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LCNB CORP - Quarter Report: 2020 March (Form 10-Q)

 
 
 
 
 
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 March 31, 2020
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 May 6, 2020 was 12,969,806 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)
 
 
March 31, 2020
 
December 31,
2019
 
 
(Unaudited)
 
ASSETS:
 
 
 
 
Cash and due from banks
 
$
17,820

 
17,019

Interest-bearing demand deposits
 
6,975

 
3,746

Total cash and cash equivalents
 
24,795

 
20,765

Investment securities:
 
 

 
 

Equity securities with a readily determinable fair value, at fair value
 
2,036

 
2,312

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

 
2,099

Debt securities, available-for-sale, at fair value
 
141,439

 
178,000

Debt securities, held-to-maturity, at cost
 
27,694

 
27,525

Federal Reserve Bank stock, at cost
 
4,652

 
4,652

Federal Home Loan Bank stock, at cost
 
5,203

 
5,203

Loans, net
 
1,267,379

 
1,239,406

Premises and equipment, net
 
35,017

 
34,787

Operating lease right-of-use assets
 
5,621

 
5,444

Goodwill
 
59,221

 
59,221

Core deposit and other intangibles, net
 
3,751

 
4,006

Bank owned life insurance
 
41,309

 
41,667

Other assets
 
16,064

 
14,221

TOTAL ASSETS
 
$
1,636,280

 
1,639,308

 
 
 
 
 
LIABILITIES:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing
 
$
342,442

 
354,391

Interest-bearing
 
1,003,430

 
993,889

Total deposits
 
1,345,872

 
1,348,280

Long-term debt
 
35,996

 
40,994

Operating lease liabilities
 
5,659

 
5,446

Accrued interest and other liabilities
 
15,275

 
16,540

TOTAL LIABILITIES
 
1,402,802

 
1,411,260

 
 
 
 
 
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 14,144,103 and 14,111,810 shares at March 31, 2020 and December 31, 2019, respectively
 
142,046

 
141,791

Retained earnings
 
107,123

 
104,431

Treasury shares at cost, 1,175,027 shares at March 31, 2020 and December 31, 2019
 
(18,847
)
 
(18,847
)
Accumulated other comprehensive income, net of taxes
 
3,156

 
673

TOTAL SHAREHOLDERS' EQUITY
 
233,478

 
228,048

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,636,280

 
1,639,308


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

The consolidated condensed balance sheet as of December 31, 2019 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 
 March 31,
 
 
2020
 
2019
INTEREST INCOME:
 
 
 
 
Interest and fees on loans
 
$
15,227

 
14,538

Dividends on equity securities:
 
 
 
 
With a readily determinable fair value
 
14

 
17

Without a readily determinable fair value
 
16

 
16

Interest on debt securities:
 
 
 
 
Taxable
 
950

 
869

Non-taxable
 
285

 
544

Interest on interest-bearing time deposits
 

 
5

Other investments
 
64

 
124

TOTAL INTEREST INCOME
 
16,556

 
16,113

 
 
 
 
 
INTEREST EXPENSE:
 
 

 
 

Interest on deposits
 
2,117

 
2,286

Interest on short-term borrowings
 
7

 
219

Interest on long-term debt
 
254

 
217

TOTAL INTEREST EXPENSE
 
2,378

 
2,722

NET INTEREST INCOME
 
14,178

 
13,391

PROVISION (CREDIT) FOR LOAN LOSSES
 
1,173

 
(105
)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES
 
13,005

 
13,496

 
 
 
 
 
NON-INTEREST INCOME:
 
 

 
 

Fiduciary income
 
1,103

 
1,034

Service charges and fees on deposit accounts
 
1,295

 
1,308

Net gains (losses) from sales of debt securities, available-for-sale
 
221

 
(18
)
Bank owned life insurance income
 
601

 
182

Gains from sales of loans
 
120

 
29

Other operating income
 
499

 
237

TOTAL NON-INTEREST INCOME
 
3,839

 
2,772

 
 
 
 
 
NON-INTEREST EXPENSE:
 
 

 
 

Salaries and employee benefits
 
6,768

 
6,162

Equipment expenses
 
287

 
266

Occupancy expense, net
 
682

 
763

State financial institutions tax
 
436

 
438

Marketing
 
177

 
302

Amortization of intangibles
 
260

 
257

FDIC insurance premiums (credit), net
 
(1
)
 
126

Contracted services
 
402

 
464

Merger-related expenses
 

 
67

Other non-interest expense
 
2,061

 
1,855

TOTAL NON-INTEREST EXPENSE
 
11,072

 
10,700

INCOME BEFORE INCOME TAXES
 
5,772

 
5,568

PROVISION FOR INCOME TAXES
 
746

 
941

NET INCOME
 
$
5,026

 
4,627

 
 
 
 
 
Dividends declared per common share
 
$
0.18

 
0.17

Earnings per common share:
 
 

 
 

Basic
 
$
0.39

 
0.35

Diluted
 
0.39

 
0.35

Weighted average common shares outstanding:
 
 

 
 

Basic
 
12,926,077

 
13,283,634

Diluted
 
12,927,666

 
13,287,338


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 
 March 31,
 
 
2020
 
2019
Net income
 
$
5,026

 
4,627

Other comprehensive income:
 
 

 
 

Net unrealized gains on available-for-sale debt securities (net of taxes of $706 and $659 for the three months ended March 31, 2020 and 2019, respectively)
 
2,658

 
2,475

Reclassification adjustment for net realized (gains) losses on sales of available-for-sale debt securities included in net income (net of taxes of $46 and $4 for the three months ended March 31, 2020 and 2019, respectively)
 
(175
)
 
14

  Other comprehensive income, net of tax
 
2,483

 
2,489

TOTAL COMPREHENSIVE INCOME
 
$
7,509

 
7,116


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 March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
 
12,936,783

 
$
141,791

 
104,431

 
(18,847
)
 
673

 
228,048

Net income
 
 

 
 

 
5,026

 
 

 
 

 
5,026

Other comprehensive income, net of taxes
 
 
 
 

 
 

 
 

 
2,483

 
2,483

Dividend Reinvestment and Stock Purchase Plan
 
7,039

 
107

 
 
 
 

 
 

 
107

Exercise of stock options
 
9,593

 
115

 
 
 
 
 
 
 
115

Compensation expense relating to restricted stock
 
15,661

 
33

 
 
 
 
 
 
 
33

Common stock dividends, $0.18 per share
 
 

 
 

 
(2,334
)
 
 

 
 

 
(2,334
)
Balance at March 31, 2020
 
12,969,076

 
$
142,046

 
107,123

 
(18,847
)
 
3,156

 
233,478

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
13,295,276

 
$
141,170

 
94,547

 
(12,013
)
 
(4,719
)
 
218,985

Net income
 
 

 
 

 
4,627

 
 

 
 

 
4,627

Other comprehensive income, net of taxes
 
 

 
 

 
 

 
 

 
2,489

 
2,489

Dividend Reinvestment and Stock Purchase Plan
 
6,368

 
109

 
 

 
 

 
 

 
109

Compensation expense relating to restricted stock
 
12,504

 
70

 
 
 
 
 
 
 
70

Common stock dividends, $0.17 per share
 
 

 
 

 
(2,262
)
 
 

 
 

 
(2,262
)
Balance at March 31, 2019
 
13,314,148

 
$
141,349

 
96,912

 
(12,013
)
 
(2,230
)
 
224,018


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)
 
 
Three Months Ended 
 March 31,
 
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
5,026

 
4,627

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

 
 

Depreciation, amortization, and accretion
 
248

 
747

Provision (credit) for loan losses
 
1,173

 
(105
)
Deferred income tax provision
 
28

 
51

Increase in cash surrender value of bank owned life insurance
 
(284
)
 
(182
)
Bank owned life insurance mortality benefits in excess of cash surrender value
 
(316
)
 

Realized (gain) loss from equity securities
 
(333
)
 
(93
)
Realized (gain) loss from sales of debt securities, available-for-sale
 
(221
)
 
18

Realized (gain) loss from sales of premises and equipment
 
(1
)
 

Realized (gain) loss from sales and impairment of other real estate owned and repossessed assets
 
(11
)
 

Origination of mortgage loans for sale
 
(4,890
)
 
(1,263
)
Realized gains from sales of loans
 
(120
)
 
