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 class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, No Par Value			LCNB			NASDAQ

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. ☐

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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.

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION			3
Item 1.  Financial Statements			3
CONSOLIDATED CONDENSED BALANCE SHEETS			3
CONSOLIDATED CONDENSED STATEMENTS OF INCOME			4
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME			5
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY			6
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS			7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS			8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations			36
Item 3.  Quantitative and Qualitative Disclosures about Market Risks			46
Item 4.  Controls and Procedures			47
PART II.  OTHER INFORMATION			48
Item 1.   Legal Proceedings			48
Item 1A.  Risk Factors			48
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3.   Defaults Upon Senior Securities			48
Item 4.   Mine Safety Disclosures			48
Item 5.   Other Information			48
Item 6.   Exhibits			49
SIGNATURES			50

1

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Table of Contents

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

2

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Table of Contents

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, 2021						December 31, 2020
						(Unaudited)
ASSETS:
Cash and due from banks						$	18,201					17,383
Interest-bearing demand deposits						22,943						14,347
Total cash and cash equivalents						41,144						31,730
Investment securities:
Equity securities with a readily determinable fair value, at fair value						2,506						2,389
Equity securities without a readily determinable fair value, at cost						2,099						2,099
Debt securities, available-for-sale, at fair value						237,619						209,471
Debt securities, held-to-maturity, at cost						24,695						24,810
Federal Reserve Bank stock, at cost						4,652						4,652
Federal Home Loan Bank stock, at cost						5,203						5,203
Loans, net						1,329,422						1,293,693
Premises and equipment, net						35,243						35,376
Operating lease right-of-use assets						6,865						6,274
Goodwill						59,221						59,221
Core deposit and other intangibles, net						3,108						3,453
Bank owned life insurance						42,416						42,149
Interest receivable						8,665						8,337
Other assets						15,463						17,027
TOTAL ASSETS						$	1,818,321					1,745,884
LIABILITIES:
Deposits:
Noninterest-bearing						$	475,127					455,073
Interest-bearing						1,061,989						1,000,350
Total deposits						1,537,116						1,455,423
Long-term debt						17,000						22,000
Operating lease liabilities						6,998						6,371
Accrued interest and other liabilities						17,961						21,265
TOTAL LIABILITIES						1,579,075						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 earnings						117,863						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 taxes						603						4,043
TOTAL SHAREHOLDERS' EQUITY						239,246						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,
																		2021						2020
INTEREST INCOME:
Interest and fees on loans																		$	14,535					15,227
Dividends on equity securities:
With a readily determinable fair value																		13						14
Without a readily determinable fair value																		6						16
Interest on debt securities:
Taxable																		718						950
Non-taxable																		224						285
Other investments																		39						64
TOTAL INTEREST INCOME																		15,535						16,556
INTEREST EXPENSE:
Interest on deposits																		1,028						2,117
Interest on short-term borrowings																		1						7
Interest on long-term debt																		134						254
TOTAL INTEREST EXPENSE																		1,163						2,378
NET INTEREST INCOME																		14,372						14,178
(CREDIT) PROVISION FOR LOAN LOSSES																		(52)						1,173
NET INTEREST INCOME AFTER (CREDIT) PROVISION FOR LOAN LOSSES																		14,424						13,005
NON-INTEREST INCOME:
Fiduciary income																		1,529						1,103
Service charges and fees on deposit accounts																		1,366						1,295
Net gains from sales of debt securities, available-for-sale																		—						221
Bank owned life insurance income																		267						601
Gains from sales of loans																		43						120
Other operating income																		260						499
TOTAL NON-INTEREST INCOME																		3,465						3,839
NON-INTEREST EXPENSE:
Salaries and employee benefits																		6,433						6,768
Equipment expenses																		368						287
Occupancy expense, net																		794						682
State financial institutions tax																		444						436
Marketing																		268						177
Amortization of intangibles																		257						260
FDIC insurance premiums (credit), net																		113						(1)
Contracted services																		540						402
Other non-interest expense																		2,275						2,061
TOTAL NON-INTEREST EXPENSE																		11,492						11,072
INCOME BEFORE INCOME TAXES																		6,397						5,772
PROVISION FOR INCOME TAXES																		1,157						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
Diluted																		0.41						0.39
Weighted average common shares outstanding:
Basic																		12,794,824						12,926,077
Diluted																		12,794,852						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,
																		2021						2020
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)																		1						—
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 Outstanding						Common Stock						Retained Earnings						Treasury Shares						Accumulated Other Comprehensive Income						Total Shareholders' Equity
Three Months Ended March 31, 2021
Balance at December 31, 2020						12,858,325						$	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 Plan						5,472						99																								99
Repurchase of common stock						(70,321)																		(1,140)												(1,140)
Exercise of stock options						311						4																								4
Compensation expense relating to restricted stock						26,321						93																								93
Common stock dividends, $0.19 per share																		(2,435)																		(2,435)
Balance at March 31, 2021						12,820,108						$	142,639					117,863						(21,859)						603						239,246
Three Months Ended March 31, 2020
Balance at December 31, 2019						12,936,783						$	141,791					104,431						(18,847)						673						228,048
Net income																		5,026																		5,026
Other comprehensive income, net of taxes																														2,483						2,483
Dividend Reinvestment and Stock Purchase Plan						7,039						107																								107
Exercise of stock options						9,593						115																								115
Compensation expense relating to restricted stock						15,661						33																								33
Common stock dividends, $0.18 per share																		(2,334)																		(2,334)
Balance at March 31, 2020						12,969,076						$	142,046					107,123						(18,847)						3,156						233,478

