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LCNB CORP - Quarter Report: 2023 September (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 September 30, 2023
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                        to                                                      

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

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

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

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

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

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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
            ☐ Yes         No
The number of shares outstanding of the issuer's common stock, without par value, as of November 7, 2023 was 11,124,072 shares.


Table of Contents


LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  










1

Table of Contents


Glossary of Abbreviations and Acronyms
ACLAllowance for Credit Losses
AFSAvailable-for-Sale
ASCAccounting Standards Codification
ASUAccounting Standards Update
BankLCNB National Bank
CARES ActCoronavirus Aid, Relief, and Economic Security Act
CECLCurrent expected credit losses
CEOChief Executive Officer
CFOChief Financial Officer
CNNBCincinnati Bancorp, Inc.
CompanyLCNB Corp. and its consolidated subsidiaries as a whole
DCFDiscounted Cash Flow
DDADemand Deposit Account
Dodd-Frank ActDodd-Frank Wall Street Reform and Consumer Protection Act
Economic Aid ActEconomic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
FFIECFinancial Institutions Examination Council
FHLBFederal Home Loan Bank
FOMCFederal Open Market Committee of the Federal Reserve System
GAAPGenerally Accepted Accounting Principles
HTMHeld-to-Maturity
IRAIndividual Retirement Account
LCNBLCNB Corp. and its consolidated subsidiaries as a whole
LDALoss Driver Analysis
LGDLoss Given Default
LIBORLondon Interbank Offered Rate
LIHTCLow Income Housing Tax Credit
OCCOffice of the Comptroller of the Currency
PDProbability of Default
PPPPaycheck Protection Program
SECSecurities and Exchange Commission
TDRsTroubled Debt Restructurings
WARMWeighted Average Remaining Maturity
    

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PART I – FINANCIAL INFORMATION
 
Item 1.Financial Statements

LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
September 30, 2023
(Unaudited)
December 31, 2022
ASSETS:
Cash and due from banks$23,124 $20,244 
Interest-bearing demand deposits20,298 2,457 
Total cash and cash equivalents43,422 22,701 
Investment securities:  
Equity securities with a readily determinable fair value, at fair value1,254 2,273 
Equity securities without a readily determinable fair value, at cost2,099 2,099 
Debt securities, available-for-sale, at fair value274,500 289,850 
Debt securities, held-to-maturity, at cost, net19,006 19,878 
Federal Reserve Bank stock, at cost4,652 4,652 
Federal Home Loan Bank stock, at cost7,583 4,415 
Loans, net1,450,472 1,395,632 
Premises and equipment, net33,288 33,042 
Operating lease right-of-use assets6,093 6,525 
Goodwill59,221 59,221 
Core deposit and other intangibles, net1,351 1,827 
Bank-owned life insurance45,128 44,298 
Interest receivable8,087 7,482 
Other assets, net25,512 25,503 
TOTAL ASSETS1,981,668 1,919,398 
LIABILITIES:  
Deposits:  
Noninterest-bearing$453,146 505,824 
Interest-bearing1,163,744 1,099,146 
Total deposits1,616,890 1,604,970 
Short-term borrowings30,000 71,455 
Long-term debt112,641 19,072 
Operating lease liabilities6,317 6,647 
Accrued interest and other liabilities14,471 16,579 
TOTAL LIABILITIES1,780,319 1,718,723 
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 14,334,765 and 14,270,550 shares at September 30, 2023 and December 31, 2022, respectively; outstanding 11,123,382 and 11,259,080 shares at September 30, 2023 and December 31, 2022, respectively
144,865 144,069 
Retained earnings143,211 139,249 
Treasury shares at cost, 3,211,383 and 3,011,470 shares at September 30, 2023 and December 31, 2022, respectively
(56,015)(52,689)
Accumulated other comprehensive loss, net of taxes(30,712)(29,954)
TOTAL SHAREHOLDERS' EQUITY201,349 200,675 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$1,981,668 $1,919,398 

