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LCNB CORP - Quarter Report: 2021 March (Form 10-Q)


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

FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                        to                                                      

Commission File Number 001-35292
LCNB Corp.
(Exact name of registrant as specified in its charter)
Ohio  31-1626393
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, No Par ValueLCNBNASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
            ☒ Yes         No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
            ☒ Yes         No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐                            Accelerated filer
Non-accelerated filer ☒                             Smaller reporting company
Emerging growth company ☐

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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
            ☐ Yes         No
The number of shares outstanding of the issuer's common stock, without par value, as of May 4, 2021 was 12,969,213 shares.


Table of Contents


LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  










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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.
Economic Aid Act    Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
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
LIHTC            Low Income Housing Tax Credit
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

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PART I – FINANCIAL INFORMATION
 
Item 1.Financial Statements

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, 2021December 31,
2020
(Unaudited)
ASSETS:
Cash and due from banks$18,201 17,383 
Interest-bearing demand deposits22,943 14,347 
Total cash and cash equivalents41,144 31,730 
Investment securities:  
Equity securities with a readily determinable fair value, at fair value2,506 2,389 
Equity securities without a readily determinable fair value, at cost2,099 2,099 
Debt securities, available-for-sale, at fair value237,619 209,471 
Debt securities, held-to-maturity, at cost24,695 24,810 
Federal Reserve Bank stock, at cost4,652 4,652 
Federal Home Loan Bank stock, at cost5,203 5,203 
Loans, net1,329,422 1,293,693 
Premises and equipment, net35,243 35,376 
Operating lease right-of-use assets6,865 6,274 
Goodwill59,221 59,221 
Core deposit and other intangibles, net3,108 3,453 
Bank owned life insurance42,416 42,149 
Interest receivable8,665 8,337 
Other assets15,463 17,027 
TOTAL ASSETS$1,818,321 1,745,884 
LIABILITIES:  
Deposits:  
Noninterest-bearing$475,127 455,073 
Interest-bearing1,061,989 1,000,350 
Total deposits1,537,116 1,455,423 
Long-term debt17,000 22,000 
Operating lease liabilities6,998 6,371 
Accrued interest and other liabilities17,961 21,265 
TOTAL LIABILITIES1,579,075 1,505,059 
COMMITMENTS AND CONTINGENT LIABILITIES— — 
SHAREHOLDERS' EQUITY:  
Preferred shares – no par value, authorized 1,000,000 shares, none outstanding
— — 
Common shares – no par value; authorized 19,000,000 shares; issued 14,196,008 and 14,163,904 shares at March 31, 2021 and December 31, 2020, respectively; outstanding 12,820,108 and 12,858,325 shares at March 31, 2021 and December 31, 2020, respectively
142,639 142,443 
Retained earnings117,863 115,058 
Treasury shares at cost, 1,375,900 and 1,305,579 shares at March 31, 2021 and December 31, 2020, respectively
(21,859)(20,719)
Accumulated other comprehensive income, net of taxes603 4,043 
TOTAL SHAREHOLDERS' EQUITY239,246 240,825 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$1,818,321 1,745,884 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended 
March 31,
 20212020
INTEREST INCOME:
Interest and fees on loans$14,535 15,227 
Dividends on equity securities:
With a readily determinable fair value13 14 
Without a readily determinable fair value16 
Interest on debt securities:
Taxable718 950 
Non-taxable224 285 
Other investments39 64 
TOTAL INTEREST INCOME15,535 16,556 
INTEREST EXPENSE:  
Interest on deposits1,028 2,117 
Interest on short-term borrowings
Interest on long-term debt134 254 
TOTAL INTEREST EXPENSE1,163 2,378 
NET INTEREST INCOME14,372 14,178 
(CREDIT) PROVISION FOR LOAN LOSSES(52)1,173 
NET INTEREST INCOME AFTER (CREDIT) PROVISION FOR LOAN LOSSES14,424 13,005 
NON-INTEREST INCOME:  
Fiduciary income1,529 1,103 
Service charges and fees on deposit accounts1,366 1,295 
Net gains from sales of debt securities, available-for-sale— 221 
Bank owned life insurance income267 601 
Gains from sales of loans43 120 
Other operating income260 499 
TOTAL NON-INTEREST INCOME3,465 3,839 
NON-INTEREST EXPENSE:  
Salaries and employee benefits6,433 6,768 
Equipment expenses368 287 
Occupancy expense, net794 682 
State financial institutions tax444 436 
Marketing268 177 
Amortization of intangibles257 260 
FDIC insurance premiums (credit), net113 (1)
Contracted services540 402 
Other non-interest expense2,275 2,061 
TOTAL NON-INTEREST EXPENSE11,492 11,072 
INCOME BEFORE INCOME TAXES6,397 5,772 
PROVISION FOR INCOME TAXES1,157 746 
NET INCOME$5,240 5,026 
Dividends declared per common share$0.19 0.18 
Earnings per common share:  
Basic$0.41 0.39 
Diluted0.41 0.39 
Weighted average common shares outstanding:  
Basic12,794,824 12,926,077 
Diluted12,794,852 12,927,666 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended 
March 31,
 20212020
Net income$5,240 5,026 
Other comprehensive income:  
Net unrealized (losses) gains on available-for-sale debt securities (net of taxes of $915 and $(706) for the three months ended March 31, 2021 and 2020, respectively)
(3,441)2,658 
Reclassification adjustment for net realized gains on sales of available-for-sale debt securities included in net income (net of taxes of $46 for the three months ended March 31, 2020)
— (175)
Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $— for the three months ended March 31, 2021)
— 
  Other comprehensive (loss) income, net of tax(3,440)2,483 
TOTAL COMPREHENSIVE INCOME$1,800 7,509 

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

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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
 Common Shares OutstandingCommon StockRetained
Earnings
Treasury
Shares
Accumulated Other Comprehensive IncomeTotal Shareholders'
Equity
Three Months Ended March 31, 2021
Balance at December 31, 202012,858,325 $142,443 115,058 (20,719)4,043 240,825 
Net income  5,240   5,240 
Other comprehensive loss, net of taxes   (3,440)(3,440)
Dividend Reinvestment and Stock Purchase Plan5,472 99   99 
Repurchase of common stock(70,321)(1,140)(1,140)
Exercise of stock options311 
Compensation expense relating to restricted stock26,321 93 93 
Common stock dividends, $0.19 per share
  (2,435)  (2,435)
Balance at March 31, 202112,820,108 $142,639 117,863 (21,859)603 239,246 
Three Months Ended March 31, 2020
Balance at December 31, 201912,936,783 $141,791 104,431 (18,847)673 228,048 
Net income  5,026   5,026 
Other comprehensive income, net of taxes    2,483 2,483 
Dividend Reinvestment and Stock Purchase Plan7,039 107    107 
Exercise of stock options9,593 115  115 
Compensation expense relating to restricted stock15,661 33 33 
Common stock dividends, $0.18 per share
  (2,334)  (2,334)
Balance at March 31, 202012,969,076 $142,046 107,123 (18,847)3,156 233,478 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended 
March 31,
 20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$5,240 5,026 
Adjustments to reconcile net income to net cash flows from operating activities:  
Depreciation, amortization, and accretion308 248 
Provision (credit) for loan losses(52)1,173 
Deferred income tax provision (benefit)74 28 
Increase in cash surrender value of bank owned life insurance(267)(284)
Bank owned life insurance mortality benefits in excess of cash surrender value— (316)
Gain from equity securities(112)(333)
Realized gain from sales of debt securities, available-for-sale— (221)
Realized gain from sales of premises and equipment(5)(1)
Realized gain from sales and impairment of other real estate owned and repossessed assets— (11)
Origination of mortgage loans for sale(1,354)(4,890)
Realized gains from sales of loans(43)(120)
Proceeds from sales of mortgage loans1,381 4,964 
Compensation expense related to restricted stock93 33 
Changes in:  
Accrued interest receivable(328)(544)
Other assets1,565 (1,494)
Other liabilities(2,461)(1,953)
TOTAL ADJUSTMENTS(1,201)(3,721)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES4,039 1,305 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Proceeds from sales of equity securities— 646 
Proceeds from sales of debt securities, available-for-sale— 8,786 
Proceeds from maturities and calls of debt securities:
Available-for-sale7,833 31,022 
Held-to-maturity115 111 
Purchases of equity securities(5)(37)
Purchases of debt securities:
Available-for-sale(40,759)— 
Held-to-maturity— (280)
Net increase in loans(34,733)(28,523)
Proceeds from bank owned life insurance mortality benefits— 958 
Proceeds from sale of other real estate owned and repossessed assets— 208 
Purchases of premises and equipment(302)(647)
Proceeds from sale of premises and equipment
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES(67,846)12,245 
CASH FLOWS FROM FINANCING ACTIVITIES:  
Net increase (decrease) in deposits81,693 (2,408)
Principal payments on long-term debt(5,000)(5,001)
Proceeds from issuance of common stock21 
Repurchase of common stock(1,140)— 
Proceeds from exercise of stock options115 
Cash dividends paid on common stock(2,344)(2,247)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES73,221 (9,520)
NET CHANGE IN CASH AND CASH EQUIVALENTS9,414 4,030 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD31,730 20,765 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$41,144 24,795 
SUPPLEMENTAL CASH FLOW INFORMATION:  
Interest paid1,265 2,418 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:  
Right-of-use assets obtained in exchange for lease obligations801 — 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

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

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

The consolidated condensed balance sheet as of December 31, 2020 has been derived from the audited consolidated balance sheet as of that date.

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies, and financial notes thereto included in LCNB's 2020 Annual Report on Form 10-K filed with the SEC.

