LCNB CORP - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐			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. ☐

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 10, 2022 was 11,401,677 shares.

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 INCOM E (LOSS)			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			35

Item 3. Quantitative and Qualitative Disclosures about Market Risks			45

Item 4. Controls and Procedures			46

PART II. OTHER INFORMATION			47

Item 1. Legal Proceedings			47

Item 1A. Risk Factors			47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47

Item 3. Defaults Upon Senior Securities			48

Item 4. Mine Safety Disclosures			48

Item 5. Other Information			48

Item 6. Exhibits			50

SIGNATURES			49

Table of Contents

Glossary of Abbreviations and Acronyms


ASC						Accounting Standards Codification
ASU						Accounting Standards Update
Bank						LCNB National Bank

CARES Act						Coronavirus Aid, Relief, and Economic Security Act
CEO						Chief Executive Officer
CFO						Chief Financial Officer

Company						LCNB Corp. and its consolidated subsidiaries as a whole


Dodd-Frank Act						Dodd-Frank Wall Street Reform and Consumer Protection Act
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
GAAP						Generally Accepted Accounting Principles
ICS						Insured Cash Sweep
IRA						Individual Retirement Account
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

SBA						Small Business Administration
SEC						Securities and Exchange Commission

TDRs						Troubled Debt Restructurings

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, 2022		December 31, 2021
	(Unaudited)
ASSETS:
Cash and due from banks	$	18,062	16,810
Interest-bearing demand deposits	1,879		1,326
Total cash and cash equivalents	19,941		18,136

Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,424		2,546
Equity securities without a readily determinable fair value, at cost	2,099		2,099
Debt securities, available-for-sale, at fair value	293,464		308,177
Debt securities, held-to-maturity, at cost	22,873		22,972
Federal Reserve Bank stock, at cost	4,652		4,652
Federal Home Loan Bank stock, at cost	5,203		5,203
Loans, net	1,373,991		1,363,939
Premises and equipment, net	34,940		35,385

Operating lease right-of-use assets	6,191		6,357
Goodwill	59,221		59,221
Core deposit and other intangibles, net	2,328		2,473
Bank owned life insurance	43,488		43,224
Interest receivable	8,364		7,999
Other assets, net	20,451		21,246
TOTAL ASSETS	$	1,899,630	1,903,629

LIABILITIES:
Deposits:
Noninterest-bearing	$	517,621	501,531
Interest-bearing	1,118,985		1,127,288
Total deposits	1,636,606		1,628,819
Short-term borrowings	24,746		—
Long-term debt	10,000		10,000
Operating lease liabilities	6,337		6,473
Accrued interest and other liabilities	15,066		19,733
TOTAL LIABILITIES	1,692,755		1,665,025

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 14,252,027 and 14,213,792 shares at March 31, 2022 and December 31, 2021, respectively; outstanding 11,401,503 and 12,414,956 shares at March 31, 2022 and December 31, 2021, respectively	143,432		143,130
Retained earnings	128,555		126,312
Treasury shares at cost, 2,850,524 and 1,798,836 shares at March 31, 2022 and December 31, 2021, respectively	(50,115)		(29,029)
Accumulated other comprehensive loss, net of taxes	(14,997)		(1,809)
TOTAL SHAREHOLDERS' EQUITY	206,875		238,604
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,899,630	1,903,629

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

Table of Contents

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,
		2022		2021
INTEREST INCOME:
Interest and fees on loans		$	13,786	14,535
Dividends on equity securities:
With a readily determinable fair value		12		13
Without a readily determinable fair value		5		6
Interest on debt securities:
Taxable		1,095		718
Non-taxable		189		224
Other investments		35		39
TOTAL INTEREST INCOME		15,122		15,535

INTEREST EXPENSE:
Interest on deposits		739		1,028
Interest on short-term borrowings		86		1
Interest on long-term debt		74		134
TOTAL INTEREST EXPENSE		899		1,163
NET INTEREST INCOME		14,223		14,372
PROVISION (CREDIT) FOR LOAN LOSSES		49		(52)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES		14,174		14,424

NON-INTEREST INCOME:
Fiduciary income		1,695		1,529
Service charges and fees on deposit accounts		1,406		1,366

Bank owned life insurance income		265		267
Gains from sales of loans		124		43
Other operating income		60		260
TOTAL NON-INTEREST INCOME		3,550		3,465

NON-INTEREST EXPENSE:
Salaries and employee benefits		7,215		6,433
Equipment expenses		408		368
Occupancy expense, net		775		794
State financial institutions tax		436		444
Marketing		262		268
Amortization of intangibles		140		257
FDIC insurance premiums, net		126		113
Contracted services		610		540



Other non-interest expense		2,278		2,275
TOTAL NON-INTEREST EXPENSE		12,250		11,492
INCOME BEFORE INCOME TAXES		5,474		6,397
PROVISION FOR INCOME TAXES		951		1,157
NET INCOME		$	4,523	5,240

Dividends declared per common share		$	0.20	0.19
Earnings per common share:
Basic		$	0.38	0.41
Diluted		0.38		0.41
Weighted average common shares outstanding:
Basic		11,818,614		12,794,824
Diluted		11,818,614		12,794,852

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 (LOSS)

(In thousands)

(Unaudited)


	Three Months Ended March 31,
		2022		2021
Net income		$	4,523	5,240
Other comprehensive income (loss):
Net unrealized losses on available-for-sale debt securities (net of taxes of $(3,506) and $(915) for the three months ended March 31, 2022 and 2021, respectively)		(13,189)		(3,441)

Change in nonqualified pension plan unrecognized net gain and unrecognized prior service cost (net of taxes of $1 and $1 for the three months ended March 31, 2022 and 2021, respectively)		1		1
Other comprehensive loss, net of tax		(13,188)		(3,440)
TOTAL COMPREHENSIVE INCOME (LOSS)		$	(8,665)	1,800

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

Table of Contents

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 (Loss)	Total Shareholders' Equity












Three Months Ended March 31, 2022
Balance at December 31, 2021	12,414,956	$	143,130	126,312	(29,029)	(1,809)	238,604
Net income				4,523			4,523
Other comprehensive loss, net of taxes						(13,188)	(13,188)
Dividend Reinvestment and Stock Purchase Plan	5,681	105					105

Repurchase of common stock	(1,051,688)				(21,086)		(21,086)

Compensation expense relating to restricted stock	32,554	197					197
Common stock dividends, $0.20 per share				(2,280)			(2,280)
Balance at March 31, 2022	11,401,503	$	143,432	128,555	(50,115)	(14,997)	206,875













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

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,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,523	5,240
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation, amortization, and accretion	772		308
Provision (credit) for loan losses	49		(52)
Deferred income tax provision	93		74
Increase in cash surrender value of bank owned life insurance	(265)		(267)

(Gain) loss from equity securities	126		(112)

Realized gain from sales of premises and equipment	(12)		(5)