The accompanying notes to consolidated condensed financial statements are an integral part of these statements.
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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2023202220232022
INTEREST INCOME:
Interest and fees on loans$17,875 15,026 50,781 43,360 
Dividends on equity securities:
With a readily determinable fair value14 34 40 
Without a readily determinable fair value29 79 16 
Interest on debt securities:
Taxable1,296 1,323 3,962 3,672 
Non-taxable173 190 523 567 
Other investments286 145 910 379 
TOTAL INTEREST INCOME19,668 16,704 56,289 48,034 
INTEREST EXPENSE:    
Interest on deposits4,426 979 10,217 2,493 
Interest on short-term borrowings830 71 3,142 320 
Interest on long-term debt841 210 1,240 387 
TOTAL INTEREST EXPENSE6,097 1,260 14,599 3,200 
NET INTEREST INCOME13,571 15,444 41,690 44,834 
PROVISION FOR (RECOVERY OF) CREDIT LOSSES(114)(157)(141)269 
NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) CREDIT LOSSES13,685 15,601 41,831 44,565 
NON-INTEREST INCOME:    
Fiduciary income1,736 1,513 5,263 4,851 
Service charges and fees on deposit accounts1,397 1,706 4,324 4,658 
Bank-owned life insurance income282 269 830 803 
Gains from sales of loans29 — 38 188 
Other operating income134 93 350 159 
TOTAL NON-INTEREST INCOME3,578 3,581 10,805 10,659 
NON-INTEREST EXPENSE:    
Salaries and employee benefits7,044 7,062 21,454 21,291 
Equipment expenses397 398 1,175 1,234 
Occupancy expense, net805 790 2,367 2,300 
State financial institutions tax396 439 1,189 1,312 
Marketing223 215 735 845 
Amortization of intangibles113 113 336 365 
FDIC insurance premiums, net224 137 663 397 
Contracted services671 613 1,978 1,902 
Other real estate owned, net(874)
Merger-related expenses302 — 742 — 
Other non-interest expense2,068 2,578 6,205 7,297 
TOTAL NON-INTEREST EXPENSE12,244 12,350 36,847 36,069 
INCOME BEFORE INCOME TAXES5,019 6,832 15,789 19,155 
PROVISION FOR INCOME TAXES949 1,253 2,868 3,435 
NET INCOME$4,070 5,579 12,921 15,720 
Earnings per common share:    
Basic$0.37 0.49 1.16 1.36 
Diluted0.37 0.49 1.16 1.36 
Weighted average common shares outstanding:    
Basic11,038,720 11,284,225 11,094,185 11,478,256 
Diluted11,038,720 11,284,225 11,094,185 11,478,256 
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
September 30,
Nine Months Ended 
September 30,
 2023202220232022
Net income$4,070 5,579 12,921 15,720 
Other comprehensive income (loss):    
Net unrealized gain (loss) on available-for-sale debt securities (net of taxes of $(782) and $(2,571) for the three months ended September 30, 2023 and 2022, respectively, and $(203) and $(7,923) for the nine months ended September 30, 2023 and 2022, respectively)
(2,941)(9,670)(758)(29,804)
Change in nonqualified pension plan unrecognized net loss and unrecognized prior service cost (net of taxes of $0 and $1 for the three and nine months ended September 30, 2022, respectively)
— — 
  Other comprehensive income (loss), net of tax(2,941)(9,669)(758)(29,800)
TOTAL COMPREHENSIVE INCOME (LOSS)$1,129 (4,090)12,163 (14,080)

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

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LCNB CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
 Common Shares OutstandingCommon StockRetained
Earnings
Treasury
Shares
Accumulated Other Comprehensive LossTotal Shareholders'
Equity
Three Months Ended September 30, 2023
Balance at July 1, 202311,116,080 $144,671 141,431 (56,015)(27,771)202,316 
Net income  4,070   4,070 
Other comprehensive loss, net of taxes   (2,941)(2,941)
Dividend Reinvestment and Stock Purchase Plan7,302 111   111 
Repurchase of common stock— — — 
Compensation expense relating to restricted stock— 83 83 
Common stock dividends, $0.21 per share
  (2,290)  (2,290)
Balance at September 30, 202311,123,382 $144,865 143,211 (56,015)(30,712)201,349 
Nine Months Ended September 30, 2023
Balance at January 1, 202311,259,080 $144,069 139,249 (52,689)(29,954)200,675 
Cumulative change in accounting principle - ASC 326(1,922)(1,922)
Balance at January 1, 2023, adjusted11,259,080 144,069 137,327 (52,689)(29,954)198,753 
Net income  12,921   12,921 
Other comprehensive loss, net of taxes   (758)(758)
Dividend Reinvestment and Stock Purchase Plan20,065 315   315 
Repurchase of common stock(199,913)(3,326)(3,326)
Shares issued for restricted stock awards44,150 
Compensation expense relating to restricted stock481 481 
Common stock dividends, $0.63 per share
  (7,037)  (7,037)
Balance at September 30, 202311,123,382 $144,865 143,211 (56,015)(30,712)201,349 
Three Months Ended September 30, 2022
Balance at July 1, 202211,374,515 $143,635 131,894 (50,629)(21,940)202,960 
Net income  5,579   5,579 
Other comprehensive loss, net of taxes    (9,669)(9,669)
Dividend Reinvestment and Stock Purchase Plan6,857 107    107 
Repurchase of common stock(87,733)(1,380)(1,380)
Compensation expense relating to restricted stock113 113 
Common stock dividends, $0.20 per share
  (2,271)  (2,271)
Balance at September 30, 202211,293,639 $143,855 135,202 (52,009)(31,609)195,439 
Nine Months Ended September 30, 2022
Balance at January 1, 202212,414,956 $143,130 126,312 (29,029)(1,809)238,604 
Net income  15,720   15,720 
Other comprehensive loss, net of taxes    (29,800)(29,800)
Dividend Reinvestment and Stock Purchase Plan18,585 308    308 
Repurchase of common stock(1,172,456)(22,980)(22,980)
Shares issued for restricted stock awards32,554 
Compensation expense relating to restricted stock417 417 
Common stock dividends, $0.60 per share
  (6,830)  (6,830)
Balance at September 30, 202211,293,639 $143,855 135,202 (52,009)(31,609)195,439 

