LCNB CORP. Introduction
The following is management's discussion and analysis of the consolidated financial condition and consolidated results of operations of LCNB. It is intended to amplify certain financial information regarding LCNB and should be read in conjunction with the consolidated financial statements and related notes contained in the 2019 Annual Report to Shareholders.
Overview
Net income for 2019 was$18,912,000 (basic and diluted earnings per share of$1.44 ), compared to$14,845,000 (basic and diluted earnings per share of$1.24 ) in 2018 and$12,972,000 (basic and diluted earnings per share of$1.30 and$1.29 , respectively) in 2017.
The following items significantly affected earnings for the years indicated:
• CFB merged with and into
• Expenses related to the merger with CFB totaled
• Other non-interest expense for 2018 included
sales of fixed assets, primarily due to losses incurred in the sale of two
office buildings. Other non-interest expense for 2017 included
organizational costs for
from sales of fixed assets, primarily due to the sale of a closed office
building.
• The Tax Cuts and Jobs Act, which was signed into law on
lowered LCNB's federal corporate income tax rate from 34% to 21%,
beginning in 2018. In addition, LCNB revalued its net deferred tax
liability position at the end of 2017 to reflect the reduction in its
federal corporate income tax rate and this revaluation resulted in a
one-time income tax benefit of approximately $224,000 , or $0.02 of basic
and diluted earnings per common share for the year ended December 31,
2017 .
Net Interest Income
LCNB's primary source of earnings is net interest income, which is the
difference between earnings from loans and other investments and interest paid
on deposits and other liabilities. The following table presents, for the years
indicated, average balances for interest-earning assets and interest-bearing
liabilities, the income or expense related to each item, and the resulting
average yields earned or rates paid.
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Years ended December 31,
2019 2018 2017
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Loans (1) $ 1,221,375 59,009 4.83
%
4.45 %
Interest-bearing demand deposits 8,389 241 2.87 % 5,164 136 2.63 % 7,972 88 1.10 %
Interest-bearing time deposits 488 11 2.25 % 4,008 58 1.45 % - - - %
Federal Reserve Bank stock 4,652 279 6.00 % 3,268 196 6.00 % 2,732 164
6.00 %
Federal Home Loan Bank stock 5,108 249 4.87 % 4,346 259 5.96 % 3,638 182 5.00 %
Investment securities:
Equity securities 4,310 127 2.95 % 3,782 104 2.75 % 3,249 89 2.74 %
Debt securities, taxable 159,377 3,601 2.26% 165,300 3,666 2.22 % 205,669 4,239
2.06 %
Debt securities, non-taxable (2) 73,634 2,123 2.88 % 123,135 3,400 2.76 % 143,394 4,815 3.36 %
Total earning assets 1,477,333 65,640 4.44 % 1,347,162 55,308 4.11 % 1,189,106 46,148 3.88 %
Non-earning assets 169,314 145,601 123,800
Allowance for loan losses (4,056 ) (3,822 ) (3,405 )
Total assets $ 1,642,591 $ 1,488,941 $ 1,309,501
Savings deposits $ 687,458 2,446 0.36 % $ 689,322 1,332 0.19 % $ 645,471 594 0.09 %
IRA and time certificates 327,321 7,080 2.16 % 253,524 4,421 1.74 % 205,540 2,784 1.35 %
Short-term borrowings 6,064 227 3.74 % 13,967 311 2.23 % 23,976 209 0.87 %
Long-term debt 42,733 1,035 2.42 % 16,789 361 2.15 % 421 12 2.85 %
Total interest-bearing liabilities 1,063,576 10,788 1.01 % 973,602 6,425 0.66 % 875,408 3,599 0.41 %
Demand deposits 336,257 315,229 274,855
Other liabilities 18,119 12,195 10,795
Capital 224,639 187,915 148,443
Total liabilities and capital $ 1,642,591 $ 1,488,941 $ 1,309,501
Net interest rate spread (3) 3.43 % 3.45 % 3.47 %
Net interest income and net
interest margin on a tax equivalent
basis (4) 54,852 3.71 % 48,883 3.63 % 42,549 3.58 %
Ratio of interest-earning assets to
interest-bearing liabilities 138.90 % 138.37 % 135.83 %
(1) Includes non-accrual loans if any.