Origination of mortgage loans for sale	(5,159)		(1,354)
Realized gains from sales of loans	(124)		(43)
Proceeds from sales of mortgage loans	5,223		1,381
Compensation expense related to restricted stock	197		93
Changes in:
Accrued interest receivable	(365)		(328)
Other assets	3,025		1,565
Other liabilities	(3,480)		(2,461)
TOTAL ADJUSTMENTS	80		(1,201)
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	4,603		4,039

CASH FLOWS FROM INVESTING ACTIVITIES:


Proceeds from maturities and calls of debt securities:
Available-for-sale	9,801		7,833
Held-to-maturity	99		115
Purchases of equity securities	(4)		(5)
Purchases of debt securities:
Available-for-sale	(12,092)		(40,759)
Held-to-maturity	—		—



Net increase in loans	(9,827)		(34,733)



Purchases of premises and equipment	(59)		(302)
Proceeds from sale of premises and equipment	12		5

NET CASH FLOWS USED IN INVESTING ACTIVITIES	(12,070)		(67,846)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	7,787		81,693
Net increase in short-term borrowings	24,746		—

Principal payments on long-term debt	—		(5,000)
Proceeds from issuance of common stock	105		8
Repurchase of common stock	(21,086)		(1,140)
Proceeds from exercise of stock options	—		4
Cash dividends paid on common stock	(2,280)		(2,344)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES	9,272		73,221
NET CHANGE IN CASH AND CASH EQUIVALENTS	1,805		9,414
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	18,136		31,730
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	19,941	41,144

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	836	1,265
Income taxes paid, net of refunds	(468)		—

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. GAAP 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 GAAP 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 8-03.

The consolidated condensed balance sheet as of December 31, 2021 has been derived from the audited consolidated balance sheet as of that date.

The preparation of consolidated financial statements in conformity with U.S. GAAP 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, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022. 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 2021 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 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, 2022 and December 31, 2021 are summarized as follows (in thousands):


	Amortized Cost		Unrealized Gains	Unrealized Losses	Fair Value
March 31, 2022
Debt Securities, Available-for-Sale:
U.S. Treasury notes	$	79,477	2	4,746	74,733
U.S. Agency notes	89,282		—	6,536	82,746
Corporate bonds	6,200		44	317	5,927
U.S. Agency mortgage-backed securities	91,497		110	4,807	86,800
Municipal securities:
Non-taxable	8,496		5	228	8,273
Taxable	37,151		88	2,254	34,985
	$	312,103	249	18,888	293,464

Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable	$	19,304	43	309	19,038
Taxable	3,569		—	198	3,371
	$	22,873	43	507	22,409

December 31, 2021
Debt Securities, Available-for-Sale:
U.S. Treasury notes	$	75,443	57	756	74,744
U.S. Agency notes	89,293		45	2,092	87,246
Corporate Bonds	5,200		70	118	5,152
U.S. Agency mortgage-backed securities	96,018		1,350	692	96,676
Municipal securities:
Non-taxable	8,959		125	18	9,066
Taxable	35,208		531	446	35,293
	$	310,121	2,178	4,122	308,177

Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable	$	19,403	98	—	19,501
Taxable	3,569		21	4	3,586
	$	22,972	119	4	23,087

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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, 2022 and December 31, 2021, 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, 2022
Available-for-Sale:
U.S. Treasury notes	$	73,736	4,746	—	—
U.S. Agency notes	35,960		2,316	46,786	4,220
Corporate bonds	4,536		264	647	53
U.S. Agency mortgage-backed securities	58,478		2,739	20,942	2,068
Municipal securities:
Non-taxable	6,088		228	—	—
Taxable	21,200		1,387	7,667	867
	$	199,998	11,680	76,042	7,208

Held-to-Maturity:
Municipal securities:
Non-taxable	$	7,434	309	—	—
Taxable	3,371		198	—	—
	$	10,805	507	—	—

December 31, 2021
Available-for-Sale:
U.S. Treasury notes	$	66,891	756	—	—
U.S. Agency notes	58,648		1,257	20,289	835
Corporate Bonds	3,898		102	484	16
U.S. Agency mortgage-backed securities	49,813		692	—	—
Municipal securities:
Non-taxable	1,020		18	—	—
Taxable	18,434		322	3,535	124
	$	198,704	3,147	24,308	975

Held-to-Maturity:
Municipal securities:
Non-taxable	$	46	—	—	—
Taxable	271		4	—	—
	$	317	4	—	—

Management has determined that the unrealized losses at March 31, 2022 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, 2022 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	$	522	524	1,867	1,867
Due from one to five years	90,192		85,832	4,960	4,818
Due from five to ten years	129,163		119,631	2,894	2,785
Due after ten years	729		677	13,152	12,939
	220,606		206,664	22,873	22,409
U.S. Agency mortgage-backed securities	91,497		86,800	—	—
	$	312,103	293,464	22,873	22,409

Debt securities with a market value of $140,418,000 and $128,426,000 at March 31, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

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, 2022 on its investments in equity securities without a readily determinable fair value.

The cost and estimated fair value of equity securities with a readily determinable fair value at March 31, 2022 and December 31, 2021 are summarized as follows (in thousands):


	March 31, 2022			December 31, 2021
	Cost		Fair Value	Cost	Fair Value
Mutual funds	$	1,414	1,317	1,410	1,379
Equity securities	778		1,107	778	1,167
Total equity securities with a readily determinable fair value	$	2,192	2,424	2,188	2,546

Changes in the fair value of equity securities with a readily determinable fair value for the three months ended March 31, 2022 and 2021 were due solely to changes in unrealized gains and losses.

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LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 3 - Loans

Major classifications of loans at March 31, 2022 and December 31, 2021 were as follows (in thousands):


	March 31, 2022		December 31, 2021
Commercial & industrial	$	105,809	101,598
Commercial, secured by real estate	904,562		887,679
Residential real estate	328,574		335,106
Consumer	32,541		34,291
Agricultural	7,990		10,649
Other loans, including deposit overdrafts	45		122
Loans, gross	1,379,521		1,369,445
Less allowance for loan losses	5,530		5,506
Loans, net	$	1,373,991	1,363,939

Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $928,000 and $961,000 at March 31, 2022 and December 31, 2021, respectively.

