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EX-23.2 - EXHIBIT 23.2 - LCNB CORPexhibit23212312015.htm
EX-31.1 - EXHIBIT 31.1 - LCNB CORPexhibit31112312015.htm
EX-10.7 - EXHIBIT 10.7 - LCNB CORPexhibit10712312015.htm
EX-21 - EXHIBIT 21 - LCNB CORPexhibit2112312015.htm
EX-31.2 - EXHIBIT 31.2 - LCNB CORPexhibit31212312015.htm
EX-23.1 - EXHIBIT 23.1 - LCNB CORPexhibit23112312015.htm
EX-32 - EXHIBIT 32 - LCNB CORPexhibit3212312015.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549

FORM 10-K

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________  to  ______________________

Commission File Number  000-26121

LCNB Corp.

(Exact name of registrant as specified in its charter)
Ohio
 
31-1626393
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

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

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

Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of Each Class
 
Name of each exchange on which registered
None
 
None

Securities registered pursuant to 12(g) of the Exchange Act:

COMMON STOCK, NO PAR VALUE
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes          x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes          x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes        o No




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).
x Yes         o No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
o Large accelerated filer
xAccelerated filer
o Non-accelerated filer (Do not check if a smaller reporting company)
o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes          x No

The aggregate market value of the registrant’s outstanding voting common stock held by nonaffiliates on June 30, 2015, determined using a per share closing price on that date of $16.20 as quoted on the NASDAQ Capital Market, was $154,224,000.

As of March 8, 2016, 9,905,147 common shares were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement included in the Notice of Annual Meeting of Shareholders to be held April 26, 2016, which Proxy Statement will be mailed to shareholders within 120 days from the end of the fiscal year ended December 31, 2015 are incorporated by reference into Part III.
 
 
 
 
 




LCNB CORP.
For the Year Ended December 31, 2015

TABLE OF CONTENTS
PART I
Item 1.  Business
Item 1A.  Risk Factors
Item 2.  Properties
 
 
PART II
Item 9B.  Other Information
 
 
PART III
 
 
PART IV
 
 


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LCNB CORP. AND SUBSIDIARIES



PART I


Item 1.  Business

FORWARD-LOOKING STATEMENTS

Certain statements made in this document regarding LCNB’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.

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, including the successful integration of recently completed and pending acquisitions;
2.
LCNB may incur increased charge-offs in the future;
3.
LCNB may face competitive loss of customers;
4.
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;
5.
changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
6.
changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;
7.
LCNB may experience difficulties growing loan and deposit balances;
8.
the current economic environment poses significant challenges for us and could adversely affect our  financial condition and results of operations;
9.
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; and
10.
the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the regulations promulgated and to be promulgated thereunder, which may subject LCNB and its subsidiaries to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses. 

Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist shareholders and potential investors in understanding current and anticipated financial operations of LCNB and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. LCNB undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made. 

DESCRIPTION OF LCNB CORP.'S BUSINESS

General Description

LCNB Corp., an Ohio corporation formed in December 1998, is a financial holding company headquartered in Lebanon, Ohio.  Substantially all of the assets, liabilities and operations of LCNB Corp. are attributable to its wholly-owned subsidiary, LCNB National Bank (the "Bank").  LCNB Corp. and its subsidiary are herein collectively referred to as “LCNB.” The predecessor of LCNB Corp., the Bank, was formed as a national banking association in 1877.  On May 19, 1999, the Bank became a wholly-owned subsidiary of LCNB Corp.  


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LCNB CORP. AND SUBSIDIARIES



On January 11, 2013, LCNB consummated a merger with First Capital Bancshares, Inc. (“First Capital”) in a stock and cash transaction valued at approximately $20.2 million.  Immediately following the merger of First Capital into LCNB, Citizens National Bank (“Citizens National”), a wholly-owned subsidiary of First Capital, was merged into LCNB National Bank.  At that time, Citizens National’s six full–service offices became offices of LCNB.  Three of these offices are located in Chillicothe, Ohio and one office is located in each of Frankfort, Ohio, Clarksburg, Ohio, and Washington Court House, Ohio.

On January 24, 2014, LCNB purchased all of the outstanding stock of Eaton National Bank & Trust Co. ("Eaton National") from its holding company, Colonial Banc Corp., in a cash transaction totaling $24.75 million. Upon consummation of the transaction, Eaton National was merged into the Bank and its five offices became offices of the Bank. Two of these offices are located in Eaton, Ohio and one office is located in each of New Paris, Ohio, Lewisburg, Ohio, and West Alexandria, Ohio.

On April 30, 2015, LCNB consummated a merger with BNB Bancorp, Inc. (“BNB”) in a stock and cash transaction valued at approximately $13.5 million. Immediately following the merger of BNB into LCNB, Brookville National Bank ("Brookville National"), a wholly-owned subsidiary of BNB, was merged into LCNB National Bank. At that time, Brookville National's two offices, both located in Brookville, Ohio, became offices of LCNB.

At February 29, 2016, the Bank had 36 offices, including a main office in Warren County, Ohio and branch offices in Warren, Butler, Clinton, Clermont, Hamilton, Montgomery, Preble, Ross, and Fayette Counties, Ohio, and 40 automated teller machines ("ATMs").

The Bank is a full service community bank offering a wide range of commercial and personal banking services.  Deposit services include checking accounts, NOW accounts, savings accounts, Christmas and vacation club accounts, money market deposit accounts, Lifetime Checking accounts (a senior citizen program), individual retirement accounts, and certificates of deposit.  Additional supportive services include online banking, bill pay, mobile banking and telephone banking. Commercial customers also have both cash management and remote deposit capture products as potential options. Deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation (the “FDIC”).

Loan products offered include commercial and industrial loans, commercial and residential real estate loans, agricultural loans, construction loans, various types of consumer loans, and Small Business Administration loans.  The Bank's residential mortgage lending activities consist primarily of loans for purchasing or refinancing personal residences, home equity lines of credit, and loans for commercial or consumer purposes secured by residential mortgages.  Most fixed-rate residential real estate loans are sold to the Federal Home Loan Mortgage Corporation with servicing retained.  Consumer lending activities include automobile, boat, home improvement and personal loans. The Bank also offers indirect financing through various automotive, boat, and lawn and garden dealers.

The Trust and Investment Management Division of the Bank performs complete trust administrative functions and offers agency and trust services, retirement savings products, and mutual fund investment products to individuals, partnerships, corporations, institutions and municipalities.

Security brokerage services are offered by the Bank through arrangements with LPL Financial LLC, a registered broker/dealer.  Licensed brokers offer a full range of investment services and products, including financial needs analysis, mutual funds, securities trading, annuities, and life insurance.

Other services offered include safe deposit boxes, night depositories, cashier's checks, bank-by-mail, ATMs, cash and transaction services, debit cards, wire transfers, electronic funds transfer, utility bill collections, notary public service, personal computer-based cash management services, 24 hour telephone banking, PC Internet banking, mobile banking, and other services tailored for both individuals and businesses.

The Bank is not dependent upon any one significant customer or specific industry.  Business is not seasonal to any material degree.

The address of the main office of the Bank is 2 North Broadway, Lebanon, Ohio 45036; telephone (513) 932-1414.