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,
						2021						2020
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 accretion						308						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 loans						1,381						4,964
Compensation expense related to restricted stock						93						33
Changes in:
Accrued interest receivable						(328)						(544)
Other assets						1,565						(1,494)
Other liabilities						(2,461)						(1,953)
TOTAL ADJUSTMENTS						(1,201)						(3,721)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES						4,039						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-sale						7,833						31,022
Held-to-maturity						115						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						5						1
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES						(67,846)						12,245
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits						81,693						(2,408)
Principal payments on long-term debt						(5,000)						(5,001)
Proceeds from issuance of common stock						8						21
Repurchase of common stock						(1,140)						—
Proceeds from exercise of stock options						4						115
Cash dividends paid on common stock						(2,344)						(2,247)
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES						73,221						(9,520)
NET CHANGE IN CASH AND CASH EQUIVALENTS						9,414						4,030
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD						31,730						20,765
CASH AND CASH EQUIVALENTS AT END OF PERIOD						$	41,144					24,795
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid						1,265						2,418
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Right-of-use assets obtained in exchange for lease obligations						801						—

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 notes			75,912						597						1,372						75,137
Corporate bonds			1,900						7						14						1,893
U.S. Agency mortgage-backed securities			95,089						2,244						730						96,603
Municipal securities:
Non-taxable			12,263						202						32						12,433
Taxable			35,120						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
Taxable			3,402						6						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 notes			66,983						950						33						67,900
Corporate Bonds			1,200						—						21						1,179
U.S. Agency mortgage-backed securities			88,455						3,180						1						91,634
Municipal securities:
Non-taxable			12,651						282						—						12,933
Taxable			32,409						1,031						3						33,437
			$	203,966					5,563						58						209,471
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable			$	21,408					181						—						21,589
Taxable			3,402						6						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 Months												Twelve 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 notes			52,785						1,372						—						—
Corporate bonds			1,186						14						—						—
U.S. Agency mortgage-backed securities			41,801						730						—						—
Municipal securities:
Non-taxable			1,758						32						—						—
Taxable			18,537						558						—						—
			$	124,991					2,784						—						—
Held-to-Maturity:
Municipal securities:
Non-taxable			$	—					—						—						—
Taxable			3,108						42						—						—
			$	3,108					42						—						—
December 31, 2020
Available-for-Sale:
U.S. Treasury notes			$	—					—						—						—
U.S. Agency notes			10,674						33						—						—
Corporate Bonds			679						21						—						—
U.S. Agency mortgage-backed securities			290						1						—						—
Municipal securities:
Non-taxable			38						—						—						—
Taxable			3,063						3						—						—
			$	14,744					58						—						—
Held-to-Maturity:
Municipal securities:
Non-taxable			$	1					—						—
Taxable			3,113						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-Sale												Held-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 years			42,243						42,853						5,676						5,739
Due from five to ten years			89,298						88,238						2,055						2,089
Due after ten years			1,029						993						14,848						14,878
			141,381						141,016						24,695						24,828
U.S. Agency mortgage-backed securities			95,089						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,
															2021						2020
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, 2021												December 31, 2020
			Amortized Cost						Fair Value						Amortized Cost						Fair Value
Mutual funds			$	1,399					1,385						1,395						1,402
Equity securities			778						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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(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,
															2021						2020
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, 2021						December 31, 2020
Commercial & industrial			$	107,630					100,254
Commercial, secured by real estate			855,894						843,230
Residential real estate			328,265						309,692
Consumer			35,799						36,917
Agricultural			8,698						10,100
Other loans, including deposit overdrafts			346						363
Loans, gross			1,336,632						1,300,556
Deferred origination fees, net			(1,531)						(1,135)
Loans, net of deferred origination fees			1,335,101						1,299,421
Less allowance for loan losses			5,679						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, 2021						December 31, 2020
Non-accrual loans:
Commercial, secured by real estate			$	2,113					2,458
Residential real estate			1,252						1,260
Total non-accrual loans			3,365						3,718
Past-due 90 days or more and still accruing			—						—
Total non-accrual and past-due 90 days or more and still accruing			3,365						3,718
Accruing restructured loans			4,992						5,176
Total			$	8,357					8,894

