued)

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 condensed statements of income. Fair values for 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. One of the mutual funds measured at fair value using its NAV was sold during the first quarter 2019.

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).
•
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 adjus t ed 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.


32
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 15 - Fair Value Measurements (continued)

The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of June 30, 2019 and December 31, 2018 (in thousands):
 
 
 
Fair Value Measurements at the End of
the Reporting Period Using
 
 
 
Fair Value Measurements
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
June 30, 2019
 
 
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
Equity securities with a readily determinable fair value:
 
 
 
 
 
 
 
 
 
     Equity securities
 
$
922

 
922

 
—

 
—

 
     Mutual funds
 
43

 
43

 
—

 
—

 
     Mutual funds measured at net asset value
 
1,281

 
1,281

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Debt securities, available-for-sale:
 
 
 
 
 
 
 
 
 
     U.S. Treasury notes
 
2,303

 
2,303

 
—

 
—

 
     U.S. Agency notes
 
77,827

 
—

 
77,827

 
—

 
     U.S. Agency mortgage-backed securities
 
62,139

 
—

 
62,139

 
—

 
     Municipal securities:
 
 

 
 

 
 

 
 

 
          Non-taxable
 
39,903

 
—

 
39,903

 
—

 
          Taxable
 
16,488

 
—

 
16,488

 
—

 
Total recurring fair value measurements
 
$
200,906

 
4,549

 
196,357

 
—

 
 
 
 
 
 
 
 
 
 
Nonrecurring fair value measurements:
 
 

 
 

 
 
 
 

 
Impaired loans
 
$
1,003

 
—

 
—

 
1,003

 
Other real estate owned and repossessed assets
 
197

 
—

 
—

 
197

 
     Total nonrecurring fair value measurements
 
$
1,200

 
—

 
—

 
1,200

 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 

 
 

 
 

 
 

Recurring fair value measurements:
 
 

 
 

 
 

 
 

 
Equity securities with a readily determinable fair value:
 
 
 
 
 
 
 
 
 
     Equity securities
 
$
519

 
519

 
—

 
—

 
     Mutual funds
 
39

 
39

 
—

 
—

 
     Mutual funds measured at net asset value
 
1,520

 
1,520

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Debt securities, available-for-sale:
 
 

 
 

 
 

 
 

 
     U.S. Treasury notes
 
2,235

 
2,235

 
—

 
—

 
     U.S. Agency notes
 
78,340

 
—

 
78,340

 
—

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

 
—

 
55,610

 
—

 
     Municipal securities:
 
 

 
 

 
 

 
 

 
          Non-taxable
 
84,714

 
—

 
84,714

 
—

 
          Taxable
 
17,522

 
—

 
17,522

 
—

 
Total recurring fair value measurements
 
$
240,499

 
4,313

 
236,186

 
—

 
 
 
 
 
 
 
 
 
 
Nonrecurring fair value measurements:
 
 

 
 

 
 

 
 

 
Impaired loans
 
$
1,039

 
—

 
—

 
1,039

 
Other real estate owned and repossessed assets
 
244

 
—

 
—

 
244

 
     Total nonrecurring fair value measurements
 
$
1,283

 
—

 
—

 
1,283



33
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 15 - Fair Value Measurements (continued)

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at June 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
 
 
 
 
 
 
Range
 
 
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
High
 
Low
 
Weighted Average
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
32

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
971

 
Discounted cash flows
 
Discount rate
 
8.25
%
 
4.50
%
 
6.84
%
Other real estate owned
 
197

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
45

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
994

 
Discounted cash flows
 
Discount rate
 
8.25
%
 
4.50
%
 
6.86
%
Other real estate owned
 
244

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable

34
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 15 - Fair Value Measurements (continued)

Carrying amounts and estimated fair values of financial instruments as of June 30, 2019 and December 31, 2018 are as follows (in thousands):
 
 
 
 
Fair Value Measurements at the End of
the Reporting Period Using
 
 
Carrying
Amount
 
Fair
Value
 
Quoted
Prices
in Active
Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
June 30, 2019
 
 
 
 
 
 
 
 
 
 
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
23,185

 
23,185

 
23,185

 
—

 
—

Interest-bearing time deposits
 
498

 
498

 
—

 
498

 
—

Debt securities, held-to-maturity
 
33,343

 
33,543

 
—

 
—

 
33,543

Federal Reserve Bank stock
 
4,652

 
4,652

 
4,652

 
—

 
—

Federal Home Loan Bank stock
 
5,203

 
5,203

 
5,203

 
—

 
—

Loans, net
 
1,226,149

 
1,241,333

 
—

 
—

 
1,241,333

  Accrued interest receivable
 
4,462

 
4,462

 
—

 
4,462

 
—

 
 