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LCNB CORP. AND SUBSIDIARIES



Market Area

LCNB’s primary market area consists of Warren, Butler, Clinton, Preble, Ross, and Fayette Counties and portions of Hamilton, Clermont, and Montgomery Counties in Southwestern and South Central Ohio.  Certain demographic information is as follows:
 
Warren
Butler
Clinton
Preble
Ross
Fayette
Hamilton
Montgomery
Population:
 
 
 
 
 
 
 
 
  2000 census
158,383

332,807

40,543

42,337

73,345

28,433

845,303

559,062

  2010 census
212,693

368,130

42,040

42,270

78,064

29,030

802,374

535,153

Percentage increase/decrease in population
34.3
%
10.6
%
3.0
%
(0.2
)%
6.4
%
2.1
%
(5.1
)%
(4.3
)%
Estimated percentage of persons below poverty level
5.9
%
12.8
%
14.0
%
10.7
 %
17.5
%
18.5
%
15.4
 %
15.7
 %
Estimated median household income
$
71,274

$
54,788

$
46,261

$
48,899

$
42,626

$
39,599

$
48,234

$
43,965

Median age
37.0

35.7

37.7

41.0

39.5

39.3

36.9

38.7

Unemployment rate:
 

 

 

 
 
 
 

 

December 2015
3.9
%
4.2
%
5.7
%
4.6
 %
5.4
%
4.7
%
4.1
 %
4.7
 %
December 2014
3.9
%
4.3
%
6.3
%
4.5
 %
5.4
%
4.5
%
4.3
 %
4.8
 %
December 2013
5.5
%
6.2
%
8.8
%
6.4
 %
7.6
%
5.9
%
6.0
 %
7.0
 %

Once primarily a rural county (its population according to the 1950 census was only 38,505), Warren County experienced significant growth during the latter half of the twentieth century and into the twenty-first century.  Many people who now live in Warren County are employed by companies located in the Cincinnati and Dayton metropolitan areas.  A sizable tourist industry that includes King’s Island, the Beach Waterpark, and the Ohio Renaissance Festival provides a number of temporary summer jobs.  Not including local government entities and school districts, which are significant sources of employment, the top five major employers in Warren County are Macy’s Credit and Customer Service, Procter & Gamble’s Mason Business Center, Atrium Health Center Mason, WellPoint (health insurance), and Luxottica.

Butler County was historically a rural area with the exception of three urban centers.  Hamilton and Middletown were both manufacturing centers.  As is true with many manufacturing communities in the Midwest, many of the manufacturing companies in Hamilton and Middletown have either closed or greatly diminished their workforces and these jobs have been largely replaced with lower-paying service oriented jobs.   Oxford is the home of Miami University and Oxford’s businesses primarily serve the college students.

Most of the growth in Butler County has occurred in West Chester, Liberty, and Fairfield Townships.  Many of the people living in these townships are employed by companies located in the Cincinnati metropolitan area.  Not including local government entities and school districts, the top five major employers in Butler County are Miami University, AK Steel, Cincinnati Financial Corp. (insurance), GE Aviation, and Liberty Mutual Group (insurance). Fort Hamilton Hospital, Mercy Hospital Fairfield, McCullough-Hyde Memorial Hospital, West Chester Hospital, Cincinnati Children's Hospital Liberty Campus, Cincinnati Children's Hospital Fairfield, and Bethesda Butler Hospital are located in Butler County and collectively are a significant source of health-related employment.

Clinton County remains mostly rural.  Wilmington, with a 2010 census population of 12,520, is the largest city.  The next largest is Blanchester, with a 2010 census population of 4,243.  The unemployment rates for December 2013 through December 2015 are unusually high because of the loss of a dominant employer.  DHL, an overnight shipping company, owned the Wilmington Air Park, a decommissioned air force base, and maintained hub operations at this location.  In 2008, Wilmington Air Park discontinued operations, resulting in the direct loss of approximately 8,000 jobs, not including job losses sustained by other businesses dependent on the air park operations.  Certain services subcontracted to ABX Air and ASTAR Air Cargo continue, but with greatly diminished work forces.

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LCNB CORP. AND SUBSIDIARIES



Preble County is mostly rural. Eaton, with a 2010 census population of 8,407, is the only city in the county. Major employers are Neaton Auto Products Manufacturing Inc., Henny Penny Corporation, Parker-Hannifin Corporation, SILFEX, a division of Lam Research Corp., and Wal-Mart.

Ross and Fayette Counties are both primarily rural. Chillicothe, with a 2010 census population of 21,901, is the largest city in Ross County and Washington Court House, with a 2010 census population of 14,192, is the largest city in Fayette County. Not including local government entities and school districts, major employers in Ross County include Adena Regional Medical Center, Kenworth Truck Company (assembler of heavy trucks), Veterans Affairs Medical Center, P.H. Glatfelter Company (formerly Mead Corp.), the Ross Correctional Institution, and the Chillicothe Correctional Institution.

Hamilton County’s economics are dominated by Cincinnati.  Fortune 500 companies with their headquarters in Hamilton County include American Financial Group, Macy's, Inc., Fifth Third Bank, The Kroger Company, The Procter & Gamble Company, and Western & Southern Financial Group.  The five largest employers are The Kroger Company, The University of Cincinnati, The Procter & Gamble Company, Cincinnati Children’s Hospital Medical Center, and TriHealth Inc.

LCNB’s four offices in Montgomery County are located in the communities of Oakwood, Centerville and Brookville.  Similar to Cincinnati and Hamilton County, Dayton is the largest city in Montgomery County and dominates the economic demographics of the county.  The largest employer of Montgomery County residents is Wright Patterson Air Force Base, which is actually located in Greene County.   Large employers located in Montgomery County include Premier Health Partners, Kettering Health Network, The Kroger Company, LexisNexis, and Sinclair Community College.

LCNB’s market area includes a portion of Clermont County primarily because of a branch office located in Goshen, Ohio.  Goshen is a suburb of Cincinnati and many of its residents work in Hamilton County.  Goshen’s economic demographics are similar to Hamilton County’s demographics.

Competition

The Bank faces strong competition both in making loans and attracting deposits.  The deregulation of the banking industry and the wide spread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking has created a highly competitive environment for financial services providers. The Bank competes with other national and state banks, savings and loan associations, credit unions, finance companies, mortgage brokerage firms, realty companies with captive mortgage brokerage firms, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries operating in its market and elsewhere, many of whom have substantially larger financial and managerial resources.

The Bank seeks to minimize the competitive effect of other financial institutions through a community banking approach that emphasizes direct customer access to the Bank's President and other officers in an environment conducive to friendly, informed, and courteous personal services.  Management believes that the Bank is well positioned to compete successfully in its primary market area.  Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of the banking facilities, and, in the case of loans to commercial borrowers, relative lending limits.

Management believes the commitment of the Bank to personal service, innovation, and involvement in the communities and primary market areas it serves, as well as its commitment to quality community banking service, are factors that contribute to its competitive advantage.

Supervision and Regulation

LCNB Corp., as a financial holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the "Act"), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board").  

The Bank is subject to the provisions of the National Bank Act.  The Bank is subject to primary supervision, regulation and examination by the Office of the Comptroller of the Currency (the "OCC"). The Bank is also subject to the rules and regulations of the Board of Governors of the Federal Reserve System and the FDIC.  

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LCNB CORP. AND SUBSIDIARIES



LCNB Corp. and the Bank are subject to an extensive array of banking laws and regulations that are intended primarily for the protection of the customers and depositors of LCNB's subsidiary.  These laws and regulations govern such areas as permissible activities, loans and investments, and rates of interest that can be charged on loans and reserves.  LCNB and the Bank also are subject to general U.S. federal laws and regulations and to the laws and regulations of the State of Ohio.  Set forth below are brief descriptions of selected laws and regulations applicable to LCNB and the Bank.

