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

FORM 10-K

(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from _______________________  to  ______________________

Commission File Number  000-26121

LCNB Corp.

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

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

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

Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of Each Class Trading Symbol(s) Name of each exchange on which registered
Common Stock, No Par Value LCNB NASDAQ

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

___None___
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes         No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes         No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes         No




Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes         No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated filer ☐                    Accelerated filer ☐
Non-accelerated filer ☒                    Smaller reporting company ☒
Emerging growth company ☐

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

The aggregate market value of the registrant’s outstanding voting common stock held by nonaffiliates on June 30, 2020, determined using a per share closing price on that date of $15.96 as quoted on the NASDAQ Capital Market, was $195,144,851.

As of March 9, 2021, 12,814,987 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 20, 2021, which Proxy Statement will be mailed to shareholders within 120 days from the end of the fiscal year ended December 31, 2020 are incorporated by reference into Part III.




LCNB CORP.
For the Year Ended December 31, 2020

TABLE OF CONTENTS
PART I
4
Item 1.  Business
4
Item 1A.  Risk Factors
21
27
Item 2.  Properties
27
Item 3.  Legal Proceedings
27
27
   
PART II
28
28
30
31
44
45
45
48
98
98
Item 9B.  Other Information
98
   
PART III
99
99
99
99
100
100
   
PART IV
101
101
   
103

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PART I

Glossary of Abbreviations and Acronyms

ASC            Accounting Standards Codification
ASU            Accounting Standards Update
Bank            LCNB National Bank
BNB            BNB Bancorp, Inc.
Brookville National    Brookville National Bank
BSA            Bank Secrecy Act
CARES Act        Coronavirus Aid, Relief, and Economic Security Act
CEO            Chief Executive Officer
CFO    `        Chief Financial Officer
CFPB            Consumer Financial Protection Bureau
Citizens National        Citizens National Bank
CFB            Columbus First Bancorp, Inc.
Columbus First        Columbus First Bank
Company        LCNB Corp. and its consolidated subsidiaries as a whole
CRA            Community Reinvestment Act of 1977
DEI            Diversity, Equity, and Inclusion
DIF            Deposit Insurance Fund
Dodd-Frank Act        Dodd-Frank Wall Street Reform and Consumer Protection Act
Eaton National        Eaton National Bank & Trust Co.
FASB            Financial Accounting Standards Board
FDIC            Federal Deposit Insurance Corporation
FHLB            Federal Home Loan Bank
First Capital        First Capital Bancshares, Inc.
ICS            Insured Cash Sweep
LCNB            LCNB Corp. and its consolidated subsidiaries as a whole
OCC            Office of the Comptroller of the Currency
PPP            Paycheck Protection Program
PPPLF            Paycheck Protection Program Liquidity Facility
SBA            Small Business Administration
SEC            Securities and Exchange Commission
SVP            Senior Vice President

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;




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2.the significant risks and uncertainties for LCNB's business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios and other regulatory requirements, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on financial markets, the effectiveness of LCNB's work from home arrangements and staffing levels in operational facilities, the impact of market participants on which LCNB relies, and actions taken by governmental authorities and other third parties in response to the pandemic;
3.the disruption of global, national, state, and local economies associated with the COVID-19 pandemic, which could effect LCNB's liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values, and further increase the allowance for credit losses;
4.LCNB’s ability to integrate recent and any future acquisitions may be unsuccessful, or may be more difficult, time-consuming, or costly than expected;
5.LCNB may incur increased loan charge-offs in the future;
6.LCNB may face competitive loss of customers;
7.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;
8.changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
9.changes in regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact LCNB’s operating results;
10.LCNB may experience difficulties growing loan and deposit balances;
11.United States trade relations with foreign countries could negatively impact the financial condition of LCNB's customers, which could adversely affect LCNB 's operating results and financial condition;
12.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;
13.difficulties with technology or data security breaches, including cyberattacks, that could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others;
14.adverse weather events and natural disasters and global and/or national epidemics; and
15.government intervention in the U.S. financial system, including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the CARES Act, the Dodd-Frank Act, the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, and the Tax Cuts and Jobs Act. 

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

DESCRIPTION OF LCNB'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.  LCNB Risk Management, Inc., a captive insurance agency, was incorporated in Nevada by LCNB Corp. during the second quarter 2017. 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.  

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 longer term, 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.

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The Wealth Management Division of the Bank provides complete trust administration, estate settlement, and fiduciary services and also offers investment management of trusts, agency accounts, individual retirement accounts, and foundations/endowments.

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

Other services offered include safe deposit boxes, night depositories, cashier's checks, bank-by-mail, ATMs, cash and transaction services, debit cards, wire transfers, electronic funds transfer, utility bill collections, notary public service, 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.

Primary Market Area

The Bank considers its primary market area to consist of counties where it has a physical presence and neighboring counties, which includes Southwestern and South Central Ohio. At December 31, 2020, the Bank had:
33 offices, including a main office in Warren County, Ohio and branch offices in Warren, Butler, Clinton, Clermont, Fayette, Franklin, Hamilton, Montgomery, Preble, and Ross Counties, Ohio,
an Operations Center in Warren County, Ohio,
and 36 ATMs.

Competition

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

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

The ability to access and use technology is an increasingly competitive factor in the financial services industry. Technology relating to the delivery of financial services, the security and privacy of customer information, and the processing of information is evolving rapidly. LCNB must continually make technology investments to remain competitive in the financial services industry.

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




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Supervision and Regulation

Both federal and state laws extensively regulate bank holding companies, financial holding companies and banks. These laws (and the regulations promulgated thereunder) are primarily intended to protect depositors and the DIF of the FDIC. The following information describes particular laws and regulatory provisions relating to financial holding companies and banks. This discussion is qualified in its entirety by reference to the particular laws and regulatory provisions. A change in any of these laws or regulations may have a material effect on our business and the business of our subsidiaries.

Bank Holding Companies and Financial Holding Companies

Historically, the activities of bank holding companies were limited to the business of banking and activities closely related or incidental to banking. Bank holding companies were generally prohibited from acquiring control of any company that was not a bank and from engaging in any business other than the business of banking or managing and controlling banks. The Gramm-Leach-Bliley Act, which took effect on March 12, 2000, dismantled many Depression-era restrictions against affiliations between banking, securities, and insurance firms by permitting bank holding companies to engage in a broader range of financial activities, so long as certain safeguards are observed. Specifically, bank holding companies may elect to become “financial holding companies” that may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental to a financial activity. Thus, with the enactment of the Gramm-Leach-Bliley Act, banks, security firms, and insurance companies find it easier to acquire or affiliate with each other and cross-sell financial products. The Gramm-Leach-Bliley Act permits a single financial services organization to offer a more complete array of financial products and services than historically was permitted.

A financial holding company is essentially a bank holding company with significantly expanded powers. Under the Gramm-Leach-Bliley Act, in addition to traditional lending activities, the following activities are among those that are deemed “financial in nature” for financial holding companies: securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, activities which the Federal Reserve Board determines to be closely related to banking, and certain merchant banking activities.

LCNB elected to become a financial holding company on April 11, 2000. As a financial holding company, LCNB has very broad discretion to affiliate with securities firms and insurance companies, provide merchant banking services, and engage in other activities that the Federal Reserve Board has deemed financial in nature. In order to continue as a financial holding company, LCNB must continue to be well-capitalized, well-managed, and maintain compliance with the Community Reinvestment Act. Depending on the types of financial activities that LCNB may elect to engage in, under the Gramm-Leach-Bliley Act’s functional regulation principles, it may become subject to supervision by additional government agencies. The election to be treated as a financial holding company increases LCNB's ability to offer financial products and services that historically it was either unable to provide or was only able to provide on a limited basis. As a result, LCNB will face increased competition in the markets for any new financial products and services that it may offer. Likewise, an increased amount of consolidation among banks and securities firms or banks and insurance firms could result in a growing number of large financial institutions that could compete aggressively with LCNB.