 
 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 

 
 

 
 
 
 
 
 
Deposits
 
1,357,959

 
1,362,247

 
1,021,956

 
340,291

 
—

Short-term borrowings
 
—

 
—

 
—

 
—

 
—

Long-term debt
 
41,986

 
42,586

 
—

 
42,586

 
—

  Accrued interest payable
 
704

 
704

 
—

 
704

 
—

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
20,040

 
20,040

 
20,040

 
—

 
—

Interest-bearing time deposits
 
996

 
995

 
—

 
995

 
—

Investment securities, held-to-maturity
 
29,721

 
29,024

 
—

 
—

 
29,024

Federal Reserve Bank stock
 
4,653

 
4,653

 
4,653

 
—

 
—

Federal Home Loan Bank stock
 
4,845

 
4,845

 
4,845

 
—

 
—

Loans, net
 
1,194,577

 
1,183,041

 
—

 
—

 
1,183,041

  Accrued interest receivable
 
4,317

 
4,317

 
—

 
4,317

 
—

 
 
 
 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 

 
 

 
 
 
 
 
 
Deposits
 
1,300,919

 
1,301,298

 
1,004,057

 
297,241

 
—

Short-term borrowings
 
56,230

 
56,230

 
56,230

 
—

 
—

Long-term debt
 
47,032

 
48,255

 
—

 
48,255

 
—

Accrued interest payable
 
690

 
690

 
—

 
690

 
—


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 June 30, 2019 and December 31, 2018 .




35
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 15 - Fair Value Measurements (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 LCNB.  The following methods and assumptions were used to estimate the fair value of certain financial instruments:

Cash and cash equivalents
The carrying amounts presented are deemed to approximate fair value.

Interest-bearing time deposits
Fair values are estimated based on the discounted value of expected net cash flows using current interest rates.

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 a similar investment of the same issuer.

Investment securities, held-to-maturity
Fair values for investment securities, held-to-maturity are based on quoted market prices for similar securities and/or discounted cash flow analysis or other methods.  

Federal Home Loan Bank stock and Federal Reserve Bank stock
The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions.

Loans
The estimated fair value of loans 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 discounts estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors.

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.

36
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)




Note 16 – Recent Accounting Pronouncements

From time to time the FASB issues an ASU to communicate changes to U.S. generally accepted accounting principles. The following information provides brief summaries of newly issued but not yet effective ASUs that could have an effect on LCNB’s financial position or results of operations:

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 current expected credit loss ("CECL") 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 debt securities, available-for-sale, 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 debt securities, available-for-sale, 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 debt securities, available-for-sale, 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 SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

LCNB has created a cross-functional CECL Committee, which reports to the Audit Committee, composed of members from the lending, trust, and finance departments. The CECL Committee has selected a vendor to assist in implementation of and ongoing compliance with the new requirements. It has completed analyzing its data collection efforts, selected a calculation model, and is currently analyzing its pool segmentation and reporting mechanisms for adoption of the new methodology. The current plan is to parallel process the CECL methodology with LCNB's current methodology for the the third quarter 2019 analysis of the allowance for loan losses. While the committee and management expect that the implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, they are continuing to evaluate the potential impact on LCNB's results of operations and financial position. The financial statement impact of this new standard cannot be reasonably estimated at this time.












37
LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 16 – Recent Accounting Pronouncements (continued)

ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment"
ASU No. 2017-04 was issued in January 2017 and applies to public and other entities that have goodwill reported in their financial statements. To simplify the subsequent measurement of goodwill, this ASU eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is an SEC filer should adopt the amendments in this update on a prospective basis for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Adoption of ASU No. 2017-04 is not expected to have a material impact on LCNB's results of operations or financial position.

ASU No. 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.








38

LCNB CORP. AND SUBSIDIARIES


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Certain statements made in this document regarding LCNB’s financial condition, results of operations, plans, objectives, future performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as “anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions. Please refer to LCNB’s Annual Report on Form 10-K for the year ended December 31, 2018 , as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.

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. However, 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 from those expectations. 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 any future acquisitions 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 legislative, tax, accounting, and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection 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. 
 









39

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




Critical Accounting Policies

Allowance for Loan Losses .  The allowance for loan losses is established through a provision for loan losses charged to expense.  Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.  The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectibility of loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components.  The specific component typically relates to loans that are classified as doubtful, substandard, or special mention.  For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.

Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses inherent in the current loan portfolio.

Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be measured at their fair values at the acquisition date. Acquired loans are reviewed to determine if there is evidence of deterioration in credit quality since inception and if it is probable that LCNB will be unable to collect all amounts due under the contractual loan agreements. The analysis includes expected prepayments and estimated cash flows including principal and interest payments at the date of acquisition. The amount in excess of the estimated future cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan (accretable yield). LCNB records these loans on the acquisition date at their net realizable value. Thus, an allowance for estimated future losses is not established on the acquisition date. Subsequent to the date of acquisition, expected future cash flows on loans acquired are updated and any losses or reductions in estimated cash flows which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan. Due to the number, size, and complexity of loans within the acquired loan portfolio, there is always a possibility of inherent undetected losses.

Accounting for Intangibles.   LCNB’s intangible assets at June 30, 2019 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 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.

Results of Operations

Net income for the three and six months ended June 30, 2019 was $4,728,000 (total basic and diluted earnings per share of $0.36) and $9,355,000 (total basic and diluted earnings per share of $0.71). This compares to net income of $2,738,000 (total basic and diluted earnings per share of $0.25) and $5,451,000 (total basic and diluted earnings per share of $0.52) for the same three and six month periods in 2018.

40

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




Net Interest Income

Three Months Ended June 30, 2019 vs. 2018
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 three months ended June 30, 2019 and 2018 , 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.
 
 
Three Months Ended June 30,
 
 
2019
 
2018
 
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
 
 
 
(Dollars in thousands)
 
 
 
 
Loans (1)
 
$
1,217,726

 
$
14,662

 
4.83
%
 
$
961,726

 
$
10,703

 
4.46
%
Interest-bearing demand deposits
 
11,545

 
76

 
2.64
%
 
8,084

 
52

 
2.58
%
Interest-bearing time deposits
 
602

 
3

 
2.00
%
 
3,462

 
2

 
0.23
%
Federal Reserve Bank stock
 
4,652

 
140

 
12.07
%
 
2,732

 
82

 
12.04
%
Federal Home Loan Bank stock
 
5,175

 
66

 
5.12
%
 
4,036

 
61

 
6.06
%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
4,292

 
31

 
2.90
%
 
3,291

 
24

 
2.93
%
Debt securities, taxable
 
161,302

 
933

 
2.32
%
 
168,245

 
934

 
2.23
%
Debt securities, non-taxable (2)
 
73,931

 
528

 
2.86
%
 
124,600

 
861

 
2.77
%
Total earnings assets
 
1,479,225

 
16,439

 
4.46
%
 
1,276,176

 
12,719

 
4.00
%
Non-earning assets
 
162,508

 
 

 
 

 
137,765

 
 

 
 

Allowance for loan losses
 
(4,088
)
 
 

 
 

 
(4,245
)
 
 

 
 

Total assets
 
$
1,637,645

 
 

 
 

 
$
1,409,696

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
685,229

 
601

 
0.35
%
 
$
676,504

 
242

 
0.14
%
IRA and time certificates
 
331,214

 
1,863

 
2.26
%
 
226,451

 
854

 
1.51
%
Short-term borrowings
 
243

 
2

 
3.30
%
 
3,491

 
7

 
0.80
%
Long-term debt
 
42,567

 
272

 
2.56
%
 
13,252

 
67

 
2.03
%
Total interest-bearing liabilities
 
1,059,253

 
2,738

 
1.04
%
 
919,698

 
1,170

 
0.51
%
Demand deposits
 
336,006

 
 

 
 

 
309,149

 
 

 
 
Other liabilities
 
18,183

 
 

 
 

 
10,772

 
 

 
 

Capital
 
224,203

 
 

 
 

 
170,077

 
 

 
 

Total liabilities and capital
 
$
1,637,645

 
 

 
 

 
$
1,409,696

 
 

 
 

Net interest rate spread (3)
 
 

 
 

 
3.42
%
 
 

 
 

 
3.49
%
Net interest income and net interest margin on a taxable-equivalent basis (4)
 
 

 
$
13,701

 
3.72
%
 
 

 
$
11,549

 
3.63
%
Ratio of interest-earning assets to interest-bearing liabilities
 
139.65
%
 
 

 
 

 
138.76
%
 
 

 
 

(1) Includes non-accrual loans.
(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%.
(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.




41

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




The following table presents the changes in taxable-equivalent basis 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 three months ended June 30, 2019 as compared to the same period in 2018 .  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.
 