The Financial Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides that a holding company and its controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of any FDIC assisted transaction involving an affiliated insured bank or savings association.

The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and several other federal banking statutes.  Among its many reforms, FDICIA, as amended:

1.
Required regulatory agencies to take "prompt corrective action" with financial  institutions that do not meet minimum capital requirements;
 
2.
Established five capital tiers:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized;

3.
Imposed significant restrictions on the operations of a financial institution that is not rated well-capitalized or adequately capitalized;

4.
Prohibited a depository institution from making any capital distributions, including payments of dividends or paying any management fee to its holding company, if the institution would be undercapitalized as a result;
 
5.
Implemented a risk-based premium system;

6.
Required an audit committee to be comprised of outside directors;
 
7.
Required a financial institution with more than $1 billion in total assets to issue annual, audited financial statements prepared in conformity with U.S. generally accepted accounting principles; and

8.
Required a financial institution with more than $1 billion in total assets to document, evaluate, and report on the effectiveness of the entity's internal control system and required an independent public accountant to attest to management's assertions concerning the bank's internal control system.

The members of an audit committee for banks with more than $1 billion in total assets must be independent of management.  Only a majority, rather than all, of the members of an audit committee for banks with total assets between $500 million and $1 billion must be independent.  FDICIA does not relieve financial institutions that are public companies, such as LCNB, from internal control reporting and attestation requirements or audit committee independence requirements prescribed by the Sarbanes-Oxley Act of 2002 (see below).
The Gramm-Leach-Bliley Act, which amended the Bank Holding Company Act of 1956 and other banking related laws, was signed into law on November 12, 1999.  The Gramm-Leach-Bliley Act repealed certain sections of the Glass-Steagall Act and substantially eliminated the barriers separating the banking, insurance, and securities industries.  Effective March 11, 2000, qualifying bank holding companies could elect to become financial holding companies.  Financial holding companies have expanded investment powers, including affiliating with securities and insurance firms and engaging in other activities that are "financial in nature or incidental to such financial activity," as defined in the act, or "complementary to a financial activity."

The Sarbanes-Oxley Act of 2002 ("SOX") became effective on July 30, 2002.  The purpose of SOX is to strengthen accounting oversight and corporate accountability by enhancing disclosure requirements, increasing accounting and auditor regulation, creating new federal crimes, and increasing penalties for existing federal crimes.  SOX directly impacts publicly traded companies, certified public accounting firms auditing public companies, attorneys who work for public companies or have public companies as clients, brokerage firms, investment bankers, and financial analysts who work for brokerage firms or investment bankers.  Key provisions affecting LCNB include:

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LCNB CORP. AND SUBSIDIARIES



 
1.
Certification of financial reports by the chief executive officer ("CEO") and the chief financial officer ("CFO"), who are responsible for designing and monitoring internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to the certifying officers by others within the company;

2.
Inclusion of an internal control report in annual reports that include management's assessment of the effectiveness of a company's internal control over financial reporting and a report by the company's independent registered public accounting firm attesting to the effectiveness of internal control over financial reporting;
 
3.
Accelerated reporting of stock trades on Form 4 by directors and executive officers;
 
4.
Disgorgement requirements of incentive pay or stock-based compensation profits received within twelve months of the release of financial statements if the company is later required to restate those financial statements due to material noncompliance with any financial reporting requirement that resulted from misconduct;

5.
Disclosure in a company's periodic reports stating if it has adopted a code of ethics for its CFO and principal accounting officer or controller and, if such code of ethics has been implemented,  immediate disclosure of any change in or waiver of the code of ethics;
6.
Disclosure in a company's periodic reports stating if at least one member of the audit committee is a "financial expert," as that term is defined by the Securities and Exchange Commission (the "SEC"); and

7.
Implementation of new duties and responsibilities for a company's audit committee, including independence requirements, the direct responsibility to appoint the outside auditing firm and to provide oversight of the auditing firm's work, and a requirement to establish procedures for the receipt, retention, and treatment of complaints from a company's employees regarding questionable accounting, internal control, or auditing matters.

In addition, the SEC adopted final rules on September 5, 2002, which rules were amended in December, 2005, requiring accelerated filing of quarterly and annual reports.  Under the amended rules, “large accelerated filers” includes companies with a market capitalization of $700 million or more and “accelerated filers” includes companies with a market capitalization between $75 million and $700 million. Large accelerated filers are required to file their annual reports within 60 days of year-end and quarterly reports within 40 days. Accelerated filers are required to file their annual and quarterly reports within 75 days and 40 days, respectively.  These new accelerated filing deadlines were effective for fiscal years ending on or after December 15, 2005.  Under the amended rules, LCNB is considered an accelerated filer.

The Federal Deposit Insurance Reform Act of 2005 and the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (collectively, the “Deposit Insurance Reform Acts”) were both signed into law during February, 2006.  The provisions of the Deposit Insurance Reform Acts included:

1.
Merging the Bank Insurance Fund and the Savings Association Insurance Fund into a new fund called the Deposit Insurance Fund, effective March 31, 2006;

2.
Increasing insurance coverage for retirement accounts from $100,000 to $250,000, effective April 1, 2006; and

3.
Eliminating a 1.25% hard target Designated Reserve Ratio, as defined, and giving the FDIC discretion to set the Designated Reserve Ratio within a range of 1.15% to 1.50% for any given year.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became effective on July 21, 2010.  The Dodd-Frank Act includes provisions that specifically affect financial institutions and other entities providing financial services and other corporate governance and compensation provisions that will affect most public companies.

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LCNB CORP. AND SUBSIDIARIES



The Dodd-Frank Act established a new independent regulatory body within the Federal Reserve System known as the Bureau of Consumer Financial Protection (the “Bureau”).  The Bureau has assumed responsibility for most consumer protection laws and has broad authority, with certain exceptions, to regulate financial products offered by banks and non-banks.  The Bureau has authority to supervise, examine, and take enforcement actions with respect to depository institutions with more than $10 billion in assets, non-bank mortgage industry participants, and other Bureau-designated non-bank providers of consumer financial services.  The primary regulator for depository institutions with $10 billion or less in assets will continue to have primary examination and enforcement authority for these institutions.  The regulations enforced, however, will be the regulations written by the Bureau.

The Dodd-Frank Act directs federal bank regulators to develop new capital requirements for holding companies and depository institutions that address activities that pose risk to the financial system, such as significant activities in higher risk areas, or concentrations in assets whose reported values are based on models.

The Dodd-Frank Act permanently raised the FDIC maximum deposit insurance amount to $250,000.  In addition, the Dodd-Frank Act places a floor on the FDIC’s reserve ratio at 1.35% of estimated insured deposits or the comparable percentage of the assessment base.

General corporate governance provisions included in the Dodd-Frank Act include expanding executive compensation disclosures to be included in the annual proxy statement, requiring non-binding shareholder advisory votes on executive compensation at annual meetings, enhancing independence requirements for compensation committee members and any advisers used by the compensation committee, and requiring the adoption of certain compensation policies including the recovery of executive compensation in the event of a financial statement restatement.
Noncompliance with laws and regulations by bank holding companies and banks can lead to monetary penalties and/or an increased level of supervision or a combination of these two items.  Management is not aware of any current significant instances of noncompliance with laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis.  Recent regulatory inspections and examinations of LCNB and the Bank have not disclosed any significant instances of noncompliance.
The earnings and growth of LCNB are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board.  Its policies influence the amount of bank loans and deposits and the interest rates charged and paid thereon and thus have an effect on earnings.  The nature of future monetary policies and the effect of such policies on the future business and earnings of LCNB and the Bank cannot be predicted.