Accounting Changes
Financial Accounting Standards (“FASB”) Accounting Standards Update (“ASU”) No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting"
ASU No. 2020-04 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying generally accepted accounting principles ("GAAP") to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. LCNB does not expect the guidance in ASU No. 2020-04 will have a material impact on its results of consolidated operations or financial position.

ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans"
ASU No. 2018-14 was issued in August 2018 and was adopted by LCNB on January 1, 2021. The amendments in this update modify disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, including the deletion, modification, and addition of certain targeted disclosures. The amendments are to be applied on a retrospective basis to all periods presented upon adoption. Adoption of ASU No. 2018-14 did not have a material impact on LCNB's results of consolidated operations or financial position.

ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"
ASU No. 2019-12 was issued in December 2019 and adopted by LCNB on January 1, 2021. It simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends certain other guidance. Adoption of ASU No. 2019-12 did not have a material impact on LCNB's results of consolidated operations or financial position.
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 2 - Investment Securities
 
The amortized cost and estimated fair value of equity and debt securities at March 31, 2021 and December 31, 2020 are summarized as follows (in thousands):
 Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
March 31, 2021
Debt Securities, Available-for-Sale:
U.S. Treasury notes$16,186 108 78 16,216 
U.S. Agency notes75,912 597 1,372 75,137 
Corporate bonds1,900 14 1,893 
U.S. Agency mortgage-backed securities95,089 2,244 730 96,603 
Municipal securities:    
Non-taxable12,263 202 32 12,433 
Taxable35,120 775 558 35,337 
 $236,470 3,933 2,784 237,619 
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable$21,293 169 — 21,462 
Taxable3,402 42 3,366 
$24,695 175 42 24,828 
December 31, 2020
Debt Securities, Available-for-Sale:
U.S. Treasury notes$2,268 120 — 2,388 
U.S. Agency notes66,983 950 33 67,900 
Corporate Bonds1,200 — 21 1,179 
U.S. Agency mortgage-backed securities88,455 3,180 91,634 
Municipal securities:    
Non-taxable12,651 282 — 12,933 
Taxable32,409 1,031 33,437 
 $203,966 5,563 58 209,471 
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable$21,408 181 — 21,589 
Taxable3,402 37 3,371 
$24,810 187 37 24,960 
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 2 - Investment Securities (continued)

Information concerning debt securities with gross unrealized losses at March 31, 2021 and December 31, 2020, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
 Less than Twelve MonthsTwelve Months or Greater
 Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
March 31, 2021
Available-for-Sale:
U.S. Treasury notes$8,924 78 — — 
U.S. Agency notes52,785 1,372 — — 
Corporate bonds1,186 14 — — 
U.S. Agency mortgage-backed securities41,801 730 — — 
Municipal securities:  
Non-taxable1,758 32 — — 
Taxable18,537 558 — — 
 $124,991 2,784 — — 
Held-to-Maturity:
Municipal securities:
  Non-taxable$— — — — 
  Taxable3,108 42 — — 
$3,108 42 — — 
December 31, 2020
Available-for-Sale:
U.S. Treasury notes$— — — — 
U.S. Agency notes10,674 33 — — 
Corporate Bonds679 21 — — 
U.S. Agency mortgage-backed securities290 — — 
Municipal securities:   
Non-taxable38 — — — 
Taxable3,063 — — 
 $14,744 58 — — 
Held-to-Maturity:
Municipal securities:
  Non-taxable$— — 
  Taxable3,113 37 — — 
$3,114 37 — — 

Management has determined that the unrealized losses at March 31, 2021 are primarily due to fluctuations in market interest rates and do not reflect credit quality deterioration of the securities.   Because LCNB does not have the intent to sell the investments and it is more likely than not that LCNB will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, LCNB does not consider these investments to be other-than-temporarily impaired.


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

Note 2 - Investment Securities (continued)

Contractual maturities of debt securities at March 31, 2021 were as follows (in thousands).  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
 Available-for-SaleHeld-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Due within one year$8,811 8,932 2,116 2,122 
Due from one to five years42,243 42,853 5,676 5,739 
Due from five to ten years89,298 88,238 2,055 2,089 
Due after ten years1,029 993 14,848 14,878 
 141,381 141,016 24,695 24,828 
U.S. Agency mortgage-backed securities95,089 96,603 — — 
 $236,470 237,619 24,695 24,828 

Debt securities with a market value of $192,973,000 and $118,599,000 at March 31, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

Certain information concerning the sale of debt securities, available-for-sale, for the three months ended March 31, 2021 and 2020 was as follows (in thousands):
 Three Months Ended 
March 31,
 20212020
Proceeds from sales$— 8,786 
Gross realized gains— 221 
Gross realized losses— — 

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

Equity securities with a readily determinable fair value are carried at fair value, with changes in fair value recognized in other operating income in the consolidated condensed statements of income. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer. LCNB was not aware of any impairment or observable price change adjustments that needed to be made at March 31, 2021 on its investments in equity securities without a readily determinable fair value.

The amortized cost and estimated fair value of equity securities with a readily determinable fair value at March 31, 2021 and December 31, 2020 are summarized as follows (in thousands):
March 31, 2021December 31, 2020
 Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Mutual funds$1,399 1,385 1,395 1,402 
Equity securities778 1,121 778 987 
Total equity securities with a readily determinable fair value$2,177 2,506 2,173 2,389 




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

Note 2 - Investment Securities (continued)

Certain information concerning changes in fair value of equity securities with a readily determinable fair value for the three months ended March 31, 2021 and 2020 is as follows (in thousands):
Three Months Ended 
March 31,
20212020
Net gains recognized$112 333 
Less net realized gains on equity securities sold— 559 
Net unrealized gains (losses) recognized and still held at period end$112 (226)


Note 3 - Loans
 
Major classifications of loans at March 31, 2021 and December 31, 2020 were as follows (in thousands):
March 31, 2021December 31, 2020
Commercial & industrial$107,630 100,254 
Commercial, secured by real estate855,894 843,230 
Residential real estate328,265 309,692 
Consumer35,799 36,917 
Agricultural8,698 10,100 
Other loans, including deposit overdrafts346 363 
  Loans, gross1,336,632 1,300,556 
Deferred origination fees, net(1,531)(1,135)
  Loans, net of deferred origination fees1,335,101 1,299,421 
Less allowance for loan losses5,679 5,728 
Loans, net$1,329,422 1,293,693 

Non-accrual, past-due, and accruing restructured loans as of March 31, 2021 and December 31, 2020 were as follows (in thousands):
March 31, 2021December 31, 2020
Non-accrual loans:
Commercial, secured by real estate$2,113 2,458 
Residential real estate1,252 1,260 
Total non-accrual loans3,365 3,718 
Past-due 90 days or more and still accruing— — 
Total non-accrual and past-due 90 days or more and still accruing3,365 3,718 
Accruing restructured loans4,992 5,176 
Total$8,357 8,894 




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

Note 3 – Loans (continued)

The allowance for loan losses for the three months ended March 31, 2021 and 2020 were as follows (in thousands):
 Commercial
& Industrial
Commercial, Secured by
Real Estate
Residential
Real Estate
ConsumerAgriculturalOtherTotal
Three Months Ended March 31, 2021
Balance, beginning of year$816 3,903 837 153 28 (9)5,728 
Provision (credit) charged to expenses141 (267)71 (20)11 12 (52)
Losses charged off— (2)(16)(3)— (21)(42)
Recoveries— — 27 — 17 45 
Balance, end of period$957 3,634 919 131 39 (1)5,679 
Three Months Ended March 31, 2020
Balance, beginning of year$456 2,924 528 99 34 4,045 
Provision (credit) charged to expenses159 920 31 41 17 1,173 
Losses charged off— (270)(3)(12)(36)(321)
Recoveries18 — 73 19 111 
Balance, end of period$633 3,574 629 129 39 5,008 
13

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

Note 3 – Loans (continued)

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, 2021 and December 31, 2020 were as follows (in thousands):
 Commercial
& Industrial
Commercial, Secured by
Real Estate
Residential
Real Estate
ConsumerAgriculturalOtherTotal
March 31, 2021
Allowance for loan losses:
Individually evaluated for impairment$11 — — — 27 
Collectively evaluated for impairment949 3,626 908 131 39 (1)5,652 
Acquired credit impaired loans— — — — — — 
Balance, end of period$957 3,634 919 131 39 (1)5,679 
Loans:
Individually evaluated for impairment$184 6,089 1,606 — — 7,881 
Collectively evaluated for impairment106,449 846,583 325,247 35,922 8,644 147 1,322,992 
Acquired credit impaired loans107 1,999 1,923 — — 199 4,228 
Balance, end of period$106,740 854,671 328,776 35,924 8,644 346 1,335,101 
December 31, 2020
Allowance for loan losses:
Individually evaluated for impairment$17 27 — — — 52 
Collectively evaluated for impairment808 3,886 810 153 28 (9)5,676 
Acquired credit impaired loans— — — — — — — 
Balance, end of period$816 3,903 837 153 28 (9)5,728 
Loans:
Individually evaluated for impairment$194 6,613 1,641 — — 8,453 
Collectively evaluated for impairment99,040 833,548 306,138 37,047 10,116 179 1,286,068 
Acquired credit impaired loans362 2,048 2,306 — — 184 4,900 
Balance, end of period$99,596 842,209 310,085 37,052 10,116 363 1,299,421 

14

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

Note 3 – Loans (continued)

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

Commercial & Industrial Loans. LCNB’s commercial & industrial loan portfolio consists of loans for various purposes, including loans to fund working capital requirements (such as inventory and receivables financing) and purchases of machinery and equipment.  LCNB offers a variety of commercial & industrial loan arrangements, including term loans, balloon loans, and lines of credit.  Commercial & industrial loans can have a fixed or variable rate, with maturities ranging from one to ten years.  Commercial & industrial loans are offered to businesses and professionals for short and medium terms on both a collateralized and uncollateralized basis. Commercial & industrial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of the business.  Collateral, when obtained, may include liens on furniture, fixtures, equipment, inventory, receivables, or other assets.  As a result, such loans involve complexities, variables, and risks that require thorough underwriting and more robust servicing than other types of loans.