The Bank is subject to the provisions of the National Bank Act.  The Bank is subject to primary supervision, regulation and examination by 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.

Banking Operations.

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





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Safe and Sound Banking Practices.

Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the bank holding company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.

Deposit Insurance Coverage and Assessments

The Bank is FDIC insured. Through the DIF, the FDIC provides deposit insurance protection that covers all deposit accounts in FDIC-insured depository institutions up to applicable limits (currently $250,000 per depositor).  

The Bank must pay assessments to the FDIC under a risk-based assessment system for this federal deposit insurance protection. FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (i.e., institutions that pose a greater risk of loss to the DIF) pay assessments at higher rates than institutions assigned to lower risk classifications. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to bank regulators. Through December 31, 2020, the assessment rate for the Bank was at the lowest risk-based premium available, which was 3.00% of the assessment base per annum. In addition, the FDIC can impose special assessments to cover shortages in the DIF and has imposed special assessments in the past.

In October 2010, the FDIC adopted a new Restoration Plan for the DIF to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. On April 26, 2016, the FDIC adopted a rule amending pricing for deposit insurance for institutions with less than $10 billion in assets, effective the quarter after the fund reserve ratio reached 1.15%. The fund reserve ratio reached 1.15% effective as of June 30, 2016. As a result, the Bank’s assessment rate was decreased to the rate stated above effective July 1, 2016. The Dodd-Frank Act also eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.

The Dodd-Frank Act required the FDIC to offset the effect of increasing the reserve ratio on insured depository institutions with total consolidated assets of less than $10 billion, such as the Bank. In September 2018, the reserve ratio reached 1.36% at which time banks with assets of less than $10 billion were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%. The Bank’s assessment credit totaled $413,000 of which $223,000 was applied against the September 30, 2019 and December 31, 2019 assessment invoices and $190,000 was applied against the March 31, 2020 and June 30, 2020 assessment invoices.

As required by the Dodd-Frank Act, the FDIC also revised the deposit insurance assessment system, effective April 1, 2011, to base assessments on the average total consolidated assets of insured depository institutions during the assessment period, less the average tangible equity of the institution during the assessment period, as opposed to solely bank deposits at an institution. This base assessment change necessitated that the FDIC adjust the assessment rates to ensure that the revenue collected under the new assessment system will approximately equal that under the existing assessment system.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), an FDIC-insured depository institution can be held liable for any losses incurred by the FDIC in connection with (1) the “default” of one of its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one of its FDIC-receivers. “In danger of default” is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.


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Dividends

LCNB Corp. is a legal entity separate and distinct from the Bank. LCNB Corp. receives most of its revenue from dividends paid to it by the Bank. Described below are some of the laws and regulations that apply when either LCNB Corp. or the Bank pay or paid dividends.

The Federal Reserve Board and the OCC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends to the extent net income is sufficient to cover both cash dividends and a rate of earnings retention consistent with capital needs, asset quality, and overall financial condition. Further, the Federal Reserve Board’s policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. In addition, the Federal Reserve Board has indicated that each bank holding company should carefully review its dividend policy and has discouraged payment ratios that are at maximum allowable levels, which is the maximum dividend amount that may be issued and allow the Company to still maintain its target Tier 1 capital ratio, unless both asset quality and capital are very strong.

To pay dividends, the Bank must maintain adequate capital above regulatory guidelines. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank would be “undercapitalized.” In addition, national banks are required by federal law to obtain the prior approval of the OCC in order to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus. In addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation).

Affiliate Transactions

The Company and the Bank and other subsidiaries are "affiliates" within the meaning of the Federal Reserve Act. The Federal Reserve Act imposes limitations on a bank with respect to extensions of credit to, investments in, and certain other transactions with, its parent bank holding company and the holding company’s other subsidiaries. Loans and extensions of credit from the Bank to its affiliates are also subject to various collateral requirements. Further, the Bank's authority to extend credit to the Company's directors, executive officers and principal shareholders, including their immediate family members, corporations and other entities that they control, is subject to the restrictions and additional requirements of the Federal Reserve Act and Regulation O promulgated thereafter. These statutes and regulations impose specific limits on the amount of loans the Bank may make to directors and other insiders, and specify approval procedures that must be followed in making loans that exceed certain amounts.

Capital

LCNB and the Bank are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board and the OCC, respectively. The current risk-based capital standards applicable to LCNB and the Bank are based on the December 2010 final capital framework for strengthening international capital standards, known as Basel III.    

In July 2013, the federal bank regulators approved final rules (the “Basel III Rules”) implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act. The Basel III Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries. The Basel III Rules became effective for LCNB and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions).

The Basel III Rules established three components of regulatory capital: (1) common equity tier 1 capital (“CET1”), (2) additional tier 1 capital, and (3) tier 2 capital. Tier 1 capital is the sum of CET1 and additional tier 1 capital instruments meeting certain revised requirements. Total capital is the sum of tier 1 capital and tier 2 capital. Under the Basel III Rules, for most banking organizations, the most common form of additional tier 1 capital is non-cumulative perpetual preferred stock and the most common form of tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the Basel III Rules’ specific requirements. LCNB Corp. does not have any non-cumulative perpetual preferred stock or subordinated notes.



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Under the Basel III Rules, the minimum capital ratios effective as of January 1, 2015 are: (i) 4.5% CET1 to risk-weighted assets; (ii) 6.0% tier 1 capital to risk-weighted assets; (iii) 8.0% total capital to risk-weighted assets; and (iv) 4.0% tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). The Basel III Rules established a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer, when added to the capital requirements, resulted in the following minimum ratios: (i) a CET1 risk-based capital ratio of 7.0%, (ii) a tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. An institution is subject to limitations on certain activities including payment of dividends, share repurchases, and discretionary bonuses to executive officers if its capital level is below the buffer amount.     

With respect to the Bank, the Basel III Rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”

As of December 31, 2020, LCNB had a total risk-based capital ratio of 12.48%, a tier 1 capital to risk-weighted asset ratio of 12.48%, a CET1 to risk-weighted assets ratio of 12.91% and a leverage ratio of 10.06%. These regulatory capital ratios were calculated under the Basel III Rules.

In November 2019, the federal banking regulators published final rules implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III Rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. LCNB Corp. and the Bank have not opted to use the community bank leverage ratio framework, but may make such an election in the future.

Prompt Corrective Action

A banking organization’s capital plays an important role in connection with regulatory enforcement as well. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

Under current regulations, the Bank was “well capitalized” as of December 31, 2020.







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Community Reinvestment Act of 1977

The CRA subjects a bank to regulatory assessment to determine if the institution meets the credit needs of its entire community, including low-and moderate-income neighborhoods served by the bank, and to take that determination into account in its evaluation of any application made by such bank for, among other things, approval of the acquisition or establishment of a branch or other depository facility, an office relocation, a merger, or the acquisition of shares of capital stock of another financial institution. The regulatory authority prepares a written evaluation of an institution’s record of meeting the credit needs of its entire community and assigns a rating. These ratings are “Outstanding,” “Satisfactory,” “Needs Improvement,” and “Substantial Non-Compliance.” Institutions with ratings lower than “Satisfactory” may be restricted from engaging in the aforementioned activities. Management believes the Bank has taken and takes significant actions to comply with the CRA and it received a “Satisfactory” rating in its most recent review by federal regulators with respect to its compliance with the CRA.

BSA and AML

Under the BSA, financial institutions are required to monitor and report unusual or suspicious account activity that might signify money laundering, tax evasion, or other criminal activities, as well as transactions involving the transfer or withdrawal of amounts in excess of prescribed limits. The BSA is sometimes referred to as an “anti-money laundering” law (“AML”). Several AML acts, including provisions in Title III of the USA PATRIOT Act of 2001, have been enacted to amend the BSA. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with financial institutions and foreign customers. 