A substantial portion of LCNB's cash revenues is derived from dividends paid by the Bank.  These dividends are subject to various legal and regulatory restrictions.  Generally, dividends are limited to the aggregate of current year retained net income, as defined, plus the retained net income of the two prior years.  In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.

Employees

As of December 31, 2015, LCNB employed 280 full-time equivalent employees. LCNB is not a party to any collective bargaining agreement.  Management considers its relationship with its employees to be very good.  Employee benefit programs are considered by management to be competitive with benefit programs provided by other financial institutions and major employers within LCNB’s market area.

Divestitures

In March 2011, LCNB Corp. sold Dakin Insurance Agency Inc. (“Dakin”) to an independent insurance agency and therefore its financial results are reported in the income statements as income from discontinued operations, net of tax.







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LCNB CORP. AND SUBSIDIARIES



Availability of Financial Information

LCNB files unaudited quarterly financial reports on Form 10-Q, annual financial reports on Form 10-K, current reports on Form 8-K, and amendments to these reports are filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the SEC.  Copies of these reports are available free of charge in the shareholder information section of the Bank's website, www.lcnb.com, as soon as reasonably practicable after they are electronically filed or furnished to the SEC, or by writing to:

Robert C. Haines II
Executive Vice President, CFO
LCNB Corp.
2 N. Broadway
P.O. Box 59
Lebanon, Ohio  45036

Financial reports and other materials filed by LCNB with the SEC may also be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  Information on the operation of the Public Reference Room may be obtained from the SEC by calling 1-800-SEC-0330.  The SEC also maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding registrants that file reports electronically, as LCNB does.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

LCNB and its subsidiary do not have any offices located in foreign countries and have no foreign assets, liabilities or related income and expense for the years presented.

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

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

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

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


-11-


LCNB CORP. AND SUBSIDIARIES



Investment Portfolio

The following table presents the carrying values of securities for the years indicated:
 
At December 31,
 
2015
 
2014
 
2013
 
(Dollars in thousands)
Securities available-for-sale:
 
 
 
 
 
U.S. Treasury notes
$
72,846

 
62,560

 
12,894

U.S. Agency notes
139,889

 
83,637

 
106,675

U.S. Agency mortgage-backed securities
29,378

 
38,032

 
40,309

Certificates of deposit
249

 
3,086

 
1,501

Municipal securities
132,420

 
93,790

 
92,642

Mutual funds
2,466

 
2,461

 
2,380

Trust preferred securities
50

 
50

 
147

Equity securities
680

 
1,749

 
1,693

Total securities available-for-sale
377,978

 
285,365

 
258,241

 
 
 
 
 
 
Securities held-to-maturity:
 

 
 

 
 

Municipal securities
22,633

 
22,725

 
16,323

 
 
 
 
 
 
Federal Reserve Bank stock
2,732

 
2,346

 
1,603

Federal Home Loan Bank stock
3,638

 
3,638

 
2,854

Total securities
$
406,981

 
314,074

 
279,021



-12-


LCNB CORP. AND SUBSIDIARIES



Contractual maturities of securities at December 31, 2015, were as follows.  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
 
Available-for-Sale
 
Held-to-Maturity
 
Amortized
Cost
 
Fair
Value
 
Yield
 
Amortized
Cost
 
Fair
Value
 
Yield
 
(Dollars in thousands)
U.S. Treasury notes:
 
 
 
 
 
 
 
 
 
 
 
  Within one year
$
9,091

 
9,081

 
0.67
%
 
$

 

 
%
  One to five years
36,725

 
36,923

 
1.60
%
 

 

 
%
Five to ten years
26,856

 
26,842

 
1.94
%
 

 

 
%
After ten years

 

 
%
 

 

 
%
Total U.S. Treasury notes
72,672

 
72,846

 
1.61
%
 

 

 
%
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Agency notes:
 

 
 

 
 

 
 

 
 

 
 

Within one year

 

 
%
 

 

 
%
One to five years
83,404

 
83,085

 
1.48
%
 

 

 
%
Five to ten years
57,472

 
56,804

 
2.06
%
 

 

 
%
After ten years

 

 
%
 

 

 
%
Total U.S. Agency notes
140,876

 
139,889

 
1.72
%
 

 

 
%
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 

 
 

 
 

 
 

 
 

 
 

Within one year
248

 
249

 
1.16
%
 

 

 
%
One to five years

 

 
%
 

 

 
%
Five to ten years

 

 
%
 

 

 
%
After ten years

 

 
%
 

 

 
%
Total certificates of deposit
248

 
249

 
1.16
%
 

 

 
%
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities (1):
 

 
 

 
 

 
 

 
 

 
 

Within one year
13,672

 
13,829

 
3.28
%
 
3,819

 
3,831

 
2.43
%
One to five years
62,645

 
63,589

 
3.03
%
 
3,904

 
3,882

 
3.04
%
Five to ten years
54,321

 
55,002

 
3.26
%
 
3,168

 
3,107

 
3.40
%
After ten years

 

 
%
 
11,742

 
11,810

 
6.31
%
Total Municipal securities
130,638

 
132,420

 
3.15
%
 
22,633

 
22,630

 
4.68
%
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Agency mortgage-backed securities
29,608

 
29,378

 
2.39
%
 

 

 
%
Mutual funds
2,517

 
2,466

 
1.92
%
 

 

 
%
Trust preferred securities
49

 
50

 
7.78
%
 

 

 
%
Equity securities
659

 
680

 
4.57
%
 

 

 
%
 
 
 
 
 
 
 
 
 
 
 
 
Totals
$
377,267

 
377,978

 
2.25
%
 
22,633

 
22,630

 
4.68
%

(1)
Yields on tax-exempt obligations are computed on a taxable-equivalent basis based upon a 34% statutory Federal income tax rate.
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any issuer that exceeded 10% of LCNB's consolidated shareholders' equity at December 31, 2015.



-13-


LCNB CORP. AND SUBSIDIARIES



Loan Portfolio

Administration of the lending function is the responsibility of the Chief Lending Officer and certain senior lenders. Lenders perform their duties subject to oversight and policy direction from the Board of Directors and the Loan Committee. The Loan Committee consists of LCNB’s Chief Executive Officer, President, Chief Financial Officer, Cashier, Chief Lending Officer, Chief Credit Officer, Loan Operations Officer, Loan Review Officer, Credit Analysis Officer, and the officers in charge of commercial, consumer, and real estate loans.

Employees authorized to accept loan applications have various, designated lending limits for the approval of loans.  A loan application for an amount outside a particular employee’s lending limit needs to be approved by an employee with a lending limit sufficient for that loan.  Residential and commercial real estate loans of any amount require the approval of two of the following designated officers:  Chief Executive Officer, President, Chief Lending Officer, Chief Credit Officer, and the officers in charge of commercial, real estate, and consumer lending.  Any loan in excess of $3.0 million or with policy exceptions needs the approval of the Board of Directors.

Interest rates charged by LCNB vary with degree of risk, type of loan, amount, complexity, repricing frequency and other relevant factors associated with the loan.