 
Three Months Ended
June 30, 2019 vs. 2018
Increase (decrease) due to:
 
 
Volume
 
Rate
 
Total
 
 
(In thousands)
Interest-earning Assets:
 
 
 
 
 
 
Loans
 
$
3,027

 
932

 
3,959

Interest-bearing demand deposits
 
23

 
1

 
24

Interest-bearing time deposits
 
(3
)
 
4

 
1

Federal Reserve Bank stock
 
58

 
—

 
58

Federal Home Loan Bank stock
 
15

 
(10
)
 
5

Investment securities:
 
 
 
 
 
 

Equity securities
 
7

 
—

 
7

Debt securities, taxable
 
(39
)
 
38

 
(1
)
Debt securities, non-taxable
 
(361
)
 
28

 
(333
)
Total interest income
 
2,727

 
993

 
3,720

 
 
 
 
 
 
 
Interest-bearing Liabilities:
 
 

 
 

 
 

Savings deposits
 
3

 
356

 
359

IRA and time certificates
 
489

 
520

 
1,009

Short-term borrowings
 
(11
)
 
6

 
(5
)
Long-term debt
 
183

 
22

 
205

Total interest expense
 
664

 
904

 
1,568

Net interest income
 
$
2,063

 
89

 
2,152


Net interest income on a fully taxable-equivalent basis for the three months ended June 30, 2019 totaled $13,701,000, an increase of $2,152,000 from the comparable period in 2018 .  Total interest income increased $3,720,000, partially offset by an increase in interest expense of $1,568,000.

The increase in total interest income was due primarily to a $3,959,000 increase in loan interest income caused by a $256.0 million increase in the average balance of LCNB's loan portfolio and by a 37 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. Slightly offsetting the increase in loan interest income was a $333,000 decrease in interest income from non-taxable debt securities. The decrease in interest income from non-taxable debt securities was due to a $50.7 million decrease in average non-taxable debt securities, partially offset by a 9 basis point increase in the average rate earned. Decreases in debt securities were invested in the loan portfolio and used to pay down short-term borrowings.

The increase in total interest expense was primarily due to a $1,009,000 increase in interest expense for IRA and time certificates due to a $104.8 million increase in the average balance on such certificates and to a 75 basis point market-driven increase in the average rates paid. Interest expense for savings deposits increased $359,000 primarily due to a 21 basis point increase in the average rate paid for these deposits Interest expense for long-term debt increase $205,000 due primarily to a $29.3 million increase in average debt outstanding and secondarily to a 53 basis point increase in the average rate paid. Deposits and long-term debt obtained through the merger with CFB were a significant component of the increase in average total interest-bearing liabilities.



42

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




Six Months Ended June 30, 2019 vs. 2018
The following table presents, for the six months ended June 30, 2019 and 2018 , 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.
 
 
Six Months Ended June 30,
 
 
2019
 
2018
 
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
 
 
 
(Dollars in thousands)
 
 
 
 
Loans (1)
 
$
1,213,292

 
$
29,200

 
4.85
%
 
$
907,739

 
$
20,116

 
4.47
%
Interest-bearing demand deposits
 
8,661

 
127

 
2.96
%
 
5,987

 
71

 
2.39
%
Interest-bearing time deposits
 
781

 
8

 
2.07
%
 
1,740

 
2

 
0.23
%
Federal Reserve Bank stock
 
4,652

 
140

 
6.07
%
 
2,732

 
82

 
6.05
%
Federal Home Loan Bank stock
 
5,011

 
139

 
5.59
%
 
3,838

 
114

 
5.99
%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
4,256

 
64

 
3.03
%
 
3,273

 
46

 
2.83
%
Debt securities, taxable
 
156,494

 
1,802

 
2.32
%
 
170,901

 
1,865

 
2.20
%
Debt securities, non-taxable (2)
 
86,778

 
1,216

 
2.83
%
 
127,523

 
1,752

 
2.77
%
Total earnings assets
 
1,479,925

 
32,696

 
4.46
%
 
1,223,733

 
24,048

 
3.96
%
Non-earning assets
 
160,527

 
 

 
 

 
131,447

 
 

 
 

Allowance for loan losses
 
(4,081
)
 
 

 
 

 
(3,825
)
 
 

 
 

Total assets
 
$
1,636,371

 
 

 
 

 
$
1,351,355

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
692,926

 
1,262

 
0.37
%
 
$
661,680

 
441

 
0.13
%
IRA and time certificates
 
320,998

 
3,488

 
2.19
%
 
207,989

 
1,526

 
1.48
%
Short-term borrowings
 
11,675

 
221

 
3.82
%
 
8,759

 
76

 
1.75
%
Long-term debt
 
43,616

 
489

 
2.26
%
 
7,784

 
81

 
2.10
%
Total interest-bearing liabilities
 
1,069,215

 
5,460

 
1.03
%
 
886,212

 
2,124

 
0.48
%
Demand deposits
 
329,118

 
 

 
 

 
294,141

 
 

 
 
Other liabilities
 
15,194

 
 

 
 

 
10,879

 
 

 
 

Capital
 
222,844

 
 

 
 

 
160,123

 
 

 
 

Total liabilities and capital
 
$
1,636,371

 
 

 
 

 
$
1,351,355

 
 

 
 

Net interest rate spread (3)
 
 

 
 

 
3.43
%
 
 

 
 

 
3.48
%
Net interest income and net interest margin on a taxable-equivalent basis (4)
 
 

 
$
27,236

 
3.71
%
 
 

 
$
21,924

 
3.61
%
Ratio of interest-earning assets to interest-bearing liabilities
 
138.41
%
 
 

 
 

 
138.09
%
 
 

 
 

(1) Includes non-accrual loans.
(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%.
(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.