In addition, under the USA PATRIOT Act, the Secretary of the U.S. Department of the Treasury ("Treasury") has adopted rules addressing a number of related issues, including increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities, and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to violate the privacy provisions of the Gramm-Leach-Bliley Act that are discussed below. Finally, under the regulations of the Office of Foreign Asset Control ("OFAC") financial institutions are required to monitor and block transactions with certain “specially designated nationals” who OFAC has determined pose a risk to U.S. national security.

Incentive Compensation

LCNB is subject to regulatory rules and guidance regarding employee incentive compensation policies intended to ensure that incentive-based compensation does not undermine the safety and soundness of the institution by encouraging excess risk-taking. LCNB's incentive compensation arrangements must provide employees with incentives that appropriately balance risk and reward and do not encourage imprudent risk, be compatible with effective controls and risk managements, and be supported by strong corporate governance, including active and effective oversight by LCNB's board of directors.

Consumer Laws and Regulations

LCNB is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the following list is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, The Fair and Accurate Credit Transactions Act, The Real Estate Settlement Procedures Act, and the Fair Housing Act, among others. These laws and regulations, among other things, prohibit discrimination on the basis of race, gender, or other designated characteristics and mandate various disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. These and other laws also limit finance charges or other fees or charges earned for offering various services. LCNB must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.






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Consumer Financial Protection Bureau

The Dodd-Frank Act created an independent federal agency called the Consumer Financial Protection Bureau, which is granted broad rulemaking, supervisory, and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive, or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits the state attorney general to enforce compliance with both the state and federal laws and regulations.

The CFPB has finalized rules relating to, among other things, remittance transfers under the Electronic Fund Transfer Act, which requires companies to provide consumers with certain disclosures before the consumer pays for a remittance transfer. These rules became effective in October 2013. The CFPB has also amended certain rules under Regulation C relating to home mortgage disclosure to reflect a change in the asset-size exemption threshold for depository institutions based on the annual percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers. In addition, on January 10, 2013, the CFPB released its final “Ability-to-Repay/Qualified Mortgage” rules, which amended the Truth in Lending Act (Regulation Z). Regulation Z prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The final amended rule implemented sections 1411 and 1412 of the Dodd-Frank Act, which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” The final rule also implemented section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. This rule became effective January 10, 2014.

Consumer Privacy

State and federal banking regulators have issued various policy statements emphasizing the importance of technology risk management and supervision in evaluating the safety and soundness of depository institutions with respect to banks that contract with outside vendors to provide data processing and core banking functions. The use of technology-related products, services, delivery channels, and processes exposes a bank to various risks, particularly operational, privacy, security, strategic, reputation, and compliance risk. Banks are generally expected to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring, and controlling risks associated with the use of technology.

Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and confidentiality of customer records and information, protection against any anticipated threats or hazards to the security or integrity of such records, and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or inconvenience to a customer. Among other matters, the rules require each bank to implement a comprehensive written information security program that includes administrative, technical, and physical safeguards relating to customer information.

Under the Gramm-Leach-Bliley Act, a financial institution must provide its customers with a notice of privacy policies and practices. Section 502 prohibits a financial institution from disclosing nonpublic personal information about a customer to nonaffiliated third parties unless the institution satisfies various notice and opt-out requirements and the customer has not elected to opt out of the disclosure. Under Section 504, the agencies are authorized to issue regulations as necessary to implement notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about customers to nonaffiliated third parties. Under the final rule the regulators adopted, all banks must develop initial and annual privacy notices which describe in general terms the bank’s information sharing practices. Banks that share nonpublic personal information about customers with nonaffiliated third parties must also provide customers with an opt-out notice and a reasonable period of time for the customer to opt out of any such disclosure, with certain exceptions. Limitations are placed on the extent to which a bank can disclose an account number or access code for credit card, deposit, or transaction accounts to any nonaffiliated third party for use in marketing.
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Dodd-Frank Act and Regulatory Relief Act

The Dodd-Frank Act, which was enacted in July 2010, effected a fundamental restructuring of federal banking regulation. In addition to those provisions discussed above, among the Dodd-Frank Act provisions that have affected LCNB are the following:
creation of a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms;
elimination of the federal statutory prohibition against the payment of interest on business checking accounts;
prohibition on state-chartered banks engaging in derivatives transactions unless the loans to one borrower of the state in which the bank is chartered takes into consideration credit exposure to derivative transactions. For this purpose, derivative transactions include any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodity securities, currencies, interest or other rates, indices, or other assets;
requirement that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. On June 29, 2011, the Federal Reserve Board set the interchange rate cap at $0.21 per transaction and 5 basis points multiplied by the value of the transaction. While the restrictions on interchange fees do not apply to banks that, together with their affiliates, have assets of less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller banks; and
restrictions under the Volcker Rule of the Company’s ability to engage in proprietary trading and to invest in, sponsor and engage in certain types of transactions with certain private funds. The Company had until July 15, 2015 to fully conform to the Volcker Rule's restrictions.

Management continues to review actively the provisions of the Dodd-Frank Act and assess its probable impact on its business, financial condition, and results of operations.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Regulatory Relief Act") was signed into law on May 24, 2018. The Regulatory Relief Act scales back certain aspects of the Dodd-Frank Act and provides other regulatory relief for financial institutions. Certain provisions affecting LCNB include:
Simplifying regulatory capital requirements by providing that banks with less than $10 billion in total consolidated assets that meet a to-be-developed community bank leverage ratio of tangible equity to average consolidated assets between eight and ten percent will be deemed to be in compliance with risk-based capital and leverage requirements.
Changing how federal financial institution regulators classify certain municipal securities assets under the liquidity coverage ratio rule;
Exempting certain reciprocal deposits from treatment as brokered deposits under the FDIC's brokered deposits rule;
Exempting banks with less than $10 billion in total consolidated assets from certain provisions under the Volcker Rule; and
Authorizing new banking procedures to better facilitate online transactions.

Monetary Policy

Banks are affected by the credit policies of monetary authorities, including the Federal Reserve Board, that affect the national supply of credit. The Federal Reserve Board regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States government obligations, varying the discount rate on financial institution borrowings, varying reserve requirements against financial institution deposits, and restricting certain borrowings by financial institutions and their subsidiaries. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future.






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Regulatory Reform and Legislation

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of LCNB and the Bank in substantial and unpredictable ways. If enacted, such legislation 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. LCNB and the Bank cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of LCNB and the Bank. A change in statutes, regulations, or regulatory policies applicable to LCNB and the Bank could have a material effect on LCNB’s business, financial condition, and results of operations.

Human Capital

As of December 31, 2020, LCNB employed 331 full-time equivalent employees working throughout the ten Ohio counties in which LCNB operates. LCNB considers these individuals the most important influence contributing to the Bank’s success and is committed to investing in their ongoing growth and development.

LCNB places a high priority on training and development and has enjoyed a long history of promoting from within the organization. Through a blend of strong internal talent and diverse new talent, the Bank has been able to successfully navigate the ongoing challenges related to talent depth and the need to obtain or enhance specific skill sets as it grows and develops new products and services. LCNB continues to look at innovative, cost effective, and efficient ways to educate and develop its employees.

LCNB places a high priority on overall employee well-being and satisfaction, providing employees with compensation and benefits that are competitive with those provided by other financial institutions and major employers within LCNB's market area. In addition to traditional benefits, which include health, dental, life, vision, and long-term disability insurance, LCNB offers other voluntary coverages. Some of these benefits are paid for by the Bank, others are shared cost, and some are employee-paid. Additional benefits include a matching 401-K plan, as well as performance bonus and tuition reimbursement plans.

LCNB has an active Wellness Committee that assists in the well-being of all employees. The committee promotes activities, education, and consultation that improve the health and lives of employees and their families. While this initiative is important every year, it was extremely important in 2020 as we went through and continue to go through the COVID-19 pandemic period. In addition to these efforts, LCNB also offers a no-cost Employee Assistance Program (EAP) benefit for both full-time and part-time employees and members of their households. These confidential services continue to be promoted and utilized.