The following table summarizes the distribution of the loan portfolio for the years indicated:
 
At December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
(Dollars in thousands)
Commercial and industrial
$
45,275

 
5.9
%
 
$
35,424

 
5.1
%
 
$
29,337

 
5.1
%
 
$
26,236

 
5.8
%
 
$
30,990

 
6.7
%
Commercial, secured by real estate
419,633

 
54.5
%
 
379,141

 
54.3
%
 
314,252

 
54.7
%
 
230,256

 
50.7
%
 
219,188

 
47.6
%
Residential real estate
273,139

 
35.4
%
 
254,087

 
36.4
%
 
215,587

 
37.6
%
 
183,132

 
40.4
%
 
186,904

 
40.5
%
Consumer
18,510

 
2.4
%
 
18,006

 
2.5
%
 
12,643

 
2.2
%
 
10,554

 
2.3
%
 
14,562

 
3.2
%
Agricultural
13,479

 
1.7
%
 
11,472

 
1.6
%
 
2,472

 
0.4
%
 
1,668

 
0.4
%
 
2,835

 
0.6
%
Other loans, including deposit overdrafts
665

 
0.1
%
 
680

 
0.1
%
 
91

 
%
 
1,875

 
0.4
%
 
6,554

 
1.4
%
 
770,701

 
100.0
%
 
698,810

 
100.0
%
 
574,382

 
100.0
%
 
453,721

 
100.0
%
 
461,033

 
100.0
%
Deferred origination costs (fees), net
237

 
 

 
146

 
 

 
(28
)
 
 

 
62

 
 

 
229

 
 

Total loans
770,938

 
 

 
698,956

 
 

 
574,354

 
 

 
453,783

 
 

 
461,262

 
 

Less allowance for loan losses
3,129

 
 

 
3,121

 
 

 
3,588

 
 

 
3,437

 
 

 
2,931

 
 

Loans, net
$
767,809

 
 

 
$
695,835

 
 

 
$
570,766

 
 

 
$
450,346

 
 

 
$
458,331

 
 


As of December 31, 2015, there were no concentrations of loans exceeding 10% of total loans that are not already disclosed as a category of loans in the above table.


-14-


LCNB CORP. AND SUBSIDIARIES



The following table summarizes the commercial and agricultural loan maturities and sensitivities to interest rate change at December 31, 2015:
 
(In thousands)
 
 
Maturing in one year or less
$
33,115

Maturing after one year, but within five years
63,883

Maturing beyond five years
381,389

Total commercial and agricultural loans
$
478,387

 
 

Loans maturing beyond one year:
 

Fixed rate
$
155,886

Variable rate
289,386

Total
$
445,272


Risk Elements

The following table summarizes non-accrual, past-due, and accruing restructured loans for the dates indicated:
 
At December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(Dollars in thousands)
Non-accrual loans
$
1,723

 
5,599

 
2,961

 
2,283

 
3,668

Past-due 90 days or more and still accruing
559

 
203

 
250

 
128

 
39

Accruing restructured loans
13,723

 
14,269

 
15,151

 
13,343

 
14,739

Total
$
16,005

 
20,071

 
18,362

 
15,754

 
18,446

Percent to total loans
2.08
%
 
2.87
%
 
3.20
%
 
3.47
%
 
4.00
%
LCNB is not committed to lend additional funds to debtors whose loans have been modified to provide a reduction or deferral of principal or interest because of deterioration in the financial position of the borrower.

At December 31, 2015, there were no material additional loans not classified as acquired credit impaired or already disclosed as non-accrual, accruing restructured, or accruing past due 90 days or more where known information about possible credit problems of the borrowers causes management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms.

Summary of Loan Loss Experience

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







-15-


LCNB CORP. AND SUBSIDIARIES



Allocation of the Allowance for Loan Losses

The following table presents the allocation of the allowance for loan loss:
 
At December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
Amount
 
Percent
of Loans
in Each
Category
to Total
Loans
 
Amount
 
Percent
of Loans
in Each
Category
to Total
Loans
 
Amount
 
Percent
of Loans
in Each
Category
to Total
Loans
 
Amount
 
Percent
of Loans
in Each
Category
to Total
Loans
 
Amount
 
Percent
of Loans
in Each
Category
to Total
Loans
 
(Dollars in thousands)
Commercial and industrial
$
244

 
5.9
%
 
$
129

 
5.1
%
 
$
175

 
5.1
%
 
$
320

 
5.8
%
 
$
162

 
6.7
%
Commercial, secured by real estate
1,908

 
54.5
%
 
1,990

 
54.3
%
 
2,520

 
54.7
%
 
2,296

 
50.7
%
 
1,941

 
47.6
%
Residential real estate
854

 
35.4
%
 
926

 
36.4
%
 
826

 
37.6
%
 
712

 
40.4
%
 
656

 
40.5
%
Consumer
54

 
2.4
%
 
63

 
2.5
%
 
66

 
2.2
%
 
108

 
2.3
%
 
166

 
3.2
%
Agricultural
66

 
1.7
%
 
11

 
1.6
%
 

 
0.4
%
 

 
0.4
%
 

 
0.6
%
Other loans, including deposit overdrafts
3

 
0.1
%
 
2

 
0.1
%
 
1

 
%
 
1

 
0.4
%
 
6

 
1.4
%
Unallocated

 

 

 

 

 

 

 

 

 

Total
$
3,129

 
100.0
%
 
$
3,121

 
100.0
%
 
$
3,588

 
100.0
%
 
$
3,437

 
100.0
%
 
$
2,931

 
100.0
%

Deposits

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

The following table presents the contractual maturity of time deposits of $100,000 or more at December 31, 2015:
 
(In thousands)
 
 
Maturity within 3 months
$
7,297

After 3 but within 6 months
5,137

After 6 but within 12 months
11,265

After 12 months
50,356

 
$
74,055

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

-16-


LCNB CORP. AND SUBSIDIARIES



Item 1A.  Risk Factors

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

New capital requirements could adversely affect LCNB’s capital ratios
On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. bank holding companies as well as state banks that are members of the Federal Reserve System and savings and loan holding companies (commonly known as Basel III). On July 9, 2013, the OCC adopted the same rules for national banks and federal savings associations, and the FDIC approved the same provisions, as an interim final rule, for state nonmember banks and state savings associations.

Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by banks and savings associations. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%.

The phase-in period for the final rules began for LCNB on January 1, 2015, with full compliance with all of the final rules' requirements phased in over a multi-year schedule. While management expects that LCNB's capital ratios under Basel III will continue to exceed the well capitalized minimum capital requirements, there can be no assurance that such will be the case. If LCNB is unable to meet or exceed the applicable minimum capital requirements, it may become subject to supervisory actions ranging in severity from losing its financial holding company status, to being precluded from making acquisitions or engaging in new activities or becoming subject to informal or formal regulatory enforcement actions.

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

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

Gains from sales of mortgage loans may experience significant volatility.
Gains from sales of mortgage loans are highly influenced by the level and direction of mortgage interest rates, real estate activity, and refinancing activity.  Current historically low market interest rates created a refinancing demand for residential fixed-rate mortgage loans.  The increased volume of refinancing activity increased gains from sales of mortgage loans as LCNB sold most of these loans to the Federal Home Loan Mortgage Corporation.  An increase in market interest rates may decrease the demand for refinanced loans and decrease the gains from sales of mortgage loans recognized in LCNB’s consolidated statements of income.  Gains from sales of mortgage loans may also be impacted by changes in LCNB’s strategy to manage its residential mortgage portfolio. For example, LCNB may occasionally change the proportion of loan originations that are sold in the secondary market and instead add a greater proportion to its loan portfolio.