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)
Nine Months Ended 
September 30,
 20232022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$12,921 15,720 
Adjustments to reconcile net income to net cash flows from operating activities:  
Depreciation, amortization, and accretion2,395 2,177 
Provision for (recovery of) credit losses(141)269 
Benefit from deferred income taxes(793)(444)
Increase in cash surrender value of bank-owned life insurance(830)(803)
Loss on equity securities78 384 
Realized (gain) loss from sales of premises and equipment(427)456 
Realized gain from sales of other real estate owned— (889)
Origination of mortgage loans for sale(2,205)(8,468)
Realized gains from sales of loans(38)(188)
Proceeds from sales of mortgage loans2,218 8,562 
Compensation expense related to restricted stock481 417 
Changes in:  
Accrued interest receivable(605)377 
Other assets1,497 2,075 
Other liabilities(2,300)(1,303)
TOTAL ADJUSTMENTS(670)2,622 
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES12,251 18,342 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Proceeds from sales of equity securities963 — 
Proceeds from maturities and calls of debt securities:
Available-for-sale14,262 17,797 
Held-to-maturity1,146 1,312 
Purchases of equity securities(22)(13)
Purchases of debt securities:
   Available-for-sale(497)(38,581)
Held-to-maturity(280)(755)
Purchases of Federal Home Loan Bank stock(4,537)— 
Proceeds from redemption of Federal Home Loan Bank stock1,369 1,162 
Net increase in loans(56,711)(7,454)
Proceeds from sale of other real estate owned— 1,605 
Purchases of premises and equipment(1,723)(553)
Proceeds from sale of premises and equipment514 874 
NET CASH FLOWS USED IN INVESTING ACTIVITIES(45,516)(24,606)
CASH FLOWS FROM FINANCING ACTIVITIES:  
Net increase in deposits11,920 28,551 
Net increase (decrease) in short-term borrowings(41,455)4,000 
Proceeds from long-term debt95,000 15,000 
Principal payments on long-term debt(1,431)(461)
Proceeds from issuance of common stock315 308 
Repurchase of common stock(3,326)(22,980)
Cash dividends paid on common stock(7,037)(6,830)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES53,986 17,588 
NET CHANGE IN CASH AND CASH EQUIVALENTS20,721 11,324 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD22,701 18,136 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$43,422 29,460 
SUPPLEMENTAL CASH FLOW INFORMATION:  
Interest paid$13,706 3,243 
Income taxes paid, net of refunds2,226 2,900 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:  
Transfer from loans to other real estate owned— 716 

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 the Company's 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, 2022 has been derived from the audited consolidated balance sheet as of that date.

Certain prior period data presented in the financial statements have been reclassified to conform with the current period presentation. These reclassifications had no effect on net income.

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 and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023.  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 2022 Annual Report on Form 10-K filed with the SEC.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
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. Originally, the amendments in this update were effective for all entities as of March 12, 2020 through December 31, 2022. ASU No. 2022-06, "Reference
Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848" extended the sunset date from December 31, 2022 to
December 31, 2024. LCNB has adopted the standard and utilized the LIBOR transition relief allowed under ASU 2020-04 and ASU 2020-06. The impact was immaterial, as all loans indexed to LIBOR were transitioned to another referenced index, predominately the Secured Overnight Financing Rate ("SOFR") for one, three, and six months. In all instances, LCNB was able to meet the criteria for the practical expedients and there was no impact on its results of consolidated operations or financial position.