Fostering a culture of open and transparent communication is always extremely important, however enhancing this area was and is critical for employment comfort and engagement. In 2020, the Bank began quarterly Town Hall meetings with all employees. In addition, senior management provides weekly informational updates through email to all employees, offering to participate in departmental or branch staff meetings. Both the quarterly Town Hall meetings and the employee updates will continue in 2021.

LCNB supports a welcoming environment that celebrates diversity, equity, and inclusion for all. Its employee-based DEI Committee is working to expand education and sharing experiences; acknowledge, celebrate, and encourage diverse recruitment efforts, backgrounds, and lifestyles; and communicate and share LCNB's commitment to diversity, equity and inclusion. LCNB has partnered with a third party to facilitate progress within the DEI Committee. Past efforts include an employee survey and unconscious bias education for officers and managers.








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Availability of Financial Information

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

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

The SEC also maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding registrants that file reports electronically, as LCNB does.

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.






















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Investment Portfolio

The following table presents the carrying values of securities for the years indicated:
  At December 31,
  2020 2019 2018
  (In thousands)
Debt securities available-for-sale:      
U.S. Treasury notes $ 2,388  2,309  2,235 
U.S. Agency notes 67,900  48,984  78,340 
U.S. Agency mortgage-backed securities 91,634  84,406  55,610 
Corporate securities 1,179  —  — 
Municipal securities 46,370  42,301  102,236 
Total debt securities available-for-sale 209,471  178,000  238,421 
Debt securities held-to-maturity:      
Municipal securities 24,810  27,525  29,721 
Equity securities with a readily determinable fair value:
Mutual funds 1,402  1,345  1,559 
Equity securities 987  967  519 
Equity securities without a readily determinable fair value:
Mutual funds 2,000  2,000  2,000 
Equity securities 99  99  99 
Federal Reserve Bank stock 4,652  4,652  4,653 
Federal Home Loan Bank stock 5,203  5,203  4,845 
Total securities $ 248,624  219,791  281,817 























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Contractual maturities of securities at December 31, 2020, were as follows.  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
  Available-for-Sale Held-to-Maturity
Amortized
Cost
Fair
Value
Yield Amortized
Cost
Fair
Value
Yield
  (Dollars in thousands)
U.S. Treasury notes:            
  Within one year $ —  —  —  % $ —  —  —  %
  One to five years 2,268  2,388  2.07  % —  —  —  %
Five to ten years —  —  —  % —  —  —  %
After ten years —  —  —  % —  —  —  %
Total U.S. Treasury notes 2,268  2,388  2.07  % —  —  —  %
U.S. Agency notes:            
Within one year —  —  —  % —  —  —  %
One to five years 28,703  29,049  0.88  % —  —  —  %
Five to ten years 38,280  38,851  1.11  % —  —  —  %
After ten years —  —  —  % —  —  —  %
Total U.S. Agency notes 66,983  67,900  1.01  % —  —  —  %
Corporate bonds:
Within one year —  —  —  % —  —  —  %
One to five years —  —  —  % —  —  —  %
Five to ten years 1,200  1,179  4.29  % —  —  —  %
After ten years —  —  —  % —  —  —  %
Total corporate bonds 1,200  1,179  4.29  % —  —  —  %
Municipal securities (1):            
Within one year 3,795  3,846  2.56  % 2,135  2,144  2.06  %
One to five years 16,728  17,401  2.56  % 5,676  5,758  2.40  %
Five to ten years 23,808  24,387  1.73  % 2,055  2,097  3.66  %
After ten years 729  736  3.77  % 14,944  14,961  5.05  %
Total Municipal securities 45,060  46,370  2.14  % 24,810  24,960  4.07  %
U.S. Agency mortgage-backed securities 88,455  91,634  1.87  % —  —  —  %
Totals $ 203,966  209,471  1.66  % 24,810  24,960  4.07  %
(1) Yields on tax-exempt obligations are computed on a taxable-equivalent basis based upon a 21.0% statutory Federal income tax rate.
Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any issuer that exceeded 10% of LCNB's consolidated shareholders' equity at December 31, 2020.




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Loan Portfolio

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

All commercial loan officers are authorized to accept loan applications and have various, designated lending limits for the approval of loans.  A loan application for an amount outside a particular officer's lending limit needs to be approved by an officer or officers with a board designated lending limit sufficient for that loan.  Board approval is required on any loan with critical policy exceptions or that will exceed designated lending limits for specified loan officers or committees.

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

The following table summarizes the distribution of the loan portfolio for the years indicated:
  At December 31,
  2020 2019 2018 2017 2016
  Amount % Amount % Amount % Amount % Amount %
  (Dollars in thousands)
Commercial and industrial $ 100,254  7.7  % $ 78,306  6.3  % $ 77,740  6.5  % $ 36,057  4.2  % $ 41,878  5.1  %
Commercial, secured by real estate 843,230  64.9  % 804,953  64.7  % 740,647  61.8  % 527,947  62.2  % 477,275  58.2  %
Residential real estate 309,692  23.8  % 322,533  26.0  % 349,127  29.1  % 251,582  29.6  % 265,788  32.5  %
Consumer 36,917  2.8  % 25,232  2.0  % 17,283  1.5  % 17,450  2.1  % 19,173  2.3  %
Agricultural 10,100  0.8  % 11,509  0.9  % 13,297  1.1  % 15,194  1.8  % 14,802  1.8  %
Other loans, including deposit overdrafts 363  —  % 1,193  0.1  % 450  —  % 539  0.1  % 633  0.1  %
  1,300,556  100.0  % 1,243,726  100.0  % 1,198,544  100.0  % 848,769  100.0  % 819,549  100.0  %
Deferred origination costs (fees), net (1,135)   (275)   79    291    254   
Total loans 1,299,421    1,243,451    1,198,623    849,060    819,803   
Less allowance for loan losses 5,728    4,045    4,046    3,403    3,575   
Loans, net $ 1,293,693    $ 1,239,406    $ 1,194,577    $ 845,657    $ 816,228   

As of December 31, 2020, 2019, and 2018, there were no concentrations of loans exceeding 10% of total loans that are not already disclosed as a category of loans in the above table, except for loans secured by multifamily properties. Loans secured by multifamily properties, which are included in the commercial, secured by real estate category in the above table, totaled $156,191,000, or 12.0% of total loans, at December 31, 2020, $156,277,000, or 12.6% of total loans, at December 31, 2019, and $129,266,000, or 10.8% of total loans, at December 31, 2018.

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The following table summarizes the commercial and agricultural loan maturities and sensitivities to interest rate change at December 31, 2020:
  (In thousands)
Maturing in one year or less $ 48,315 
Maturing after one year, but within five years 151,043 
Maturing beyond five years 754,226 
Total commercial and agricultural loans $ 953,584 
   
Loans maturing beyond one year:  
Fixed rate $ 352,187 
Variable rate 553,082 
Total $ 905,269 

Risk Elements

The following table summarizes non-accrual, past-due, and accruing restructured loans for the dates indicated:
  At December 31,
  2020 2019 2018 2017 2016
  (Dollars in thousands)
Non-accrual loans $ 3,718  3,210  2,951  2,965  5,725 
Past-due 90 days or more and still accruing —  —  149  —  23 
Accruing restructured loans 5,176  6,609  10,516  10,469  11,731 
Total $ 8,894  9,819  13,616  13,434  17,479 
Percent to total loans 0.68  % 0.79  % 1.14  % 1.58  % 2.13  %

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, 2020, 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.