Non-accrual, past-due, and accruing restructured loans as of March 31, 2022 and December 31, 2021 were as follows (in thousands):


	March 31, 2022		December 31, 2021
Non-accrual loans:

Commercial, secured by real estate	$	1,173	1,182
Residential real estate	282		299


Total non-accrual loans	1,455		1,481
Past-due 90 days or more and still accruing	—		56
Total non-accrual and past-due 90 days or more and still accruing	1,455		1,537
Accruing troubled debt restructured loans	2,280		2,622
Total	$	3,735	4,159

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(Continued)

Note 3 – Loans (continued)

The allowance for loan losses for the three months ended March 31, 2022 and 2021 were as follows (in thousands):


	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total







Three Months Ended March 31, 2022
Balance, beginning of year	$	1,095	3,607	665	105	30	4	5,506
Provision (credit) charged to expenses	202		(113)	(22)	(27)	(12)	21	49
Losses charged off	—		—	(5)	(5)	—	(27)	(37)
Recoveries	—		—	1	—	—	11	12
Balance, end of period	$	1,297	3,494	639	73	18	9	5,530








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

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(Continued)

Note 3 – Loans (continued)

A breakdown of the allowance for loan losses and the loan portfolio by loan segment at March 31, 2022 and December 31, 2021 were as follows (in thousands):


	Commercial & Industrial		Commercial, Secured by Real Estate	Residential Real Estate	Consumer	Agricultural	Other	Total
March 31, 2022
Allowance for loan losses:
Individually evaluated for impairment	$	5	12	9	—	—	—	26
Collectively evaluated for impairment	1,292		3,482	630	73	18	9	5,504
Acquired credit impaired loans	—		—	—	—	—		—
Balance, end of period	$	1,297	3,494	639	73	18	9	5,530

Loans:
Individually evaluated for impairment	$	145	2,617	535	—	—	—	3,297
Collectively evaluated for impairment	105,585		900,396	326,901	32,541	7,990	45	1,373,458
Acquired credit impaired loans	79		1,549	1,138	—	—	—	2,766
Balance, end of period	$	105,809	904,562	328,574	32,541	7,990	45	1,379,521

December 31, 2021
Allowance for loan losses:
Individually evaluated for impairment	$	5	11	9	—	—	—	25
Collectively evaluated for impairment	1,090		3,596	656	105	30	4	5,481
Acquired credit impaired loans	—		—	—	—	—	—	—
Balance, end of period	$	1,095	3,607	665	105	30	4	5,506

Loans:
Individually evaluated for impairment	$	155	2,945	559	—	—	—	3,659
Collectively evaluated for impairment	101,355		883,122	333,384	34,291	10,649	122	1,362,923
Acquired credit impaired loans	88		1,612	1,163	—	—	—	2,863
Balance, end of period	$	101,598	887,679	335,106	34,291	10,649	122	1,369,445

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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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 could apply for a First Draw or a Second Draw PPP Loan prior to the program ending on May 31, 2021. PPP loans made by LCNB have a maturity of two years if issued prior to June 5, 2020 and five years if issued on or after June 5, 2020. The loans have an interest rate of 1%. In addition, the SBA paid originating lenders processing fees based on the size of the loan. Outstanding PPP loans at March 31, 2022 and December 31, 2021 totaled $1,415,000 and $6,935,000, respectively, and unrecognized fees at those dates totaled $66,000 and $272,000, respectively.

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. Mortgage loans secured by owner-occupied agricultural property are included in this category. 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 and liquidity 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 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 fifteen 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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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(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, 2022 and December 31, 2021 is as follows (in thousands):


	Pass		OAEM	Substandard	Doubtful	Total
March 31, 2022
Commercial & industrial	$	102,024	3,652	133	—	105,809
Commercial, secured by real estate	877,229		17,566	9,767	—	904,562
Residential real estate	326,458		—	2,116	—	328,574
Consumer	32,541		—	—	—	32,541
Agricultural	7,990		—	—	—	7,990
Other	45		—	—	—	45
Total	$	1,346,287	21,218	12,016	—	1,379,521

December 31, 2021
Commercial & industrial	$	98,694	2,757	147	—	101,598
Commercial, secured by real estate	851,709		22,336	13,634	—	887,679
Residential real estate	332,962		—	2,144	—	335,106
Consumer	34,281		—	10	—	34,291
Agricultural	10,649		—	—	—	10,649
Other	122		—	—	—	122
Total	$	1,328,417	25,093	15,935	—	1,369,445

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(Continued)

Note 3 – Loans (continued)

A loan portfolio aging analysis at March 31, 2022 and December 31, 2021 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, 2022
Commercial & industrial	$	—	—	—	—	105,809	105,809	—
Commercial, secured by real estate	105		—	784	889	903,673	904,562	—
Residential real estate	542		—	58	600	327,974	328,574	—
Consumer	—		—	—	—	32,541	32,541	—
Agricultural	—		—	—	—	7,990	7,990	—
Other	45		—	—	45	—	45	—
Total	$	692	—	842	1,534	1,377,987	1,379,521	—

December 31, 2021
Commercial & industrial	$	—	—	—	—	101,598	101,598	—
Commercial, secured by real estate	181		—	784	965	886,714	887,679	—
Residential real estate	1,130		1	109	1,240	333,866	335,106	51
Consumer	22		5	5	32	34,259	34,291	5
Agricultural	—		—	—	—	10,649	10,649	—
Other	122		—	—	122	—	122	—
Total	$	1,455	6	898	2,359	1,367,086	1,369,445	56

Impaired loans, including acquired credit impaired loans, at March 31, 2022 and December 31, 2021 were as follows (in thousands):


	March 31, 2022				December 31, 2021
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Recorded Investment	Unpaid Principal Balance	Related Allowance
With no related allowance recorded:
Commercial & industrial	$	79	296	—	88	316	—
Commercial, secured by real estate	3,510		4,318	—	3,897	4,736	—
Residential real estate	1,457		1,807	—	1,501	1,857	—
Consumer	—		—	—	—	—	—
Agricultural	—		—	—	—	—	—
Other	—		—	—	—	—	—
Total	$	5,046	6,421	—	5,486	6,909	—

With an allowance recorded:
Commercial & industrial	$	145	150	5	155	160	5
Commercial, secured by real estate	656		656	12	660	660	11
Residential real estate	216		216	9	221	221	9
Consumer	—		—	—	—	—	—
Agricultural	—		—	—	—	—	—
Other	—		—	—	—	—	—
Total	$	1,017	1,022	26	1,036	1,041	25

Total:
Commercial & industrial	$	224	446	5	243	476	5
Commercial, secured by real estate	4,166		4,974	12	4,557	5,396	11
Residential real estate	1,673		2,023	9	1,722	2,078	9
Consumer	—		—	—	—	—	—
Agricultural	—		—	—	—	—	—
Other	—		—	—	—	—	—
Total	$	6,063	7,443	26	6,522	7,950	25

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(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, 2022 and 2021 (in thousands):


	2022			2021
	Average Recorded Investment		Interest Income Recognized	Average Recorded Investment	Interest Income Recognized




























Three Months Ended March 31,
With no related allowance recorded:
Commercial & industrial	$	84	14	235	25
Commercial, secured by real estate	3,704		73	6,794	119
Residential real estate	1,477		29	3,448	66
Consumer	—		—	4	—
Agricultural	—		—	—	—
Other	—		—	191	15
Total	$	5,265	116	10,672	225

With an allowance recorded:
Commercial & industrial	$	150	2	189	3
Commercial, secured by real estate	659		9	1,617	17
Residential real estate	218		3	307	4
Consumer	—		—	—	—
Agricultural	—		—	—	—
Other	—		—	—	—
Total	$	1,027	14	2,113	24