.

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(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						Consumer						Agricultural						Other						Total
Three Months Ended March 31, 2021
Balance, beginning of year			$	816					3,903						837						153						28						(9)						5,728
Provision (credit) charged to expenses			141						(267)						71						(20)						11						12						(52)
Losses charged off			—						(2)						(16)						(3)						—						(21)						(42)
Recoveries			—						—						27						1						—						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						4,045
Provision (credit) charged to expenses			159						920						31						41						5						17						1,173
Losses charged off			—						(270)						(3)						(12)												(36)						(321)
Recoveries			18						—						73						1												19						111
Balance, end of period			$	633					3,574						629						129						39						4						5,008

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(Unaudited)

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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						Consumer						Agricultural						Other						Total
March 31, 2021
Allowance for loan losses:
Individually evaluated for impairment			$	8					8						11						—						—						—						27
Collectively evaluated for impairment			949						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						2						—						—						7,881
Collectively evaluated for impairment			106,449						846,583						325,247						35,922						8,644						147						1,322,992
Acquired credit impaired loans			107						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			$	8					17						27						—						—						—						52
Collectively evaluated for impairment			808						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						5						—						—						8,453
Collectively evaluated for impairment			99,040						833,548						306,138						37,047						10,116						179						1,286,068
Acquired credit impaired loans			362						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

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(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%.

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(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):

			Pass						OAEM						Substandard						Doubtful						Total
March 31, 2021
Commercial & industrial			$	105,070					—						1,670						—						106,740
Commercial, secured by real estate			826,296						8,999						19,376						—						854,671
Residential real estate			325,284						597						2,895						—						328,776
Consumer			35,924						—						—						—						35,924
Agricultural			8,644						—						—						—						8,644
Other			346						—						—						—						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 estate			811,558						9,279						21,372						—						842,209
Residential real estate			306,092						1,005						2,988						—						310,085
Consumer			37,050						—						2						—						37,052
Agricultural			10,116						—						—						—						10,116
Other			363						—						—						—						363
Total			$	1,262,570					10,284						26,567						—						1,299,421

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(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						Current						Total Loans Receivable						Total Loans Greater Than 90 Days and Accruing
March 31, 2021
Commercial & industrial			$	—					—						—						—						106,740						106,740						—
Commercial, secured by real estate			834						—						901						1,735						852,936						854,671						—
Residential real estate			586						—						532						1,118						327,658						328,776
Consumer			3						—						—						3						35,921						35,924						—
Agricultural			—						—						—						—						8,644						8,644						—
Other			28						—						—						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 estate			16						—						1,476						1,492						840,717						842,209						—
Residential real estate			497						219						675						1,391						308,694						310,085						—
Consumer			4						1						—						5						37,047						37,052						—
Agricultural			—						—						—						—						10,116						10,116						—
Other			60						—						—						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, 2021																		December 31, 2020
			Recorded Investment						Unpaid Principal Balance						Related Allowance						Recorded Investment						Unpaid Principal Balance						Related Allowance
With no related allowance recorded:
Commercial & industrial			$	107					373												362						646
Commercial, secured by real estate			6,471						7,476												6,050						6,735
Residential real estate			3,225						3,658												3,261						3,695
Consumer			2						2												4						4
Agricultural			—						—												—						—
Other			199						297												184						297
Total			$	10,004					11,806												9,861						11,377
With an allowance recorded:
Commercial & industrial			$	184					190						8						194						199						8
Commercial, secured by real estate			1,617						1,617						8						2,611						2,908						17
Residential real estate			304						304						11						686						687						27
Consumer			—						—						—						1						1						—
Agricultural			—						—						—						—						—						—
Other			—						—						—						—						—						—
Total			$	2,105					2,111						27						3,492						3,795						52
Total:
Commercial & industrial			$	291					563						8						556						845						8
Commercial, secured by real estate			8,088						9,093						8						8,661						9,643						17
Residential real estate			3,529						3,962						11						3,947						4,382						27
Consumer			2						2						—						5						5						—
Agricultural			—						—						—						—						—						—
Other			199						297						—						184						297						—
Total			$	12,109					13,917						27						13,353						15,172						52