(29
)
Proceeds from sales of mortgage loans
 
4,964

 
1,280

Compensation expense related to restricted stock
 
33

 
70

Changes in:
 
 

 
 

Accrued income receivable
 
(546
)
 
(1,072
)
Other assets
 
(1,492
)
 
(129
)
Other liabilities
 
(1,953
)
 
(1,597
)
TOTAL ADJUSTMENTS
 
(3,721
)
 
(2,304
)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
 
1,305

 
2,323

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of equity securities
 
646

 
331

Proceeds from sales of debt securities, available-for-sale
 
8,786

 
21,806

Proceeds from maturities and calls of debt securities:
 
 
 
 
Available-for-sale
 
31,022

 
1,790

Held-to-maturity
 
111

 
506

Purchases of equity securities
 
(37
)
 
(345
)
Purchases of debt securities:
 
 
 
 
Held-to-maturity
 
(280
)
 
(3,148
)
Proceeds from maturities of interest-bearing time deposits
 

 
249

Proceeds from redemption of Federal Reserve Bank stock
 

 
1

Net increase in loans
 
(28,523
)
 
(8,191
)
Proceeds from bank owned life insurance mortality benefits
 
958

 

Proceeds from sale of other real estate owned and repossessed assets
 
208

 

Purchases of premises and equipment
 
(647
)
 
(335
)
Proceeds from sale of premises and equipment
 
1

 

NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
 
12,245

 
12,664

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase (decrease) in deposits
 
(2,408
)
 
46,938

Net decrease in short-term borrowings
 

 
(56,230
)
Principal payments on long-term debt
 
(5,001
)
 
(4,055
)
Proceeds from issuance of common stock
 
21

 
14

Proceeds from exercise of stock options
 
115

 

Cash dividends paid on common stock
 
(2,247
)
 
(2,167
)
NET CASH FLOWS USED IN FINANCING ACTIVITIES
 
(9,520
)
 
(15,500
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
 
4,030

 
(513
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
20,765

 
20,040

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
24,795

 
19,527

 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
2,418

 
2,607


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, 2019 has been derived from the audited consolidated balance sheet as of that date.

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

The preparation of consolidated 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 consolidated 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 months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020.  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 2019 Annual Report on Form 10-K filed with the SEC.

Accounting Changes

Financial Accounting Standards Board ("FASB) Accounting Standards Update ("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 was adopted by LCNB as of January 1, 2020. It 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. Adoption of ASU No. 2017-04 did not 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 was adopted by LCNB as of January 1, 2020. It 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. Adoption of ASU No. 2018-13 did not have a material impact on LCNB's results of operations or financial position.





7

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




Note 2 - Investment Securities
 
The amortized cost and estimated fair value of equity and debt securities at March 31, 2020 and December 31, 2019 are summarized as follows (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
March 31, 2020
 
 
 
 
 
 
 
Debt Securities, Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
2,272

 
137

 

 
2,409

U.S. Agency notes
21,882

 
821

 

 
22,703

U.S. Agency mortgage-backed securities
80,072

 
2,613

 

 
82,685

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
13,254

 
118

 
4

 
13,368

Taxable
19,732

 
550

 
8

 
20,274

 
$
137,212

 
4,239

 
12

 
141,439

 
 
 
 
 
 
 
 
Debt Securities, Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
$
24,189

 
480

 
21

 
24,648

Taxable
3,505

 
2

 
136

 
3,371

 
$
27,694

 
482

 
157

 
28,019

 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
Debt Securities, Available-for-Sale:
 
 
 
 
 
 
 
U.S. Treasury notes
$
2,273

 
36

 

 
2,309

U.S. Agency notes
48,745

 
273

 
34

 
48,984

U.S. Agency mortgage-backed securities
83,977

 
672

 
243

 
84,406

Municipal securities:
 

 
 

 
 

 
 

Non-taxable
22,174

 
161

 
14

 
22,321

Taxable
19,746

 
269

 
35

 
19,980

 
$
176,915

 
1,411

 
326

 
178,000

 
 
 
 
 
 
 
 
Debt Securities, Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Non-taxable
$
24,300

 
343

 
5

 
24,638

Taxable
3,225

 
25

 

 
3,250

 
$
27,525

 
368

 
5

 
27,888


8

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

Note 2 - Investment Securities (continued)


Information concerning debt securities with gross unrealized losses at March 31, 2020 and December 31, 2019, 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
March 31, 2020
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Agency mortgage-backed securities
$

 

 
60

 

Municipal securities:
 

 
 

 
 
 
 
Non-taxable
646

 
4

 

 

Taxable
868

 
8

 

 

 
$
1,514

 
12

 
60

 

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
2,142

 
16

 
1,790

 
5

  Taxable
3,089

 
136

 

 

 
$
5,231

 
152

 
1,790

 
5

 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
U.S. Agency notes
$
3,586

 
11

 
11,939

 
23

U.S. Agency mortgage-backed securities
10,555

 
10

 
19,233

 
233

Municipal securities:
 

 
 

 
 

 
 
Non-taxable
2,631

 
2

 
1,257

 
12

Taxable
5,067

 
35

 
450

 

 
$
21,839

 
58

 
32,879

 
268

 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
  Non-taxable
$
54

 

 
2,660

 
5

 
$
54

 

 
2,660

 
5


Management has determined that the unrealized losses at March 31, 2020 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.










9

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

Note 2 - Investment Securities (continued)


Contractual maturities of debt securities at March 31, 2020 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
$
11,145

 
11,198

 
2,472

 
2,473

Due from one to five years
26,964

 
27,677

 
7,349

 
7,365

Due from five to ten years
19,031

 
19,879

 
2,260

 
2,282

Due after ten years

 

 
15,613

 
15,899

 
57,140

 
58,754

 
27,694

 
28,019

U.S. Agency mortgage-backed securities
80,072

 
82,685

 

 

 
$
137,212

 
141,439

 
27,694

 
28,019


Debt securities with a market value of $124,314,000 and $123,009,000 at March 31, 2020 and December 31, 2019, 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 months ended March 31, 2020 and 2019 was as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2020
 
2019
Proceeds from sales
 
8,786

 
21,806

Gross realized gains
 
221

 
58

Gross realized losses
 

 
76


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 March 31, 2020 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 March 31, 2020 and December 31, 2019 are summarized as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Mutual funds
$
1,378

 
1,361

 
1,371

 
1,345

Equity securities
685

 
675

 
741

 
967

Total equity securities with a readily determinable fair value
$
2,063

 
2,036

 
2,112

 
2,312







10

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

Note 2 - Investment Securities (continued)


Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the three months ended March 31, 2020 and 2019 is as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2020
 
2019
Net gains recognized
$
333

 
93

Net realized gains (losses) on equity securities sold
559

 
(6
)
Unrealized gains (losses) recognized and still held at period end
$
(226
)
 
99



Note 3 - Loans
 
Major classifications of loans at March 31, 2020 and December 31, 2019 were as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
Commercial and industrial
$
85,356

 
78,306

Commercial, secured by real estate
829,461

 
804,953

Residential real estate
318,009

 
322,533

Consumer
28,955

 
25,232

Agricultural
10,519

 
11,509

Other loans, including deposit overdrafts
436

 
1,193

  Loans, gross
1,272,736

 
1,243,726

Deferred origination fees, net
(349
)
 
(275
)
  Loans, net of deferred origination fees
1,272,387

 
1,243,451

Less allowance for loan losses
5,008

 
4,045

Loans, net
$
1,267,379

 
1,239,406


Non-accrual, past-due, and accruing restructured loans as of March 31, 2020 and December 31, 2019 were as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
Non-accrual loans:
 
 
 
Commercial, secured by real estate
$
2,172

 
2,467

Residential real estate
657

 
743

Total non-accrual loans
2,829

 
3,210

Past-due 90 days or more and still accruing
39

 

Total non-accrual and past-due 90 days or more and still accruing
2,868

 
3,210

Accruing restructured loans
4,126

 
6,609

Total
$
6,994

 
9,819



.