Total:
Commercial & industrial	$	234	16	424	28
Commercial, secured by real estate	4,363		82	8,411	136
Residential real estate	1,695		32	3,755	70
Consumer	—		—	4	—
Agricultural	—		—	—	—
Other	—		—	191	15
Total	$	6,292	130	12,785	249

Of the interest income recognized on impaired loans during the three months ended March 31, 2022 and 2021, none was 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. Each modification is separately negotiated with the borrower and includes terms and conditions that reflect the borrower's ability to pay the debt as modified. 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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(Continued)

Note 3 – Loans (continued)

Loan modifications that were classified as TDRs during the three months ended March 31, 2022 and 2021 were as follows (dollars in thousands):


	2022					2021
	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	—	$	—	$	—	—	$	—	$	—
Commercial, secured by real estate	—	—		—		—	—		—
Residential real estate	—	—		—		1	21		21
Consumer	—	—		—		—	—		—
Total	—	$	—	$	—	1	$	21	$	21

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 restructured loans for which there was a payment default within twelve months of the restructuring date during the three months ended March 31, 2022 and 2021.

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, 2022 and 2021 and that were determined to be troubled debt restructurings follows (in thousands):


	2022		2021
Impaired loans without a valuation allowance	$	—	21
Impaired loans with a valuation allowance	—		—

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, 2022 and December 31, 2021 were approximately $152,271,000 and $149,382,000, respectively.

The total recorded investment in residential consumer mortgage loans secured by residential real estate that were in the process of foreclosure at March 31, 2022 and December 31, 2021 was $58,000 for both dates.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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Note 4 - Acquired Credit Impaired Loans

The following table provides at March 31, 2022 and December 31, 2021 the major classifications of acquired credit impaired loans that are accounted for in accordance with ASC 310-30 (in thousands):


	March 31, 2022		December 31, 2021
Acquired from First Capital Bancshares, Inc.
Commercial & industrial	$	1	1
Commercial, secured by real estate	—		—
Residential real estate	388		398
Other loans, including deposit overdrafts	—		—
Loans, gross	389		399
Less allowance for loan losses	—		—
Loans, net	$	389	399

Acquired from Eaton National Bank & Trust Co.
Commercial & industrial	$	—	—
Commercial, secured by real estate	284		310
Residential real estate	452		463
Other loans, including deposit overdrafts	—		—
Loans, gross	736		773
Less allowance for loan losses	—		—
Loans, net	$	736	773

Acquired from BNB Bancorp, Inc.
Commercial & industrial	$	—	—
Commercial, secured by real estate	665		688
Residential real estate	50		51
Other loans, including deposit overdrafts	—		—
Loans, gross	715		739
Less allowance for loan losses	—		—
Loans, net	$	715	739

Acquired from Columbus First Bancorp, Inc.
Commercial & industrial	$	78	87
Commercial, secured by real estate	600		614
Residential real estate	248		251
Other loans, including deposit overdrafts	—		—
Loans, gross	926		952
Less allowance for loan losses	—		—
Loans, net	$	926	952

Total
Commercial & industrial	$	79	88
Commercial, secured by real estate	1,549		1,612
Residential real estate	1,138		1,163
Other loans, including deposit overdrafts	—		—
Loans, gross	2,766		2,863
Less allowance for loan losses	—		—
Loans, net	$	2,766	2,863

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(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, 2022		December 31, 2021
Outstanding balance	$	3,624	3,769
Carrying amount	2,766		2,863

Activity during the three months ended March 31, 2022 and 2021 for the accretable discount related to acquired credit impaired loans is as follows (in thousands):


	Three Months Ended March 31,
		2022		2021
Accretable discount at beginning of period		$	116	182

Reclassification from nonaccretable discount to accretable discount		17		12

Accretion		(50)		(71)
Accretable discount at end of period		$	83	123

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, 2022 and December 31, 2021 (in thousands):


	March 31, 2022		December 31, 2021
Affordable housing tax credit investment	$	14,950	14,950
Less amortization	2,423		2,126
Net affordable housing tax credit investment	$	12,527	12,824

Unfunded commitment	$	7,180	8,655

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 thirteen years.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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(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, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
		2022		2021
Tax credits and other tax benefits recognized		$	357	260
Tax credit amortization expense included in provision for income taxes		297		217

Note 6 – Borrowings

Borrowings at March 31, 2022 and December 31, 2021 were as follows (dollars in thousands):


	March 31, 2022				December 31, 2021
	Amount		Rate		Amount		Rate
Lines of credit	$	24,746	2.62	%	$	—	—	%

FHLB long-term advances	10,000		3.00	%	10,000		3.00	%
	$	34,746	2.73	%	$	10,000	3.00	%

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 $303 million at March 31, 2022 and December 31, 2021, respectively. Total remaining borrowing capacity at March 31, 2022 was approximately $225.5 million.

At March 31, 2022, LCNB Corp. had a short-term revolving line of credit arrangement with a financial institution for a maximum amount of $20 million at an interest rate equal to the Wall Street Journal Prime Rate minus 25 basis points. The full amount of the line of credit was outstanding at that date. This agreement expires on February 8, 2023.

At March 31, 2022, LCNB had short-term line of credit borrowing arrangements with two financial institutions. The first arrangement is a short-term line of credit for a maximum amount of $25 million at the interest rate in effect at the time of the borrowing. The second arrangement is a short-term line of credit for a maximum amount of $30 million, of which $4,746,000 was outstanding at March 31, 2022, at an interest rate equal to the lending institution’s federal funds rate plus 50 basis points.

Under the terms of a REPO Based Advance program with the FHLB of Cincinnati, LCNB can borrow up to $87.1 million in short-term advances as of March 31, 2022, subject to total remaining borrowing capacity limitations. LCNB can select terms ranging from one day to one year. The interest rate is the published rate in effect at the time of the advance. This agreement expires on February 8, 2023.

Under the terms of a Cash Management Advance program with the FHLB of Cincinnati, LCNB can borrow up to $87.1 million in short-term advances as of March 31, 2022, subject to total remaining borrowing capacity limitations. LCNB can select a variable rate of interest for up to ninety days or a fixed rate of interest for a maximum of thirty days. The interest rate is the published rate in effect at the time of the advance. This agreement expires on February 8, 2023.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

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, 2022 were as follows (in thousands):


	Three Months Ended March 31,
		2022		2021
Operating lease expense		$	159	215
Short-term lease expense		34		14
Variable lease expense		—		1
Other		3		3
Total lease expense		$	196	233

Other information related to leases at March 31, 2022 were as follows (dollars in thousands):


Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	130

Weighted average remaining lease term in years for operating leases	33.1
Weighted average discount rate for operating leases	3.41		%

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,
		2022		2021
Statutory tax rate		21.0	%	21.0	%
Increase (decrease) resulting from:
Tax exempt interest		(0.7)	%	(0.7)	%
Tax exempt income on bank owned life insurance		(1.0)	%	(0.9)	%
Captive insurance premium income		(0.9)	%	(0.7)	%

Other, net		(1.0)	%	(0.6)	%
Effective tax rate		17.4	%	18.1	%

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. These financial instruments 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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 9 – Commitments and Contingent Liabilities (continued)

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, 2022 and December 31, 2021 were as follows (in thousands):


	March 31, 2022		December 31, 2021
Commitments to extend credit:
Commercial loans	$	66,854	82,578
Other loans
Fixed rate	5,959		5,196
Adjustable rate	3,563		2,784
Unused lines of credit:
Fixed rate	34,570		32,655
Adjustable rate	193,015		150,746
Unused overdraft protection amounts on demand and NOW accounts	16,654		16,711
Standby letters of credit	5		5
Total commitments	$	320,620	290,675

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, 2022 totaled approximately $356,000.