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(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):

			2021												2020
			Average Recorded Investment						Interest Income Recognized						Average Recorded Investment						Interest Income Recognized
Three Months Ended March 31,
With no related allowance recorded:
Commercial & industrial			$	235					25						637						264
Commercial, secured by real estate			6,794						119						9,823						344
Residential real estate			3,448						66						3,289						92
Consumer			4						—						18						—
Agricultural			—						—						—						—
Other			191						15						266						7
Total			$	10,672					225						14,033						707
With an allowance recorded:
Commercial & industrial			$	189					3						839						10
Commercial, secured by real estate			1,617						17						95						2
Residential real estate			307						4						339						5
Consumer			—						—						5						—
Agricultural			—						—						—						—
Other			—						—						—						—
Total			$	2,113					24						1,278						17
Total:
Commercial & industrial			$	424					28						1,476						274
Commercial, secured by real estate			8,411						136						9,918						346
Residential real estate			3,755						70						3,628						97
Consumer			4						—						23						—
Agricultural			—						—						—						—
Other			191						15						266						7
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):

			2021																		2020
			Number of Loans						Pre-Modification Recorded Balance						Post-Modification Recorded Balance						Number of Loans						Pre-Modification Recorded Balance						Post-Modification Recorded Balance
Three Months Ended March 31,
Commercial & industrial			—						$	—					$	—					1						$	4					$	5
Residential real estate			1						21						21						—						—						—
Total			1						$	21					$	21					1						$	4					$	5

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(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 Modification						Rate Modification						Interest Only						Principal Forgiveness						Combination						Total Modifications
Three Months Ended March 31, 2021
Residential real estate			$	—					—						—						—						21						21
Total			$	—					—						—						—						21						21
Three Months Ended March 31, 2020
Commercial & industrial			$	—					—						—						—						5						5
Total			$	—					—						—						—						5						5

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):

			2021						2020
Impaired loans without a valuation allowance			$	21					5
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.

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(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.

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(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, 2021						December 31, 2020
Acquired from First Capital Bancshares, Inc.
Commercial & industrial			$	—					1
Commercial, secured by real estate			—						—
Residential real estate			442						449
Other loans, including deposit overdrafts			—						—
Loans, gross			442						450
Less allowance for loan losses			—						—
Loans, net			$	442					450
Acquired from Eaton National Bank & Trust Co.
Commercial & industrial			$	—					249
Commercial, secured by real estate			587						601
Residential real estate			540						595
Other loans, including deposit overdrafts			199						184
Loans, gross			1,326						1,629
Less allowance for loan losses			—						—
Loans, net			$	1,326					1,629
Acquired from BNB Bancorp, Inc.
Commercial & industrial			$	—					—
Commercial, secured by real estate			758						780
Residential real estate			83						85
Other loans, including deposit overdrafts			—						—
Loans, gross			841						865
Less allowance for loan losses			—						—
Loans, net			$	841					865
Acquired from Columbus First Bancorp, Inc.
Commercial & industrial			$	107					112
Commercial, secured by real estate			654						667
Residential real estate			858						1,177
Other loans, including deposit overdrafts			—						—
Loans, gross			1,619						1,956
Less allowance for loan losses			—						—
Loans, net			$	1,619					1,956
Total
Commercial & industrial			$	107					362
Commercial, secured by real estate			1,999						2,048
Residential real estate			1,923						2,306
Other loans, including deposit overdrafts			199						184
Loans, gross			4,228						4,900
Less allowance for loan losses			—						—
Loans, net			$	4,228					4,900

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(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, 2021						December 31, 2020
Outstanding balance			$	5,386					6,128
Carrying amount			4,228						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,
															2021						2020
Accretable discount at beginning of period															$	182					480
Reclassification from nonaccretable discount to accretable discount															12						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 amortization			1,538						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.