(2) Income from tax-exempt securities is included in interest income on a
taxable-equivalent basis. Interest income has been divided by a factor
comprised of the complement of the incremental tax rate of 21% for 2019 and
2018 and 34% for 2017.
(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.
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in interest income and expense for each
major category of interest-earning assets and interest-bearing liabilities and
the amount of change attributable to volume and rate changes for the years
indicated. Changes not solely attributable to rate or volume have been allocated
to volume and rate changes in proportion to the relationship of absolute dollar
amounts of the changes in each.
For the years ended December 31,
2019 vs. 2018 2018 vs. 2017
Increase (decrease) due to Increase (decrease) due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest income
attributable to:
Loans (1) $ 8,738 2,782 11,520 9,840 1,078 10,918
Interest-bearing
demand deposits 92 13 105 (40 ) 88 48
Interest-bearing time
deposits (68 ) 21 (47 ) 58 - 58
Federal Reserve Bank
stock 83 - 83 32 - 32
Federal Home Loan Bank
stock 41 (51 ) (10 ) 39 38 77
Investment securities:
Equity securities 15 8 23 15 - 15
Debt securities,
taxable (133 ) 68 (65 ) (878 ) 305 (573 )
Debt securities,
non-taxable (2) (1,421 ) 144 (1,277 ) (627 ) (788 ) (1,415 )
Total interest income 7,347 2,985 10,332 8,439 721 9,160
Interest expense
attributable to:
Savings deposits (4 ) 1,118 1,114 43 695 738
IRA and time
certificates 1,456 1,203 2,659 734 903 1,637
Short-term borrowings (230 ) 146 (84 ) (116 ) 218 102
Long-term debt 623 51 674 353 (4 ) 349
Total interest expense 1,845 2,518 4,363 1,014
1,812 2,826
Net interest income $ 5,502 467 5,969 7,425 (1,091 ) 6,334
(1) Non-accrual loans, if any, are included in average loan balances.
(2) Change in interest income from non-taxable investment securities is computed
based on interest income determined on a taxable-equivalent yield
basis. Interest income has been divided by a factor comprised of the
complement of the incremental tax rate of 21% for 2019 and 2018 and 34% for
2017.
2019 vs. 2018. Net interest income on a fully tax-equivalent basis for 2019
totaled $54,852,000 , an increase of $5,969,000 from 2018. The increase resulted
from an increase in total taxable-equivalent interest income of $10,332,000 ,
partially offset by an increase in total interest expense of $4,363,000 .
The increase in total interest income was due primarily to a $11,520,000
increase in loan interest income caused by a $183.2 million increase in average
loans and secondarily to a 26 basis point (a basis point equals 0.01%) increase
in the average rate earned on loans. Loans obtained through the merger with CFB
were a significant component of the increase in average loans. Partially
offsetting the increase in loan interest income was a $1,277,000 decrease in
taxable-equivalent interest income from non-taxable debt securities. Interest
income from non-taxable investment securities decreased due to a $49.5 million
decrease in average non-taxable debt securities, slightly offset by a 12 basis
point increase in the average rate earned on these securities. The decrease in
non-taxable debt securities were invested in the loan portfolio and used to pay
down short-term borrowings.
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The increase in total interest expense was primarily due to a$1,114,000 increase in interest paid on savings deposits, a$2,659,000 increase in interest paid on IRA and time certificates, and a$674,000 increase in interest paid on long-term debt. Interest paid on savings deposits increased primarily due to a 17 basis point increase in the average rate paid. Interest paid on IRA and time certificates increased due to a$73.8 million increase in the average balance and to a 42 basis point increase in the average rate paid. Increases in average rates paid for savings deposits and IRA and time certificates were primarily due to increases in market rates. Deposits obtained through the merger with CFB were a significant component of the increases in savings deposits and IRA and time certificates. Interest paid on long-term debt increased primarily due to$25.9 million increase in the average balance and secondarily to a 27 basis point increase in the average rate paid. The average balance on long-term debt increased due to$25.0 million in new borrowings obtained inDecember 2018 and to borrowings obtained through the merger with CFB, partially offset by borrowings that matured.