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 10 – Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021 were as follows (in thousands):


	Three Months Ended March 31,
		Unrealized Gains and Losses on Available-for-Sale Debt Securities		Changes in Pension Plan Assets and Benefit Obligations	Total
2022
Balance at beginning of period		$	(1,536)	(273)	(1,809)
Before reclassifications		(13,189)		1	(13,188)
Reclassifications		—		—	—
Balance at end of period		$	(14,725)	(272)	(14,997)

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

There were no reclassifications out of accumulated other comprehensive income (loss) during the three months ended March 31, 2022 and 2021.

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, 2022 and 2021 were as follows (in thousands):


	Three Months Ended March 31,
		2022		2021
Qualified noncontributory defined benefit retirement plan		$	308	279
401(k) plan		180		160

LCNB CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 11 – Retirement Plans (continued)

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, 2022 and 2021 are summarized as follows (in thousands):


	Three Months Ended March 31,
		2022		2021

Interest cost		$	12	13
Amortization of unrecognized net loss		2		2

Net periodic pension cost		$	14	15

Amounts recognized in accumulated other comprehensive income (loss), net of tax, for the nonqualified defined benefit retirement plan for the three months ended March 31, 2022 and 2021 were as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Net actuarial gain	$	(1)	(2)

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 12 – Stock Based Compensation (continued)

The following table summarizes stock option activity for the periods indicated:


	Three Months Ended March 31,
	2022					2021
	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
Granted	—	—				—	—
Exercised	—	—				(311)	12.60
Expired	—	—				—	—
Outstanding, March 31,	—	—		$	—	—	—		$	—
Exercisable, March 31,	—	—		$	—	—	—		$	—
(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.

The following table provides information related to stock options exercised during the periods indicated (in thousands):


	Three Months Ended March 31,
	2022		2021
Intrinsic value of options exercised	$	—	1
Cash received from options exercised	—		4
Tax benefit realized from options exercised	—		—

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


	2022			2021
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Outstanding, January 1,	44,512	$	17.08	28,596	$	17.42
Granted	32,554	19.25		26,321	16.85
Vested	(17,229)	17.98		(8,817)	17.55
Forfeited	—	—		(122)	16.87
Outstanding, March 31,	59,837	$	18.00	45,978	$	17.07

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, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
		2022		2021
Restricted stock expense		$	197	93
Tax effect		41		20

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 12 – Stock Based Compensation (continued)

Unrecognized compensation expense for restricted stock awards was $1,034,000 at March 31, 2022 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.

Earnings per share for the three months ended March 31, 2022 and 2021 were calculated as follows (dollars in thousands, except share and per share data):


	Three Months Ended March 31,
		2022		2021
Net income		$	4,523	5,240
Less allocation of earnings and dividends to participating securities		24		18
Net income allocated to common shareholders		$	4,499	5,222

Weighted average common shares outstanding, gross		11,878,451		12,840,782
Less average participating securities		59,837		45,958
Weighted average number of shares outstanding used in the calculation of basic earnings per common share		11,818,614		12,794,824
Add dilutive effect of:
Stock options		—		28
Adjusted weighted average number of shares outstanding used in the calculation of diluted earnings per common share		11,818,614		12,794,852

Earnings per common share:
Basic		$	0.38	0.41
Diluted		0.38		0.41

There were no anti-dilutive stock options outstanding at March 31, 2022 or 2021.

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

•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 and are considered level 1 because the net asset values are determined and published and are the basis for current transactions.

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. 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 values for U.S. Treasury notes are determined based on market quotations (level 1).

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

Assets Recorded at Fair Value on a Nonrecurring Basis

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

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

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, 2022 and December 31, 2021 (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, 2022
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	1,107	1,107	—	—
	Mutual funds	47		47	—	—
	Mutual funds measured at net asset value	1,270		1,270	—	—

	Debt securities, available-for-sale:
	U.S. Treasury notes	74,733		74,733	—	—
	U.S. Agency notes	82,746		—	82,746	—
	Corporate bonds	5,927		—	5,927	—
	U.S. Agency mortgage-backed securities	86,800		—	86,800	—
	Municipal securities:
	Non-taxable	8,273		—	8,273	—
	Taxable	34,985		—	34,985	—
	Total recurring fair value measurements	$	295,888	77,157	218,731	—

Nonrecurring fair value measurements:
	Impaired loans	$	991	—	—	991

	Total nonrecurring fair value measurements	$	991	—	—	991

December 31, 2021
Recurring fair value measurements:
	Equity securities with a readily determinable fair value:
	Equity securities	$	1,167	1,167	—	—
	Mutual funds	51		51	—	—
	Mutual funds measured at net asset value	1,328		1,328	—	—

	Debt securities, available-for-sale:
	U.S. Treasury notes	74,744		74,744	—	—
	U.S. Agency notes	87,246		—	87,246	—
	Corporate bonds	5,152		—	5,152	—
	U.S. Agency mortgage-backed securities	96,676		—	96,676	—
	Municipal securities:
	Non-taxable	9,066		—	9,066	—
	Taxable	35,293		—	35,293	—
	Total recurring fair value measurements	$	310,723	77,290	233,433	—

Nonrecurring fair value measurements:
	Impaired loans	$	1,011	—	—	1,011

	Total nonrecurring fair value measurements	$	1,011	—	—	1,011

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at March 31, 2022 and December 31, 2021 (dollars in thousands):


					Range
	Fair Value		Valuation Technique	Unobservable Inputs	High		Low		Weighted Average
March 31, 2022
Impaired loans	$	—	Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable
Impaired loans	$	991	Discounted cash flows	Discount rate	8.125	%	4.625	%	6.07	%


December 31, 2021
Impaired loans	$	—	Estimated sales price	Adjustments for comparable properties, discounts to reflect current market conditions	Not applicable
	1,011		Discounted cash flows	Discount rate	8.25	%	4.00	%	6.07	%

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 14 - Fair Value Measurements (continued)

Carrying amounts and estimated fair values of financial instruments as of March 31, 2022 and December 31, 2021 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, 2022
FINANCIAL ASSETS:
Cash and cash equivalents	$	19,941	19,941	19,941	—	—