43

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




The following table presents the changes in taxable-equivalent basis 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 six months ended June 30, 2019 , as compared to the same period in 2018 .  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.
 
 
Six Months Ended
June 30, 2019 vs. 2018
Increase (decrease) due to:
 
 
Volume
 
Rate
 
Total
 
 
(In thousands)
Interest-earning Assets:
 
 
 
 
 
 
Loans
 
$
7,235

 
1,849

 
9,084

Interest-bearing demand deposits
 
37

 
19

 
56

Interest-bearing time deposits
 
(2
)
 
8

 
6

Federal Reserve Bank stock
 
58

 
—

 
58

Federal Home Loan Bank stock
 
33

 
(8
)
 
25

Investment securities:
 
 
 
 
 
 

Equity securities
 
15

 
3

 
18

Debt securities, taxable
 
(162
)
 
99

 
(63
)
Debt securities, non-taxable
 
(570
)
 
34

 
(536
)
Total interest income
 
6,644

 
2,004

 
8,648

 
 
 
 
 
 
 
Interest-bearing Liabilities:
 
 

 
 

 
 

Savings deposits
 
22

 
799

 
821

IRA and time certificates
 
1,041

 
921

 
1,962

Short-term borrowings
 
32

 
113

 
145

Long-term debt
 
401

 
7

 
408

Total interest expense
 
1,496

 
1,840

 
3,336

Net interest income
 
$
5,148

 
164

 
5,312


Net interest income on a fully taxable-equivalent basis for the six months ended June 30, 2019 totaled $27,236,000, an increase of $5,312,000 from the comparable period in 2018 .  Total interest income increased $8,648,000, partially offset by an increase in interest expense of $3,336,000.

The increase in total interest income was due primarily to a $9,084,000 increase in loan interest income caused by a $305.6 million increase in the average balance of the loan portfolio and by a 38 basis point 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. Slightly offsetting the increase in loan interest income was a $536,000 decrease in interest income from non-taxable debt securities due to a $40.7 million decrease in average non-taxable debt securities, partially offset by 6 basis point increase in the average rate earned. Decreases in debt securities were invested in the loan portfolio.

The increase in total interest expense was due to increases in all line items due to increases in average balances and market-driven increases in average rates paid. Total average interest-bearing liabilities increased $183.0 million and the average rate paid on total interest-bearing liabilities increased 55 basis points. Deposits and long-term debt obtained through the merger with CFB were a significant component of the increase in average total interest-bearing liabilities.








44

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




Provision and Allowance For Loan Losses

The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the 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, and current economic conditions that may affect borrowers' ability to pay.  The provision (credit) for loan losses for the three and six months ended June 30, 2019 was $54,000 and $(51,000), respectively, as compared to a provision of $224,000 and $303,000 for the comparable periods in 2018 . Net charge-offs (recoveries) for the three and six months ended June 30, 2019 was $68,000 and $(117,000), respectively, as compared to net charge-offs of $150,000 and $103,000 for the comparable periods in 2018 .

Non-Interest Income

A comparison of non-interest income for the three and six months ended June 30, 2019 and 2018 is as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
Difference
 
2019
 
2018
 
Difference
Fiduciary income
$
1,058

 
942

 
116

 
2,092

 
1,906

 
186

Service charges and fees on deposit accounts
1,497

 
1,426

 
71

 
2,805

 
2,731

 
74

Net gains (losses) on sales of debt securities
1

 
(1
)
 
2

 
(17
)
 
(1
)
 
(16
)
Bank owned life insurance income
183

 
182

 
1

 
365

 
368

 
(3
)
Gains from sales of loans
64

 
97

 
(33
)
 
93

 
119

 
(26
)
Other operating income
195

 
145

 
50

 
432

 
304

 
128

Total non-interest income
$
2,998

 
2,791

 
207

 
5,770

 
5,427

 
343


Reasons for increases and decreases include:
•
Fiduciary income increased due to an increase in trust and brokerage assets managed.
•
Other operating income increased due to an increase in the fair value of equity security investments, partially offset by smaller decreases in various other accounts.