2018 vs. 2017. Net interest income on a fully tax-equivalent basis for 2018
totaled
The increase in total interest income was due primarily to a$10,918,000 increase in loan interest income caused by a$215.7 million increase in average loans and secondarily to a 12 basis point increase in the average rate earned on loans. Loans obtained through the merger with CFB were a significant component of the increase in average loans. Partially offsetting the increase in loan interest income was a$573,000 decrease in interest income from taxable debt securities and a$1,415,000 decrease in taxable-equivalent interest income from non-taxable debt securities. Interest income from taxable investment securities decreased due to a$40.4 million decrease in average taxable investment securities, partially offset by a 16 basis point increase in the average rate earned on these securities. Interest income from non-taxable investment securities decreased due to a$20.3 million decrease in average non-taxable debt securities and to a 60 basis point decrease in the average rate earned on these securities. One of the reasons for the 60 basis point decrease in the average rate earned on non-taxable debt securities was the decrease in the federal corporate tax rate to 21%, which decreased the effective yield earned on these securities. Decreases in debt securities were invested in the loan portfolio and used to pay down short-term borrowings. The increase in total interest expense was primarily due to a$738,000 increase in interest paid on savings deposits and to a$1,637,000 increase in interest paid on IRA and time certificates. Interest paid on savings deposits increased due to a 10 basis point increase in the average rate paid and to a$43.8 million increase in average balances outstanding. Interest paid on IRA and time certificates increased due to a 39 basis point increase in the average rate paid and to a$48.0 million increase in average balances outstanding. Increases in average rates paid was primarily due to increases in market rates. Deposits obtained through the merger with CFB were a significant component of the increases in savings deposits and IRA and time certificates. -32-
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Provisions and Allowance for Loan Losses
The following table presents the total loan loss provision and the other changes in the allowance for loan losses for the years 2015 through 2019:
2019 2018 2017 2016 2015
(Dollars in thousands)
Balance - Beginning of year $ 4,046 3,403 3,575 3,129 3,121
Loans charged off:
Commercial and industrial 47 - - 234 100
Commercial, secured by real
estate 143 145 462 185 1,133
Residential real estate 272 234 225 127 304
Consumer 24 135 90 85 52
Agricultural - - - - 67
Other loans, including deposit
overdrafts 181 179 138 119 74
Total loans charged off 667 693 915 750 1,730
Recoveries:
Commercial and industrial - 1 99 26 7
Commercial, secured by real
estate 56 239 113 98 96
Residential real estate 297 71 140 52 107
Consumer 32 13 114 53 60
Agricultural - - - - 67
Other loans, including deposit
overdrafts 74 89 62 54 35
Total recoveries 459 413 528 283 372
Net charge offs 208 280 387 467 1,358
Provision charged to operations 207 923 215
913 1,366 Balance - End of year$ 4,045 4,046 3,403
3,575 3,129
Ratio of net charge-offs during the period to average loans outstanding 0.02 % 0.03 % 0.05 % 0.06 % 0.18 % Ratio of allowance for loan losses to total loans at year-end 0.33 % 0.34 % 0.40 % 0.44 % 0.41 %
Charge-offs for the commercial, secured by real estate category had an elevated balance during 2015 due to the sale of impaired loans.
Charge-offs and recoveries classified as "Other" include charge-offs and recoveries on checking and NOW account overdrafts. LCNB charges off such overdrafts when considered uncollectible, but no later than 60 days from the date first overdrawn.
LCNB continuously reviews the loan portfolio for credit risk through the use of
its lending and loan review functions. Independent loan reviews analyze specific
loans, providing validation that credit risks are appropriately identified and
reported to the Loan Committee and Board of Directors. In addition, the Board of
Directors' Audit Committee receives loan review reports throughout each
year. New credits meeting specific criteria are analyzed prior to origination
and are reviewed by the Loan Committee and Board of Directors.