Debt securities, held-to-maturity	22,873		22,409	—	—	22,409
Federal Reserve Bank stock	4,652		4,652	4,652	—	—
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—
Loans, net	1,373,991		1,299,509	—	—	1,299,509
Accrued interest receivable	8,364		8,364	—	8,364	—

FINANCIAL LIABILITIES:
Deposits	1,636,606		1,637,621	1,451,644	185,977	—
Short-term borrowings	24,746		24,746	24,746	—	—
Long-term debt	10,000		10,243	—	10,243	—
Accrued interest payable	339		339	—	339	—

December 31, 2021
FINANCIAL ASSETS:
Cash and cash equivalents	$	18,136	18,136	18,136	—	—

Debt securities, held-to-maturity	22,972		23,087	—	—	23,087
Federal Reserve Bank stock	4,652		4,652	4,652	—	—
Federal Home Loan Bank stock	5,203		5,203	5,203	—	—
Loans, net	1,363,939		1,333,840	—	—	1,333,840
Accrued interest receivable	7,999		7,999	—	7,999	—

FINANCIAL LIABILITIES:
Deposits	1,628,819		1,630,158	1,435,487	194,671	—

Long-term debt	10,000		10,292	—	10,292	—
Accrued interest payable	277		277	—	277	—

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, 2022 and December 31, 2021.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 – Recent Accounting Pronouncements

From time to time the FASB issues an ASU to communicate changes to U.S. GAAP. 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.

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 implementation of ASU No. 2016-13 will increase the balance of the allowance for loan losses, they continue to analyze modeling after studying the impacts that the most recent economic conditions presented due to the pandemic. As they adjust and finalize appropriate modeling, they are continuing to evaluate the modeling and its 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; however, it is anticipated during 2022 that modeling adjustments should be complete after finalizing review of prepayment, curtailment, and forecasting assessments.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Continued)

Note 15 – Recent Accounting Pronouncements (continued)

ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures"

ASU No. 2022-02 was issued in March 2022 and, once effective, will eliminate the accounting guidance on TDRs for creditors who have adopted ASU No. 2016-13 and provides for enhanced disclosures for certain modifications to borrowers experiencing financial difficulties. The update also amends the guidance on vintage disclosures for public business entities, as defined, to require the disclosure of current-period gross charge-offs by year of origination. For entities that have adopted ASU No. 2016-13, the update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU No. 2016-13, this update needs to be adopted at the same time that ASU No. 2016-13 is adopted. Early adoption is permitted if an entity has already adopted ASU No. 2016-13.

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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, 2021, 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 and the Russia/Ukraine conflict, 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 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, which may include continued interest rate increases, 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 continued to disrupt the global economy and the lives of individuals throughout the world. Governments, businesses, and the public have taken and are taking actions to contain the spread of COVID-19 and to mitigate its effects. While the effects of COVID-19 are 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 continue, the future affects from the pandemic, including the potential scope of recovery, are not fully known.

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, 2022 and December 31, 2021 totaled $1,415,000 and $6,935,000, respectively, and unrecognized fees at those dates totaled $66,000 and $272,000, respectively.

LCNB continues to closely monitor the COVID-19 pandemic and its impact on its business, customers, employees, vendors, and service providers and expects to make future changes to respond to the pandemic as this situation continues to evolve.

Critical Accounting Estimates

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.

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.

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LCNB CORP. AND SUBSIDIARIES

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

Accounting for Intangibles. LCNB’s intangible assets at March 31, 2022 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, 2022 was $4,523,000 (total basic and diluted earnings per share of $0.38). This compares to net income of $5,240,000 (total basic and diluted earnings per share of $0.41) for the same three month period in 2021.

Net interest income for the three months ended March 31, 2022 was $14,223,000, compared to $14,372,000 for the same period in 2021. The decrease was primarily due to a decrease in the average rate earned on the loan portfolio, partially offset by an increase in average loan and taxable debt security balances. A decrease in fees recognized from PPP loans contributed to the decrease in average loan rates.

An increase in the provision for loan losses negatively affected earnings during the 2022 period. LCNB recorded a provision of $49,000 for the three months ended March 31, 2022, compared to a credit of $52,000 for the same three month period in 2021.

Non-interest income for the three months ended March 31, 2022 was $3,550,000. This compares to $3,465,000 for the same period in 2021. The increase was primarily due to increases in fiduciary income, service charges and fees on deposit accounts, and gains from sales of loans. These increases were partially offset by a decrease in other operating income, primarily due to a decrease in market values for LCNB's equity investments portfolio.

Non-interest expense for the three months ended March 31, 2022 was $12,250,000, compared to $11,492,000 for the same three month period in 2021. The increase was primarily due to a an increase in salaries and employee benefits.

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LCNB CORP. AND SUBSIDIARIES

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

Net Interest Income

Three Months Ended March 31, 2022 vs. March 31, 2021

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, 2022 and March 31, 2021, 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,
	2022						2021
	Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid	Average Yield/ Rate
					(Dollars in thousands)
Loans (1)	$	1,376,926		13,786	4.06	%	$	1,313,803		14,535	4.49	%
Interest-bearing demand deposits	9,743			9	0.37	%	15,632			13	0.34	%

Federal Reserve Bank stock	4,652			—	—	%	4,652			—	—	%
Federal Home Loan Bank stock	5,203			26	2.03	%	5,203			26	2.03	%
Investment securities:
Equity securities	4,611			17	1.50	%	4,500			19	1.71	%
Debt securities, taxable	298,152			1,095	1.49	%	211,618			718	1.38	%
Debt securities, non-taxable (2)	28,048			239	3.46	%	34,174			284	3.37	%
Total earnings assets	1,727,335			15,172	3.56	%	1,589,582			15,595	3.98	%
Non-earning assets	195,394						191,287
Allowance for loan losses	(5,503)						(5,715)
Total assets	$	1,917,226					$	1,775,154

NOW and money fund deposits	$	511,250		147	0.12	%	$	419,832		132	0.13	%
Savings deposits	444,243			147	0.13	%	375,194			148	0.16	%
IRA and time certificates	189,305			445	0.95	%	234,134			748	1.30	%
Short-term borrowings	12,503			86	2.79	%	342			1	1.19	%
Long-term debt	10,000			74	3.00	%	19,689			134	2.76	%
Total interest-bearing liabilities	1,167,301			899	0.31	%	1,049,191			1,163	0.45	%
Demand deposits	501,829						458,996
Other liabilities	22,371						25,450
Capital	225,725						241,517
Total liabilities and capital	$	1,917,226					$	1,775,154
Net interest rate spread (3)					3.25	%					3.53	%
Net interest income and net interest margin on a taxable-equivalent basis (4)				14,273	3.35	%				14,432	3.68	%
Ratio of interest-earning assets to interest-bearing liabilities	147.98		%				151.51		%

(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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LCNB CORP. AND SUBSIDIARIES