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


ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments" ("ASC 326")
The Company adopted ASC 326 on January 1, 2023. It significantly changed guidance for recognizing impairment of financial instruments. Previous guidance required an "incurred loss" methodology for recognizing credit losses that delayed recognition until it was probable a loss had been incurred. ASC 326 replaced the incurred loss impairment methodology with a new "current expected credit loss" ("CECL") methodology that reflects expected credit losses over the lives of the credit instruments and requires consideration of a broader range of information to estimate credit losses. ASC 326 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. It also applies to off-balance sheet credit exposures, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. ASC 326 also made changes to the accounting for credit losses on available-for-sale debt securities. Additional disclosures are required. Adoption of ASC 326 did not have a material impact on LCNB's results of consolidated operations or financial position.

LCNB adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable guidance. The following table shows the impact of adopting ASC 326 on January 1, 2023 (in thousands):


As Reported Pre-ASC 326Impact of ASC 326 AdoptionAs Reported Under ASC 326
Assets:
Loans, gross of allowance$1,401,278 341 1,401,619 
ACL on loans(5,646)(2,196)(7,842)
ACL on debt securities, held to maturity— (7)(7)
Deferred tax assets, net6,639 511 7,150 
Liabilities:
ACL on off-balance sheet credit exposures— 571 571 
Shareholders' Equity:
Retained earnings139,249 (1,922)137,327 


ACL - LOANS
The allowance for credit losses ("ACL") is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes that the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in external conditions, such as changes in unemployment rates, property values, or other relevant factors.



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


Accrued interest receivable totaling $6.6 million at September 30, 2023 was excluded from the amortized cost basis of the estimate of credit losses and is reported in interest receivable on the consolidated condensed balance sheets. Loans are generally placed on non-accrual status at 90 days past due or when the borrower's ability to repay becomes doubtful. When a loan is placed on non-accrual status, any accrued interest is reversed and charged against interest income.

ACL - LOANS - COLLECTIVELY EVALUATED
The ACL is measured on a collective pool basis when similar risk characteristics exist. LCNB has identified the following portfolio segments:
Commercial and industrial loans
Commercial, secured by real estate
Real estate loans secured by owner occupied commercial real estate
Real estate loans secured by non-owner occupied commercial real estate
Real estate loans secured by farmland
Real estate loans secured by multi-family dwellings
Construction loans secured by 1-4 family dwellings
Construction loans secured by other real estate

Residential real estate
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
Agricultural loans not secured by real estate
DDA Overdrafts

Measures of the allowance for credit loss are as follows:
Portfolio Segment
Pool
Methodology
Loss Driver(s)
Agricultural
Ag Production and Other Farm
Remaining Life
N/A
Commercial & industrial
Commercial & Industrial
Discounted Cash Flow
Weighted Combined MSA Unemployment and Coincident Economic Activity (CEA) Index for Ohio
Commercial, secured by real estate
Commercial Real Estate (CRE) Non-Owner Occupied
Discounted Cash Flow
Weighted Combined MSA Unemployment
Commercial, secured by real estate
Commercial Real Estate (CRE) Owner Occupied
Discounted Cash Flow
Weighted Combined MSA Unemployment and Moody's Commercial Real Estate Price Indexes (CREPI) - US Commercial
Commercial, secured by real estate
Farm Real Estate
Remaining Life
N/A
Residential real estate
Home Equity Line
Discounted Cash Flow
Weighted Combined MSA Unemployment
Consumer
Installment - Direct and ODP (Consumer)
Discounted Cash Flow
Weighted Combined MSA Unemployment
Consumer
Letter of Credit
Discounted Cash Flow/Manual
N/A
Commercial, secured by real estate
Multifamily
Discounted Cash Flow
Weighted Combined MSA Unemployment
Commercial, secured by real estate
Other Construction, Land Development, and Other Land
Discounted Cash Flow
Weighted Combined MSA Unemployment and Weighted Combined MSA Home Price Index
Consumer
Overdrafts
Manual
N/A
Other
Other Loans
Remaining Life
N/A
Residential real estate
Real Estate Mortgage
Discounted Cash Flow
Weighted Combined MSA Unemployment
Residential real estate
Residential 1-4 Family Construction
Discounted Cash Flow
Weighted Combined MSA Unemployment and Weighted Combined MSA Home Price Index
Residential real estate
Second Mortgage (Residential)
Discounted Cash Flow
Weighted Combined MSA Unemployment
*"MSA" referenced above combines forecasts for Cincinnati, Dayton and Columbus metro areas.
**"Weighted" referenced above refers to weighted average of baseline and alternative scenarios

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


Management has chosen the discounted cash flow ("DCF") methodology to estimate the quantitative portion of the allowance for credit losses on loans for all loan pools except for the farm real estate and agricultural pools, which use the weighted average remaining maturity ("WARM") methodology. A Loss Driver Analysis (“LDA”) was performed for each segment to identify potential loss drivers and create a regression model for use in forecasting cash flows. The LDA for all DCF-based pools utilized LCNB’s data and peer data from the Federal Financial Institutions Examination Council's (“FFIEC”) Call Report filings.