-17-


LCNB CORP. AND SUBSIDIARIES



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

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

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

Economic conditions in Southwestern and South Central Ohio could adversely affect LCNB’s financial condition and results of operations.
LCNB conducts its operations from offices that are located in nine Southwestern and South Central Ohio counties, from which substantially all of its customer base is drawn. Because of this geographic concentration of operations and customer base, LCNB's financial performance is heavily influenced by economic conditions in these areas. LCNB's financial performance could be negatively affected to the extent that business and economic conditions in these areas do not continue to recover from the recent recession. Any material deterioration in economic conditions in these markets could have material direct or indirect adverse impacts on LCNB's customers and on LCNB. Such deterioration could increase the number of customers experiencing financial distress, negatively impacting their ability to obtain new loans or to repay existing loans. As a result, LCNB may experience increases in the levels of impaired loans, increased charge-offs, and increased provisions for loan losses. Deteriorating economic conditions may also effect the ability of depositors to maintain or add to deposit balances and may effect the demand for loans, trust, brokerage, and other products and services offered by LCNB. Such losses and decreased demand could have material adverse effects on LCNB's financial position, results of operations, and cash flows.

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


-18-


LCNB CORP. AND SUBSIDIARIES



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

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

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

Changes in income tax laws or interpretations or in accounting standards could materially affect LCNB’s financial condition or results of operations.
Changes in income tax laws could be enacted, or interpretations of existing income tax laws could change, causing an adverse effect to LCNB’s financial condition or results of operations. Similarly, new accounting standards may be issued by the Financial Accounting Standards Board (the “FASB”) or existing standards revised, changing the methods for preparing financial statements. These changes are not within LCNB’s control and may significantly impact its reported financial condition and results of operations.  FASB is currently working on various projects, including accounting for impaired financial instruments and accounting for leases.
LCNB is subject to environmental liability risk associated with lending activities.
A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on LCNB’s financial condition and results of operations.

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

-19-


LCNB CORP. AND SUBSIDIARIES



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

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

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

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

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

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

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

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


-20-


LCNB CORP. AND SUBSIDIARIES



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

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

LCNB’s ability to pay cash dividends is limited.
LCNB is dependent upon the earnings of the Bank for funds to pay dividends on its common shares.  The payment of dividends by LCNB and the Bank is subject to certain regulatory restrictions.  As a result, any payment of dividends in the future will be dependent, in large part, on the ability of LCNB and the Bank to satisfy these regulatory restrictions and on the Bank’s earnings, capital levels, financial condition, and other factors.  Although LCNB’s financial earnings and financial condition have allowed it to declare and pay periodic cash dividends to shareholders, there can be no assurance that the current dividend policy or the amount of dividend distributions will continue in the future.
Item 1B. Unresolved Staff Comments

Not applicable

-21-


LCNB CORP. AND SUBSIDIARIES



Item 2.  Properties

The Bank conducts its business from the following offices:
 
 
Name of Office
 
Address
 
 
 
 
 
 
 
 
 
1.
 
Main Office
 
2 North Broadway
Lebanon, Ohio  45036
 
Owned
 
 
 
 
 
 
 
2.
 
Auto Bank
 
Silver and Mechanic Streets
Lebanon, Ohio  45036
 
Owned
 
 
 
 
 
 
 
3.
 
Barron Street Office
 
1697 North Barron Street
Eaton, Ohio  45320
 
Leased
 
 
 
 
 
 
 
4.
 
Bridge Street Office
 
1240 North Bridge Street
Chillicothe, Ohio  45601
 
Owned
 
 
 
 
 
 
 
5.
 
Brookville Office
 
225 West Upper Lewisburg Salem Road Brookville, Ohio 45309
 
Owned
 
 
 
 
 
 
 
6.
 
Centerville Office
 
9605 Dayton-Lebanon Pike
Centerville, Ohio 45458
 
Owned
 
 
 
 
 
 
 
7.
 
Chillicothe Office
 
33 West Main Street
Chillicothe, Ohio  45601
 
Owned
 
 
 
 
 
 
 
8.
 
Clarksburg Office
 
10820 Main Street
Clarksburg, Ohio  43115
 
Owned
 
 
 
 
 
 
 
9.
 
Colerain Township Office
 
3209 West Galbraith Road
Cincinnati, Ohio 45239
 
Owned
 
 
 
 
 
 
 
10.
 
Columbus Avenue Office
 
730 Columbus Avenue
Lebanon, Ohio  45036
 
Owned
 
 
 
 
 
 
 
11.
 
Eaton Office
 
110 West Main Street
Eaton, Ohio  45320
 
Owned
 
 
 
 
 
 
 
12.
 
Fairfield Office
 
765 Nilles Road
Fairfield, Ohio  45014
 
Leased
 
 
 
 
 
 
 
13.
 
Frankfort Office
 
Springfield and Main Streets
Frankfort, Ohio  45628
 
Owned
 
 
 
 
 
 
 
14.
 
Goshen Office
 
6726 Dick Flynn Blvd.
Goshen, Ohio  45122
 
Owned
 
 
 
 
 
 
 
15.
 
Hamilton Office
 
794 NW Washington Blvd.
Hamilton, Ohio  45013
 
Owned
 
 
 
 
 
 
 
16.
 
Hay Avenue Office
 
121 Hay Avenue
Brookville, Ohio  45309
 
Owned
 
 
 
 
 
 
 
17.
 
Hunter Office
 
3878 State Route 122
Franklin, Ohio  45005
 
Owned
 
 
 
 
 
 
 
18.
 
Lewisburg Office
 
522 South Commerce Street
Lewisburg, Ohio  45338
 
Owned

-22-


LCNB CORP. AND SUBSIDIARIES



 
 
Name of Office
 
Address
 
 
 
 
 
 
 
 
 
19.
 
Loveland Office
 
500 Loveland-Madeira Road
Loveland, OH 45140
 
Owned
 
 
 
 
 
 
 
20.
 
Maineville Office
 
7795 South State Route 48
Maineville, Ohio  45039
 
Owned
 
 
 
 
 
 
 
21.
 
Mason/West Chester Office
 
1050 Reading Road
Mason, Ohio  45040
 
Owned
 
 
 
 
 
 
 
22.
 
Middletown Office
 
4441 Marie Drive
Middletown, Ohio  45044
 
Owned
 
 
 
 
 
 
 
23.
 
Monroe Office
 
101 Clarence F. Warner Drive
Monroe, Ohio  45050
 
Owned
 
 
 
 
 
 
 
24.
 
New Paris Office
 
201 South Washington Street
New Paris, Ohio  45347
 
Owned
 
 
 
 
 
 
 
25.
 
Oakwood Office
 
2705 Far Hills Avenue
Oakwood, Ohio  45419
 
(2)
 
 
 
 
 
 
 
26.
 
Okeana Office (closed February 12, 2016)
 
6225 Cincinnati-Brookville Road
Okeana, Ohio  45053
 
Owned
 
 
 
 
 
 
 
27.
 
Otterbein Office
 
Otterbein Retirement Community
State Route 741
Lebanon, Ohio  45036
 
Leased
 
 
 
 
 
 
 
28.
 
Oxford Office (1)
 
30 West Park Place
Oxford, Ohio  45056
 
(2)
 
 
 
 
 
 
 
29.
 
Rochester/Morrow Office
 
Route 22-3 at 123
Morrow, Ohio  45152
 
Owned
 
 
 
 
 
 
 
30.
 
South Lebanon Office
 
603 Corwin Nixon Blvd.
South Lebanon, Ohio  45065
 
Owned
 
 
 
 
 
 
 
31.
 
Springboro/Franklin Office
 
525 West Central Avenue
Springboro, Ohio  45066
 
Owned
 
 
 
 
 
 
 
32.
 