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Allocation of the Allowance for Loan Losses

The following table presents the allocation of the allowance for loan loss:
  At December 31,
  2020 2019 2018 2017 2016
  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 $ 816  7.7  % $ 456  6.3  % $ 400  6.5  % $ 378  4.2  % $ 350  5.1  %
Commercial, secured by real estate 3,903  64.9  % 2,924  64.7  % 2,745  61.8  % 2,178  62.2  % 2,179  58.2  %
Residential real estate 837  23.8  % 528  26.0  % 767  29.1  % 717  29.6  % 885  32.5  %
Consumer 153  2.8  % 99  2.0  % 87  1.5  % 76  2.1  % 96  2.3  %
Agricultural 28  0.8  % 34  0.9  % 46  1.1  % 53  1.8  % 60  1.8  %
Other loans, including deposit overdrafts (9) —  % 0.1  % —  % 0.1  % 0.1  %
Total $ 5,728  100.0  % $ 4,045  100.0  % $ 4,046  100.0  % $ 3,403  100.0  % $ 3,575  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, 2020:
  (In thousands)
Maturity within 3 months $ 28,500 
After 3 but within 6 months 17,694 
After 6 but within 12 months 30,808 
After 12 months 36,365 
  $ 113,367 

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.
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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.

Risks Related to Economic and Market Conditions

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

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

Weakness in the economy and in the real estate market, including specific weakness within our geographic footprint, may affect us, including requiring us to record additional loan loss provision or to charge off loans.
LCNB’s success depends, in part, on economic and political conditions, local and national, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy and other factors beyond LCNB’s control, especially in light of COVID-19, may affect its deposit levels and composition, demand for loans, the ability of borrowers to repay their loans, and the value of the collateral securing the loans it makes. Economic turmoil in different regions of the world affect the economy and stock prices in the United States, which can affect LCNB’s earnings and capital and the ability of its customers to repay loans. Due to LCNB’s volume of real estate loans, declining real estate values could affect the value of property used as collateral as well as LCNB’s ability to sell the collateral upon foreclosure.

If the strength of the United States economy in general and the strength of the local economies in which LCNB conducts operations decline, this could result in, among other things, a deterioration of credit quality or a reduced demand for credit, including a resultant effect on the loan portfolio and allowance for credit losses. These factors could also result in higher delinquencies and greater charge-offs in future periods, which would materially affect LCNB's financial condition and results of operations.

There is no assurance that LCNB's non-impaired loans will not become impaired or that impaired loans will not suffer further deterioration in value. The fluctuations in national, regional and local economic conditions, including those related to local residential, commercial real estate and construction markets, may result in increased charge-offs and, consequently, reduce net income. These fluctuations are not predictable, cannot be controlled, and may have a material impact on LCNB's operations and financial condition even if other favorable events occur.


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Declining values of real estate, increases in unemployment, insurance market disruptions, and the related effects on local economies may increase LCNB's credit losses, which would negatively affect financial results.
LCNB offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer, and other loans. Many loans are secured by real estate (both residential and commercial) within LCNB's market area. A major change in the real estate market, such as deterioration in the value of collateral or in the local or national economy, could affect customers’ ability to pay these loans, which in turn could impact LCNB's results of operations and financial condition. Additionally, increases in unemployment also may affect the ability of certain clients to repay loans and the financial results of commercial clients in localities with higher unemployment, may result in loan defaults and foreclosures and may impair the value of loan collateral. This is especially relevant in light of COVID-19's impact on national and local economies. Loan defaults and foreclosures are unavoidable in the banking industry and management tries to limit exposure to this risk by monitoring carefully LCNB's extensions of credit. LCNB cannot fully eliminate credit risk and, as a result, credit losses may increase in the future.

Risks Related to LCNB's Operations
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 can involve a greater degree of financial and credit risk than home equity, residential mortgage, or consumer loans. The potential for 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 businesses and loans secured by income-producing properties, and the continual evaluation and monitoring of these types of loans.

The repayment of loans secured by commercial real estate is often dependent upon the successful operation, development, or sale of the related real estate or commercial business and may, therefore, be subject to adverse conditions in the real estate market or economy. If the cash flow from operations is reduced, the borrower’s ability to repay the loan may be impaired. In such cases, LCNB may take 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 be difficult to liquidate.

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

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

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

LCNB’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.

Risk factors related to LCNB’s Wealth Management business.

Competition for wealth management business is intense.  Competitors include other commercial bank and trust companies, brokerage firms, investment advisory firms, mutual fund companies, accountants, and attorneys.

LCNB’s Wealth Management 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 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.

General Risk Factors

Failure to meet regulatory capital requirements could adversely affect LCNB’s business.
The Bank is subject to regulations requiring it to satisfy minimum capital requirements, see Note 1 - Regulatory Matters of the consolidated financial statements for more information. While management expects that LCNB's capital ratios under Basel III will continue to exceed well capitalized minimum capital requirements, there can be no assurance that such will be the case. If LCNB is unable to meet or exceed applicable minimum capital requirements, it may become subject to supervisory actions including, but not limited to, requirements to raise additional capital or dispose of assets, the loss of its financial holding company status, limitations on its ability to engage in new acquisitions or new activities, or other informal or formal regulatory enforcement actions.







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

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

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

Banking competition 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 located in its markets.  Many of LCNB’s competitors include major financial institutions that have been in business for many years and have established customer bases, numerous branches, substantially higher regulatory lending limits, and the ability to mount extensive promotional and advertising campaigns. 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.  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 Wealth Management customers, its growth and profitability levels may be negatively impacted.











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

New lines of business or new products and services may subject LCNB to additional risks.
From time to time, LCNB may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or products and services, LCNB may invest significant time and resources. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. If LCNB is unable to successfully manage these risks in the development and implementation of new lines of business or new products or services, it could have a material adverse effect on LCNB’s business, financial condition, and result of operations.

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.

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

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

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

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

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

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

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



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Climate change, severe weather, natural disasters, acts of war or terrorism, epidemics and other external events could significantly impact LCNB’s business.
Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war or terrorism, and other adverse external events could have a significant impact on LCNB’s ability to conduct business or upon third parties who perform operational services for LCNB or its customers. Such events could affect the stability of LCNB’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue, or cause LCNB to incur additional expenses.


Item 1B. Unresolved Staff Comments

None.

Item 2.  Properties

LCNB owns its main office in Lebanon, Ohio, which is approximately 28,000 square feet and houses its executive, wealth management, and certain administrative personnel. LCNB owns an additional 24 branch locations and leases an additional eight branch locations, pursuant to operating leases. The Oxford, Ohio location has excess space, which is currently being leased to a third party. An operations center in Lebanon, Ohio is currently being leased from the Warren County Port Authority. Upon expiration of the lease in 2027, LCNB has the option to purchase the property for $1.00. Management believes that LCNB's banking and other offices are in good condition and suitable to its needs.

All of LCNB's ATMs were replaced during 2020 using a lease/outsourcing arrangement with a third party vendor.

Item 3.  Legal Proceedings

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

Item 4.  Mine Safety Disclosures

Not Applicable.
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PART II

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

LCNB had approximately 961 registered holders of its common stock as of December 31, 2020.  The number of shareholders includes banks and brokers who act as nominees, each of whom may represent more than one shareholder.  LCNB’s stock trades on the NASDAQ Capital Market® exchange under the symbol “LCNB.”  

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

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

On August 24, 2020, LCNB's Board of Directors authorized a share repurchase program (the “Program”). Under the terms of the Program, LCNB is authorized to repurchase up to 645,000 of its outstanding common shares. The Program is authorized to last no longer than five years. The Program replaced and superseded LCNB’s prior share repurchase program, which was adopted in April 2019.

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

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

The following table sets forth information relating to purchases made under the Program during the three months ended December 31, 2020:
Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 2020 37,884  $ 14.0814  37,884  551,526
November 2020 20,605  $ 14.6291  20,605  530,921
December 2020 16,473  $ 14.8922  16,473  514,448


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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, 2015 through December 31, 2020.  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, 2015 in LCNB common stock, the NASDAQ Composite, and the SNL Midwest Bank Index and that all dividends were reinvested.