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, 2022 as compared to the same period in 2021. 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, 2022 vs. 2021
	Increase (decrease) attributable to:
	Volume		Rate	Total
	(In thousands)
Interest-earning Assets:
Loans	$	676	(1,425)	(749)

Interest-bearing demand deposits	(5)		1	(4)

Federal Reserve Bank stock	—		—	—
Federal Home Loan Bank stock	—		—	—
Investment securities:
Equity securities	—		(2)	(2)
Debt securities, taxable	314		63	377
Debt securities, non-taxable	(52)		7	(45)
Total interest income	933		(1,356)	(423)

Interest-bearing Liabilities:
NOW and money fund deposits	27		(12)	15
Savings deposits	25		(26)	(1)
IRA and time certificates	(127)		(176)	(303)
Short-term borrowings	82		3	85
Long-term debt	(71)		11	(60)
Total interest expense	(64)		(200)	(264)
Net interest income	$	997	(1,156)	(159)

Net interest income on a fully taxable-equivalent basis for the three months ended March 31, 2022 totaled $14,273,000, a decrease of $159,000 from the comparable period in 2021. Total interest income decreased $423,000, which was partially offset by a $264,000 decrease in total interest expense.

The $423,000 decrease in total interest income was due primarily to a $749,000 decrease in loan interest income, which was partially offset by a $377,000 increase in interest income from taxable debt securities. The decrease in loan interest income was primarily due to a 43 basis point (a basis point equals 0.01%) decrease in the average rate earned on loans, partially offset by a $63.1 million increase in the average balance of LCNB's loan portfolio. Loan interest income for the first quarter 2022 included $248,000 of PPP loan fees recognized, as compared to $523,000 of PPP fees recognized during the first quarter 2021. The increase in interest income from taxable debt securities was due to an $86.5 million increase in average securities and to an 11 basis point increase in the average rate earned on these securities. The decrease in average rates for loans was primarily due to market conditions and also reflected the decrease in PPP fees recognized.

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LCNB CORP. AND SUBSIDIARIES

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

The $264,000 decrease in total interest expense was due to a $303,000 decrease in interest expense for IRA and time certificates and a $60,000 decrease in interest expense for long-term debt, partially offset by an $85,000 increase in interest expense for short-term borrowings. Interest expense for IRA and time certificates decreased due to a 34 basis point decrease in the average rate paid for these deposits and to an $44.8 million decrease in the average balance of these deposits. Management believes the decrease reflects customer preferences for liquidity during uncertain economic periods. Balances in demand deposits, NOW and money fund deposits, and savings deposits have grown, while balances in IRA and time deposits have decreased. Interest expense for long-term debt decreased due to a $9.7 million decrease in average debt outstanding, slightly offset by a 24 basis point increase in the average rate paid. Interest expense for short-term borrowings increased primarily because of a $12.2 million increase in average borrowings outstanding.

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, 2022 was $49,000, compared to a credit of $52,000 for the same period in 2021. 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 charge-offs for the three months ended March 31, 2022 were $25,000, as compared to net recoveries of $3,000 for the same three-month period in 2021.

Non-Interest Income

A comparison of non-interest income for the three months ended March 31, 2022 and March 31, 2021 is as follows (in thousands):


	Three Months Ended March 31,
		2022		2021	Difference
Fiduciary income		$	1,695	1,529	166
Service charges and fees on deposit accounts		1,406		1,366	40

Bank owned life insurance income		265		267	(2)
Gains from sales of loans		124		43	81
Other operating income		60		260	(200)
Total non-interest income		$	3,550	3,465	85

Reasons for changes include:

•Fiduciary income increased due to a combination of new accounts and increases in the fair value of trust and brokerage assets managed.

•Gains from sales of loans increased primarily due to a higher volume of residential real estate loan sales.

•Other operating income decreased primarily due to a decrease in unrealized net gains or losses recognized on equity securities.

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LCNB CORP. AND SUBSIDIARIES

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

Non-Interest Expense

A comparison of non-interest expense for the three months ended March 31, 2022 and March 31, 2021 is as follows (in thousands):


	Three Months Ended March 31,
		2022		2021	Difference
Salaries and employee benefits		$	7,215	6,433	782
Equipment expenses		408		368	40
Occupancy expense, net		775		794	(19)
State financial institutions tax		436		444	(8)
Marketing		262		268	(6)
Amortization of intangibles		140		257	(117)
FDIC insurance premiums, net		126		113	13
Contracted services		610		540	70

Other non-interest expense		2,278		2,275	3
Total non-interest expense		$	12,250	11,492	758

Reasons for changes include:

•Salaries and employee benefits increased primarily due to increases in salaries and wages, increased bonus expense accruals, increased compensation expense for restricted stock grants, increased FICA matching expense, and to a higher percentage of personnel expenses deferred in 2021 attributable to the high volume of PPP loans originated in that period.

•Amortization of intangibles decreased because the core deposit intangibles from the First Capital Bancshares, Inc. and Eaton National Bank & Trust Co. acquisitions amortized in full during the first quarter 2022.

Income Taxes

LCNB's effective tax rate for the three months ended March 31, 2022 was 17.4%, compared to 18.1% for the three months ended March 31, 2021. 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.

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LCNB CORP. AND SUBSIDIARIES

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, 2022 and December 31, 2021 is as follows (dollars in thousands):


	March 31, 2022		December 31, 2021	Difference $	Difference %
ASSETS:
Total cash and cash equivalents	$	19,941	18,136	1,805	9.95	%

Investment securities:
Equity securities with a readily determinable fair value, at fair value	2,424		2,546	(122)	(4.79)	%
Equity securities without a readily determinable fair value, at cost	2,099		2,099	—	—	%
Debt securities, available-for-sale, at fair value	293,464		308,177	(14,713)	(4.77)	%
Debt securities, held-to-maturity, at cost	22,873		22,972	(99)	(0.43)	%
Federal Reserve Bank stock, at cost	4,652		4,652	—	—	%
Federal Home Loan Bank stock, at cost	5,203		5,203	—	—	%
Loans, net	1,373,991		1,363,939	10,052	0.74	%
Premises and equipment, net	34,940		35,385	(445)	(1.26)	%
Operating lease right-of-use assets	6,191		6,357	(166)	(2.61)	%
Goodwill	59,221		59,221	—	—	%
Core deposit and other intangibles	2,328		2,473	(145)	(5.86)	%
Bank owned life insurance	43,488		43,224	264	0.61	%
Interest receivable	8,364		7,999	365	4.56	%
Other assets	20,451		21,246	(795)	(3.74)	%
Total assets	$	1,899,630	1,903,629	(3,999)	(0.21)	%

LIABILITIES:
Deposits:
Non-interest-bearing	$	517,621	501,531	16,090	3.21	%
Interest-bearing	1,118,985		1,127,288	(8,303)	(0.74)	%
Total deposits	1,636,606		1,628,819	7,787	0.48	%
Short-term borrowings	24,746		—	24,746	N/A
Long-term debt	10,000		10,000	—	—	%
Operating lease liabilities	6,337		6,473	(136)	(2.10)	%
Accrued interest and other liabilities	15,066		19,733	(4,667)	(23.65)	%
Total liabilities	1,692,755		1,665,025	27,730	1.67	%

SHAREHOLDERS' EQUITY:
Common shares	143,432		143,130	302	0.21	%
Retained earnings	128,555		126,312	2,243	1.78	%
Treasury shares at cost	(50,115)		(29,029)	(21,086)	72.64	%
Accumulated other comprehensive loss, net of taxes	(14,997)		(1,809)	(13,188)	729.02	%
Total shareholders' equity	206,875		238,604	(31,729)	(13.30)	%
Total liabilities and shareholders' equity	$	1,899,630	1,903,629	(3,999)	(0.21)	%

Reasons for changes include:

•Debt securities, available-for-sale, decreased due to maturities and calls of securities totaling $9.8 million and decreases in market value totaling $16.7 million, largely offset by purchases of additional securities totaling $12.1 million.