Warrior Office
 
Lebanon High School
1916 Drake Road
Lebanon, Ohio  45036
 
Leased
 
 
 
 
 
 
 
33.
 
Washington Court House Office
 
100 Crossings Drive
Washington Court House, Ohio  43160
 
Owned
 
 
 
 
 
 
 
34.
 
Waynesville Office
 
9 North Main Street
Waynesville, Ohio  45068
 
Owned
 
 
 
 
 
 
 
35.
 
West Alexandria Office
 
55 East Dayton Street
West Alexandria, Ohio  45381
 
Owned
 
 
 
 
 
 
 
36.
 
Western Avenue Office
 
1006 Western Avenue
Chillicothe, Ohio  45601
 
Owned
 
 
 
 
 
 
 
 
 
 
 
 
 
 

-23-


LCNB CORP. AND SUBSIDIARIES



 
 
Name of Office
 
Address
 
 
 
 
 
 
 
 
 
37.
 
Wilmington Office
 
1243 Rombach Avenue
Wilmington, Ohio  45177
 
Owned
 
 
 
 
 
 
 
38.
 
Operations Center (under construction)
 
105 North Broadway
Lebanon, Ohio  45036
 
Owned
 
(1)
Excess space in this office is leased to third parties.
(2)
The Bank owns the Oakwood and Oxford office buildings and leases the land.

Item 3.  Legal Proceedings

Except for routine litigation incidental to its businesses, LCNB is not a party to any material pending legal proceedings and none of its property is the subject of any such proceedings.
Item 4.  Mine Safety Disclosures

Not Applicable

-24-


LCNB CORP. AND SUBSIDIARIES



PART II


Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

LCNB had approximately 1,026 registered holders of its common stock as of December 31, 2015.  The number of shareholders includes banks and brokers who act as nominees, each of whom may represent more than one shareholder.  LCNB’s stock trades on the NASDAQ Capital Market exchange under the symbol “LCNB.”  

Trade prices for shares of LCNB Common Stock and cash dividends per share declared and paid are set forth below.  The trade prices shown below are interdealer without retail markups, markdowns, or commissions.
 
2015
 
2014
 
High
 
Low
 
Dividends Declared
 
High
 
Low
 
Dividends Declared
First Quarter
$
16.40

 
13.95

 
0.16

 
18.24

 
17.25

 
0.16

Second Quarter
17.88

 
15.01

 
0.16

 
18.89

 
14.67

 
0.16

Third Quarter
16.40

 
15.26

 
0.16

 
17.14

 
14.84

 
0.16

Fourth Quarter
17.18

 
15.07

 
0.16

 
15.43

 
13.83

 
0.16

  Total dividends declared
 
 
 
 
0.64

 
 
 
 
 
0.64


It is expected that LCNB will continue to pay dividends on a similar schedule, to the extent permitted by business and potential factors beyond management's control.

LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. National banking law limits the amount of dividends the Bank may pay to the sum of retained net income, as defined, for the current year plus retained net income for the previous two years. Prior approval from the OCC, the Bank’s primary regulator, would be necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated ordinary dividends to LCNB without needing to request approval.

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

On April 17, 2001, LCNB's Board of Directors authorized three separate stock repurchase programs, two of which continue to be in effect – the “Market Repurchase Program and the “Private Sale Repurchase Program.”  Any shares purchased will be held for future corporate purposes.
 
Under the Market Repurchase Program, LCNB was originally authorized to purchase up to 200,000 shares of its stock through market transactions with a selected stockbroker.  On November 14, 2005, the Board of Directors extended the Market Repurchase Program by increasing the shares authorized for repurchase to 400,000 total shares.  Through December 31, 2015, 290,444 shares have been purchased under this program.  No shares were purchased under the Market Repurchase Program during 2015.

The Private Sale Repurchase Program is available to shareholders who wish to sell large blocks of stock at one time.  Because LCNB's stock is not widely traded, a shareholder releasing large blocks may not be able to readily sell all shares through normal procedures.  Purchases of blocks will be considered on a case-by-case basis and will be made at prevailing market prices.  There is no limit to the number of shares that may be purchased under this program.  A total of 466,018 shares have been purchased under this program since its inception through December 31, 2015.  No shares were purchased under the Private Sale Repurchase Program during 2015.

LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for the issuance of up to 200,000 shares of stock-based awards to eligible employees, as determined by the Board of Directors.  The awards could be in the form of stock options, share awards, and/or appreciation rights.   The 2002 Plan expired on April 16, 2012. Outstanding, unexercised options continue to be exercisable in accordance with their terms.

-25-


LCNB CORP. AND SUBSIDIARIES



The 2015 Ownership Incentive Plan (the "2015 Plan") was approved by LCNB's shareholders at the annual meeting on April 28, 2015 and allows for stock-based awards to eligible employees, as determined by the Compensation Committee of the Board of Directors. Awards may be made in the form of stock options, appreciation rights, restricted shares, and/or restricted share units. This plan provides for the issuance of up to 450,000 shares and will terminate on April 28, 2025, unless earlier terminated by the Compensation Committee.

The following table shows information relating to stock options outstanding under the 2002 Plan and 2015 Plan at December 31, 2015:
Plan Category
Number of Securities to
be Issued upon Exercise
of Outstanding Options
 
Weighted Average
Exercise Price of
Outstanding Options
 
Number of Securities
Remaining Available
for Future Issuance
Equity compensation plans approved by security holders
83,861

 
$
12.39

 
433,962

Equity compensation plans not approved by security holders

 

 

Total
83,861

 
$
12.39

 
433,962




-26-


LCNB CORP. AND SUBSIDIARIES



The graph below provides an indicator of cumulative total shareholder returns for LCNB as compared with the NASDAQ Composite, the SNL Midwest OTC-BB and Pink Sheet Banks, and the SNL Midwest Bank indexes.  This graph covers the period from December 31, 2010 through December 31, 2015.  The cumulative total shareholder returns included in the graph reflect the returns for the shares of common stock of LCNB.  The information provided in the graph assumes that $100 was invested on December 31, 2010 in LCNB common stock, the NASDAQ Composite, and the SNL Midwest Bank Index and that all dividends were reinvested.

 
 
Period Ending
 
Index
12/31/2010

12/31/2011

12/31/2012

12/31/2013

12/31/2014

12/31/2015

LCNB Corp.
$
100.00

114.16

126.65

171.16

150.37

169.90

NASDAQ Composite
$
100.00

99.21

116.82

163.75

188.03

201.40

SNL Midwest Bank index
$
100.00

94.46

113.69

155.65

169.21

171.78

 
 
 
 
 
 
 
Source : SNL Financial LC, Charlottesville, VA
© 2016
 
 
 
 
 
 
www.snl.com
 
 
 
 
 
 
 
 
 
 
 
 
 


-27-


LCNB CORP. AND SUBSIDIARIES



Item 6.  Selected Financial Data
The following represents selected consolidated financial data of LCNB for the years ended December 31, 2011 through 2015 and are derived from LCNB's consolidated financial statements.  Certain prior year data presented in this table have been reclassified to conform with the current year presentation.  This data should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 8 of this Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk included in Items 7 and 7A, respectively, of this Form 10-K, and are qualified in their entirety thereby and by other detailed information elsewhere in this Form 10-K.
 