Non-Interest Expense

A comparison of non-interest expense for the three and six months ended June 30, 2019 and 2018 is as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
Difference
 
2019
 
2018
 
Difference
Salaries and employee benefits
$
6,243

 
$
5,128

 
$
1,115

 
$
12,405

 
$
10,105

 
$
2,300

Equipment expenses
278

 
268

 
10

 
544

 
521

 
23

Occupancy expense, net
744

 
658

 
86

 
1,507

 
1,385

 
122

State financial institutions tax
436

 
296

 
140

 
874

 
599

 
275

Marketing
297

 
284

 
13

 
599

 
416

 
183

Amortization of intangibles
260

 
188

 
72

 
517

 
373

 
144

FDIC insurance premiums
112

 
99

 
13

 
238

 
198

 
40

Contracted services
475

 
391

 
84

 
939

 
706

 
233

Other real estate owned
48

 
1

 
47

 
51

 
3

 
48

Merger-related expenses
20

 
855

 
(835
)
 
87

 
1,613

 
(1,526
)
Other non-interest expense
1,920

 
2,543

 
(623
)
 
3,772

 
4,341

 
(569
)
Total non-interest expense
$
10,833

 
$
10,711

 
$
122

 
$
21,533

 
$
20,260

 
$
1,273




45

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)




Reasons for increases and decreases include:
•
Salaries and employee benefits increased 21.7% and 22.8% for the respective three and six months ended June 30, 2019 as compared to the same periods in 2018. The increase was primarily due to salary and wage increases, newly hired employees, and CFB employees retained. Full-time equivalent employees at June 30, 2019 totaled 355, compared with 344 full-time equivalent employees at Jun 30, 2018.
•
State financial institutions tax expense increased due to a larger capital base (Ohio financial institutions tax is based on capital, not income), largely caused by stock issued to CFB stockholders as merger consideration.
•
Marketing increased primarily due to promotion costs for new checking products introduced during 2018 and expanded use of broadcast and digital media.
•
Amortization of intangibles increased due to amortization of the core deposit intangible recognized as part of the acquisition accounting for CFB.
•
Contracted services increased due to additional fees paid for loan and deposit system upgrades and improvements and to general price increases on other contracted services.
•
Other real estate owned expense increased due to an impairment charge recognized during the second quarter 2019.
•
Merger-related expenses during the 2019 and 2018 periods are due to the acquisition of CFB.
•
Other non-interest expense decreased due to the absence of a $645,000 impairment charge recognized on one of LCNB's office buildings during the second quarter 2018.

Income Taxes

LCNB's effective tax rates for the three and six months ended June 30, 2019 were 17.1% and 17.0%, respectively, compared to 15.1% for both the three and six months ended June 30, 2018 .  The difference between the statutory rate of 21% 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. The effective tax rates for the three and six months ended June 30, 2019 were greater than the comparable periods in 2018 due to a lower volume of tax-exempt municipal securities.































46

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)





Financial Condition

A comparison of balance sheet line items at June 30, 2019 and December 31, 2018 is as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
 
Difference $
 
Difference %
ASSETS:
 
 
 
 
 
 
 
Total cash and cash equivalents
23,185

 
20,040

 
3,145

 
15.69
 %
Interest -bearing time deposits
498

 
996

 
(498
)
 
(50.00
)%
Investment securities:
 
 
 
 

 

Equity securities with a readily determinable fair value, at fair value
2,246

 
2,078

 
168

 
8.08
 %
Equity securities without a readily determinable fair value, at cost
2,099

 
2,099

 
—

 
—
 %
Debt securities, available-for-sale, at fair value
198,660

 
238,421

 
(39,761
)
 
(16.68
)%
Debt securities, held-to-maturity, at cost
33,343

 
29,721

 
3,622

 
12.19
 %
Federal Reserve Bank stock, at cost
4,652

 
4,653

 
(1
)
 
(0.02
)%
Federal Home Loan Bank stock, at cost
5,203

 
4,845

 
358

 
7.39
 %
Loans, net
1,226,149

 
1,194,577

 
31,572

 
2.64
 %
Premises and equipment, net
33,013

 
32,627

 
386

 
1.18
 %
Operating lease right-of-use assets
5,686

 
—

 
5,686

 
—
 %
Goodwill
59,221

 
59,221

 
—

 
—
 %
Core deposit and other intangibles
4,494

 
5,042

 
(548
)
 
(10.87
)%
Bank owned life insurance
29,088

 
28,723

 
365

 
1.27
 %
Other assets
14,475

 
13,884

 
591

 
4.26
 %
Total assets
1,642,012

 
1,636,927

 
5,085

 
0.31
 %
 
 
 
 
 

 

LIABILITIES:
 
 
 
 

 

Deposits:
 
 
 
 

 