11

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

Note 3 – Loans (continued)


The allowance for loan losses for the three months ended March 31, 2020 and 2019 were as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
Three Months Ended March 31, 2020
Balance, beginning of year
$
456

 
2,924

 
528

 
99

 
34

 
4

 
4,045

Provision charged to expenses
159

 
920

 
31

 
41

 
5

 
17

 
1,173

Losses charged off

 
(270
)
 
(3
)
 
(12
)
 

 
(36
)
 
(321
)
Recoveries
18

 

 
73

 
1

 

 
19

 
111

Balance, end of period
$
633

 
3,574

 
629

 
129

 
39

 
4

 
5,008

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
Balance, beginning of year
$
400

 
2,745

 
767

 
87

 
46

 
1

 
4,046

Provision (credit) charged to expenses
51

 
57

 
(195
)
 
(31
)
 
(5
)
 
18

 
(105
)
Losses charged off

 

 
(33
)
 

 

 
(31
)
 
(64
)
Recoveries

 
56

 
154

 
21

 

 
18

 
249

Balance, end of period
$
451

 
2,858

 
693

 
77

 
41

 
6

 
4,126


12

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

Note 3 – Loans (continued)


A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, 2020 and December 31, 2019 were as follows (in thousands):
 
Commercial
& Industrial
 
Commercial, Secured by
Real Estate
 
Residential
Real Estate
 
Consumer
 
Agricultural
 
Other
 
Total
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
22

 

 
12

 

 

 

 
34

Collectively evaluated for impairment
611

 
3,574

 
617

 
129

 
39

 
4

 
4,974

Acquired credit impaired loans

 

 

 

 

 

 

Balance, end of period
$
633

 
3,574

 
629

 
129

 
39

 
4

 
5,008

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
956

 
5,355

 
924

 
13

 

 

 
7,248

Collectively evaluated for impairment
83,916

 
820,535

 
314,802

 
29,070

 
10,535

 
166

 
1,259,024

Acquired credit impaired loans
562

 
2,690

 
2,593

 

 

 
270

 
6,115

Balance, end of period
$
85,434

 
828,580

 
318,319

 
29,083

 
10,535

 
436

 
1,272,387

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
6

 
272

 
17

 

 

 

 
295

Collectively evaluated for impairment
450

 
2,652

 
511

 
99

 
34

 
4

 
3,750

Acquired credit impaired loans

 

 

 

 

 

 

Balance, end of period
$
456

 
2,924

 
528

 
99

 
34

 
4

 
4,045

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
230

 
7,432

 
949

 
27

 

 

 
8,638

Collectively evaluated for impairment
77,430

 
793,191

 
319,188

 
25,328

 
11,523

 
930

 
1,227,590

Acquired credit impaired loans
711

 
3,531

 
2,718

 

 

 
263

 
7,223

Balance, end of period
$
78,371

 
804,154

 
322,855

 
25,355

 
11,523

 
1,193

 
1,243,451



13

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

Note 3 – Loans (continued)


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

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


14

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

Note 3 – 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 March 31, 2020 and December 31, 2019 is as follows (in thousands):
 
Pass
 
OAEM
 
Substandard
 
Doubtful
 
Total
March 31, 2020
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
83,816

 

 
1,618

 

 
85,434

Commercial, secured by real estate
815,998

 
2,467

 
10,115

 

 
828,580

Residential real estate
313,270

 
1,795

 
3,254

 

 
318,319

Consumer
29,078

 

 
5

 

 
29,083

Agricultural
10,513

 

 
22

 

 
10,535

Other
436

 

 

 

 
436

Total
$
1,253,111

 
4,262

 
15,014

 

 
1,272,387

 
 
 
 
 
 
 
 
 
 
December 31, 2019
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
76,236

 
233

 
1,902

 

 
78,371

Commercial, secured by real estate
789,319

 
3,007

 
11,828

 

 
804,154

Residential real estate
319,075

 
267

 
3,513

 

 
322,855

Consumer
25,342

 

 
13

 

 
25,355

Agricultural
11,523

 

 

 

 
11,523

Other
1,193

 

 

 

 
1,193

Total
$
1,222,688

 
3,507

 
17,256

 

 
1,243,451















15

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

Note 3 – Loans (continued)


A loan portfolio aging analysis at March 31, 2020 and December 31, 2019 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
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
1,465

 

 

 
1,465

 
83,969

 
85,434

 

Commercial, secured by real estate
261

 
511

 
1,092

 
1,864

 
826,716

 
828,580

 

Residential real estate
2,398

 
23

 
461

 
2,882

 
315,437

 
318,319

 
39

Consumer
19

 
1

 

 
20

 
29,063

 
29,083

 

Agricultural
22

 

 

 
22

 
10,513

 
10,535

 

Other
67

 

 

 
67

 
369

 
436

 

Total
$
4,232

 
535

 
1,553

 
6,320

 
1,266,067

 
1,272,387

 
39

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial & industrial
$
283

 

 

 
283

 
78,088

 
78,371

 

Commercial, secured by real estate
339

 

 
1,171

 
1,510

 
802,644

 
804,154

 

Residential real estate
1,573

 
260

 
423

 
2,256

 
320,599

 
322,855

 

Consumer
27

 
9

 

 
36

 
25,319

 
25,355

 

Agricultural

 

 

 

 
11,523

 
11,523

 

Other
930

 

 

 
930

 
263

 
1,193

 

Total
$
3,152

 
269

 
1,594

 
5,015

 
1,238,436

 
1,243,451

 


Impaired loans, including acquired credit impaired loans, at March 31, 2020 and December 31, 2019 were as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
$
562

 
862

 

 
711

 
1,253

 

Commercial, secured by real estate
7,951

 
8,459

 

 
8,625

 
9,373

 

Residential real estate
3,185

 
3,655

 

 
3,118

 
3,651

 

Consumer
9

 
9

 

 
10

 
10

 

Agricultural

 

 

 

 

 

Other
270

 
391

 

 
263

 
392

 

Total
$
11,977

 
13,376

 

 
12,727

 
14,679

 

 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 

 
 

 
 

Commercial & industrial
$
956

 
956

 
22

 
230

 
235

 
6

Commercial, secured by real estate
94

 
95

 

 
2,338

 
2,485

 
272

Residential real estate
332

 
332

 
12

 
549

 
549

 
17

Consumer
4

 
4

 

 
17

 
17

 

Agricultural

 

 

 

 

 

Other

 

 

 

 

 

Total
$
1,386

 
1,387

 
34

 
3,134

 
3,286

 
295

 
 
 
 
 
 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
 

 
 

 
 

Commercial & industrial
$
1,518

 
1,818

 
22

 
941

 
1,488

 
6

Commercial, secured by real estate
8,045

 
8,554

 

 
10,963

 
11,858

 
272

Residential real estate
3,517

 
3,987

 
12

 
3,667

 
4,200

 
17

Consumer
13

 
13

 

 
27

 
27

 

Agricultural

 

 

 

 

 

Other
270

 
391

 

 
263

 
392

 

Total
$
13,363

 
14,763

 
34

 
15,861

 
17,965

 
295


16

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

Note 3 – 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 months ended March 31, 2020 and 2019 (in thousands):
 
2020
 
2019
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Three Months Ended March 31,
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
Commercial & industrial
$
637

 
264

 
767

 
7

Commercial, secured by real estate
9,823

 
344

 
18,302

 
199

Residential real estate
3,289

 
92

 
3,916

 
47

Consumer
18

 

 
13

 

Agricultural

 

 

 

Other
266

 
7

 
340

 
9

Total
$
14,033

 
707

 
23,338

 
262

 
 
 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

 
 

Commercial & industrial
$
839

 
10

 
259

 
4

Commercial, secured by real estate
95

 
2

 
244

 
12

Residential real estate
339

 
5

 
622

 
8

Consumer
5

 

 
22

 

Agricultural

 

 

 

Other

 

 

 

Total
$
1,278

 
17

 
1,147

 
24

 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

Commercial & industrial
$
1,476

 
274

 
1,026

 
11

Commercial, secured by real estate
9,918

 
346

 
18,546

 
211

Residential real estate
3,628

 
97

 
4,538

 
55

Consumer
23

 

 
35

 

Agricultural

 

 

 

Other
266

 
7

 
340

 
9

Total
$
15,311

 
724

 
24,485

 
286


Of the interest income recognized on impaired loans during the three months ended March 31, 2020 and 2019, approximately $10,000 and $0, 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 months ended March 31, 2020 and 2019 were as follows (dollars in thousands):
 
2020
 
2019
 
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 March 31,
 
 

 
 
 
 

 
 

 
 

Commercial and industrial
1

 
$
4

 
$
5

 

 
$

 
$

Commercial, secured by real estate

 

 

 
2

 
258

 
258

Residential real estate

 

 

 
2

 
54

 
54

Total
1

 
$
4

 
$
5

 
4

 
$
312

 
$
312


17

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

Note 3 – Loans (continued)


Post-modification balances, at the dates of modification, of newly restructured troubled debt by type of modification for the three months ended March 31, 2020 and 2019 were as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
Term Modification
 
Rate Modification
 
Interest Only
 
Principal Forgiveness
 
Combination
 
Total Modifications
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Commercial & industrial
$

 

 

 

 
5

 
5

Total
$

 

 

 

 
5

 
5

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Commercial, secured by real estate
$

 

 

 

 
258

 
258

Residential real estate
54

 

 

 

 

 
54

Total
$
54

 

 

 

 
258

 
312


There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, 2020 and 2019 and that remained in default at period end.