LCNB-20201231_G1.JPG
Period Ending
Index 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
LCNB Corp. $ 100.00  147.35  133.73  102.64  136.12  108.63 
NASDAQ Composite Index $ 100.00  108.87  141.13  137.12  187.44  271.64 
SNL Midwest Bank index $ 100.00  133.61  143.58  122.61  159.51  136.96 
Source: S&P Global Market Intelligence
© 2021

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Item 6.  Selected Financial Data
The following represents selected consolidated financial data of LCNB for the years ended December 31, 2016 through 2020 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,
  2020 2019 2018 2017 2016
  (Dollars in thousands, except per share data)
Income Statement:          
Interest income $ 63,780  65,194  54,594  44,463  43,750 
Interest expense 7,562  10,788  6,425  3,599  3,504 
Net interest income 56,218  54,406  48,169  40,864  40,246 
Provision for loan losses 2,014  207  923  215  913 
Net interest income after provision for loan losses 54,204  54,199  47,246  40,649  39,333 
Non-interest income 15,741  12,348  11,050  10,458  10,853 
Non-interest expenses 45,785  43,522  40,502  33,863  33,261 
Income before income taxes 24,160  23,025  17,794  17,244  16,925 
Provision for income taxes 4,085  4,113  2,949  4,272  4,443 
Net income $ 20,075  18,912  14,845  12,972  12,482 
Dividends per common share $ 0.73  0.69  0.65  0.64  0.64 
Earnings per common share:  
Basic 1.55  1.44  1.24  1.30  1.26 
Diluted 1.55  1.44  1.24  1.29  1.25 
Balance Sheet:  
Securities $ 248,624  219,791  282,813  317,413  368,032 
Loans, net 1,293,693  1,239,406  1,194,577  845,657  816,228 
Total assets 1,745,884  1,639,308  1,636,927  1,295,638  1,306,799 
Total deposits 1,455,423  1,348,280  1,300,919  1,085,821  1,110,905 
Short-term borrowings —  —  56,230  47,000  42,040 
Long-term debt 22,000  40,994  47,032  303  598 
Total shareholders' equity 240,825  228,048  218,985  150,271  142,944 
Selected Financial Ratios and Other Data:  
Return on average assets 1.18  % 1.15  % 1.00  % 0.99  % 0.96  %
Return on average equity 8.49  % 8.42  % 7.90  % 8.74  % 8.60  %
Equity-to-assets ratio 13.79  % 13.91  % 13.38  % 11.60  % 10.94  %
Dividend payout ratio 47.10  % 47.92  % 52.42  % 49.23  % 50.79  %
Net interest margin, fully taxable equivalent 3.70  % 3.71  % 3.63  % 3.58  % 3.51  %

CFB merged with and into LCNB as of the close of business on May 31, 2018. As of the date of the merger, LCNB recorded additional loans of $284.0 million, additional deposits of $244.4 million, and additional long-term debt of $22.9 million.

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

Introduction

The following is management's discussion and analysis of the consolidated financial condition and consolidated results of operations of LCNB.  It is intended to amplify certain financial information regarding LCNB and should be read in conjunction with the consolidated financial statements and related notes contained in the 2020 Annual Report to Shareholders.

Overview

Net income for 2020 was $20,075,000 (basic and diluted earnings per share of $1.55), compared to $18,912,000 (basic and diluted earnings per share of $1.44) in 2019 and $14,845,000 (basic and diluted earnings per share of $1.24) in 2018 .

The following items significantly affected earnings for the years indicated:
The provision for loan losses for 2020 was $2,014,000, compared to $207,000 for 2019 and $923,000 for 2018, partially due to adjustments for potential impacts from the economic recession caused by the COVID-19 pandemic;
CFB merged with and into LCNB Corp. on May 31, 2018;
Expenses related to the merger with CFB totaled $2,123,000 during 2018; and
Other non-interest expense for 2018 included $575,000 in net losses from sales of fixed assets, primarily due to losses incurred in the sale of two office buildings.

Coronavirus Update/Status

The coronavirus (COVID-19) pandemic has created unprecedented challenges throughout the communities LCNB serves, the
state of Ohio, the United States and the entire world. LCNB has implemented a number of procedures in response to the
pandemic to support the safety and well-being of our employees, customers, and shareholders that continue through the date of
this report, including the following:
We addressed the safety of our 33 branches, following the guidelines of the Center for Disease Control, by temporarily closing our lobbies from March through May 2020 in an effort to encourage use of mobile banking applications and our drive-thru facilities, while allowing access to the lobbies by appointment only and only when necessary;
We re-opened most lobbies during June and July 2020 and introduced various safety measures including the installation of clear barriers at the teller windows, placing markers on the floor to properly space customers as they wait, enhancing our cleaning procedures, and requiring the wearing of masks;
As the pandemic worsened in the fourth quarter, we once again made our office lobbies available by appointment only, beginning November 27, 2020 and lasting through January 31, 2021.
We hold frequent executive management meetings to address issues that change rapidly;
We have encouraged non-customer service employees to work remotely from home as much as possible and have adopted technological improvements to make this possible;
We moved our Annual Shareholders’ Meeting, held on April 21, 2020, from a physical meeting to a virtual meeting and the 2021 Annual Shareholders' Meeting to be held on April 20, 2021 will also be virtual;
We provided COVID-19 related payment deferrals, primarily agreements to accept interest only payments for a period of time or agreements to defer principal and interest payments for a period of time, on 607 loans with balances as follows (in thousands)
  At Time of Deferral At December 31, 2020
Commercial and industrial $ 33,683  — 
Commercial, secured by real estate 337,263  20,231 
Residential real estate 48,903  324 
Consumer 868  21 
  $ 420,717  20,576 



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

We chose to participate in the CARES Act Paycheck Protection Program ("PPP") that provided government guaranteed and potentially forgivable loans to applicants. The PPP was implemented by the Small Business Administration with support from the Department of the Treasury and provided small businesses with funds to pay up to eight or twenty-four weeks, depending on the date of the loan, of payroll costs including benefits. Funds could also be used to pay interest on mortgages, rent, and utilities. All PPP loans originated by LCNB during 2020 were closed during April and May 2020 and we were able to assist 316 small businesses with $45.5 million of such loans. Remaining outstanding at December 31, 2020 was $21.1 million and unrecognized fees at that date totaled $747,000. We believe these loans and our participation in the program is good for our customers, the employees who work for these companies, and the communities we serve.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which was signed into law on December 27, 2020, extends the authority to make PPP loans through March 31, 2021 and LCNB is participating in this new round.

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

Net Interest Income

LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the years indicated, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

  Years ended December 31,
  2020 2019 2018
  Average
Outstanding
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
  (Dollars in thousands)
Loans (1) $ 1,306,314  $ 59,267  4.54  % $ 1,221,375  $ 59,009  4.83  % $ 1,038,159  $ 47,489  4.57  %
Interest-bearing demand deposits 20,808  83  0.40  % 8,389  241  2.87  % 5,164  136  2.63  %
Interest-bearing time deposits —  —  —  % 488  11  2.25  % 4,008  58  1.45  %
Federal Reserve Bank stock 4,652  279  6.00  % 4,652  279  6.00  % 3,268  196  6.00  %
Federal Home  Loan Bank stock 5,203  117  2.25  % 5,108  249  4.87  % 4,346  259  5.96  %
Investment securities:          
Equity securities 4,303  91  2.11  % 4,310  127  2.95  % 3,782  104  2.75  %
Debt securities, taxable 148,415  2,916  1.96  % 159,377  3,601  2.26  % 165,300  3,666  2.22  %
Debt securities, non-taxable (2) 38,439  1,300  3.38  % 73,634  2,123  2.88  % 123,135  3,400  2.76  %
Total earning assets 1,528,134  64,053  4.19  % 1,477,333  65,640  4.44  % 1,347,162  55,308  4.11  %
Non-earning assets 183,819      169,314    145,601   
Allowance for loan losses (5,029)     (4,056)   (3,822)  
Total assets $ 1,706,924      $ 1,642,591    $ 1,488,941   
Savings deposits $ 715,357  1,433  0.20  % $ 687,458  2,446  0.36  % $ 689,322  1,332  0.19  %
IRA and time certificates 289,775  5,201  1.79  % 327,321  7,080  2.16  % 253,524  4,421  1.74  %
Short-term borrowings 372  1.88  % 6,064  227  3.74  % 13,967  311  2.23  %
Long-term debt 34,265  921  2.69  % 42,733  1,035  2.42  % 16,789  361  2.15  %
Total interest-bearing liabilities 1,039,769  7,562  0.73  % 1,063,576  10,788  1.01  % 973,602  6,425  0.66  %
Demand deposits 407,961      336,257    315,229   
Other liabilities 22,798      18,119    12,195   
Capital 236,396      224,639    187,915   
Total  liabilities  and capital $ 1,706,924      $ 1,642,591      $ 1,488,941     
Net interest rate spread  (3)     3.46  %     3.43  %     3.45  %
Net interest income and net interest margin on a tax equivalent basis (4)   $ 56,491  3.70  %   $ 54,852  3.71  %   $ 48,883  3.63  %
Ratio of interest-earning assets to interest-bearing liabilities 146.97  %     138.90  %     138.37  %    
(1)Includes non-accrual loans if any.
(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%.
(3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.