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(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,
															2021						2020
Tax credits and other tax benefits recognized															$	260					159
Tax credit amortization expense included in provision for income taxes															217						126

Note 6 – Borrowings

Borrowings at March 31, 2021 and December 31, 2020 were as follows (dollars in thousands):

			March 31, 2021												December 31, 2020
			Amount						Rate						Amount						Rate
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,
															2021						2020
Operating lease expense															$	215					153
Short-term lease expense															14						12
Variable lease expense															1						3
Other															3						1
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 leases			31.6
Weighted average discount rate for operating leases			3.35		%

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(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,
															2021						2020
Statutory tax rate															21.0		%				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 rate															18.1		%				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, 2021						December 31, 2020
Commitments to extend credit:
Commercial loans			$	101,614					24,581
Other loans
Fixed rate			14,534						14,668
Adjustable rate			3,743						4,386
Unused lines of credit:
Fixed rate			28,440						24,205
Adjustable rate			134,773						133,073
Unused overdraft protection amounts on demand and NOW accounts			16,549						16,471
Standby letters of credit			55						243
Total commitments			$	299,708					217,627

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(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 Securities						Changes in Pension Plan Assets and Benefit Obligations						Total
2021
Balance at beginning of period																					$	4,349					(306)						4,043
Before reclassifications																					(3,441)						1						(3,440)
Reclassifications																					—						—						—
Balance at end of period																					$	908					(305)						603
2020
Balance at beginning of period																					$	857					(184)						673
Before reclassifications																					2,658						—						2,658
Reclassifications																					(175)						—						(175)
Balance at end of period																					$	3,340					(184)						3,156

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(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
															2021									2020
Realized gains from sales of debt securities, available-for-sale															$	—					221						Net gains from sales of debt securities, available-for-sale
Income tax expense																					46						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,
															2021						2020
Qualified noncontributory defined benefit retirement plan															$	279					270
401(k) plan															160						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,
																		2021						2020
Interest cost																		$	13					16
Amortization of unrecognized net loss																		2						—
Net periodic pension cost																		$	15					16

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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, 2021						December 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,
			2021																		2020
			Options						Weighted Average Exercise Price						Aggregate Intrinsic Value (in thousands) (1)						Options						Weighted Average Exercise Price						Aggregate Intrinsic Value (in thousands) (1)
Outstanding, January 1,			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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(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,
			2021						2020
Intrinsic value of options exercised			$	1					46
Cash received from options exercised			4						115
Tax benefit realized from options exercised			—						5

Restricted stock awards granted under the 2015 Plan were as follows:

			2021												2020
			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
Granted			26,321						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,
															2021						2020
Restricted stock expense															$	93					33
Tax effect															20						7

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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(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,
															2021						2020
Net income															$	5,240					5,026
Less allocation of earnings and dividends to participating securities															18						11
Net income allocated to common shareholders															$	5,222					5,015
Weighted average common shares outstanding, gross															12,840,782						12,955,672
Less average participating securities															45,958						29,595
Weighted average number of shares outstanding used in the calculation of basic earnings per common share															12,794,824						12,926,077
Add dilutive effect of:
Stock options															28						1,589
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share															12,794,852						12,927,666
Earnings per common share:
Basic															$	0.41					0.39
Diluted															0.41						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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(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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(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 Measurements						Quoted 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 funds						52						52						—						—
			Mutual funds measured at net asset value						1,333						1,333						—						—
			Debt securities, available-for-sale:
			U.S. Treasury notes						16,216						16,216						—						—
			U.S. Agency notes						75,137						—						75,137						—
			Corporate bonds						1,893						—						1,893						—
			U.S. Agency mortgage-backed securities						96,603						—						96,603						—
			Municipal securities:
			Non-taxable						12,433						—						12,433						—
			Taxable						35,337						—						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 funds						50						50						—						—
			Mutual funds measured at net asset value						1,352						1,352						—						—
			Debt securities, available-for-sale:
			U.S. Treasury notes						2,388						2,388						—						—
			U.S. Agency notes						67,900						—						67,900						—
			Corporate bonds						1,179						—						1,179						—
			U.S. Agency mortgage-backed securities						91,634						—						91,634						—
			Municipal securities:
			Non-taxable						12,933						—						12,933						—
			Taxable						33,437						—						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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(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 Value						Valuation Technique						Unobservable Inputs						High						Low						Weighted Average
March 31, 2021
Impaired loans						$	2,078					Discounted cash flows						Discount rate						8.25		%				4.00		%				4.72		%
December 31, 2020
Impaired loans						$	1,352					Estimated sales price						Adjustments for comparable properties, discounts to reflect current market conditions						Not applicable
						2,087						Discounted cash flows						Discount rate						8.25		%				4.00		%				4.74		%