Information concerning loans that were modified during the three months ended March 31, 2020 and 2019 and that were determined to be troubled debt restructurings follows (in thousands):
 
2020
 
2019
Impaired loans without a valuation allowance
$
5

 
312

Impaired loans with a valuation allowance

 


The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“Section 4013”). To be eligible under Section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. As of March 31, 2020, LCNB has not made the election under the CARES Act.

In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

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 March 31, 2020 and December 31, 2019 were approximately $94,805,000 and $93,596,000, respectively.

The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at March 31, 2020 was $224,000.

18

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




Note 4 - 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.



19

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

Note 4 – Acquired Credit Impaired Loans (continued)


The following table provides at March 31, 2020 and December 31, 2019 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):
 
March 31, 2020
 
December 31, 2019
Acquired from First Capital Bancshares, Inc.
 
 
 
Commercial & industrial
$
5

 
5

Commercial, secured by real estate

 
792

Residential real estate
455

 
551

Other loans, including deposit overdrafts

 

  Loans, gross
460

 
1,348

Less allowance for loan losses

 

  Loans, net
$
460

 
1,348

 
 
 
 
Acquired from Eaton National Bank & Trust Co.
 
 
 
Commercial & industrial
$
423

 
423

Commercial, secured by real estate
796

 
815

Residential real estate
675

 
685

Other loans, including deposit overdrafts
270

 
263

  Loans, gross
2,164

 
2,186

Less allowance for loan losses

 

  Loans, net
$
2,164

 
2,186

 
 
 
 
Acquired from BNB Bancorp, Inc.
 
 
 
Commercial & industrial
$

 

Commercial, secured by real estate
1,205

 
1,219

Residential real estate
95

 
100

Other loans, including deposit overdrafts

 

  Loans, gross
1,300

 
1,319

Less allowance for loan losses

 

  Loans, net
$
1,300

 
1,319

 
 
 
 
Acquired from Columbus First Bancorp, Inc.
 
 
 
Commercial & industrial
$
134

 
283

Commercial, secured by real estate
689

 
705

Residential real estate
1,368

 
1,382

Other loans, including deposit overdrafts

 

  Loans, gross
2,191

 
2,370

Less allowance for loan losses

 

  Loans, net
$
2,191

 
2,370

 
 
 
 
Total
 
 
 
Commercial & industrial
$
562

 
711

Commercial, secured by real estate
2,690

 
3,531

Residential real estate
2,593

 
2,718

Other loans, including deposit overdrafts
270

 
263

Loans, gross
6,115

 
7,223

Less allowance for loan losses

 

  Loans, net
$
6,115

 
7,223


20

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

Note 4 – 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):
 
March 31, 2020
 
December 31, 2019
Outstanding balance
$
7,537

 
9,139

Carrying amount
6,115

 
7,223


Activity during the three months ended March 31, 2020 and 2019 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Accretable discount at beginning of period
 
480

 
743

Reclassification from nonaccretable discount to accretable discount
 
333

 

Disposals
 

 
1

Accretion
 
(495
)
 
(25
)
Accretable discount at end of period
 
318

 
719



Note 5 - 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 March 31, 2020 and December 31, 2019 (in thousands):
 
March 31,
2020
 
December 31,
2019
Affordable housing tax credit investment
$
7,000

 
7,000

Less amortization
936

 
810

Net affordable housing tax credit investment
$
6,064

 
6,190

 
 
 
 
Unfunded commitment
$
4,344

 
4,596


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.







21

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

Note 5 – Affordable Housing Tax Credit Limited Partnership (continued)

The following table presents other information relating to LCNB's affordable housing tax credit investments for the three months ended March 31, 2020 and 2019 (in thousands):
 
2020
 
2019
Tax credits and other tax benefits recognized
$
159

 
84

Tax credit amortization expense included in provision for income taxes
126

 
45



Note 6 – Borrowings

Borrowings at March 31, 2020 and December 31, 2019 were as follows (dollars in thousands):
 
March 31, 2020
 
December 31, 2019
 
Amount
 
Rate

 
Amount
 
Rate
FHLB long-term advances
35,996

 
2.63
%
 
40,994

 
2.55
%
 
$
35,996

 
2.63
%
 
$
40,994

 
2.55
%

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 $280 million and $283 million at March 31, 2020 and December 31, 2019, respectively.  Additionally, LCNB is required to hold minimum levels of FHLB stock, based on the outstanding borrowings. Total remaining borrowing capacity at March 31, 2020 was approximately $93.4 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 7 - 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 and ATM 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.











22

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

Note 7 – Leases (continued)


Lease expenses for offices are included in the consolidated condensed statements of income in occupancy expense, net and lease expenses for equipment and ATMs are included in equipment expenses. Components of lease expense for the three months ended March 31, 2020 were as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Operating lease expense
 
$
153

 
140

Short-term lease expense
 
12

 
12

Variable lease expense
 
3

 
2

Other
 
1

 
5

Total lease expense
 
$
169

 
159


Other information related to leases at March 31, 2020 were as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
120

Right-of-use assets obtained in exchange for new operating lease liabilities
$
313

Weighted average remaining lease term in years for operating leases
37.4

Weighted average discount rate for operating leases
3.65
%


Note 8 – Income Taxes

A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Statutory tax rate
 
21.0
 %
 
21.0
 %
Increase (decrease) resulting from:
 
 

 
 

Tax exempt interest
 
(1.0
)%
 
(1.9
)%
Tax exempt income on bank owned life insurance
 
(2.2
)%
 
(0.7
)%
Captive insurance premium income
 
(0.8
)%
 
(0.9
)%
Tax benefit from certain provisions of the CARES Act
 
(3.4
)%
 
 %
Other, net
 
(0.7
)%
 
(0.6
)%
Effective tax rate
 
12.9
 %
 
16.9
 %


Note 9 - 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.

23

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

Note 9 – 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 March 31, 2020 and December 31, 2019 were as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
Commitments to extend credit:
 
 
 
Commercial loans
$
99,330

 
50,235

Other loans
 

 
 

Fixed rate
24,518

 
4,431

Adjustable rate
9,360

 
1,199

Unused lines of credit:
 

 
 

Fixed rate
24,245

 
28,796

Adjustable rate
166,492

 
174,577

Unused overdraft protection amounts on demand and NOW accounts
16,288

 
16,304

Standby letters of credit
879

 
883

Total commitments
$
341,112

 
276,425


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 March 31, 2020 totaled approximately $1,780,000.

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.

24

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




Note 10 – Accumulated Other Comprehensive Income (Loss)
 
Changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019 were as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Changes in Pension Plan Assets and Benefit Obligations
 
Total
2020
 
 
 
 
 
 
Balance at beginning of period
 
$
857

 
(184
)
 
673

Before reclassifications
 
2,658

 

 
2,658

Reclassifications
 
(175
)
 

 
(175
)
Balance at end of period
 
$
3,340

 
(184
)
 
3,156

 
 
 
 
 
 
 
2019
 
 

 
 

 
 

Balance at beginning of period
 
$
(4,631
)
 
(88
)
 
(4,719
)
Before reclassifications
 
2,475

 

 
2,475

Reclassifications
 
14

 

 
14

Balance at end of period
 
$
(2,142
)
 
(88
)
 
(2,230
)

Reclassifications out of accumulated other comprehensive income (loss) during the three months ended March 31, 2020 and 2019 and the affected line items in the consolidated condensed statements of income were as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
Affected Line Item in the Consolidated Condensed Statements of Income
 
 
2020
 
2019
 
Realized gains (losses) from sales of debt securities, available-for-sale
 
$
221

 
(18
)
 
Net gains (losses) from sales of debt securities, available-for-sale
Income tax expense (benefit)
 
46

 
(4
)
 
Provision for income taxes
Reclassification adjustment, net of taxes
 
$
175

 
(14
)
 
 


Note 11 – 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.