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Inputs from all of the Bank's credit risk identification processes are used by management to analyze and validate the adequacy and methodology of the allowance quarterly. The analysis includes two basic components: specific allocations for individual loans and general loss allocations for pools of loans based on average historic loss ratios for the sixty preceding months adjusted for identified economic and other risk factors. Due to the number, size, and complexity of loans within the loan portfolio, there is always a possibility of inherent undetected losses.
Non-Interest Income
A comparison of non-interest income for 2019, 2018, and 2017 is as follows:
Increase (Decrease)
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(In thousands)
Fiduciary income $ 4,354 3,958 3,473 396 485
Service charges and fees on
deposit accounts 5,875 5,590 5,236 285 354
Net gains (losses) on sales of
securities (41 ) (8 ) 233 (33 ) (241 )
Bank owned life insurance income 943 738 867
205 (129 ) Net gains from sales of loans 328 223 166 105 57 Other operating income 889 549 483 340 66 Total non-interest income 12,348 11,050 10,458 1,298 592
Reasons for changes include: • Fiduciary income increased during 2019 and 2018 due to increases in the
fair value of trust and brokerage assets managed.
• Service charges and fees increased during 2019 due to fee income
recognized on the Insured Cash Sweep ("ICS") deposit program, fees
received from debit card usage, and incentive income received onco-branded Mastercards. These increases were partially offset by decreases
in service charges on deposit accounts, ATM surcharge fees, and overdraft
fees. The increase during 2018 was primarily due to fees earned from the
ICS deposit program that was introduced during the second quarter 2017 and
from an increase in debit card income. Debit card income benefited from
more cards outstanding due to the merger with CFB and greater depositor
utilization of the cards.
• Net gains (losses) on sales of securities were less during 2019 and 2018
as compared to 2017 primarily due to market pricing at the times of the
sales. Dollar volume of sales for 2019, 2018, and 2017 were, respectively,
• Bank owned life insurance income was greater during 2019 primarily due to
quarter 2019. Income decreased in 2018 as compared to 2017 primarily due
to the absence of mortality benefits recognized during 2017. No mortality
benefits were received in 2019 or 2018.
• Other operating income was higher in 2019 primarily due to an increase in
the fair value of equity security investments.
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-Interest Expense
A comparison of non-interest expense for 2019, 2018, and 2017 is as follows:
Increase (Decrease)
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
(In thousands)
Salaries and employee benefits
4,041 2,694 Equipment expenses 1,209 1,138 1,172 71 (34 ) Occupancy expense, net 2,961 2,861 2,613 100 248
State financial institutions tax 1,669 1,197 1,137
472 60 Marketing 1,319 1,119 873 200 246 Amortization of intangibles 1,043 922 751 121 171 FDIC premiums 225 419 423 (194 ) (4 ) ATM expense 580 580 572 - 8
Computer maintenance and supplies 1,094 990 882
104 108 Telephone expense 707 649 735 58 (86 ) Contracted services 1,865 1,547 1,255 318 292 Other real estate owned 53 20 10 33 10 Merger-related expenses 114 2,123 118 (2,009 ) 2,005 Other non-interest expense 5,363 5,658 4,737 (295 ) 921 Total non-interest expense 43,522 40,502 33,863 3,020 6,639
Reasons for changes include: • Salaries and employee benefits were 19.0% greater in 2019 than in 2018 and
14.5% greater in 2018 than in 2017. The increases for both years were
primarily due to salary and wage increases, incentive payment increases,
and newly hired employees, including additional business development
positions and CFB employees retained. An increase in health insurance
costs also contributed to the increase. The number of full-time equivalent
employees was 332 at
at
• Occupancy expense for 2019 increased primarily due to increased branch
rental expense and increased charges for maintenance and repairs.
Occupancy expense for 2018 increased primarily due to increased branch
rental expense and increased depreciation of bank premises. The increase
in branch rental expense primarily reflects rent paid for the new
Worthington Office, previously the CFB Office.
• State financial institutions tax expense increased in 2019 due to a larger
capital base (Ohio financial institutions tax is based on capital, not
income), largely due to stock issued to CFB stockholders during 2018 as
merger consideration.
• Marketing expense increased in 2019 and 2018 primarily due to promotion
costs for new checking products introduced in 2018, increased marketing
activities in the
and digital media.