This category includes PPP loans that were authorized under the CARES Act and updated by the Economic Aid Act. The PPP was implemented by the SBA with support from the Department of the Treasury and provided small businesses that were negatively impacted by the COVID-19 pandemic with government guaranteed and potentially forgivable loans that could be used 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, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Eligible borrowers can apply for a First Draw or a Second Draw PPP Loan. PPP loans made by LCNB have a maturity of two years if issued prior to June 5, 2020 and five years if issued after June 5, 2020. The loans have an interest rate of 1%. In addition, the SBA pays originating lenders processing fees based on the size of the loan. A borrower who meets certain requirements can request loan forgiveness from the SBA. If loan forgiveness is granted, the SBA will forward the forgiveness amount to the lender. LCNB originated 316 PPP loans with original balances totaling $45.5 million during 2020 and originated an additional 345 loans with original balances totaling $23.6 million during the first quarter 2021. The outstanding balance at March 31, 2021 was $33.3 million.

Commercial, Secured by Real Estate Loans.  Commercial real estate loans include loans secured by a variety of commercial, retail, and office buildings, religious facilities, hotels, multifamily (more than four-family) residential properties, construction and land development loans, and other land loans. Commercial real estate loan products generally amortize over five to twenty-five years and are payable in monthly principal and interest installments.  Some have balloon payments due within one to ten years after the origination date.  The majority have adjustable interest rates with adjustment periods ranging from one to ten years, some of which are subject to established “floor” interest rates.

Commercial real estate loans are underwritten based on the ability of the property, in the case of income producing property, or the borrower’s business to generate sufficient cash flow to amortize the debt. Secondary emphasis is placed upon global debt service, collateral value, financial strength of any and all guarantors, and other factors. Commercial real estate loans are generally originated with a 75% to 85% maximum loan to appraised value ratio, depending upon borrower occupancy.

Residential Real Estate Loans.  Residential real estate loans include loans secured by first or second mortgage liens on one to four-family residential properties.  Home equity lines of credit and mortgage loans secured by owner-occupied agricultural property are included in this category.  First and second mortgage loans are generally amortized over five to thirty years with monthly principal and interest payments.  Home equity lines of credit generally have a five year or less draw period with interest only payments followed by a repayment period with monthly payments based on the amount outstanding.  LCNB offers both fixed and adjustable rate mortgage loans.  Adjustable rate loans are available with adjustment periods ranging between one to ten years and adjust according to an established index plus a margin, subject to certain floor and ceiling rates.  Home equity lines of credit have a variable rate based on the Wall Street Journal prime rate plus a margin.

Residential real estate loans are underwritten primarily based on the borrower’s ability to repay, prior credit history, and the value of the collateral.  LCNB generally requires private mortgage insurance for first mortgage loans that have a loan to appraised value ratio of greater than 80%.
15

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

Note 3 – Loans (continued)

Consumer Loans.  LCNB’s portfolio of consumer loans generally includes secured and unsecured loans to individuals for household, family and other personal expenditures.  Secured loans include loans to fund the purchase of automobiles, recreational vehicles, boats, and similar acquisitions. Consumer loans made by LCNB generally have fixed rates and terms ranging up to 72 months, depending upon the nature of the collateral, size of the loan, and other relevant factors. Consumer loans generally have higher interest rates, but pose additional risks of collectibility and loss when compared to certain other types of loans. Collateral, if present, is generally subject to damage, wear, and depreciation.  The borrower’s ability to repay is of primary importance in the underwriting of consumer loans.

Agricultural Loans.  LCNB’s portfolio of agricultural loans includes loans for financing agricultural production and for financing the purchase of equipment used in the production of agricultural products.  LCNB’s agricultural loans are generally secured by farm machinery, livestock, crops, vehicles, or other agricultural-related collateral.

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

Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.
Other Assets Especially Mentioned ("OAEM") – loans in this category are currently protected but are potentially weak. These loans constitute a risk but not to the point of justifying a classification of substandard.  The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.
Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the possibility that LCNB will sustain some loss if the deficiencies are not corrected.
Doubtful – loans classified in this category have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
A breakdown of the loan portfolio by credit quality indicators at March 31, 2021 and December 31, 2020 is as follows (in thousands):
 PassOAEMSubstandardDoubtfulTotal
March 31, 2021
Commercial & industrial$105,070 — 1,670 — 106,740 
Commercial, secured by real estate826,296 8,999 19,376 — 854,671 
Residential real estate325,284 597 2,895 — 328,776 
Consumer35,924 — — — 35,924 
Agricultural8,644 — — — 8,644 
Other346 — — — 346 
Total$1,301,564 9,596 23,941 — 1,335,101 
December 31, 2020     
Commercial & industrial$97,391 — 2,205 — 99,596 
Commercial, secured by real estate811,558 9,279 21,372 — 842,209 
Residential real estate306,092 1,005 2,988 — 310,085 
Consumer37,050 — — 37,052 
Agricultural10,116 — — — 10,116 
Other363 — — — 363 
Total$1,262,570 10,284 26,567 — 1,299,421 

16

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

Note 3 – Loans (continued)

A loan portfolio aging analysis at March 31, 2021 and December 31, 2020 is as follows (in thousands):
 30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
Past Due
Total
Past Due
CurrentTotal Loans
Receivable
Total Loans Greater Than
90 Days and
Accruing
March 31, 2021
Commercial & industrial$— — — — 106,740 106,740 — 
Commercial, secured by real estate834 — 901 1,735 852,936 854,671 — 
Residential real estate586 — 532 1,118 327,658 328,776 
Consumer— — 35,921 35,924 — 
Agricultural— — — — 8,644 8,644 — 
Other28 — — 28 318 346 — 
Total$1,451 — 1,433 2,884 1,332,217 1,335,101 — 
December 31, 2020       
Commercial & industrial$— — — — 99,596 99,596 — 
Commercial, secured by real estate16 — 1,476 1,492 840,717 842,209 — 
Residential real estate497 219 675 1,391 308,694 310,085 — 
Consumer— 37,047 37,052 — 
Agricultural— — — — 10,116 10,116 — 
Other60 — — 60 303 363 — 
Total$577 220 2,151 2,948 1,296,473 1,299,421 — 

Impaired loans, including acquired credit impaired loans, at March 31, 2021 and December 31, 2020 were as follows (in thousands):
March 31, 2021December 31, 2020
 Recorded InvestmentUnpaid Principal BalanceRelated AllowanceRecorded InvestmentUnpaid Principal BalanceRelated Allowance
With no related allowance recorded:
Commercial & industrial$107 373 362 646 
Commercial, secured by real estate6,471 7,476 6,050 6,735 
Residential real estate3,225 3,658 3,261 3,695 
Consumer
Agricultural— — — — 
Other199 297 184 297 
Total$10,004 11,806 9,861 11,377 
With an allowance recorded:   
Commercial & industrial$184 190 194 199 
Commercial, secured by real estate1,617 1,617 2,611 2,908 17 
Residential real estate304 304 11 686 687 27 
Consumer— — — — 
Agricultural— — — — — — 
Other— — — — — — 
Total$2,105 2,111 27 3,492 3,795 52 
Total:   
Commercial & industrial$291 563 556 845 
Commercial, secured by real estate8,088 9,093 8,661 9,643 17 
Residential real estate3,529 3,962 11 3,947 4,382 27 
Consumer— — 
Agricultural— — — — — — 
Other199 297 — 184 297 — 
Total$12,109 13,917 27 13,353 15,172 52 
17

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

Note 3 – Loans (continued)

The following presents information related to the average recorded investment and interest income recognized on impaired loans, including acquired credit impaired loans, for the three months ended March 31, 2021 and 2020 (in thousands):
20212020
 Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
Three Months Ended March 31,
With no related allowance recorded:
Commercial & industrial$235 25 637 264 
Commercial, secured by real estate6,794 119 9,823 344 
Residential real estate3,448 66 3,289 92 
Consumer— 18 — 
Agricultural— — — — 
Other191 15 266 
Total$10,672 225 14,033 707 
With an allowance recorded:    
Commercial & industrial$189 839 10 
Commercial, secured by real estate1,617 17 95 
Residential real estate307 339 
Consumer— — — 
Agricultural— — — — 
Other— — — — 
Total$2,113 24 1,278 17 
Total:    
Commercial & industrial$424 28 1,476 274 
Commercial, secured by real estate8,411 136 9,918 346 
Residential real estate3,755 70 3,628 97 
Consumer— 23 — 
Agricultural— — — — 
Other191 15 266 
Total$12,785 249 15,311 724 

Of the interest income recognized on impaired loans during the three months ended March 31, 2021 and 2020, approximately $0 and $10,000, respectively, were recognized on a cash basis.

From time to time, the terms of certain loans are modified as troubled debt restructurings ("TDRs") where concessions are granted to borrowers experiencing financial difficulties. The modification of the terms of such loans may have included one, or a combination of, the following: a temporary or permanent reduction of the stated interest rate of the loan, an increase in the stated rate of interest lower than the current market rate for new debt with similar risk, forgiveness of principal, an extension of the maturity date, or a change in the payment terms.