25

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


Note 11 – 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-month period ended March 31, 2020 and 2019 were as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2020
 
2019
Qualified noncontributory defined benefit retirement plan
 
$
270

 
256

401(k) plan
 
165

 
143


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 months ended March 31, 2020 and 2019 are summarized as follows (in thousands):
 
 
 
Three Months Ended 
 March 31,
 
 
 
2020
 
2019
Service cost
 
 
$

 

Interest cost
 
 
16

 
18

Amortization of unrecognized net loss
 
 

 

Net periodic pension cost
 
 
$
16

 
18


Amounts recognized in accumulated other comprehensive income (loss), net of tax, at March 31, 2020 and December 31, 2019 for the nonqualified defined benefit retirement plan consists of (in thousands):
 
March 31, 2020
 
December 31, 2019
Net actuarial loss
$
184

 
184

Past service cost

 

  Total recognized, net of tax
$
184

 
184



Note 12 – 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.


26

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

Note 12 – 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 March 31, 2020 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
 
311

 
$
12.60

 
1.9
 
311

 
$
12.60

 
1.9

The following table summarizes stock option activity for the periods indicated:
 
Three Months Ended March 31,
 
2020
 
2019
 
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,
9,904

 
$
11.96

 
 
 
13,278

 
$
11.98

 
 
Granted

 

 
 
 

 

 
 
Exercised
(9,593
)
 
11.94

 
 
 

 

 
 
Expired

 

 
 
 

 

 
 
Outstanding, March 31,
311

 
12.60

 

 
13,278

 
11.98

 
68,593

Exercisable, March 31,
311

 
12.60

 

 
13,278

 
11.98

 
68,593

(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):
 
Three Months Ended March 31,
 
2020
 
2019
Intrinsic value of options exercised
$
46

 

Cash received from options exercised
115

 

Tax benefit realized from options exercised
5

 


No compensation costs related to option awards were recognized during 2020 or 2019.














27

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

Note 12 – Stock Based Compensation (continued)

Restricted stock awards granted under the 2015 Plan were as follows:
 
2020
 
2019
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
 
 
 
Shares
 
Weighted Average Grant Date Fair Value
Outstanding, January 1,
17,752

 
$
18.03

 
16,958

 
$
18.94

Granted
19,211

 
16.87

 
12,504

 
16.95

Vested
(3,818
)
 
18.45

 
(2,795
)
 
20.01

Forfeited
(3,550
)
 
16.90

 

 

Outstanding, March 31,
29,595

 
$
17.37

 
26,667

 
$
17.89


The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three months ended March 31, 2020 and 2019 (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2020
 
2019
Restricted stock expense
 
$
33

 
70

Tax effect
 
7

 
15


Unrecognized compensation expense for restricted stock awards was $514,000 at March 31, 2020 and is expected to be recognized over a period of 4.9 years.


Note 13 – 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.  

28

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

Note 13 – Earnings per Common Share (continued)


Earnings per share for the three months ended March 31, 2020 and 2019 were calculated as follows (dollars in thousands, except share and per share data):
 
 
Three Months Ended 
 March 31,
 
 
2020
 
2019
Net income
 
$
5,026

 
4,627

Less allocation of earnings and dividends to participating securities
 
11

 
8

Net income allocated to common shareholders
 
$
5,015

 
4,619

 
 
 
 


Weighted average common shares outstanding, gross
 
12,955,672

 
13,307,865

Less average participating securities
 
29,595

 
24,231

Weighted average number of shares outstanding used in the calculation of basic earnings per common share
 
12,926,077

 
13,283,634

Add dilutive effect of:
 
 

 
 

Stock options
 
1,589

 
3,704

Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share
 
12,927,666

 
13,287,338

 
 
 
 
 
Earnings per common share:
 
 

 
 

Basic
 
$
0.39

 
0.35

Diluted
 
0.39

 
0.35


There were no anti-dilutive stock options outstanding at March 31, 2020 or 2019.


Note 14 - 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.








29

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

Note 14 - 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 were 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 adjusted to fair value, less costs to sell, upon transfer of the loan to foreclosed assets, usually based on an appraisal of the property.  Subsequently, foreclosed assets are carried at the lower of carrying value or fair value.  Other repossessed assets are valued at estimated sales prices, less costs to sell. The inputs for real estate owned and other repossessed assets are considered to be level 3.


30

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

Note 14 - Fair Value Measurements (continued)

The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, 2020 and December 31, 2019 (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)
March 31, 2020
 
 
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
 
 
 
Equity securities with a readily determinable fair value:
 
 
 
 
 
 
 
 
 
     Equity securities
 
$
675

 
675

 

 

 
     Mutual funds
 
34

 
34

 

 

 
     Mutual funds measured at net asset value
 
1,327

 
1,327

 

 

 
 
 
 
 
 
 
 
 
 
 
Debt securities, available-for-sale:
 
 
 
 
 
 
 
 
 
     U.S. Treasury notes
 
2,409

 
2,409

 

 

 
     U.S. Agency notes
 
22,703

 

 
22,703

 

 
     U.S. Agency mortgage-backed securities
 
82,685

 

 
82,685

 

 
     Municipal securities:
 
 

 
 

 
 

 
 

 
          Non-taxable
 
13,368

 

 
13,368

 

 
          Taxable
 
20,274

 

 
20,274

 

 
Total recurring fair value measurements
 
$
143,475

 
4,445

 
139,030

 

 
 
 
 
 
 
 
 
 
 
Nonrecurring fair value measurements:
 
 

 
 

 
 
 
 

 
Impaired loans
 
$
1,352

 

 

 
1,352

 
Other real estate owned and repossessed assets
 

 

 

 

 
     Total nonrecurring fair value measurements
 
$
1,352

 

 

 
1,352

 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 

 
 

 
 

 
 

Recurring fair value measurements:
 
 

 
 

 
 

 
 

 
Equity securities with a readily determinable fair value:
 
 
 
 
 
 
 
 
 
     Equity securities
 
$
967

 
967

 

 

 
     Mutual funds
 
45

 
45

 

 

 
     Mutual funds measured at net asset value
 
1,300

 
1,300

 

 

 
 
 
 
 
 
 
 
 
 
 
Debt securities, available-for-sale:
 
 

 
 

 
 

 
 

 
     U.S. Treasury notes
 
2,309

 
2,309

 

 

 
     U.S. Agency notes
 
48,984

 

 
48,984

 

 
     U.S. Agency mortgage-backed securities
 
84,406

 

 
84,406

 

 
     Municipal securities:
 
 

 
 

 
 

 
 

 
          Non-taxable
 
22,321

 

 
22,321

 

 
          Taxable
 
19,980

 

 
19,980

 

 
Total recurring fair value measurements
 
$
180,312

 
4,621

 
175,691

 

 
 
 
 
 
 
 
 
 
 
Nonrecurring fair value measurements:
 
 

 
 

 
 

 
 

 
Impaired loans
 
$
2,840

 

 

 
2,840

 
Other real estate owned and repossessed assets
 
197

 

 

 
197

 
     Total nonrecurring fair value measurements
 
$
3,037

 

 

 
3,037



31

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

Note 14 - Fair Value Measurements (continued)

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at March 31, 2020 and December 31, 2019 (dollars in thousands):
 
 
 
 
 
 
 
 
Range
 
 
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
High
 
Low
 
Weighted Average
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
728

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
624

 
Discounted cash flows
 
Discount rate
 
8.25
%
 
4.50
%
 
6.66
%
Other real estate owned
 

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
1,931

 
Estimated sales price
 
Adjustments for comparable properties, discounts to reflect current market conditions
 
Not applicable
 
 
909

 
Discounted cash flows
 
Discount rate
 
8.25
%
 
4.50
%
 
6.83
%
Other real estate owned
 
197

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

32

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

Note 14 - Fair Value Measurements (continued)

Carrying amounts and estimated fair values of financial instruments as of March 31, 2020 and December 31, 2019 were 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)
March 31, 2020
 
 
 
 
 
 
 
 
 