•
bank assessment credits received from the FDIC during 2019 because the
Deposit Insurance Fund was above the mandated level of 1.35%.
• Computer maintenance and supplies increased in 2019 and 2018 due toincreased technology and software related expenditures designed to offer
technological convenience to customers, to protect the integrity of LCNB's
data systems and software, and to protect the confidentiality of customer
information.
• Contracted services increased in 2019 and 2018 due to additional fees paid
for loan and deposit system upgrades and improvements and to general price
increases on other contracted services.
• Merger-related expenses for 2019, 2018, and 2017 are due to theacquisition of CFB and are primarily comprised of various professional
fees, costs to prepare and distribute the proxy statement/prospectus, and
costs to merge CFB's data system into LCNB's system.
• Other non-interest expense for 2018 included
sales of fixed assets, primarily due to the sale of two office buildings.
Other non-interest expense for 2017 included
costs for
fixed assets, primarily due to the sale of a closed office building.
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Income Taxes LCNB's effective tax rates for the years endedDecember 31, 2019 , 2018, and 2017 were 17.9%, 16.6%, and 24.8%, respectively. The difference between the statutory rate of 21% for 2019 and 2018 and the effective tax rate is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings fromLCNB Risk Management, Inc. , and tax credits and losses related to investments in affordable housing tax credit limited partnerships. The difference between the statutory rate of 34% in 2017 and the effective tax rate is primarily due to the same reasons noted above. As a result of the Tax Cuts and Jobs Act that was signed into law onDecember 22, 2017 , LCNB revalued its net deferred tax liability position to reflect the reduction in its federal corporate income tax rate from 34% to 21%. This revaluation resulted in a one-time income tax benefit of approximately$224,000 , or$0.02 of basic and diluted earnings per common share, for the year endedDecember 31, 2017 . -36-
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financial Condition
A comparison of balance sheet line items at
December December
31, 2019 31, 2018 Difference $ Difference %
ASSETS:
Total cash and cash equivalents 20,765 20,040 725 3.62 %
Interest-bearing time deposits - 996 (996 ) (100.00 )%
Investment securities:
Equity securities with a readily
determinable fair value, at fair value 2,312 2,078 234 11.26 %
Equity securities without a readily
determinable fair value, at cost 2,099 2,099 - - %
Debt securities, available-for-sale, at
fair value 178,000 238,421 (60,421 ) (25.34 )%
Debt securities, held-to-maturity, at
cost 27,525 29,721 (2,196 ) (7.39 )%
Federal Reserve Bank stock, at cost 4,652 4,653 (1 ) (0.02 )%
Federal Home Loan Bank stock, at cost 5,203 4,845 358 7.39 %
Loans, net 1,239,406 1,194,577 44,829 3.75 %
Premises and equipment, net 34,787 32,627 2,160 6.62 %
Operating lease right-of-use assets 5,444 - 5,444 - %
Goodwill 59,221 59,221 - - %
Core deposit and other intangibles 4,006 5,042 (1,036 ) (20.55 )%
Bank owned life insurance 41,667 28,723 12,944 45.06 %
Other assets 14,221 13,884 337 2.43 %
Total assets 1,639,308 1,636,927 2,381 0.15 %
LIABILITIES:
Deposits:
Non-interest-bearing 354,391 322,571 31,820 9.86 %
Interest-bearing 993,889 978,348 15,541 1.59 %
Total deposits 1,348,280 1,300,919 47,361 3.64 %
Short-term borrowings - 56,230 (56,230 ) (100.00 )%
Long-term debt 40,994 47,032 (6,038 ) (12.84 )%
Operating leases liability 5,446 - 5,446 - %
Accrued interest and other liabilities 16,540 13,761 2,779 20.19 %
Total liabilities 1,411,260 1,417,942 (6,682 ) (0.47 )%
TOTAL SHAREHOLDERS' EQUITY 228,048 218,985 9,063 4.14 %
Total liabilities and shareholders'
equity 1,639,308 1,636,927 2,381 0.15 %
Reasons for changes include: • Interest-bearing time deposits were obtained through the merger with CFB.