Loan modifications that were classified as TDRs during the three months ended March 31, 2021 and 2020 were as follows (dollars in thousands):
 20212020
 Number
of
Loans
Pre-Modification Recorded BalancePost-Modification Recorded BalanceNumber of LoansPre-Modification Recorded BalancePost-Modification Recorded Balance
Three Months Ended March 31,    
Commercial & industrial— $— $— $$
Residential real estate21 21 — — — 
Total$21 $21 $$
18

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

Note 3 – Loans (continued)

Post-modification balances, as of the dates of modification, of newly restructured troubled debt by type of modification for the three months ended March 31, 2021 and 2020 were as follows (in thousands):
Term ModificationRate ModificationInterest OnlyPrincipal ForgivenessCombinationTotal Modifications
Three Months Ended March 31, 2021     
Residential real estate$— — — — 21 21 
Total$— — — — 21 21 
Three Months Ended March 31, 2020
Commercial & industrial$— — — — 
Total$— — — — 

LCNB is not committed to lend additional funds to borrowers whose loan terms were modified in a troubled debt restructuring.

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructuring date for the three months ended March 31, 2021 and 2020.

All troubled debt restructurings are considered impaired loans. The allowance for loan losses on such restructured loans is based on the present value of future expected cash flows.

Information concerning loans that were modified during the three months ended March 31, 2021 and 2020 and that were determined to be troubled debt restructurings follows (in thousands):
20212020
Impaired loans without a valuation allowance$21 
Impaired loans with a valuation allowance— — 

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“Section 4013”). To be eligible under Section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The Consolidated Appropriations Act, 2021 was signed into law on December 20, 2020 and, among other provisions, extended the provisions in Section 4013 to January 1, 2022.

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

The carrying value of loans that remain on modified terms under the guidance of Section 4013 totaled $18,857,000 and $19,023,000 at March 31, 2021 and December 31, 2020, respectively. The carrying value of loans that remain on modified terms under the guidance of the revised interagency statement totaled $781,000 and $1,553,000 at March 31, 2021 and December 31, 2020, respectively.

Mortgage loans sold to and serviced for investors are not included in the accompanying consolidated condensed balance sheets.  The unpaid principal balances of those loans at March 31, 2021 and December 31, 2020 were approximately $127,290,000 and $137,188,000, respectively.
19

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

Note 3 – Loans (continued)

The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at March 31, 2021 was $481,000.


Note 4 - Acquired Credit Impaired Loans

Loans acquired through mergers are recorded at fair value with no carryover of the acquired entity's previously established allowance for loan losses.  The excess of expected cash flows over the estimated fair value of acquired loans is recognized as interest income over the remaining contractual lives of the loans using the level yield method. Subsequent decreases in expected cash flows will require additions to the allowance for loan losses.  Subsequent improvements in expected cash flows result in the recognition of additional interest income over the then-remaining contractual lives of the loans.

Impaired loans acquired are accounted for under ASC 310-30.  Factors considered in evaluating whether an acquired loan was impaired include delinquency status and history, updated borrower credit status, collateral information, and updated loan-to-value information.  The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected is referred to as the nonaccretable difference. The interest component of the cash flows expected to be collected is referred to as the accretable yield and is recognized as interest income over the remaining contractual life of the loan using the level yield method.   Subsequent decreases in expected cash flows will require additions to the allowance for loan losses.  Subsequent improvements in expected cash flows will result in a reclassification from the nonaccretable difference to the accretable yield.

20

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

Note 4 – Acquired Credit Impaired Loans (continued)

The following table provides at March 31, 2021 and December 31, 2020 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):
March 31, 2021December 31, 2020
Acquired from First Capital Bancshares, Inc.
Commercial & industrial$— 
Commercial, secured by real estate— — 
Residential real estate442 449 
Other loans, including deposit overdrafts— — 
  Loans, gross442 450 
Less allowance for loan losses— — 
  Loans, net$442 450 
Acquired from Eaton National Bank & Trust Co.
Commercial & industrial$— 249 
Commercial, secured by real estate587 601 
Residential real estate540 595 
Other loans, including deposit overdrafts199 184 
  Loans, gross1,326 1,629 
Less allowance for loan losses— — 
  Loans, net$1,326 1,629 
Acquired from BNB Bancorp, Inc.
Commercial & industrial$— — 
Commercial, secured by real estate758 780 
Residential real estate83 85 
Other loans, including deposit overdrafts— — 
  Loans, gross841 865 
Less allowance for loan losses— — 
  Loans, net$841 865 
Acquired from Columbus First Bancorp, Inc.
Commercial & industrial$107 112 
Commercial, secured by real estate654 667 
Residential real estate858 1,177 
Other loans, including deposit overdrafts— — 
  Loans, gross1,619 1,956 
Less allowance for loan losses— — 
  Loans, net$1,619 1,956 
Total
Commercial & industrial$107 362 
Commercial, secured by real estate1,999 2,048 
Residential real estate1,923 2,306 
Other loans, including deposit overdrafts199 184 
Loans, gross4,228 4,900 
Less allowance for loan losses— — 
  Loans, net$4,228 4,900 
21

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

Note 4 – Acquired Credit Impaired Loans (continued)

The following table provides the outstanding balance and related carrying amount for acquired credit impaired loans at the dates indicated (in thousands):
March 31, 2021December 31, 2020
Outstanding balance$5,386 6,128 
Carrying amount4,228 4,900 

Activity during the three months ended March 31, 2021 and 2020 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):
Three Months Ended March 31,
20212020
Accretable discount at beginning of period$182 480 
Reclassification from nonaccretable discount to accretable discount12 333 
Accretion(71)(495)
Accretable discount at end of period$123 318 


Note 5 - Affordable Housing Tax Credit Limited Partnership

LCNB is a limited partner in limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit pursuant to Section 42 of the Internal Revenue Code. The purpose of the investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.

The following table presents the balances of LCNB's affordable housing tax credit investments and related unfunded commitments at March 31, 2021 and December 31, 2020 (in thousands):
 March 31,
2021
December 31,
2020
Affordable housing tax credit investment$11,950 12,000 
Less amortization1,538 1,320 
Net affordable housing tax credit investment$10,412 10,680 
Unfunded commitment$8,187 8,237 

The net affordable housing tax credit investment is included in other assets and the unfunded commitment is included in accrued interest and other liabilities in the consolidated condensed balance sheets.

LCNB expects to fund the unfunded commitment over 14 years.







22

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

Note 5 – Affordable Housing Tax Credit Limited Partnership (continued)
The following table presents other information relating to LCNB's affordable housing tax credit investments for the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31,
 20212020
Tax credits and other tax benefits recognized$260 159 
Tax credit amortization expense included in provision for income taxes217 126 


Note 6 – Borrowings

Borrowings at March 31, 2021 and December 31, 2020 were as follows (dollars in thousands):
March 31, 2021December 31, 2020
AmountRateAmountRate
FHLB long-term advances$17,000 2.81 %$22,000 2.68 %
$17,000 2.81 %$22,000 2.68 %
All advances from the FHLB of Cincinnati are secured by a blanket pledge of LCNB's 1-4 family first lien mortgage loans in the amount of approximately $296 million and $276 million at March 31, 2021 and December 31, 2020, respectively.  Total remaining borrowing capacity at March 31, 2021 was approximately $172.6 million.


Note 7 - Leases

Lease expenses for offices are included in the consolidated condensed statements of income in net occupancy expense and lease expenses for equipment and ATMs are included in equipment expense. Components of lease expense for the three months ended March 31, 2021 were as follows (in thousands):
Three Months Ended 
March 31,
20212020
Operating lease expense$215 153 
Short-term lease expense14 12 
Variable lease expense
Other
Total lease expense$233 169 

Other information related to leases at March 31, 2021 were as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$181 
Right-of-use assets obtained in exchange for new operating lease liabilities$801 
Weighted average remaining lease term in years for operating leases31.6
Weighted average discount rate for operating leases3.35 %
23

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



Note 8 – Income Taxes

A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
 Three Months Ended March 31,
 20212020
Statutory tax rate21.0 %21.0 %
Increase (decrease) resulting from:  
Tax exempt interest(0.7)%(1.0)%
Tax exempt income on bank owned life insurance(0.9)%(2.2)%
Captive insurance premium income(0.7)%(0.8)%
Tax benefit from certain provisions of the CARES Act— %(3.4)%
Other, net(0.6)%(0.7)%
Effective tax rate18.1 %12.9 %


Note 9 - Commitments and Contingent Liabilities
 
LCNB is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit.  They involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.  Exposure to credit loss in the event of nonperformance by the other parties to financial instruments for commitments to extend credit is represented by the contract amount of those instruments.

The Bounce Protection product, a customer deposit overdraft program, is offered as a service and does not constitute a contract between the customer and LCNB.

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

Financial instruments whose contract amounts represent off-balance-sheet credit risk at March 31, 2021 and December 31, 2020 were as follows (in thousands):
March 31, 2021December 31, 2020
Commitments to extend credit:
Commercial loans$101,614 24,581 
Other loans  
Fixed rate14,534 14,668 
Adjustable rate3,743 4,386 
Unused lines of credit:  
Fixed rate28,440 24,205 
Adjustable rate134,773 133,073 
Unused overdraft protection amounts on demand and NOW accounts16,549 16,471 
Standby letters of credit55 243 
Total commitments$299,708 217,627 

24

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

Note 9 – Commitments and Contingent Liabilities (continued)

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

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  These guarantees generally are fully secured and have varying maturities.  

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

Capital expenditures include the construction or acquisition of new office buildings, improvements to LCNB's offices, purchases of furniture and equipment, and additions or improvements to LCNB's information technology system. Commitments outstanding for capital expenditures as of March 31, 2021 totaled approximately $1,840,000.