 
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
24,795

 
24,795

 
24,795

 

 

Debt securities, held-to-maturity
 
27,694

 
28,019

 

 

 
28,019

Federal Reserve Bank stock
 
4,652

 
4,652

 
4,652

 

 

Federal Home Loan Bank stock
 
5,203

 
5,203

 
5,203

 

 

Loans, net
 
1,267,379

 
1,280,021

 

 

 
1,280,021

  Accrued interest receivable
 
4,462

 
4,462

 

 
4,462

 

 
 
 
 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 

 
 

 
 
 
 
 
 
Deposits
 
1,345,872

 
1,351,382

 
1,028,564

 
322,818

 

Short-term borrowings
 

 

 


 

 

Long-term debt
 
35,996

 
37,008

 

 
37,008

 

  Accrued interest payable
 
575

 
575

 

 
575

 

 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
20,765

 
20,765

 
20,765

 

 

Debt securities, held-to-maturity
 
27,525

 
27,888

 

 

 
27,888

Federal Reserve Bank stock
 
4,652

 
4,652

 
4,652

 

 

Federal Home Loan Bank stock
 
5,203

 
5,203

 
5,203

 

 

Loans, net
 
1,239,406

 
1,252,156

 

 

 
1,252,156

  Accrued interest receivable
 
3,911

 
3,911

 

 
3,911

 

 
 
 
 
 
 
 
 
 
 
 
FINANCIAL LIABILITIES:
 
 

 
 

 
 
 
 
 
 
Deposits
 
1,348,280

 
1,352,061

 
1,004,057

 
348,004

 

Short-term borrowings
 

 

 

 

 

Long-term debt
 
40,994

 
41,487

 

 
41,487

 

Accrued interest payable
 
705

 
705

 

 
705

 


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 March 31, 2020 and December 31, 2019.





33

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

Note 14 - 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.

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.

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

Federal Home Loan Bank 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.

34

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




Note 15 – 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.
 
Originally, ASU No. 2016-13 would have taken effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. At their meeting on October 16, 2019, FASB approved a final ASU delaying the effective date for several major standards, including ASU No. 2016-13, if certain qualifications are met. The new effective date for SEC filers eligible to be smaller reporting companies ("SRC"), as defined, will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. As an SRC, LCNB intends to adopt ASU No. 2016-13 for the fiscal year, and interim periods within the fiscal year, beginning after December 15, 2022.

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. 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.










35

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

Note 15 – Recent Accounting Pronouncements (continued)

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. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"
ASU No. 2019-12 was issued in December 2019 and simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends certain other guidance. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. Adoption of ASU No. 2019-12 is not expected to have a material impact on LCNB's results of operations or financial position.

36


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, 2019, 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. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:

1.
the success, impact, and timing of the implementation of LCNB’s business strategies;
2.
the significant risks and uncertainties for LCNB's business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios and other regulatory requirements, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on financial markets, the effectiveness of LCNB's work from home arrangements and staffing levels in operational facilities, the impact of market participants on which LCNB relies and actions taken by governmental authorities and other third parties in response to the pandemic;
3.
LCNB’s ability to integrate recent and any future acquisitions may be unsuccessful or may be more difficult, time-consuming, or costly than expected;
4.
LCNB may incur increased loan charge-offs in the future;
5.
LCNB may face competitive loss of customers;
6.
changes in the interest rate environment may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;
7.
changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
8.
changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;
9.
LCNB may experience difficulties growing loan and deposit balances;
10.
United States trade relations with foreign countries could negatively impact the financial condition of LCNB's
customers, which could adversely affect LCNB 's operating results and financial condition;
11.
deterioration in the financial condition of the U.S. banking system may impact the valuations of investments LCNB has made in the securities of other financial institutions resulting in either actual losses or other-than-temporary impairments on such investments;
12.
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;
13.
adverse weather events and natural disasters and global and/or national epidemics; and
14.
government intervention in the U.S. financial system, including the effects of legislative, tax, accounting, and regulatory actions and reforms, including the the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), 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. 
 

37


LCNB CORP. AND SUBSIDIARIES

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





Coronavirus Update/Status
The coronavirus (COVID-19) pandemic has placed significant health, economic and other major pressure throughout the communities LCNB serves, the state of Ohio, the United States and the entire world. LCNB has implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers, and shareholders that continue through the date of this report:
We have addressed the safety of our 35 branches, following the guidelines of the Center for Disease Control, by closing our lobbies in an effort to encourage use of mobile banking applications and our drive-thru facilities, while allowing access to the lobbies by appointment only and only when necessary;
We hold daily executive meetings to address issues that change rapidly;
We moved our Annual Shareholders’ Meeting, held on April 21, 2020, from a physical meeting to a virtual meeting;
We provided payment deferrals to over 500 loan customers with loans totaling approximately $369 million who were affected by COVID-19, provided such customers were not 30 days past due at December 31, 2019; and
We have chosen to participate in the CARES Act Paycheck Protection Program ("PPP") that will provide government guaranteed and potentially forgivable loans to applicants. The PPP is implemented by the Small Business Administration with support from the Department of the Treasury and provides small businesses with funds to pay up to eight weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. Through April 30, 2020, we were able to assist over 300 small businesses and had funding for over $46 million of such loans. We believe these loans and our participation in the program is good for our customers, the employees who work for these companies, and the communities we serve.

LCNB continues to closely monitor this pandemic and expects to make future changes to respond to the pandemic as this situation continues to evolve.

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.


38


LCNB CORP. AND SUBSIDIARIES

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




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

Accounting for Intangibles.  LCNB’s intangible assets at March 31, 2020 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.

Fair Value Accounting for Debt Securities. Debt securities classified as available-for-sale are carried at estimated fair value. Unrealized gains and losses, net of taxes, are reported as accumulated other comprehensive income or loss in shareholders' equity. Fair value is estimated using market quotations for U.S. Treasury investments. Fair value for the majority of the remaining available-for-sale securities is estimated using the discounted cash flow method for each security with discount rates based on rates observed in the market.

Results of Operations

Net income for the three months ended March 31, 2020 was $5,026,000 (total basic and diluted earnings per share of $0.39). This compares to net income of $4,627,000 (total basic and diluted earnings per share of $0.35) for the same three month period in 2019.


39


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 March 31, 2020 vs. 2019
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 March 31, 2020 and 2019, 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 March 31,
 
 
2020
 
2019
 
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
 
 
 
(Dollars in thousands)
 
 
 
 
Loans (1)
 
$
1,252,554

 
$
15,227

 
4.89
%
 
$
1,208,809

 
$
14,538

 
4.88
%
Interest-bearing demand deposits
 
5,480

 
31

 
2.28
%
 
5,744

 
51

 
3.60
%
Interest-bearing time deposits
 

 

 
%
 
963

 
5

 
2.11
%
Federal Reserve Bank stock
 
4,652

 

 
%
 
4,652

 

 
%
Federal Home Loan Bank stock
 
5,203

 
33

 
2.55
%
 
4,845

 
73

 
6.11
%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
4,313

 
30

 
2.80
%
 
4,220

 
33

 
3.17
%
Debt securities, taxable
 
146,954

 
950

 
2.60
%
 
151,633

 
869

 
2.32
%
Debt securities, non-taxable (2)
 
43,790

 
361

 
3.32
%
 
99,768

 
689

 
2.80
%
Total earnings assets
 
1,462,946

 
16,632

 
4.57
%
 
1,480,634

 
16,258

 
4.45
%
Non-earning assets
 
179,478

 
 

 
 

 
158,853

 
 

 
 

Allowance for loan losses
 
(3,938
)
 
 

 
 

 
(4,074
)
 
 

 
 

Total assets
 
$
1,638,486

 
 

 
 

 
$
1,635,413

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
 
$
679,092

 
486

 
0.29
%
 
$
700,708

 
661

 
0.38
%
IRA and time certificates
 
320,651

 
1,631

 
2.05
%
 
310,668

 
1,625

 
2.12
%
Short-term borrowings
 
1,415

 
7

 
1.99
%
 
23,235

 
219

 
3.82
%
Long-term debt
 
38,325

 
254

 
2.67
%
 
44,676

 
217

 
1.97
%
Total interest-bearing liabilities
 
1,039,483

 
2,378

 
0.92
%
 
1,079,287

 
2,722

 
1.02
%
Demand deposits
 
347,027

 
 

 
 

 
332,153

 
 

 
 
Other liabilities
 
20,918

 
 

 
 

 
12,503

 
 

 
 

Capital
 
231,058

 
 

 
 

 
221,470

 
 

 
 

Total liabilities and capital
 
$
1,638,486

 
 

 
 

 
$
1,645,413

 
 

 
 

Net interest rate spread (3)
 
 

 
 

 
3.65
%
 
 

 
 

 
3.43
%
Net interest income and net interest margin on a taxable-equivalent basis (4)
 
 

 
$
14,254

 
3.92
%
 
 

 
$
13,536

 
3.71
%
Ratio of interest-earning assets to interest-bearing liabilities
 
140.74
%
 
 

 
 

 
137.19
%
 
 

 
 

(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.