This line item represents certificates of deposit with individual balances
of less than $250,000 invested in various financial institutions.
Management decided not to renew matured certificates.
• Debt securities, available-for-sale, decreased due to sales of securities
with a total book value of
securities totaling
by the purchase of new securities totaling
increase in fair values totaling
invested in the loan portfolio and used to help pay down short-term
borrowings and long-term debt.
•
shares.
• Net loans increased due to organic growth in the loan portfolio.
• Premises and equipment, net increased primarily due to Main Office
remodeling costs, partially offset by depreciation expense.
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
• LCNB adopted ASU No. 2016-02, "Leases (Topic 842)" on
recorded operating lease right-of-use assets representing its right to use
the underlying assets for the terms of the leases and an operating leases
liability representing its liability to make lease payments. See Note 1
-Basis of Presentation - Accounting Changes and Note 8 - Leases for more
information.
• Core deposit and other intangibles decreased due to amortization of core
deposit intangibles.
• Bank owned life insurance increased due to the purchase of
in new policies at the beginning of the third quarter 2019.
• Total deposits increased partially due to a $28.8 million increase in
public fund deposits by local government entities and partially due to
organic growth. Public fund deposits can be relatively volatile due toseasonal tax collections and the financial needs of the local entities.
Historically, these deposits tend to be at their lowest balances at
year-ends. This increase was partially offset by a decline in ICS
reciprocal accounts deposited with LCNB. The reciprocal deposits were
allowed to decrease because management utilized other sources ofliquidity, including the decrease in debt securities, available-for-sale.
• The decrease in short-term borrowings was funded primarily by the increase
in total deposits and the decrease in debt securities, available-for-sale.
• Long-term debt decreased due to payoffs of matured debt. There were no new
borrowings during 2019.
• Total shareholders' equity increased primarily due to earnings retained
during 2019 and to a $5.5 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. Theseincreases were partially offset by common stock repurchased and dividends
paid to shareholders.
Liquidity
LCNB Corp. depends on dividends from the Bank for the majority of its liquid
assets, including the cash needed to pay dividends to its shareholders. Federal
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 OCC, the Bank's primary regulator,
is necessary for the Bank to pay dividends in excess of this amount. In
addition, dividend payments may not reduce capital levels below minimum
regulatory guidelines. Management believes the Bank will be able to pay
anticipated dividends to LCNB without needing to request approval. The Bank is
not aware of any reasons why it would not receive such approval, if required.
Effective liquidity management ensures that cash is available to meet the cash
flow needs of borrowers and depositors, as well as meeting LCNB's operating cash
needs. Primary funding sources include customer deposits with the Bank,
short-term and long-term borrowings from the Federal Home Loan Bank , short-term
line of credit arrangements totaling $55.5 million with two correspondent banks,
and interest and repayments received from LCNB's loan and investment portfolios.
Total remaining borrowing capacity with the Federal Home Loan Bank at December
31, 2019 was approximately $88.4 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. Additional borrowings of
approximately $55.5 million were available through the line of credit
arrangements at year-end.
Management closely monitors the level of liquid assets available to meet ongoing
funding needs. It is management's intent to maintain adequate liquidity so that
sufficient funds are readily available at a reasonable cost. LCNB experienced no
liquidity or operational problems as a result of current liquidity levels.