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

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


Note 10 – Accumulated Other Comprehensive Income (Loss)
 
Changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020 were as follows (in thousands):
Three Months Ended March 31,
 Unrealized Gains and Losses on Available-for-Sale SecuritiesChanges in Pension Plan Assets and Benefit ObligationsTotal
2021
Balance at beginning of period$4,349 (306)4,043 
Before reclassifications(3,441)(3,440)
Reclassifications— — — 
Balance at end of period$908 (305)603 
2020   
Balance at beginning of period$857 (184)673 
Before reclassifications2,658 — 2,658 
Reclassifications(175)— (175)
Balance at end of period$3,340 (184)3,156 





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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 10 – Accumulated Other Comprehensive Income (Loss), continued
 

Reclassifications out of accumulated other comprehensive income (loss) during the three months ended March 31, 2021 and 2020 and the affected line items in the consolidated condensed statements of income were as follows (in thousands):
Three Months Ended 
March 31,
Affected Line Item in the Consolidated Condensed Statements of Income
 20212020
Realized gains from sales of debt securities, available-for-sale$— 221 Net gains from sales of debt securities, available-for-sale
Income tax expense46 Provision for income taxes
Reclassification adjustment, net of taxes$— 175 


Note 11 – Retirement Plans
 
LCNB participates in a noncontributory defined benefit multi-employer retirement plan that covers substantially all regular full-time employees hired before January 1, 2009. Employees hired before this date who received a benefit reduction under certain amendments to the defined benefit retirement plan receive an automatic contribution of 5% or 7% of their annual compensation, depending on the sum of an employee's age and vesting service, into their defined contribution plans (401(k) plans), regardless of the contributions made by the employees.  These contributions are made annually and these employees do not receive any employer matches to their 401(k) contributions.

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

Funding and administrative costs of the qualified noncontributory defined benefit retirement plan and 401(k) plan charged to pension and other employee benefits in the consolidated condensed statements of income for the three-month period ended March 31, 2021 and 2020 were as follows (in thousands):
Three Months Ended 
March 31,
 20212020
Qualified noncontributory defined benefit retirement plan$279 270 
401(k) plan160 165 

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

The components of net periodic pension cost of the nonqualified defined benefit retirement plan for the three months ended March 31, 2021 and 2020 are summarized as follows (in thousands):
 Three Months Ended 
March 31,
 20212020
Interest cost$13 16 
Amortization of unrecognized net loss— 
Net periodic pension cost$15 16 
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Note 11 – Retirement Plans (continued)

Amounts recognized in accumulated other comprehensive income, net of tax, at March 31, 2021 and December 31, 2020 for the nonqualified defined benefit retirement plan consists of (in thousands):
March 31, 2021December 31, 2020
Net actuarial loss$304 306 
Past service cost— — 
  Total recognized, net of tax$304 306 


Note 12 – Stock Based Compensation
 
LCNB established an Ownership Incentive Plan (the "2002 Plan") during 2002 that allowed for stock-based awards to eligible employees, as determined by the Board of Directors.  The awards were made in the form of stock options, share awards, and/or appreciation rights.  The 2002 Plan provided for the issuance of up to 200,000 shares of common stock. Options granted under the 2002 Plan vested ratably over a five-year period and expired ten years after the date of grant. The 2002 Plan expired on April 16, 2012. Any outstanding unexercised options, however, continued to be exercisable in accordance with their terms.

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

Stock-based awards may be in the form of treasury shares or newly issued shares.

LCNB has not granted stock option awards since 2012.

The following table summarizes stock option activity for the periods indicated:
Three Months Ended March 31,
 20212020
 OptionsWeighted Average Exercise
Price
Aggregate Intrinsic Value (in thousands) (1)OptionsWeighted Average Exercise
Price
Aggregate Intrinsic Value (in thousands) (1)
Outstanding, January 1,311 $12.60 9,904 $11.96 
Granted— — — — 
Exercised(311)12.60 (9,593)11.94 
Expired— — — — 
Outstanding, March 31,— — — 311 12.60 — 
Exercisable, March 31,— — — 311 12.60 — 
(1) Aggregate Intrinsic Value is defined as the amount by which the current market value of the underlying stock exceeds the exercise price of the option.







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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 12 – Stock Based Compensation (continued)
The following table provides information related to stock options exercised during the periods indicated (in thousands):
Three Months Ended March 31,
 20212020
Intrinsic value of options exercised$46 
Cash received from options exercised115 
Tax benefit realized from options exercised— 

Restricted stock awards granted under the 2015 Plan were as follows:
20212020
  
 
Shares
Weighted Average Grant Date Fair Value 
 
Shares
Weighted Average Grant Date Fair Value
Outstanding, January 1,28,596 $17.42 17,752 $18.03 
Granted26,321 16.85 19,211 16.87 
Vested(8,817)17.55 (3,818)18.45 
Forfeited(122)16.87 (3,550)16.90 
Outstanding, March 31,45,978 $17.07 29,595 $17.37 

The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three months ended March 31, 2021 and 2020 (in thousands):
 Three Months Ended 
March 31,
20212020
Restricted stock expense$93 33 
Tax effect20 

Unrecognized compensation expense for restricted stock awards was $761,000 at March 31, 2021 and is expected to be recognized over a period of 4.9 years.


Note 13 – Earnings per Common Share
 
LCNB has granted restricted stock awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, earnings per share is computed using the two-class method as required by ASC 260-10-45. Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities.  Diluted earnings per common share is adjusted for the dilutive effects of stock options, warrants, and restricted stock.  The diluted average number of common shares outstanding has been increased for the assumed exercise of stock options and warrants with proceeds used to purchase treasury shares at the average market price for the period.  
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 13 – Earnings per Common Share (continued)

Earnings per share for the three months ended March 31, 2021 and 2020 were calculated as follows (dollars in thousands, except share and per share data):
Three Months Ended 
March 31,
 20212020
Net income$5,240 5,026 
Less allocation of earnings and dividends to participating securities18 11 
Net income allocated to common shareholders$5,222 5,015 
Weighted average common shares outstanding, gross12,840,782 12,955,672 
Less average participating securities45,958 29,595 
Weighted average number of shares outstanding used in the calculation of basic earnings per common share12,794,824 12,926,077 
Add dilutive effect of:  
Stock options28 1,589 
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share12,794,852 12,927,666 
Earnings per common share:  
Basic$0.41 0.39 
Diluted0.41 0.39 

There were no anti-dilutive stock options outstanding at March 31, 2021 or 2020.


Note 14 - Fair Value Measurements
 
LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset.  Fair value is defined as the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:
Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets,  quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
Level 3 – inputs that are unobservable for the asset or liability.
Equity Securities With a Readily Determinable Fair Value
Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the consolidated condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). LCNB has invested in two mutual funds that are traded in active markets and their fair values are based on market quotations (level 1). Investments in another two mutual funds are measured at fair value using net asset values ("NAV") and are considered level 1 because the NAVs are determined and published and are the basis for current transactions.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
Debt Securities, Available-for-Sale
The majority of LCNB's financial debt securities are classified as available-for-sale.  The securities are reported at fair value with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income (loss). LCNB utilizes a pricing service for determining the fair values of its debt securities.  Methods and significant assumptions used to estimate fair value were as follows:

Fair value for U.S. Treasury notes are determined based on market quotations (level 1).
Fair values for the other debt securities are calculated using the discounted cash flow method for each security.  The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions.  

Assets Recorded at Fair Value on a Nonrecurring Basis
Assets that may be recorded at fair value on a nonrecurring basis include impaired loans, other real estate owned, and other repossessed assets.

A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement.  Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance.  These inputs are considered to be level 3.

































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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, 2021 and December 31, 2020 (in thousands):
Fair Value Measurements at the End of
the Reporting Period Using
 Fair Value MeasurementsQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
March 31, 2021
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
     Equity securities$1,121 1,121 — — 
     Mutual funds52 52 — — 
     Mutual funds measured at net asset value1,333 1,333 — — 
Debt securities, available-for-sale:
     U.S. Treasury notes16,216 16,216 — — 
     U.S. Agency notes75,137 — 75,137 — 
     Corporate bonds1,893 — 1,893 — 
     U.S. Agency mortgage-backed securities96,603 — 96,603 — 
     Municipal securities:    
          Non-taxable12,433 — 12,433 — 
          Taxable35,337 — 35,337 — 
Total recurring fair value measurements$240,125 18,722 221,403 — 
Nonrecurring fair value measurements:   
Impaired loans$2,078 — — 2,078 
     Total nonrecurring fair value measurements$2,078 — — 2,078 
December 31, 2020    
Recurring fair value measurements:    
Equity securities with a readily determinable fair value:
     Equity securities$987 987 — — 
     Mutual funds50 50 — — 
     Mutual funds measured at net asset value1,352 1,352 — — 
Debt securities, available-for-sale:    
     U.S. Treasury notes2,388 2,388 — — 
     U.S. Agency notes67,900 — 67,900 — 
     Corporate bonds1,179 — 1,179 — 
     U.S. Agency mortgage-backed securities91,634 — 91,634 — 
     Municipal securities:    
          Non-taxable12,933 — 12,933 — 
          Taxable33,437 — 33,437 — 
Total recurring fair value measurements$211,860 4,777 207,083 — 
Nonrecurring fair value measurements:    
Impaired loans$3,439 — — 3,439 
     Total nonrecurring fair value measurements$3,439 — — 3,439 