40


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 March 31, 2020 as compared to the same period in 2019.  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
March 31, 2020 vs. 2019
Increase (decrease) due to:
 
 
Volume
 
Rate
 
Total
 
 
(In thousands)
Interest-earning Assets:
 
 
 
 
 
 
Loans
 
$
530

 
159

 
689

Interest-bearing demand deposits
 
(2
)
 
(18
)
 
(20
)
Interest-bearing time deposits
 
(5
)
 

 
(5
)
Federal Reserve Bank stock
 

 

 

Federal Home Loan Bank stock
 
5

 
(45
)
 
(40
)
Investment securities:
 
 
 
 
 
 

Equity securities
 
1

 
(4
)
 
(3
)
Debt securities, taxable
 
(27
)
 
108

 
81

Debt securities, non-taxable
 
(442
)
 
114

 
(328
)
Total interest income
 
60

 
314

 
374

 
 
 
 
 
 
 
Interest-bearing Liabilities:
 
 

 
 

 
 

Savings deposits
 
(20
)
 
(155
)
 
(175
)
IRA and time certificates
 
51

 
(45
)
 
6

Short-term borrowings
 
(141
)
 
(71
)
 
(212
)
Long-term debt
 
(34
)
 
71

 
37

Total interest expense
 
(144
)
 
(200
)
 
(344
)
Net interest income
 
$
204

 
514

 
718


Net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2020 totaled $14,254,000, an increase of $718,000 from the comparable period in 2019.  Total interest income increased $374,000 and total interest expense decreased $344,000.

The $374,000 increase in total interest income was due primarily to a $689,000 increase in loan interest income caused by a $43.7 million increase in the average balance of LCNB's loan portfolio and by a 1 basis point (a basis point equals 0.01%) increase in the average rate earned on loans. Partially offsetting the increase in loan interest income was a $328,000 decrease in interest income from non-taxable debt securities. The decrease in interest income from non-taxable debt securities was due to a $56.0 million decrease in average non-taxable debt securities, partially offset by a 52 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 and long-term debt.

The $344,000 decrease in total interest expense was due to a $175,000 decrease in interest expense for savings deposits and a $212,000 decrease in interest expense for short-term borrowings. Interest expense for savings deposits decreased primarily due to a 9 basis point market-driven decrease in the average rate paid for these deposits and secondarily to a $21.6 million decrease in the average balance of these deposits. Interest expense for short-term borrowings decreased due to a $21.8 million decrease in average debt outstanding and to a 183 basis point decrease in the average rate paid.






41


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 for loan losses for the three months ended March 31, 2020 was $1,173,000, an increase of $1,278,000 when compared to a credit of $105,000 for the comparable period in 2019. The factors for current economic conditions for the 2020 period include the economic downturn caused by the COVID-19 pandemic, which accounted for about 67% of the increase. Calculating an appropriate level for the allowance and provision for loan losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available.

Net charge-offs for the three months ended March 31, 2020 was $210,000, as compared to a net recovery of $185,000 for the comparable period in 2019.

Non-Interest Income

A comparison of non-interest income for the three months ended March 31, 2020 and 2019 is as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2020
 
2019
 
Difference
Fiduciary income
 
$
1,103

 
1,034

 
69

Service charges and fees on deposit accounts
 
1,295

 
1,308

 
(13
)
Net gains (losses) from sales of debt securities, available-for-sale
 
221

 
(18
)
 
239

Bank owned life insurance income
 
601

 
182

 
419

Gains from sales of loans
 
120

 
29

 
91

Other operating income
 
499

 
237

 
262

Total non-interest income
 
$
3,839

 
2,772

 
1,067


Reasons for changes include:
Net gains (losses) from sales of available-for-sale debt securities increased due to market valuations at the times of sales, as the volume of debt securities sold during the 2020 period was less than that for the 2019 period.
Bank owned life insurance income increased due to $12.0 million of new policies purchased at the beginning of the third quarter 2019 and to a mortality benefit recognized during the first quarter 2020.
Other operating income increased primarily due to net gains realized from the sale of equity security investments.


















42


LCNB CORP. AND SUBSIDIARIES

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




Non-Interest Expense

A comparison of non-interest expense for the three months ended March 31, 2020 and 2019 is as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2020
 
2019
 
Difference
Salaries and employee benefits
 
$
6,768

 
6,162

 
606

Equipment expenses
 
287

 
266

 
21

Occupancy expense, net
 
682

 
763

 
(81
)
State financial institutions tax
 
436

 
438

 
(2
)
Marketing
 
177

 
302

 
(125
)
Amortization of intangibles
 
260

 
257

 
3

FDIC insurance premiums (credit), net
 
(1
)
 
126

 
(127
)
Contracted services
 
402

 
464

 
(62
)
Other real estate owned
 
(10
)
 
3

 
(13
)
Merger-related expenses
 

 
67

 
(67
)
Other non-interest expense
 
2,071

 
1,852

 
219

Total non-interest expense
 
$
11,072

 
10,700

 
372


Reasons for changes include:
Salaries and employee benefits increased 9.8% primarily due to salary and wage increases and newly hired employees, including additional business development positions. An increase in health insurance costs also contributed to the increase in salaries and employee benefits.
Marketing decreased primarily due to a realignment of the marketing strategy within LCNB.
FDIC insurance premiums (credit), net for the 2020 period reflects a Small Bank Assessment Credit received from the FDIC because the Deposit Insurance Fund was above the mandated 1.35% level. LCNB has used the substantial portion of the credit and anticipates quarterly premium payments will resume in the second quarter 2020.
Other non-interest expense increased due to smaller net increases in a variety of accounts.

Income Taxes

LCNB's effective tax rate for the three months ended March 31, 2020 was 12.9%, compared to 16.9% for the three months ended March 31, 2019.  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. A one-time tax benefit recognized as a result of certain provisions in the Coronavirus Aid, Relief, & Economic Security ("CARES") Act passed by Congress and signed by President Trump during the first quarter 2020 also contributed to the difference during the 2020 period.

















43


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 March 31, 2020 and December 31, 2019 is as follows (dollars in thousands):
 
March 31, 2020
 
December 31, 2019
 
Difference $
 
Difference %
ASSETS:
 
 
 
 
 
 
 
Total cash and cash equivalents
$
24,795

 
$
20,765

 
$
4,030

 
19.41
 %
Investment securities:
 
 
 
 

 

Equity securities with a readily determinable fair value, at fair value
2,036

 
2,312

 
(276
)
 
(11.94
)%
Equity securities without a readily determinable fair value, at cost
2,099

 
2,099

 

 
 %
Debt securities, available-for-sale, at fair value
141,439

 
178,000

 
(36,561
)
 
(20.54
)%
Debt securities, held-to-maturity, at cost
27,694

 
27,525

 
169

 
0.61
 %
Federal Reserve Bank stock, at cost
4,652

 
4,652

 

 
 %
Federal Home Loan Bank stock, at cost
5,203

 
5,203

 

 
 %
Loans, net
1,267,379

 
1,239,406

 
27,973

 
2.26
 %
Premises and equipment, net
35,017

 
34,787

 
230

 
0.66
 %
Operating lease right-of-use assets
5,621

 
5,444

 
177

 
3.25
 %
Goodwill
59,221

 
59,221

 

 
 %
Core deposit and other intangibles
3,751

 
4,006

 
(255
)
 
(6.37
)%
Bank owned life insurance
41,309

 
41,667

 
(358
)
 
(0.86
)%
Other assets
16,064

 
14,221

 
1,843

 
12.96
 %
Total assets
$
1,636,280

 
$
1,639,308

 
$
(3,028
)
 