•Net loans increased due to organic growth in the loan portfolio. Most of the growth occurred in the commercial real estate and commercial and industrial portfolios, partially offset by decreases in the residential real estate and agricultural loan portfolios.

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LCNB CORP. AND SUBSIDIARIES

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 three months of 2022. 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. Interest-bearing deposits show a decrease because of a $29.5 million decrease in ICS® Demand Reciprocal deposit balances.

•Short-term borrowings increased due to a $20 million one-year revolving line of credit obtained during the first quarter 2022. The borrowing was used to finance the repurchase of 1,051,688 shares of LCNB common stock.

•Accrued interest and other liabilities decreased due to a combination of decreases in accrued bonuses caused by the payment of annual bonuses in January, a decrease in LIHTC liabilities due to funding payments made during the first quarter, and net deferred federal income taxes being categorized as an asset at March 31, 2022 vs. being categorized as a liability at December 31, 2021.

•Treasury shares increased because of the purchase referred to above.

•Accumulated other comprehensive loss, net of taxes increased because of market-driven decreases in the fair value of LCNB's debt security investments.

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.

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LCNB CORP. AND SUBSIDIARIES

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, 2022			December 31, 2021
Regulatory Capital:
Shareholders' equity	$	222,813		234,451
Goodwill and other intangibles	(60,516)			(60,655)
Accumulated other comprehensive (income) loss	14,997			1,809
Tier 1 risk-based capital	177,294			175,605
Eligible allowance for loan losses	5,530			5,506
Total risk-based capital	$	182,824		181,111
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets	12.05		%	12.25	%
Tier 1 Capital to risk-weighted assets	12.05		%	12.25	%
Total Capital to risk-weighted assets	12.42		%	12.64	%
Leverage	9.54		%	9.58	%

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, 2022 regulatory capital calculations.

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 OCC, the Bank's primary regulator, is necessary for the Bank to pay dividends in excess of this amount. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. Management believes the Bank will be able to pay anticipated dividends to LCNB without needing to request approval. The Bank is not aware of any reasons why it would not receive such approval, if required.

Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, as well as meeting LCNB's operating cash needs. Primary funding sources include customer deposits with the Bank, short-term and long-term borrowings from the Federal Home Loan Bank, short-term line of credit arrangements 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, 2022 was approximately $225.5 million. In addition, additional borrowings of approximately $50.3 million were available through the line of credit arrangements at March 31, 2022.

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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LCNB CORP. AND SUBSIDIARIES


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, 2022 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	$	65,115	3,499	5.68	%
Up 300	63,837		2,221	3.60	%
Up 200	62,574		958	1.55	%
Up 100	61,328		(288)	(0.47)	%
Base	61,616		—	—	%
Down 100	59,510		(2,106)	(3.42)	%

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, 2022 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 all upward rate assumptions are within LCNB's acceptable ranges. The change in EVE for the 100 basis point downward scenario is slightly outside LCNB's acceptable range of 20%.


Rate Shock Scenario in Basis Points	Amount		$ Change in EVE	% Change in EVE
	(Dollars in thousands)
Up 400	$	140,166	(26,297)	(15.80)	%
Up 300	149,004		(17,459)	(10.49)	%
Up 200	157,434		(9,029)	(5.42)	%
Up 100	165,473		(990)	(0.59)	%
Base	166,463		—	—	%
Down 100	203,646		37,183	22.34	%

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, 2022, 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

Readers should carefully consider the risk factors previously disclosed in Part I, Item 1A. Risk Factors in LCNB's Form 10-K for the year ended December 31, 2021.

Operational risk created by the war waged on Ukraine.

On February 24, 2022, Russian forces launched a military invasion of Ukraine. In response, the United States and other European Union countries have imposed significant economic sanctions on Russia and Russia has responded with counter-sanctions. As a result, the Russian/Ukraine conflict has disrupted international commerce, exacerbated already existing supply chain disruptions, and negatively affected the global economy. While it is difficult to estimate the impact current or future disruptions could have on LCNB's business and financial position or that of its borrowers, such economic disruptions may affect the ability of borrowers to repay loans, thus increasing the risk of borrower defaults.

There is widespread concern that cyberattacks could intensify as the crisis continues and perhaps worsens, with impacts that could be both regional and global.

LCNB continues to monitor the evolving situation and its potential impact on its business, financial condition, results of operations, and cash flows.

LCNB may face risk caused by additional interest rate increases.

Interest rate increases by the Federal Reserve, such as the 50 basis point increase in the federal funds rate announced May 4, 2022, may continue throughout 2022 and into 2023. The higher borrowing cost resulting from increasing interest rates may cause financial hardship on consumers and businesses, including LCNB's borrowers, which could lead to increased loan losses, especially in fixed interest rate products. In addition, uncertainty about the timing and magnitude of future interest rate increases could reduced borrowing demand and, thus, the need for LCNB's lending services.


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.

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The following table sets forth information relating to repurchases made under the Program during the three months ended March 31, 2022:


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 1 through 31, 2022	—	$	—	—	21,191
February 1 through 28, 2022	—	$	—	—	21,191
March 1 through 31, 2022	—	$	—	—	21,191

The repurchase of 1,051,688 shares of common stock at $20.00 per share during the first quarter 2022 was not completed under the terms of the ongoing share repurchase program.


Item 3.			Defaults Upon Senior Securities

None.


Item 4.			Mine Safety Disclosures

Not applicable.


Item 5.			Other Information

None.

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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 11, 2022			/s/ Eric J. Meilstrup
			Eric J. Meilstrup
			Chief Executive Officer and President

May 11, 2022			/s/ Robert C. Haines, II
			Robert C. Haines, II
			Executive Vice President and Chief Financial Officer

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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.

10.6			Form of Business Loan Agreement between LCNB Corp. and Bankers' Bank - incorporated by reference to Registrant's Current Report on Form 8-K filed on February 14, 2022, Exhibit 10.1.

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, 2022 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).