Commitments to extend credit at December 31, 2019 totaled $276.4 million ,
including standby letters of credit totaling $883,000 , and are more fully
described in Note 14 - Commitments and Contingent Liabilities to LCNB's
consolidated financial statements. Since many commitments to extend credit may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
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LCNB CORP. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table provides information concerning LCNB's contractual
obligations at
Payments due by period
Over 1 Over 3
1 year through 3 through 5 More than
Total or less years years 5 years
(In thousands)
Short-term borrowings $ - - - - -
Long-term debt obligations 40,994 18,998 16,996 5,000 -
Operating lease obligations 11,683 458 654 472 10,099
Estimated pension plan
contribution for 2019 205 205 - - -
Funding commitments for
affordable housing tax credit
limited partnerships 4,596 1,396 2,197 418 585
Estimated capital expenditure
obligations 1,820 1,820 - - -
Certificates of deposit:
$100,000 and over 157,591 104,588 36,917 15,819 267
Other time certificates 166,537 99,955 47,076 18,511 995
Total $ 383,426 227,420 103,840 40,220 11,946
The following table provides information concerning LCNB's commitments at
December 31, 2019 :
Amount of Commitment Expiration Per Period
Total Over 1 Over 3
Amounts 1 year through 3 through 5 More than
Committed or less years years 5 years
(In thousands)
Commitments to extend credit $ 55,865 55,865 - - -
Unused lines of credit 219,677 68,621 102,795 20,849 27,412
Standby letters of credit 883 883 - - -
Total $ 276,425 125,369 102,795 20,849 27,412
Capital Resources
LCNB and the Bank are required by banking regulators to meet certain minimum
levels of capital adequacy. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a material effect on LCNB's and the
Bank's financial statements. These minimum levels are expressed in the form of
certain ratios. Capital is separated into Tier 1 capital (essentially
shareholders' equity less goodwill and other intangibles) and Tier 2 capital
(essentially the allowance for loan losses limited to 1.25% of risk-weighted
assets). Common Equity Tier 1 Capital is the sum of common stock, related
surplus, and retained earnings, net of treasury stock, accumulated other
comprehensive income, and other adjustments. The first three ratios, which are
based on the degree of credit risk in the Bank's assets, provide for weighting
assets based on assigned risk factors and include off-balance sheet items such
as loan commitments and stand-by letters of credit. Information summarizing the
regulatory capital of the Bank at December 31, 2019 and 2018 and corresponding
regulatory minimum requirements is included in Note 15 - Regulatory Matters of
the consolidated financial statements.
The FDIC , the insurer of deposits in financial institutions, has adopted a
risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is required to pay
successively higher premiums depending on its capital levels and its supervisory
rating by its primary regulator. It is management's intention to maintain
sufficient capital to permit the Bank to maintain a "well capitalized"
designation, which is the FDIC's highest rating.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
OnApril 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 inApril 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.
LCNB established an Ownership Incentive Plan during 2002 that allowed for
stock-based awards to eligible employees. Under the plan, awards could be in the
form of stock options, share awards, and/or appreciation rights. The plan
provided for the issuance of up to 200,000 shares, as restated for a stock
dividend. The plan expired on
The 2015 Ownership Incentive Plan (the "2015 Plan") was approved by LCNB's shareholders at the annual meeting onApril 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. The 2015 Plan provides for the issuance of up to 450,000 shares. The 2015 Plan will terminate onApril 28, 2025 and is subject to earlier termination by the Compensation Committee.
Critical Accounting Policies
The accounting policies of LCNB conform toU.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management's estimates. As this information changes, management's estimates and assumptions used to prepare LCNB's financial statements and related disclosures may also change. The most significant accounting policies followed by LCNB are presented in Note One of the Notes to Consolidated Financial Statements included herein. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified (i) the determination of the allowance for loan losses and (ii) income taxes to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb inherent losses in the loan portfolio, based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions. -40-
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Based on its evaluations, management believes that the allowance for loan losses will be adequate to absorb estimated losses inherent in the current loan portfolio.
Acquired Credit Impaired Loans. LCNB accounts for acquisitions using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be measured at their fair values at the acquisition date. Acquired loans are reviewed to determine if there is evidence of deterioration in credit quality since inception and if it is probable that LCNB will be unable to collect all amounts due under the contractual loan agreements. The analysis includes expected prepayments and estimated cash flows including principal and interest payments at the date of acquisition. The amount in excess of the estimated future cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan (accretable yield). LCNB records these loans on the acquisition date at their net realizable value. Thus, an allowance for estimated future losses is not established on the acquisition date. Subsequent to the date of acquisition, expected future cash flows on loans acquired are updated and any losses or reductions in estimated cash flows which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan. Due to the number, size, and complexity of loans within the acquired loan portfolio, there is always a possibility of inherent undetected losses. Accounting for Intangibles. LCNB's intangible assets atDecember 31, 2019 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of fixed-rate mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National and CFB.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 forDebt 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 forU.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. -41-
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