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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at March 31, 2021 and December 31, 2020 (dollars in thousands):
Range
Fair ValueValuation TechniqueUnobservable InputsHighLowWeighted Average
March 31, 2021
Impaired loans$2,078 Discounted cash flowsDiscount rate8.25 %4.00 %4.72 %
December 31, 2020
Impaired loans$1,352 Estimated sales priceAdjustments for comparable properties, discounts to reflect current market conditionsNot applicable
2,087 Discounted cash flowsDiscount rate8.25 %4.00 %4.74 %


























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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
Carrying amounts and estimated fair values of financial instruments as of March 31, 2021 and December 31, 2020 were as follows (in thousands):
 Fair Value Measurements at the End of
the Reporting Period Using
Carrying
Amount
Fair
Value
Quoted
Prices
in Active
Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
March 31, 2021
FINANCIAL ASSETS:
Cash and cash equivalents$41,144 41,144 41,144 — — 
Debt securities, held-to-maturity24,695 24,828 — — 24,828 
Federal Reserve Bank stock4,652 4,652 4,652 — — 
Federal Home Loan Bank stock5,203 5,203 5,203 — — 
Loans, net1,329,422 1,281,697 — — 1,281,697 
  Accrued interest receivable8,665 8,665 — 8,665 — 
FINANCIAL LIABILITIES:  
Deposits1,537,116 1,539,552 1,311,915 227,637 — 
Long-term debt17,000 17,510 — 17,510 — 
  Accrued interest payable349 349 — 349 — 
December 31, 2020
FINANCIAL ASSETS:
Cash and cash equivalents$31,730 31,730 31,730 — — 
Debt securities, held-to-maturity24,810 24,960 — — 24,960 
Federal Reserve Bank stock4,652 4,652 4,652 — — 
Federal Home Loan Bank stock5,203 5,203 5,203 — — 
Loans, net1,293,693 1,252,642 — — 1,252,642 
  Accrued interest receivable8,337 8,337 — 8,337 — 
FINANCIAL LIABILITIES:  
Deposits1,455,423 1,458,413 1,212,903 245,510 — 
Long-term debt22,000 22,595 — 22,595 — 
Accrued interest payable452 452 — 452 — 

The fair values of off-balance-sheet financial instruments such as loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of such instruments were not material at March 31, 2021 and December 31, 2020.

Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions.  In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of LCNB.  The following methods and assumptions were used to estimate the fair value of certain financial instruments:
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 14 - Fair Value Measurements (continued)
Cash and cash equivalents
The carrying amounts presented are deemed to approximate fair value.

Equity securities without a readily determinable fair value
Equity securities without a readily determinable fair value are measured at cost, less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

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

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

Loans
The estimated fair value of loans follows the guidance in ASU 2016-01, which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments. The fair value calculation discounts estimated future cash flows using rates that incorporated discounts for credit, liquidity, and marketability factors.

Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities, which approximates market rates.

Borrowings
The carrying amounts of federal funds purchased, repurchase agreements, and U.S. Treasury demand note borrowings are deemed to approximate fair value of short-term borrowings.  For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rates.

Accrued interest receivable and accrued interest payable
Carrying amount approximates fair value.


Note 15 – Recent Accounting Pronouncements

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

ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
ASU No. 2016-13 was issued in June 2016 and, once effective, will significantly change current guidance for recognizing impairment of financial instruments. Current guidance requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU No. 2016-13 replaces the incurred loss impairment methodology with a new current expected credit loss ("CECL") methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to inform credit loss estimates. The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. Additional disclosures are required.


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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

Note 15 – Recent Accounting Pronouncements (continued)
ASU No. 2016-13 also amends the accounting for credit losses on debt securities, available-for-sale, and purchased financial assets with credit deterioration. Under the new guidance, entities will determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Any credit loss will be recognized as an allowance for credit losses on debt securities, available-for-sale, rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to estimated credit losses on debt securities, available-for-sale, immediately in earnings rather than as interest income over time, as currently required.

ASU No. 2016-13 eliminates the current accounting model for purchased credit impaired loans and debt securities. Instead, purchased financial assets with credit deterioration will be recorded gross of estimated credit losses as of the date of acquisition and the estimated credit losses amounts will be added to the allowance for credit losses. Thereafter, entities will account for additional impairment of such purchased assets using the models listed above.
Originally, ASU No. 2016-13 would have taken effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. At their meeting on October 16, 2019, FASB approved a final ASU delaying the effective date for several major standards, including ASU No. 2016-13, if certain qualifications are met. The new effective date for SEC filers eligible to be smaller reporting companies ("SRC"), as defined, will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted. As an SRC, LCNB intends to adopt ASU No. 2016-13 for the fiscal year, and interim periods within the fiscal year, beginning after December 15, 2022.

LCNB has created a cross-functional CECL Committee, which reports to the Audit Committee, composed of members from the lending, Wealth Management, and finance departments. During 2017, the CECL Committee selected a vendor to assist in implementation of and ongoing compliance with the new requirements. It has completed analyzing its data collection efforts, selected a calculation model, analyzed its pool segmentation and reporting mechanisms, and has finished back testing in preparation for adoption of the new methodology. While the committee and management expect that the implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, they are continuing to evaluate the potential impact on LCNB's results of consolidated operations and financial position. The consolidated financial statement impact of this new standard cannot be reasonably estimated at this time.

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

Certain statements made in this document regarding LCNB’s financial condition, results of operations, plans, objectives, future performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as “anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions. Please refer to LCNB’s Annual Report on Form 10-K for the year ended December 31, 2020, as well as its other filings with the SEC, for a more detailed discussion of risks, uncertainties and factors that could cause actual results to differ from those discussed in the forward-looking statements.

These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of LCNB’s business and operations. Additionally, LCNB’s financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:

1.the success, impact, and timing of the implementation of LCNB’s business strategies;
2.the significant risks and uncertainties for LCNB's business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios and other regulatory requirements, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on financial markets, the effectiveness of LCNB's work from home arrangements and staffing levels in operational facilities, the impact of market participants on which LCNB relies and actions taken by governmental authorities and other third parties in response to the pandemic;
3.the disruption of global, national, state, and local economies associated with the COVID-19 pandemic, which could affect 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 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. 
 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Coronavirus Update/Status

The COVID-19 pandemic has created 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. While vaccination efforts are underway, the pandemic has not yet been contained and economic activity has not yet returned to pre-pandemic levels.

On April 8, 2021, the Ohio Department of Health director signed an Amended Order for Social Distancing, Facial Coverings and Non-Congregating (the "Amended Order"). The Amended Order encourages Ohio residents to continue wearing masks in public, to wash their hands as frequently as possible or use hand sanitizer, to maintain social distancing when possible, and to avoid large gatherings. Businesses are required to post clearly visible signage at building entrances requiring all persons entering to wear facial coverings, have hand sanitizer available at entrances and throughout their facilities, maintain appropriate distancing in que lines through the use of signage or tape or other means, and routinely disinfect high-contact surfaces such as desks, workstations, restrooms, and equipment. The Amended Order remains in force until rescinded or modified by the Ohio Department of Health.

Because of the economic disruption caused by the pandemic, LCNB has 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 a number of loans. Loans still on deferral at March 31, 2021 and December 31, 2020 are as follows (in thousands):
 March 31, 2021December 31, 2020
Commercial, secured by real estate$19,611 20,231 
Residential real estate27 324 
Consumer— 21 
 $19,682 20,576 

LCNB participated in the CARES Act PPP that provided government guaranteed and potentially forgivable loans to applicants. The PPP was implemented by the SBA 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, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Outstanding PPP loans at March 31, 2021 and December 31, 2020 totaled $33,263,000 and $21,088,000, respectively and unrecognized fees at those dates totaled $1,044,000 and $747,000, respectively.

LCNB continues to closely monitor the COVID-19 pandemic and expects to make future changes to respond to the pandemic as this situation continues to evolve.

Critical Accounting Policies

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

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The allowance consists of specific and general components.  The specific component typically relates to loans that are classified as doubtful, substandard, or special mention.  For such loans an allowance is established when the discounted cash flows or collateral value is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, which include trends in underperforming loans, trends in the volume and terms of loans, economic trends and conditions, concentrations of credit, trends in the quality of loans, and borrower financial statement exceptions.

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

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

Accounting for Intangibles.  LCNB’s intangible assets at March 31, 2021 are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. It also includes mortgage servicing rights recorded from sales of mortgage loans to the Federal Home Loan Mortgage Corporation and mortgage servicing rights acquired through the acquisition of Eaton National Bank & Trust Co. and Columbus First Bancorp, Inc. Goodwill is not subject to amortization, but is reviewed annually for impairment or sooner if circumstances indicate a possible impairment.  Core deposit intangibles are being amortized on a straight line basis over their respective estimated weighted average lives.  Mortgage servicing rights are capitalized by allocating the total cost of loans between mortgage servicing rights and the loans based on their estimated fair values.  Capitalized mortgage servicing rights are amortized to loan servicing income in proportion to and over the period of estimated servicing income, subject to periodic review for impairment.

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

Results of Operations

Net income for the three months ended March 31, 2021 was $5,240,000 (total basic and diluted earnings per share of $0.41). This compares to net income of $5,026,000 (total basic and diluted earnings per share of $0.39) for the same three month period in 2020.