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(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-maturity						24,695						24,828						—						—						24,828
Federal Reserve Bank stock						4,652						4,652						4,652						—						—
Federal Home Loan Bank stock						5,203						5,203						5,203						—						—
Loans, net						1,329,422						1,281,697						—						—						1,281,697
Accrued interest receivable						8,665						8,665						—						8,665						—
FINANCIAL LIABILITIES:
Deposits						1,537,116						1,539,552						1,311,915						227,637						—
Long-term debt						17,000						17,510						—						17,510						—
Accrued interest payable						349						349						—						349						—
December 31, 2020
FINANCIAL ASSETS:
Cash and cash equivalents						$	31,730					31,730						31,730						—						—
Debt securities, held-to-maturity						24,810						24,960						—						—						24,960
Federal Reserve Bank stock						4,652						4,652						4,652						—						—
Federal Home Loan Bank stock						5,203						5,203						5,203						—						—
Loans, net						1,293,693						1,252,642						—						—						1,252,642
Accrued interest receivable						8,337						8,337						—						8,337						—
FINANCIAL LIABILITIES:
Deposits						1,455,423						1,458,413						1,212,903						245,510						—
Long-term debt						22,000						22,595						—						22,595						—
Accrued interest payable						452						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, 2021						December 31, 2020
Commercial, secured by real estate						$	19,611					20,231
Residential real estate						27						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,
						2021																		2020
						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 deposits						15,632						13						0.34		%				5,480						31						2.28		%
Federal Reserve Bank stock						4,652						—						—		%				4,652						—						—		%
Federal Home Loan Bank stock						5,203						26						2.03		%				5,203						33						2.55		%
Investment securities:
Equity securities						4,500						19						1.71		%				4,313						30						2.80		%
Debt securities, taxable						211,618						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 assets						1,589,582						15,595						3.98		%				1,462,946						16,632						4.57		%
Non-earning assets						191,287																		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 certificates						234,134						748						1.30		%				320,651						1,631						2.05		%
Short-term borrowings						342						1						1.19		%				1,415						7						1.99		%
Long-term debt						19,689						134						2.76		%				38,325						254						2.67		%
Total interest-bearing liabilities						1,049,191						1,163						0.45		%				1,039,483						2,378						0.92		%
Demand deposits						458,996																		347,027
Other liabilities						25,450																		20,918
Capital						241,517																		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 liabilities						151.51		%																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:
						Volume						Rate						Total
						(In thousands)
Interest-earning Assets:
Loans						$	721					(1,413)						(692)
Interest-bearing demand deposits						24						(42)						(18)
Federal Reserve Bank stock						—						—						—
Federal Home Loan Bank stock						—						(7)						(7)
Investment securities:
Equity securities						1						(12)						(11)
Debt securities, taxable						323						(555)						(232)
Debt securities, non-taxable						(80)						3						(77)
Total interest income						989						(2,026)						(1,037)
Interest-bearing Liabilities:
Savings deposits						72						(278)						(206)
IRA and time certificates						(371)						(512)						(883)
Short-term borrowings						(4)						(2)						(6)
Long-term debt						(127)						7						(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,
																					2021						2020						Difference
Fiduciary income																					$	1,529					1,103						426
Service charges and fees on deposit accounts																					1,366						1,295						71
Net gains from sales of debt securities, available-for-sale																					—						221						(221)
Bank owned life insurance income																					267						601						(334)
Gains from sales of loans																					43						120						(77)
Other operating income																					260						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,
																					2021						2020						Difference
Salaries and employee benefits																					$	6,433					6,768						(335)
Equipment expenses																					368						287						81
Occupancy expense, net																					794						682						112
State financial institutions tax																					444						436						8
Marketing																					268						177						91
Amortization of intangibles																					257						260						(3)
FDIC insurance premiums (credit), net																					113						(1)						114
Contracted services																					540						402						138
Other non-interest expense																					2,275						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, 2021						December 31, 2020						Difference $						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 value			2,506						2,389						117						4.90		%
Equity securities without a readily determinable fair value, at cost			2,099						2,099						—						—		%
Debt securities, available-for-sale, at fair value			237,619						209,471						28,148						13.44		%
Debt securities, held-to-maturity, at cost			24,695						24,810						(115)						(0.46)		%
Federal Reserve Bank stock, at cost			4,652						4,652						—						—		%
Federal Home Loan Bank stock, at cost			5,203						5,203						—						—		%
Loans, net			1,329,422						1,293,693						35,729						2.76		%
Premises and equipment, net			35,243						35,376						(133)						(0.38)		%
Operating lease right-of-use assets			6,865						6,274						591						9.42		%
Goodwill			59,221						59,221						—						—		%
Core deposit and other intangibles			3,108						3,453						(345)						(9.99)		%
Bank owned life insurance			42,416						42,149						267						0.63		%
Interest receivable			8,665						8,337						328						3.93		%
Other assets			15,463						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-bearing			1,061,989						1,000,350						61,639						6.16		%
Total deposits			1,537,116						1,455,423						81,693						5.61		%
Long-term debt			17,000						22,000						(5,000)						(22.73)		%
Operating lease liabilities			6,998						6,371						627						9.84		%
Accrued interest and other liabilities			17,961						21,265						(3,304)						(15.54)		%
Total liabilities			1,579,075						1,505,059						74,016						4.92		%
TOTAL SHAREHOLDERS' EQUITY			239,246						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 Requirement						Minimum Requirement with Capital Conservation Buffer						To Be Considered Well-Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets						4.5		%				7.0		%				6.5		%
Ratio of Tier 1 Capital to risk-weighted assets						6.0		%				8.5		%				8.0		%
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets						8.0		%				10.5		%				10.0		%
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)						4.0		%				N/A						5.0		%