For the Years Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(Dollars in thousands, except ratios and per share data)
Income Statement:
 

 
 

 
 

 
 

 
 

Interest income
$
42,659

 
39,477

 
33,497

 
29,938

 
32,093

Interest expense
3,328

 
3,590

 
4,065

 
4,889

 
6,387

Net interest income
39,331

 
35,887

 
29,432

 
25,049

 
25,706

Provision for loan losses
1,366

 
930

 
588

 
1,351

 
2,089

Net interest income after provision for loan losses
37,965

 
34,957

 
28,844

 
23,698

 
23,617

Non-interest income
10,123

 
9,142

 
9,090

 
9,049

 
7,764

Non-interest expenses
32,392

 
30,844

 
26,212

 
21,682

 
21,849

Income before income taxes
15,696

 
13,255

 
11,722

 
11,065

 
9,532

Provision for income taxes
4,222

 
3,386

 
2,942

 
2,795

 
2,210

Net income from continuing operations
11,474

 
9,869

 
8,780

 
8,270

 
7,322

Income from discontinued operations, net of tax

 

 

 

 
793

Net income
$
11,474

 
9,869

 
8,780

 
8,270

 
8,115

 
 
 
 
 
 
 
 
 
 
Dividends per common share
$
0.64

 
0.64

 
0.64

 
0.64

 
0.64

Basic earnings per common share:
 

 
 

 
 

 
 

 
 

Continuing operations
1.18

 
1.06

 
1.12

 
1.23

 
1.09

Discontinued operations

 

 

 

 
0.12

Diluted earnings per common share:
 

 
 

 
 

 
 

 
 

Continuing operations
1.17

 
1.05

 
1.10

 
1.22

 
1.08

Discontinued operations

 

 

 

 
0.12

 
 
 
 
 
 
 
 
 
 
Balance Sheet:
 

 
 

 
 

 
 

 
 

Securities
$
406,981

 
314,074

 
279,021

 
276,970

 
267,771

Loans, net
767,809

 
695,835

 
570,766

 
450,346

 
458,331

Total assets
1,280,531

 
1,108,066

 
932,338

 
788,637

 
791,570

Total deposits
1,087,160

 
946,205

 
785,761

 
671,471

 
663,562

Short-term borrowings
37,387

 
16,645

 
8,655

 
13,756

 
21,596

Long-term debt
5,947

 
11,357

 
12,102

 
13,705

 
21,373

Total shareholders' equity
140,108

 
125,695

 
118,873

 
82,006

 
77,960

 
 
 
 
 
 
 
 
 
 
Selected Financial Ratios and Other Data:
 

 
 

 
 

 
 

 
 

Return on average assets
0.94
%
 
0.88
%
 
0.93
%
 
1.02
%
 
1.02
%
Return on average equity
8.43
%
 
8.04
%
 
9.02
%
 
10.22
%
 
10.89
%
Equity-to-assets ratio
10.94
%
 
11.34
%
 
12.75
%
 
10.40
%
 
9.85
%
Dividend payout ratio
54.24
%
 
60.38
%
 
57.14
%
 
52.03
%
 
52.89
%
Net interest margin, fully taxable equivalent
3.64
%
 
3.66
%
 
3.57
%
 
3.52
%
 
3.70
%

-28-


LCNB CORP. AND SUBSIDIARIES



Dakin Insurance Agency, Inc. ("Dakin") was sold during the first quarter 2011 and therefore the net gain on the sale and Dakin’s financial operating results are reported in the income statements as income from discontinued operations, net of tax.
First Capital merged with and into LCNB as of the close of business on January 11, 2013. As of the date of the merger, LCNB recorded additional loans of $98.9 million and additional deposits of $136.8 million.
An underwritten public offering of common stock was conducted during the fourth quarter 2013. The offering increased shareholders' equity by $26.9 million, which was the net proceeds LCNB received after deducting offering expenses. The proceeds were used to fund the acquisition of Eaton National on January 24, 2014 and the remainder was used for general corporate purposes.
Eaton National merged with and into LCNB as of the close of business on January 24, 2014. As of the date of the merger, LCNB recorded additional loans of $115.9 million and additional deposits of $165.3 million.
BNB merged with and into LCNB as of the close of business on April 30, 2015. As of the date of the merger, LCNB recorded additional loans of $34.7 million and additional deposits of $99.1 million.


-29-

LCNB CORP. AND SUBSIDIARIES


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

Introduction

The following is management's discussion and analysis of the consolidated financial condition and consolidated results of operations of LCNB.  It is intended to amplify certain financial information regarding LCNB and should be read in conjunction with the Consolidated Financial Statements and related Notes and the Financial Highlights contained in the 2015 Annual Report to Shareholders.

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.

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, including the successful integration of recently completed acquisitions;
2.
LCNB may incur increased charge-offs in the future;
3.
LCNB may face competitive loss of customers;
4.
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;
5.
changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
6.
changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;
7.
LCNB may experience difficulties growing loan and deposit balances;
8.
the current economic environment poses significant challenges for us and could adversely affect our  financial condition and results of operations;
9.
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; and
10.
the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the regulations promulgated and to be promulgated thereunder, which may subject LCNB and its subsidiaries to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses. 

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. 

Overview

Net income for 2015 was $11,474,000 (basic and diluted earnings per share of $1.18 and $1.17, respectively), compared to $9,869,000 (basic and diluted earnings per share of $1.06 and $1.05) in 2014 and $8,780,000 (total basic and diluted earnings per share of $1.12 and $1.10) in 2013.

The following items significantly affected earnings for the years indicated:
1.
The completion of a merger with BNB Bancorp, Inc. on April 30, 2015.
2.
The completion of a merger with Eaton National Bank & Trust Co. on January 24, 2014.

-30-

LCNB CORP. AND SUBSIDIARIES

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


3.
The completion of a merger with First Capital Bancshares, Inc. and its subsidiary, Citizens National Bank of Chillicothe, on January 11, 2013.
4.
Net gains on sales of securities were significantly greater in 2013 when compared to 2015 and 2014.
5.
Other real estate owned expense was significantly less in 2013 as compared to 2015 and 2014 because of decreases in valuation write-downs and a gain recognized during the first quarter 2013 on the sale of commercial real estate property.
6.
Impaired loans with a carrying value of approximately $4.5 million were sold during the second second quarter 2015, significantly improving LCNB's loan quality metrics.

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.

-31-

LCNB CORP. AND SUBSIDIARIES

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


 
Years ended December 31,
 
2015
 
2014
 
2013
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/
Paid
 
Average
Yield/
Rate
 
(Dollars in thousands)
Loans (1)
$
740,626

 
35,285

 
4.76
%
 
$
679,223

 
32,706

 
4.82
%
 
$
555,602

 
27,325

 
4.92
%
Federal funds sold
452

 
1

 
0.22
%
 

 

 
%
 
768

 
1

 
0.13
%
Interest-bearing demand deposits
12,245

 
30

 
0.24
%
 
12,450

 
29

 
0.23
%
 
9,908

 
24

 
0.24
%
Federal Reserve Bank stock
2,495

 
152

 
6.09
%
 
2,100

 
126

 
6.00
%
 
1,436

 
86

 
5.99
%
Federal Home  Loan Bank stock
3,638

 
146

 
4.01
%
 
3,571

 
146

 
4.09
%
 
2,826

 
119

 
4.21
%
Investment securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Taxable
245,410

 
4,197

 
1.71
%
 
219,131

 
3,757

 
1.71
%
 
192,983

 
3,369

 
1.75
%
Non-taxable (2)
115,215

 
4,315

 
3.75
%
 
102,902

 
4,111

 
4.00
%
 
98,567

 
3,898

 
3.95
%
Total earning assets
1,120,081

 
44,126

 
3.94
%
 
1,019,377