Increases in the provision for loan losses, partially due to adjustments for estimated impacts from the economic downturn caused by the COVID-19 pandemic, negatively affected earnings during the 2020 period. LCNB recorded a $52,000 credit for loan losses for the 2021 period, compared to a provision of $1,173,000 for the first quarter 2020.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net Interest Income

Three Months Ended March 31, 2021 vs. March 31, 2020
LCNB's primary source of earnings is net interest income, which is the difference between earnings from loans and other investments and interest paid on deposits and other liabilities.  The following table presents, for the three months ended March 31, 2021 and March 31, 2020, average balances for interest-earning assets and interest-bearing liabilities, the income or expense related to each item, and the resulting average yields earned or rates paid.
 Three Months Ended March 31,
 20212020
Average
Outstanding
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
 (Dollars in thousands)
Loans (1)$1,313,803 14,535 4.49 %$1,252,554 15,227 4.89 %
Interest-bearing demand deposits15,632 13 0.34 %5,480 31 2.28 %
Federal Reserve Bank stock4,652 — — %4,652 — — %
Federal Home Loan Bank stock5,203 26 2.03 %5,203 33 2.55 %
Investment securities:
Equity securities4,500 19 1.71 %4,313 30 2.80 %
Debt securities, taxable211,618 718 1.38 %146,954 950 2.60 %
Debt securities, non-taxable (2)34,174 284 3.37 %43,790 361 3.32 %
Total earnings assets1,589,582 15,595 3.98 %1,462,946 16,632 4.57 %
Non-earning assets191,287   179,478   
Allowance for loan losses(5,715)  (3,938)  
Total assets$1,775,154   $1,638,486   
Savings deposits$795,026 280 0.14 %$679,092 486 0.29 %
IRA and time certificates234,134 748 1.30 %320,651 1,631 2.05 %
Short-term borrowings342 1.19 %1,415 1.99 %
Long-term debt19,689 134 2.76 %38,325 254 2.67 %
Total interest-bearing liabilities1,049,191 1,163 0.45 %1,039,483 2,378 0.92 %
Demand deposits458,996   347,027  
Other liabilities25,450   20,918   
Capital241,517   231,058   
Total liabilities and capital$1,775,154   $1,638,486   
Net interest rate spread (3)  3.53 %  3.65 %
Net interest income and net interest margin on a taxable-equivalent basis (4) 14,432 3.68 % 14,254 3.92 %
Ratio of interest-earning assets to interest-bearing liabilities151.51 %  140.74 %  
(1)Includes non-accrual loans.
(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided
    by a factor comprised of the complement of the incremental tax rate of 21%.
(3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.





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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended March 31, 2021 as compared to the same period in 2020.  Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of absolute dollar amounts of the changes in each.
Three Months Ended March 31, 2021 vs. 2020
Increase (decrease) due to:
 VolumeRateTotal
 (In thousands)
Interest-earning Assets:
Loans$721 (1,413)(692)
Interest-bearing demand deposits24 (42)(18)
Federal Reserve Bank stock— — — 
Federal Home Loan Bank stock— (7)(7)
Investment securities: 
Equity securities(12)(11)
Debt securities, taxable323 (555)(232)
Debt securities, non-taxable(80)(77)
Total interest income989 (2,026)(1,037)
Interest-bearing Liabilities:  
Savings deposits72 (278)(206)
IRA and time certificates(371)(512)(883)
Short-term borrowings(4)(2)(6)
Long-term debt(127)(120)
Total interest expense(430)(785)(1,215)
Net interest income$1,419 (1,241)178 

Net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2021 totaled $14,432,000, an increase of $178,000 from the comparable period in 2020.  Total interest expense decreased $1,215,000, partially offset by a $1,037,000 decrease in total interest income.

The $1,037,000 decrease in total interest income was due primarily to a $692,000 decrease in loan interest income and a $309,000 total decrease in interest income from taxable and non-taxable debt securities. The decrease in loan interest income was primarily due to a 40 basis point (a basis point equals 0.01%) decrease in the average rate earned on loans, partially offset by a $61.2 million increase in the average balance of LCNB's loan portfolio. The decrease in interest income from taxable debt securities was due to a 122 basis point decrease in the average rate earned on these securities, partially offset by a $64.7 million increase in average securities. The decrease in non-taxable debt securities was due to a $9.6 million decrease in average securities, partially offset by a 5 basis point increase in the average rate earned on these securities. The net decrease in the average balance of taxable debt securities was invested in the loan portfolio and was also used to enhance liquidity. The decrease in average rates was due to market conditions.







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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The $1,215,000 decrease in total interest expense was due to a $206,000 decrease in interest expense for savings deposits, an $883,000 decrease in interest expense for IRA and time certificates, and a $120,000 decrease in interest expense for long-term debt. Interest expense for savings deposits decreased primarily due to a 15 basis point market-driven decrease in the average rate paid for these deposits, partially offset by a $115.9 million increase in the average balance of these deposits. Interest expense for IRA and time certificates decreased primarily due to a 75 basis point decrease in the average rate paid for these deposits and secondarily to an $86.5 million decrease in the average balance of these deposits. Interest expense for long-term debt decreased due to an $18.6 million decrease in average debt outstanding, slightly offset by a 9 basis point increase in the average rate paid.

Provision and Allowance For Loan Losses

The total provision for loan losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial & 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 the three months ended March 31, 2021 was $1,225,000 less than the comparable period in 2020. 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.

Net recoveries for the three months ended March 31, 2021 were $3,000, as compared to net charge-offs of $210,000 for the same three-month period in 2020.

Non-Interest Income

A comparison of non-interest income for the three months ended March 31, 2021 and March 31, 2020 is as follows (in thousands):
Three Months Ended 
March 31,
 20212020Difference
Fiduciary income$1,529 1,103 426 
Service charges and fees on deposit accounts1,366 1,295 71 
Net gains from sales of debt securities, available-for-sale— 221 (221)
Bank owned life insurance income267 601 (334)
Gains from sales of loans43 120 (77)
Other operating income260 499 (239)
Total non-interest income$3,465 3,839 (374)

Reasons for changes include:
Fiduciary income increased primarily due to growth in the market value of assets serviced.
Service charges and fees on deposit accounts increased primarily due to increases in check card income, partially offset by decreases in overdraft fees and fee income recognized on Insured Cash Sweep ("ICS") deposit products.
Net gains from sales of debt securities, available-for-sale, decreased due to the absence of security sales during the 2021 period.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Bank owned life insurance income for the three months ended March 31, 2020 included a mortality benefit, while no mortality benefits were recognized during the 2021 period.
Gains from sales of loans decreased primarily due to a lower volume of residential real estate loan sales.
Other operating income decreased primarily due to the absence of net gains realized from the sale of equity security investments during the 2021 period, partially offset by an increase in unrealized net gains from equity securities held in the portfolio.

Non-Interest Expense

A comparison of non-interest expense for the three months ended March 31, 2021 and March 31, 2020 is as follows (in thousands):
Three Months Ended 
March 31,
 20212020Difference
Salaries and employee benefits$6,433 6,768 (335)
Equipment expenses368 287 81 
Occupancy expense, net794 682 112 
State financial institutions tax444 436 
Marketing268 177 91 
Amortization of intangibles257 260 (3)
FDIC insurance premiums (credit), net113 (1)114 
Contracted services540 402 138 
Other non-interest expense2,275 2,061 214 
Total non-interest expense$11,492 11,072 420 

Reasons for changes include:
Salaries and employee benefits decreased primarily due to an increase in salaries and benefits allocated to deferred costs on loans, reflecting a greater volume of originations during the 2021 period. The 2021 period included PPP loans, which were not a factor in the 2020 period.
Equipment expenses increased primarily due to increased equipment rental costs and increased depreciation charges for furniture and equipment. During 2020, LCNB gradually replaced ATMs that it had previously owned with new ATMs obtained through an outsourcing arrangement.
Occupancy expense increased primarily due to increased janitorial and cleaning costs and to increases in facility repair and maintenance costs.
Marketing increased primarily due to expanded use of television, radio, and digital media.
FDIC insurance premiums increased in 2021 because LCNB received small bank assessment credits from the FDIC during the first and second quarters 2020. LCNB received the full amount of the credit during the first two quarters of 2020 and premium payments returned to their normal levels thereafter.
Contracted services increased due to increased usage of technology services and to price increases in general.
Other non-interest expense increased partially due to a strategic decision to outsource LCNB's ATM operations to a third-party vendor during 2020, relieving LCNB branch personnel from various ATM maintenance responsibilities.
.
Income Taxes

LCNB's effective tax rate for the three months ended March 31, 2021 was 18.1%, compared to 12.9% for the three months ended March 31, 2020.  The difference between the statutory rate of 21% and the effective tax rates is primarily due to tax-exempt interest income from municipal securities, tax-exempt earnings from bank owned life insurance, tax-exempt earnings from LCNB Risk Management, Inc., and tax credits and losses related to investments in affordable housing tax credit limited partnerships. A one-time tax benefit recognized as a result of certain provisions in the CARES Act passed by Congress and signed by President Trump during the first quarter 2020 also contributed to the difference during the 2020 period.