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

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, 2021						December 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 capital						172,386						168,351
Eligible allowance for loan losses						5,679						5,728
Total risk-based capital						$	178,065					174,079
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets						12.48		%				12.48		%
Tier 1 Capital to risk-weighted assets						12.48		%				12.48		%
Total Capital to risk-weighted assets						12.89		%				12.91		%
Leverage						10.11		%				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 Points						Amount						$ Change in NII						% Change in NII
						(Dollars in thousands)
Up 400						$	66,189					2,436						3.82		%
Up 300						65,300						1,547						2.43		%
Up 200						64,423						670						1.05		%
Up 100						63,562						(191)						(0.30)		%
Base						63,753						—						—		%
Down 100						62,201						(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 Points						Amount						$ Change in EVE						% Change in EVE
						(Dollars in thousands)
Up 400						$	178,698					(47,877)						(21.13)		%
Up 300						189,273						(37,302)						(16.46)		%
Up 200						199,598						(26,977)						(11.91)		%
Up 100						209,872						(16,703)						(7.37)		%
Base						226,575						—						—		%
Down 100						275,007						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:

Period						Total Number of Shares Purchased						Average Price Paid Per Share						Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs						Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 2021						14,532						$	14.85					14,532						499,916
February 2021						53,382						$	16.54					53,382						446,534
March 2021						2,407						$	16.98					2,407						444,127

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			Agreement and Plan of Merger dated as of December 20, 2017 by and between LCNB Corp. and Columbus First Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on December 21, 2017, Exhibit 2.1.
3.1			Amended and Restated Articles of Incorporation of LCNB Corp., as amended. (This document represents the Amended and Restated Articles of Incorporation of LCNB Corp. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) - incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, Exhibit 3.1.
3.2			Code of Regulations of LCNB Corp. – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).
10.1			LCNB Corp. Ownership Incentive Plan – incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A (000-26121).
10.2			LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 13, 2015, Exhibit A (001-35292)
10.3			Form of Option Grant Agreement under the LCNB Corp. Ownership Incentive Plan – incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, Exhibit 10.2.
10.4			Nonqualified Executive Retirement Plan – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2009, Exhibit 10.4.
10.5			Form of Restricted Share Grant Agreement under the LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2015, Exhibit 10.7.
31.1			Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32			Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
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.
104			Cover 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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