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

The following table presents the changes in interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the years indicated.  Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
  For the years ended December 31,
  2020 vs. 2019 2019 vs. 2018
  Increase (decrease) due to Increase (decrease) due to
  Volume Rate Total Volume Rate Total
  (In thousands)
Interest income attributable to:            
Loans (1) $ 3,970  (3,712) 258  8,738  2,782  11,520 
Interest-bearing demand deposits 163  (321) (158) 92  13  105 
Interest-bearing time deposits (11) —  (11) (68) 21  (47)
Federal Reserve Bank stock —  —  —  83  —  83 
Federal Home Loan Bank stock (137) (132) 41  (51) (10)
Investment securities:        
Equity securities —  (36) (36) 15  23 
Debt securities, taxable (237) (448) (685) (133) 68  (65)
Debt securities, non-taxable (2) (1,144) 321  (823) (1,421) 144  (1,277)
Total interest income 2,746  (4,333) (1,587) 7,347  2,985  10,332 
Interest expense attributable to:        
Savings deposits 96  (1,109) (1,013) (4) 1,118  1,114 
IRA and time certificates (756) (1,123) (1,879) 1,456  1,203  2,659 
Short-term borrowings (144) (76) (220) (230) 146  (84)
Long-term debt (220) 106  (114) 623  51  674 
Total interest expense (1,024) (2,202) (3,226) 1,845  2,518  4,363 
Net interest income $ 3,770  (2,131) 1,639  5,502  467  5,969 
(1)Non-accrual loans, if any, are included in average loan balances.
(2)Change in interest income from non-taxable investment securities is computed based on interest income determined on a taxable-equivalent yield basis.  Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 21%.

2020 vs. 2019.  Net interest income on a fully tax-equivalent basis for 2020 totaled $56,491,000, an increase of $1,639,000 from 2019.  The increase resulted from a decrease in total interest expense of $3,226,000, partially offset by a decrease in total taxable-equivalent interest income of $1,587,000.

The decrease in total interest income was due primarily to a $685,000 decrease in interest income from taxable debt securities and an $823,000 decrease from taxable-equivalent interest income from non-taxable debt securities. Interest income from taxable debt securities decreased due to an $11.0 million decrease in average securities and to a 30 basis point decrease in the average rate earned on these securities. Interest income from non-taxable debt securities decreased due to a $35.2 million decrease in average securities, partially offset by a 50 basis point increase in the average rate earned on these securities. The decreases in debt securities were invested in the loan portfolio and used to pay down short-term borrowings and long-term debt.
Loan interest income increased by $258,000 due to an $84.9 million increase in average loans, largely offset by a 29 basis point decrease in the average rate earned on loans.




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

The decrease in total interest expense was primarily due to a $1,013,000 decrease in interest paid on savings deposits and a $1,879,000 decrease in interest paid on IRA and time certificates. Interest paid on savings deposits decreased primarily due to a 16 basis point decrease in the average rate paid, slightly offset by a $27.9 million increase in average deposit balances. Interest paid on IRA and time certificates decreased due to a 37 basis point decrease in the average rate paid and to a $37.5 million decrease in average deposit balances. Decreases in average rates paid for savings deposits and IRA and time certificates were primarily due to decreases in market rates.

2019 vs. 2018.  Net interest income on a fully tax-equivalent basis for 2019 totaled $54,852,000, an increase of $5,969,000 from 2018.  The increase resulted from an increase in total taxable-equivalent interest income of $10,332,000, partially offset by an increase in total interest expense of $4,363,000.

The increase in total interest income was due primarily to a $11,520,000 increase in loan interest income caused by a $183.2 million increase in average loans and secondarily to a 26 basis point increase in the average rate earned on loans. Loans obtained through the merger with CFB were a significant component of the increase in average loans. Partially offsetting the increase in loan interest income was a $1,277,000 decrease in taxable-equivalent interest income from non-taxable debt securities. Interest income from non-taxable investment securities decreased due to a $49.5 million decrease in average non-taxable debt securities, slightly offset by a 12 basis point increase in the average rate earned on these securities. The decrease in non-taxable debt securities were invested in the loan portfolio and used to pay down short-term borrowings.

The increase in total interest expense was primarily due to a $1,114,000 increase in interest paid on savings deposits, a $2,659,000 increase in interest paid on IRA and time certificates, and a $674,000 increase in interest paid on long-term debt. Interest paid on savings deposits increased primarily due to a 17 basis point increase in the average rate paid. Interest paid on IRA and time certificates increased due to a $73.8 million increase in the average balance and to a 42 basis point increase in the average rate paid. Increases in average rates paid for savings deposits and IRA and time certificates were primarily due to increases in market rates. Deposits obtained through the merger with CFB were a significant component of the increases in savings deposits and IRA and time certificates. Interest paid on long-term debt increased primarily due to a $25.9 million increase in the average balance and secondarily to a 27 basis point increase in the average rate paid. The average balance on long-term debt increased due to $25.0 million in new borrowings obtained in December 2018 and to borrowings obtained through the merger with CFB, partially offset by borrowings that matured.




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

Provisions and Allowance for Loan Losses

The following table presents the total loan loss provision and the other changes in the allowance for loan losses for the years 2016 through 2020:
  2020 2019 2018 2017 2016
  (Dollars in thousands)
Balance – Beginning of year $ 4,045  4,046  3,403  3,575  3,129 
Loans charged off:          
Commercial and industrial 13  47  —  —  234 
Commercial, secured by real estate 353  143  145  462  185 
Residential real estate 272  234  225  127 
Consumer 30  24  135  90  85 
Agricultural —  —  —  —  — 
Other loans, including deposit overdrafts 140  181  179  138  119 
Total loans charged off 541  667  693  915  750 
Recoveries:          
Commercial and industrial 31  —  99  26 
Commercial, secured by real estate —  56  239  113  98 
Residential real estate 75  297  71  140  52 
Consumer 22  32  13  114  53 
Agricultural —  —  —  —  — 
Other loans, including deposit overdrafts 82  74  89  62  54 
Total recoveries 210  459  413  528  283 
Net charge offs 331  208  280  387  467 
Provision charged to operations 2,014  207  923  215  913 
Balance - End of year $ 5,728  4,045  4,046  3,403  3,575 
Ratio of net charge-offs during the period to average loans outstanding 0.03  % 0.02  % 0.03  % 0.05  % 0.06  %
Ratio of allowance for loan losses to total loans at year-end 0.44  % 0.33  % 0.34  % 0.40  % 0.44  %

Charge-offs and recoveries classified as “Other” include charge-offs and recoveries on checking and NOW account overdrafts.  LCNB charges off such overdrafts when considered uncollectible, but no later than 60 days from the date first overdrawn.