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

A comparison of balance sheet line items at March 31, 2021 and December 31, 2020 is as follows (dollars in thousands):
 March 31, 2021December 31, 2020Difference $Difference %
ASSETS:
Total cash and cash equivalents$41,144 31,730 9,414 29.67 %
Investment securities:
Equity securities with a readily determinable fair value, at fair value2,506 2,389 117 4.90 %
Equity securities without a readily determinable fair value, at cost2,099 2,099 — — %
Debt securities, available-for-sale, at fair value237,619 209,471 28,148 13.44 %
Debt securities, held-to-maturity, at cost24,695 24,810 (115)(0.46)%
Federal Reserve Bank stock, at cost4,652 4,652 — — %
Federal Home Loan Bank stock, at cost5,203 5,203 — — %
Loans, net1,329,422 1,293,693 35,729 2.76 %
Premises and equipment, net35,243 35,376 (133)(0.38)%
Operating lease right-of-use assets6,865 6,274 591 9.42 %
Goodwill59,221 59,221 — — %
Core deposit and other intangibles3,108 3,453 (345)(9.99)%
Bank owned life insurance42,416 42,149 267 0.63 %
Interest receivable8,665 8,337 328 3.93 %
Other assets15,463 17,027 (1,564)(9.19)%
Total assets$1,818,321 1,745,884 72,437 4.15 %
LIABILITIES:
Deposits:
Non-interest-bearing$475,127 455,073 20,054 4.41 %
Interest-bearing1,061,989 1,000,350 61,639 6.16 %
Total deposits1,537,116 1,455,423 81,693 5.61 %
Long-term debt17,000 22,000 (5,000)(22.73)%
Operating lease liabilities6,998 6,371 627 9.84 %
Accrued interest and other liabilities17,961 21,265 (3,304)(15.54)%
Total liabilities1,579,075 1,505,059 74,016 4.92 %
TOTAL SHAREHOLDERS' EQUITY239,246 240,825 (1,579)(0.66)%
Total liabilities and shareholders' equity$1,818,321 1,745,884 72,437 4.15 %

Reasons for changes include:
Debt securities, available-for-sale, increased due to purchases of additional securities totaling $40.8 million, partially offset by maturities and calls of securities totaling $7.8 million. No securities were sold during the first quarter 2021.
Net loans increased due to organic growth in the loan portfolio, including a net increase in PPP loans of $12.2 million. Most of the growth occurred in the commercial & industrial, commercial real estate, and residential real estate portfolios.
Operating lease right-of-use assets and operating lease liabilities increased due to a new lease for the Union Village office and the renewal of a postage machine lease.
Core deposit and other intangibles decreased due to amortization of core deposit intangibles and mortgage servicing rights.
Interest receivable increased primarily due to an increase in accrued interest on debt securities, partially due to the increase in debt securities and partially due to timing of interest payment receipts. This increase was partially offset by a decrease in accrued interest on COVID-19 related loan payment deferrals.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-interest-bearing deposits and interest-bearing deposits have grown substantially since the start of the COVID-19 pandemic and this trend continued during the first quarter 2021. Management believes the growth reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits and NOW and savings accounts have grown, while balances in IRA and time deposits have decreased.
Long-term debt decreased due to payoffs of matured debt. There were no new borrowings during 2021.
Total shareholders' equity decreased primarily due to a $3.4 million decrease in accumulated other comprehensive income, net of taxes caused by market-driven decreases in the fair value of LCNB's debt security investments, dividends paid to shareholders, and treasury shares purchased. These decreases were partially offset by earnings retained during the first three months of 2021.

Regulatory Capital

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

In addition to the minimum capital requirements, a financial institution needs to maintain a Capital Conservation Buffer composed of Common Equity Tier 1 Capital of at least 2.5% above its minimum risk-weighted capital requirements to avoid limitations on its ability to make capital distributions, including dividend payments to shareholders and certain discretionary bonus payments to executive officers. A financial institution with a buffer below 2.5% is subject to increasingly stringent limitations on capital distributions as the buffer approaches zero.

For various regulatory purposes, financial institutions are classified into categories based upon capital adequacy:
 Minimum RequirementMinimum Requirement with Capital Conservation BufferTo Be Considered
Well-Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets4.5 %7.0 %6.5 %
Ratio of Tier 1 Capital to risk-weighted assets6.0 %8.5 %8.0 %
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets8.0 %10.5 %10.0 %
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)4.0 %N/A5.0 %

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

On September 17, 2019, the FDIC finalized a rule that introduced an optional simplified measure of capital adequacy for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The simplified rule was designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. Its use was permitted beginning with the March 31, 2020 Call Report. Qualifications to use the simplified approach include having a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the Community Bank Leverage Ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. LCNB qualifies to use the simplified measure, but did not opt in for the March 31, 2021 regulatory capital calculations.







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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):
March 31, 2021December 31, 2020
Regulatory Capital:
Shareholders' equity$234,430 234,092 
Goodwill and other intangibles(61,441)(61,698)
Accumulated other comprehensive (income) loss(603)(4,043)
Tier 1 risk-based capital172,386 168,351 
Eligible allowance for loan losses5,679 5,728 
Total risk-based capital$178,065 174,079 
Capital ratios:  
Common Equity Tier 1 Capital to risk-weighted assets12.48 %12.48 %
Tier 1 Capital to risk-weighted assets12.48 %12.48 %
Total Capital to risk-weighted assets12.89 %12.91 %
Leverage10.11 %10.06 %

Liquidity

LCNB depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders.  National banking law limits the amount of dividends the Bank may pay to the sum of retained net income for the current year plus retained net income for the previous two years.  Prior approval from the Office of the Comptroller of the Currency, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.  Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval.  The Bank is not aware of any reasons why it would not receive such approval, if required.

Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, as well as meeting LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, short-term line of credit arrangements with two correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.

Total remaining borrowing capacity with the Federal Home Loan Bank at March 31, 2021 was approximately $172.6 million. In addition, additional borrowings of approximately $55.0 million were available through the line of credit arrangements at March 31, 2021.

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

Management closely monitors the level of liquid assets available to meet ongoing funding needs.  It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost.  LCNB experienced no liquidity or operational problems as a result of current liquidity levels.
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Item 3.Quantitative and Qualitative Disclosures about Market Risk

Market risk for LCNB is primarily interest rate risk.  LCNB attempts to mitigate this risk through asset/liability management strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates.  LCNB does not use derivatives such as interest rate swaps, caps, or floors to hedge this risk.  LCNB has not entered into any market risk instruments for trading purposes.

The Bank's Asset and Liability Management Committee ("ALCO") primarily uses a combination of Interest Rate Sensitivity Analysis ("IRSA") and Economic Value of Equity ("EVE") analysis for measuring and managing interest rate risk.  IRSA is used to estimate the effect on net interest income ("NII") during a one-year period of instantaneous and sustained movements in interest rates, also called interest rate shocks, of 100, 200, 300, and 400 basis points.  Management considers the results of any significant downward scenarios of more than 100 basis points to not be meaningful in the current interest rate environment. The base projection uses a current interest rate scenario.  As shown below, the March 31, 2021 IRSA indicates that an increase in interest rates of 200 basis points or more will have a positive effect on NII and a 100 basis point increase or decrease in interest rates will have a negative effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.
Rate Shock Scenario in Basis PointsAmount$ Change in
NII
% Change in
NII
 (Dollars in thousands)
Up 400$66,189 2,436 3.82 %
Up 30065,300 1,547 2.43 %
Up 20064,423 670 1.05 %
Up 10063,562 (191)(0.30)%
Base63,753 — — %
Down 10062,201 (1,552)(2.43)%

IRSA shows the effect on NII during a one-year period only.  A more long-range model is the EVE analysis, which shows the estimated present value of future cash inflows from interest-earning assets less the present value of future cash outflows for interest-bearing liabilities for the same rate shocks.  As shown below, the March 31, 2021 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and a 100 basis point decrease in interest rates will have a positive effect on the EVE.  The changes in the EVE for the upward rate assumptions are within LCNB's acceptable ranges. The changes in EVE for the down 100 basis points rate assumption is slightly outside the acceptable range of 20%.
Rate Shock Scenario in Basis PointsAmount$ Change in
EVE
% Change in
EVE
 (Dollars in thousands)
Up 400$178,698 (47,877)(21.13)%
Up 300189,273 (37,302)(16.46)%
Up 200199,598 (26,977)(11.91)%
Up 100209,872 (16,703)(7.37)%
Base226,575 — — %
Down 100275,007 48,432 21.38 %

The IRSA and EVE simulations discussed above are not projections of future income or equity and should not be relied on as being indicative of future operating results.  Assumptions used, including the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows, are inherently uncertain and, as a result, the models cannot precisely measure future net interest income or equity.  Furthermore, the models do not reflect actions that borrowers, depositors, and management may take in response to changing economic conditions and interest rate levels.

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Item 4.Controls and Procedures

a)  Disclosure controls and procedures.  The Chief Executive Officer and the Chief Financial Officer have carried out an evaluation of the effectiveness of LCNB's disclosure controls and procedures that ensure that information relating to LCNB required to be disclosed by LCNB in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to LCNB's management, including its principal executive officer and principal financial officer, as appropriate, in order to allow timely decisions to be made regarding required disclosures.  Based upon this evaluation, these officers have concluded that, as of March 31, 2021, LCNB's disclosure controls and procedures were effective.

b)  Changes in internal control over financial reporting.  During the period covered by this report, there were no changes in LCNB's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, LCNB's internal control over financial reporting.
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PART II.  OTHER INFORMATION
 
Item 1.Legal Proceedings
Except for routine litigation incidental to its business, LCNB is not a party to any material pending legal proceedings and none of its property is the subject of any material proceedings.

Item 1A.Risk Factors
There have been no material changes in the risk factors previously disclosed in the December 31, 2020 Form 10-K.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, LCNB did not sell any of its securities that were not registered under the Securities Act.

On 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 repurchases made under the Program during the three months ended March 31, 2021:
PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 202114,532$14.85 14,532499,916
February 202153,382$16.54 53,382446,534
March 20212,407$16.98 2,407444,127

Item 3.Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures
Not applicable.

Item 5.Other Information
None.
 
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Item 6.Exhibits
Exhibit No.Exhibit Description
2.1
3.1
  
3.2
10.1
10.2
  
10.3
  
10.4
10.5
  
31.1
  
31.2
  
32
  
101
The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 is formatted in Extensible Business Reporting Language:  (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 LCNB Corp. 
   
May 5, 2021/s/ Eric J. Meilstrup 
 Eric J. Meilstrup 
 Chief Executive Officer and President 
   
May 5, 2021/s/ Robert C. Haines, II 
 Robert C. Haines, II 
 Executive Vice President and Chief Financial Officer
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