Non-interest-bearing
335,474

 
322,571

 
12,903

 
4.00
 %
Interest-bearing
1,022,485

 
978,348

 
44,137

 
4.51
 %
Total deposits
1,357,959

 
1,300,919

 
57,040

 
4.38
 %
Short-term borrowings
—

 
56,230

 
(56,230
)
 
(100.00
)%
Long-term debt
41,986

 
47,032

 
(5,046
)
 
(10.73
)%
Operating leases liability
5,615

 
—

 
5,615

 
—
 %
Accrued interest and other liabilities
13,480

 
13,761

 
(281
)
 
(2.04
)%
Total liabilities
1,419,040

 
1,417,942

 
1,098

 
0.08
 %
 
 
 
 
 

 

TOTAL SHAREHOLDERS' EQUITY
222,972

 
218,985

 
3,987

 
1.82
 %
Total liabilities and shareholders' equity
1,642,012

 
1,636,927

 
5,085

 
0.31
 %

Reasons for increases and decreases include:
•
Interest-bearing time deposits were obtained through the merger with CFB. This line item represents certificates of deposit with individual balances of less than $250,000 invested in various financial institutions. Management has decided not to renew matured certificates.
•
Debt securities, available-for-sale, decreased due to sales of securities with a total book value of $50.3 million and maturities and calls of securities totaling $7.1 million. These decreases were partially offset by the purchase of new securities totaling $12.3 million and by a net increase in fair values totaling $5.9 million. The net funds received were invested in the loan portfolio and used to help pay down short-term borrowings and long-term debt.
•
Federal Home Loan Bank stock increased due to the purchase of additional shares.
•
Net loans increased due to organic growth in the loan portfolio.


47

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)





•
LCNB adopted ASU No. 2016-02, "Leases (Topic 842)" on January 1, 2019 and recorded operating lease right-of-use assets representing its right to use the underlying assets for the terms of the leases and an operating leases liability representing its liability to make lease payments. See Note 1 -Basis of Presentation - Accounting Changes and Note 8 - Leases for more information.
•
Core deposit and other intangibles decreased due to amortization of core deposit intangibles.
•
Total deposits increased largely due to a $47.0 million increase in 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, these deposits tend to be at their lowest balances at year-ends.
•
The decrease in short-term borrowings was funded primarily by the increase in total deposits and the decrease in debt securities, available-for-sale.
•
Long-term debt decreased due to payoffs of matured debt. There were no new borrowings during the first half of 2019.
•
Total shareholders' equity increased primarily due to earnings retained during the first half of 2019 and to a $4.7 million decrease in accumulated other comprehensive loss, net of taxes caused by market-driven increases in the fair value of LCNB's debt security investments. These increases were partially offset by the purchase of new treasury shares and dividends paid to shareholders.

Regulatory Capital

LCNB (consolidated) and the Bank must meet certain minimum capital requirements set by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's and Bank's financial statements. LCNB’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

A 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 needs 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% is subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.

For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:
 
 
Minimum Requirement
 
Minimum Requirement with Capital Conservation Buffer for 2019
 
To Be Considered
Well-Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets
 
4.5
%
 
7.0
%
 
6.5
%
Ratio of Tier 1 Capital to risk-weighted assets
 
6.0
%
 
8.5
%
 
8.0
%
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets
 
8.0
%
 
10.5
%
 
10.0
%
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)
 
4.0
%
 
N/A

 
5.0
%

As of the most recent notification from their regulators, the Bank and LCNB were categorized as "well-capitalized" under the regulatory framework for prompt corrective action.  Management believes that no conditions or events have occurred since the last notification that would change the Bank's or LCNB's category.








48

LCNB CORP. AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)





A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):
 
 
June 30, 2019
 
December 31, 2018
Regulatory Capital:
 
 
Shareholders' equity
 
$
219,230

 
$
215,395

Goodwill and other intangibles
 
(63,270
)
 
(63,788
)
Accumulated other comprehensive loss
 
53

 
4,719

Tier 1 risk-based capital
 
156,013

 
156,326

Eligible allowance for loan losses
 
4,112

 
4,046

Total risk-based capital
 
$
160,125

 
$
160,372

Capital ratios:
 
 

 
 

Common Equity Tier 1 Capital to risk-weighted assets
 
12.44
%
 
12.65
%
Tier 1 Capital to risk-weighted assets
 
12.44
%
 
12.65
%
Total Capital to risk-weighted assets
 
12.77
%
 
12.98
%
Leverage
 
9.95
%
 
9.96
%

Risk-weighted capital ratios decreased due to changes made in LCNB's balance sheet during 2019. As previously discussed, management reduced investments in debt securities, available-for-sale, and used the funds to finance loan growth. In general, the government, government agency, and municipal debt securities that comprise the majority of LCNB's investments tend to have lower risk weights than loans and, as a result, the denominators for the ratios increased.