(0.18
)%
 
 
 
 
 

 

LIABILITIES:
 
 
 
 

 

Deposits:
 
 
 
 

 

Non-interest-bearing
$
342,442

 
$
354,391

 
$
(11,949
)
 
(3.37
)%
Interest-bearing
1,003,430

 
993,889

 
9,541

 
0.96
 %
Total deposits
1,345,872

 
1,348,280

 
(2,408
)
 
(0.18
)%
Long-term debt
35,996

 
40,994

 
(4,998
)
 
(12.19
)%
Operating leases liability
5,659

 
5,446

 
213

 
3.91
 %
Accrued interest and other liabilities
15,275

 
16,540

 
(1,265
)
 
(7.65
)%
Total liabilities
1,402,802

 
1,411,260

 
(8,458
)
 
(0.60
)%
 
 
 
 
 

 

TOTAL SHAREHOLDERS' EQUITY
233,478

 
228,048

 
5,430

 
2.38
 %
Total liabilities and shareholders' equity
$
1,636,280

 
$
1,639,308

 
$
(3,028
)
 
(0.18
)%

Reasons for changes include:
Debt securities, available-for-sale, decreased due to sales of securities with a total book value of $8.6 million and maturities and calls of securities totaling $31.0 million. These decreases were partially offset by a net increase in fair values totaling $3.1 million. The net funds received were invested in the loan portfolio and used to help pay down long-term debt.
Net loans increased due to organic growth in the loan portfolio. Most of the growth occurred in the commercial and industrial and commercial real estate portfolios, slightly offset by a decrease in the residential real estate portfolio.
Premises and equipment, net increased due primarily to Main Office remodeling costs, partially offset by depreciation expense.
Core deposit and other intangibles decreased due to amortization of core deposit intangibles.
Bank owned life insurance decreased due to a mortality claim recognized during the first quarter 2020.
Non-interest-bearing deposits decreased due to a decrease in business demand deposit accounts, slightly offset by an increase in personal demand deposit accounts.

44


LCNB CORP. AND SUBSIDIARIES

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




Interest-bearing deposits increased primarily due to increases in NOW and savings accounts, partially offset by decreases in IRA and time certificates.
Long-term debt decreased due to payoffs of matured debt. There were no new borrowings during the three months ended March 31, 2020.
Total shareholders' equity increased primarily due to earnings retained during the first three months of 2020 and to a $2.5 million increase in accumulated other comprehensive income (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 dividends paid to shareholders.

At each reporting date between annual goodwill impairment tests, LCNB management considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID-19, management assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered included the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB’s stock and other relevant events. Management further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and sensitivities performed.  At the conclusion of the assessment, management determined that, as of March 31, 2020, it was more likely than not that fair value exceeded carrying value. Management will continue to monitor developments regarding the COVID-19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.

Regulatory Capital

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
 
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.






45


LCNB CORP. AND SUBSIDIARIES

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




On September 17, 2019, the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The simplified rule was designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. It may be used beginning with the March 31, 2020 Call Report. Qualifications to use the simplified approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB qualifies to use the simplified measure, but did not opt in for the March 31, 2020 regulatory capital calculations.

A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):
 
 
March 31, 2020
 
December 31, 2019
Regulatory Capital:
 
 
Shareholders' equity
 
$
229,573

 
$
222,065

Goodwill and other intangibles
 
(62,485
)
 
(62,744
)
Accumulated other comprehensive (income) loss
 
(3,156
)
 
(673
)
Tier 1 risk-based capital
 
163,932

 
158,648

Eligible allowance for loan losses
 
5,008

 
4,045

Total risk-based capital
 
$
168,940

 
$
162,693

Capital ratios:
 
 

 
 

Common Equity Tier 1 Capital to risk-weighted assets
 
12.44
%
 
12.21
%
Tier 1 Capital to risk-weighted assets
 
12.44
%
 
12.21
%
Total Capital to risk-weighted assets
 
12.82
%
 
12.52
%
Leverage
 
10.43
%
 
10.06
%

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 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 March 31, 2020 was approximately $93.4 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 $55.0 million were available through the line of credit arrangements at March 31, 2020.

On April 9, 2020, the Federal Reserve established the Paycheck Protection Program Liquidity Facility ("PPPLF") to bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program. The PPPLF will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. LCNB management has decided not to currently use the PPPLF as a source of liquidity, as other sources of liquidity are believed to be adequate at this time.


46


LCNB CORP. AND SUBSIDIARIES

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




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.

47




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 March 31, 2020 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 also have a positive 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
 
$
58,229

 
2,204

 
3.93
%
Up 300
 
57,628

 
1,603

 
2.86
%
Up 200
 
57,066

 
1,041

 
1.86
%
Up 100
 
56,501

 
476

 
0.85
%
Base
 
56,025

 

 
%
Down 100
 
56,144

 
119

 
0.21
%

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 March 31, 2020 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a 100 basis point decrease in interest rates will have a positive 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
 
$
192,424

 
(42,504
)
 
(18.09
)%
Up 300
 
202,506

 
(32,422
)
 
(13.80
)%
Up 200
 
212,718

 
(22,210
)
 
(9.45
)%
Up 100
 
221,568

 
(13,360
)
 
(5.69
)%
Base
 
234,928

 

 
 %
Down 100
 
266,165

 
31,237

 
13.30
 %

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.


48




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 March 31, 2020, 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.

49




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

The disclosures below supplement the risk factors previously disclosed under Item 1A. of LCNB’s 2019 Annual Report on Form 10-K.

The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of 
COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance.

Further, Ohio Governor Mike DeWine issued a Stay-at-Home Order, effective 11:59 p.m. on March 23, 2020, in the interest of protecting the state's citizens and ordered non-essential businesses to close. Banks are a designated essential business and LCNB is continuing operations. As a result of the order though, many of LCNB's commercial borrowers have been required to cease or curtail operations or may be facing operational issues, such as supply chain disruptions and decreased sales.   Some businesses may not be able to survive.  Many home mortgage and consumer borrowers are suddenly unemployed or working reduced hours. LCNB expects that it will need to make short-term modifications to a number of loans to help borrowers through this period, but the eventual number of modifications that will be required or their impact on LCNB's financial results cannot be estimated at this time.  Likewise, the pandemic’s effect on LCNB’s allowance for loan losses and provision for loan losses cannot be estimated at this time.

During March 2020, The Federal Reserve's Open Market Committee reduced its benchmark federal funds rate by a total of 150 basis points in response to the risks the pandemic poses to the economy. This rate influences other rates, including the prime rate and rates charged for home mortgage loans. Many of LCNB's commercial loans and most of its home equity loans are indexed to the prime rate. The future effect these reductions will have on LCNB's loan interest income cannot be estimated at this time.

Economic turmoil associated with the pandemic had wide-ranging and severe impacts upon financial markets, including stock and bond markets, during the first quarter 2020. Fees for trust and brokerage accounts serviced for clients is predominantly based on the market value of such funds. A general decline in market valuations will decrease the fees LCNB collects for servicing these accounts. In addition, LCNB's investments in equity securities are carried at fair value, with changes in fair value recognized in other operating income in the consolidated statements of income. Debt securities classified as "available-for-sale" are carried at fair value, with changes in fair value recorded in other comprehensive income, a separate component of shareholders' equity. Future pandemic effects on trust and brokerage accounts, LCNB's equity and debt investments, and the resulting effects on LCNB's income and equity cannot be estimated at this time.





50




Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the U.S. economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.
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.

There were no repurchases under the Program during the three months ended March 31, 2020. A maximum number of 100,000 shares may yet be purchased under the Program.


Item 3.
Defaults Upon Senior Securities

None.


Item 4.
Mine Safety Disclosures

Not applicable.


Item 5.
Other Information

None.
 

51




LCNB CORP. AND SUBSIDIARIES
Item 6.
Exhibits

Exhibit No.
Exhibit Description
2.1
 
 
3.1
 
 
3.2
 
 
4.1
 
 
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 March 31, 2020 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.

52




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.
 
 
 
 
May 7, 2020
/s/ Eric J. Meilstrup
 
 
Eric J. Meilstrup
 
 
Chief Executive Officer and President
 
 
 
 
May 7, 2020
/s/ Robert C. Haines, II
 
 
Robert C. Haines, II
 
 
Executive Vice President and Chief Financial Officer

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