LCNB continuously reviews the loan portfolio for credit risk through the use of its lending and loan review functions.  Independent loan reviews analyze specific loans, providing validation that credit risks are appropriately identified, graded, and reported to the Loan Committee, Board of Directors, and the Audit Committee of the Board of Directors. New credits meeting specific criteria are analyzed prior to origination and are reviewed by the Loan Committee, the Loan Committee of the Board of Directors, and the Board of Directors.


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

The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial and industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit loans, consumer loans, loans for agricultural purposes not secured by real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for loan losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.

The provision for loan losses for 2020 was $2,014,000, compared to $207,000 for 2019 and $923,000 for 2018. The 2020 period included qualitative adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic. Calculating an appropriate level for the allowance and provision for loan losses involves a high degree of management judgment and is, by its nature, imprecise. Revisions may be necessary as more information becomes available.

Non-Interest Income

A comparison of non-interest income for 2020, 2019, and 2018 is as follows:
Increase (Decrease)
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(In thousands)
Fiduciary income $ 5,009  4,354  3,958  655  396 
Service charges and fees on deposit accounts 5,482  5,875  5,590  (393) 285 
Net gains (losses) on sales of securities 221  (41) (8) 262  (33)
Bank owned life insurance income 1,441  943  738  498  205 
Net gains from sales of loans 2,297  328  223  1,969  105 
Other operating income 1,291  889  549  402  340 
Total non-interest income $ 15,741  12,348  11,050  3,393  1,298 

Reasons for changes include:
Fiduciary income increased during 2020 and 2019 due to increases in the fair value of trust and brokerage assets managed.
Service charges and fees on deposit accounts decreased during 2020 primarily due to decreases in fee income recognized on the ICS deposit program, overdraft fees, and smaller decreases in other fee accounts, partially offset by an increase in fees received from debit card usage. Service charges and fees increased during 2019 due to fee income recognized on the ICS deposit program, fees received from debit card usage, and incentive income received on co-branded Mastercards. These increases were partially offset by decreases in service charges on deposit accounts, ATM surcharge fees, and overdraft fees.
Net gains (losses) on sales of securities were greater during 2020 as compared to 2019 and 2018 primarily due to market pricing at the times of the sales. The book value of sales for 2020, 2019, and 2018 were, respectively, $8.6 million, $84.6 million, and $8.6 million.
Bank owned life insurance income was greater in 2020 partially due to $12.0 million of new policies purchased at the beginning of the third quarter 2019 and partially due to a mortality benefit received during the first quarter 2020. Income increased during 2019 primarily due to the new policies previously mentioned.
Net gains from sales of loans was greater during 2020 as compared to 2019 and 2018 primarily due to the volume of loans sold.
Other operating income increased in 2020 primarily due to gains recognized on the sale of equity securities, partially offset by decreases in the fair value of equity security investments. Other operating income increased in 2019 primarily due to increases in the fair value of equity security investments.


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

Non-Interest Expense

A comparison of non-interest expense for 2020, 2019, and 2018 is as follows:
Increase (Decrease)
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(In thousands)
Salaries and employee benefits $ 27,178  25,320  21,279  1,858  4,041 
Equipment expenses 1,377  1,209  1,138  168  71 
Occupancy expense, net 2,875  2,961  2,861  (86) 100 
State financial institutions tax 1,708  1,669  1,197  39  472 
Marketing 1,254  1,319  1,119  (65) 200 
Amortization of intangibles 1,046  1,043  922  121 
FDIC premiums 256  225  419  31  (194)
ATM expense 1,028  580  580  448  — 
Computer maintenance and supplies 1,107  1,094  990  13  104 
Telephone expense 706  707  649  (1) 58 
Contracted services 1,821  1,865  1,547  (44) 318 
Merger-related expenses —  114  2,123  (114) (2,009)
Other non-interest expense 5,429  5,416  5,678  13  (262)
Total non-interest expense $ 45,785  43,522  40,502  2,263  3,020 

Reasons for changes include:
Salaries and employee benefits were 7.3% greater in 2020 than in 2019 and 19.0% greater in 2019 than in 2018. The increases for both years were primarily due to salary and wage increases, incentive payment increases, and newly hired employees, including additional business development positions. Increases in health insurance costs also contributed to the increases for both years.
Equipment expenses increased during 2020 primarily due to increased depreciation charges for furniture and equipment and increased equipment rental costs. During 2020, LCNB replaced ATMs that it had previously owned with new ATMs obtained through an outsourcing arrangement.
Occupancy expense decreased during 2020 primarily due to decreased costs for facility maintenance and repairs and smaller decreases in utility costs and depreciation charges for bank premises, partially offset by higher janitorial costs. Occupancy expense for 2019 increased primarily due to increased branch rental expense and increased charges for maintenance and repairs. The increase in branch rental expense primarily reflects rent paid for the new Worthington Office, previously the CFB Office.
State financial institutions tax expense increased in 2019 due to a larger capital base (Ohio financial institutions tax is based on capital, not income), largely due to stock issued to CFB stockholders during 2018 as merger consideration.
Marketing expense increased in 2019 primarily due to promotion costs for new checking products introduced in 2018, increased marketing activities in the Columbus area, and expanded use of television, radio, and digital media.
FDIC premiums were lower in 2020 and 2019 as compared to 2018 due to small bank assessment credits received from the FDIC during 2020 and 2019 because the DIF was above the mandated level of 1.35%. LCNB has received the full amount of the credit and quarterly premium payments have returned to their normal amounts.
ATM expense increased during 2020 partially due to a strategic decision to outsource LCNB's ATM operations to a third-party vendor, relieving LCNB branch personnel from various ATM maintenance responsibilities.
Computer maintenance and supplies increased in 2019 due to increased technology and software related expenditures designed to offer technological convenience to customers, to protect the integrity of LCNB's data systems and software, and to protect the confidentiality of customer information.
Contracted services increased in 2019 due to additional fees paid for loan and deposit system upgrades and improvements and to general price increases on other contracted services.
Merger-related expenses for 2019 and 2018 were due to the acquisition of CFB and were primarily comprised of various professional fees, costs to prepare and distribute the proxy statement/prospectus, and costs to merge CFB's data system into LCNB's system.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Other non-interest expense for 2018 included $575,000 in net losses from sales of fixed assets, primarily due to the sale of two office buildings.

Income Taxes

LCNB's effective tax rates for the years ended December 31, 2020, 2019, and 2018 were 16.9%, 17.9%, and 16.6%, respectively.  The difference between the statutory rate of 21% and the effective tax rate is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships. A one-time tax benefit recognized as a result of certain provisions in the CARES Act also contributed to the difference during 2020.

Financial Condition

A comparison of balance sheet line items at December 31, 2020 and 2019 is as follows (in thousands):
  December 31, 2020 December 31, 2019 Difference $ Difference %
ASSETS:
Total cash and cash equivalents 31,730  20,765  10,965  52.81  %
Investment securities:
Equity securities with a readily determinable fair value, at fair value 2,389  2,312  77  3.33  %
Equity securities without a readily determinable fair value, at cost 2,099  2,099  —  —  %
Debt securities, available-for-sale, at fair value 209,471  178,000  31,471  17.68  %
Debt securities, held-to-maturity, at cost 24,810  27,525  (2,715) (9.86) %
Federal Reserve Bank stock, at cost 4,652  4,652  —  —  %
Federal Home Loan Bank stock, at cost 5,203  5,203  —  —  %
Loans, net 1,293,693  1,239,406  54,287  4.38  %
Premises and equipment, net 35,376  34,787  589  1.69  %
Operating lease right-of-use assets 6,274  5,444  830  15.25  %
Goodwill 59,221  59,221  —  —  %
Core deposit and other intangibles, net 3,453  4,006  (553) (13.80) %
Bank owned life insurance 42,149  41,667  482  1.16  %
Interest receivable 8,337  3,926  4,411  112.35