Liquidity

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 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 June 30, 2019 was approximately $87.4 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 $40.0 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.

49

LCNB CORP. AND SUBSIDIARIES
Item 3.
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.  IRSA is used to estimate the effect on net interest income ("NII") during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, 300, and 400 basis points.  Management considers the results of any significant 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 June 30, 2019 IRSA indicates that an increase in interest rates will have a positive effect on NII and a 100 basis point decrease in interest rates will have a negative effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.

Rate Shock Scenario in Basis Points
 
Amount
 
$ Change in
NII
 
% Change in
NII
 
 
(Dollars in thousands)
Up 400
 
$
60,633

 
2,823

 
4.88
 %
Up 300
 
59,929

 
2,119

 
3.67
 %
Up 200
 
59,216

 
1,406

 
2.43
 %
Up 100
 
58,498

 
688

 
1.19
 %
Base
 
57,810

 
—

 
—
 %
Down 100
 
57,181

 
(629
)
 
(1.09
)%

IRSA shows the effect on NII 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 June 30, 2019 EVE analysis indicates that an increase in interest rates will have a positive effect on the EVE and a 100 basis point decrease in interest rates will have a negative effect on the EVE.  The changes in the EVE for all rate assumptions are within LCNB's acceptable ranges.

Rate Shock Scenario in Basis Points
 
Amount
 
$ Change in
EVE
 
% Change in
EVE
 
 
(Dollars in thousands)
Up 400
 
$
237,015

 
10,645

 
4.70
 %
Up 300
 
237,106

 
10,736

 
4.74
 %
Up 200
 
235,737

 
9,367

 
4.14
 %
Up 100
 
232,213

 
5,843

 
2.58
 %
Base
 
226,370

 
—

 
—
 %
Down 100
 
221,840

 
(4,530
)
 
(2.00
)%

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.


50

LCNB CORP. AND SUBSIDIARIES
Item 4.
Controls and Procedures

a)   Disclosure controls and procedures.  The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures.  Based upon this evaluation, these officers have concluded that, as of June 30, 2019 , LCNB's disclosure controls and procedures were effective.

b)   Changes in internal control over financial reporting.  During the period covered by this report, 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.

51

PART II.  OTHER INFORMATION

LCNB CORP. AND SUBSIDIARIES
 
Item 1.
Legal Proceedings

Except for routine litigation incidental to its business, LCNB is not a party to any material pending legal proceedings and none of its property is the subject of any material proceedings.

Item 1A.
Risk Factors

No material changes.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

During the period covered by this report, LCNB did not sell any of its securities that were not registered under the Securities Act.

On April 24, 2019, LCNB's Board of Directors authorized a share repurchase program (the “Program”). Under the terms of the Program, LCNB is authorized to repurchase up to 500,000 of its outstanding common shares. The Program is authorized to last no longer than five years. The Program replaced and superseded LCNB’s prior share repurchase programs, the “Market Repurchase Program” and the “Private Sale Repurchase Program,” which were adopted in April 2001.

Under the Program, LCNB may purchase common shares through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at LCNB's discretion. Factors include, but are not limited to, share price, trading volume and general market conditions, along with LCNB’s general business conditions. The Program may be suspended or discontinued at any time and does not obligate LCNB to acquire any specific number of its common shares.

As part of the Program, LCNB entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common shares to be repurchased at times that LCNB might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions.

The following table sets forth information relating to repurchases made under the Program during the three months ended June 30, 2019, which were the only shares repurchased during 2019:
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
April 2019
 
—

 
—

 
—

 
500,000

May 2019
 
139,182

 
$
17.09

 
139,182

 
360,818

June 2019
 
202,903

 
$
16.98

 
202,903

 
157,915




Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures


52

Not applicable.

Item 5.
Other Information

None.
 

53

LCNB CORP. AND SUBSIDIARIES
Item 6.
Exhibits

Exhibit No.
Exhibit Description
2.1
 
 
3.1
 
 
3.2
 
 
10.1
 
 
10.2
 
 
10.3
 
 
10.4
 
 
10.5
 
 
31.1
 
 
31.2
 
 
32
 
 
101
The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 is formatted in Extensible Business Reporting Language:  (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.

54

LCNB CORP. AND SUBSIDIARIES
SIGNATURES
 
Pursuant to the requirements 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.
 
 
 
 
August 7, 2019
/s/ Eric J. Meilstrup
 
 
Eric J. Meilstrup
 
 
Chief Executive Officer
 
 
 
 
August 7, 2019
/s/ Robert C. Haines, II
 
 
Robert C. Haines, II
 
 
Executive Vice President and Chief Financial Officer

55
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