In creating the DCF model, as well as reviewing the model quarterly, management established a one-quarter reasonable and supportable forecast period with a two-quarter straight line reversion to the long-term historical average. Due to the infrequency of losses within the farm real estate and agricultural loan portfolios, LCNB elected to use peer data for a more statistically sound calculation.

Key assumptions in the DCF model include the probability of default (“PD”), loss given default (“LGD”), and prepayment/curtailment rates. The model-driven PD and LGD are derived using company specific historical data. Prepayment and curtailment rates were calculated using third party studies of LCNB's data.

Expected credit losses are estimated over the contractual term of the loans, adjusted for prepayments when appropriate. The contractual term excludes extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Qualitative factors for the DCF and WARM methodologies include the following:
Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Company operates that affect the collectability of financial assets;
The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics; and
Model risk including statistical risk, reversion risk, timing risk, and model limitation risk.

ACL - LOANS - INDIVIDUALLY EVALUATED
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation.
Management has determined that any loans which have been placed on non-performing status will be individually evaluated. When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the estimated fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. Other non-performing loans may estimate fair value using either the collateral valuation or the net present value of expected future cash receipts, depending on the financial situation of the borrower.

ACL - HELD-TO-MATURITY (“HTM”) DEBT SECURITIES
Expected credit losses on HTM debt securities are measured on a collective basis by major security type. Accrued interest receivable on HTM securities totaled $232,000 at September 30, 2023 and is excluded from the estimate of credit losses. The HTM securities portfolio consists of taxable and nontaxable municipal securities from local governmental entities. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At the time of adoption, the estimated reserve was immaterial.

ACL - AVAILABLE-FOR-SALE (“AFS”) DEBT SECURITIES
For AFS debt securities in an unrealized loss position, LCNB first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


Changes in the ACL are recorded as a provision for (or recovery of) credit loss expense. Losses are charged against the allowance when management believes that uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $1.2 million at September 30, 2023 and is excluded from the estimate of credit losses.

ACL - OFF-BALANCE SHEET CREDIT EXPOSURES
LCNB estimates expected credit losses over the contractual period during which it is exposed to credit risk by a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for (or recovery of) credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate is made of expected credit losses on commitments expected to be funded over their estimated lives. Funding rates are based on a historical analysis of the Company’s portfolio, while estimates of credit losses are determined using the same loss rates as funded loans.

REGULATORY CAPITAL
Federal banking regulatory agencies allow an optional phase-in period of three years for banks to absorb the impact to regulatory capital of implementing CECL. LCNB has elected not to exercise this option and the full impact of adopting ASC 326 is included in regulatory capital as of September 30, 2023. Adoption of the ASC did not materially affect LCNB's regulatory capital ratios.

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 became effective for LCNB on January 1, 2023. These amendments eliminated previous TDR recognition and measurement guidance and, instead, required that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance disclosure requirements and introduce new disclosure requirements for certain modifications to borrowers experiencing financial difficulties. Additionally, the amendments require the disclosure of current-period gross charge-offs by year of origination.

RECENT ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
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. 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a Consensus of the Emerging Issues Task Force)"
ASU No. 2023-02 was issued in March 2023 and allows reporting entities the option to use the proportional amortization method to account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met, regardless of the tax credit program from which the income tax credits are received. The proportional amortization method was previously limited to Low-Income Housing Tax Credit investments. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. LCNB does not expect adoption of ASU No. 2023-02 to have a material impact on its results of consolidated operations or financial position.

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


NOTE 2 - BUSINESS COMBINATION

LCNB and Cincinnati Bancorp, Inc. (“CNNB”), the holding company for Cincinnati Federal, a federally chartered stock
savings and loan association, signed a definitive merger agreement on May 17, 2023 whereby CNNB would merge with and into LCNB in a stock-and-cash transaction. CNNB operated five full-service branch offices in Cincinnati, Ohio and Northern Kentucky and had approximately $310.8 million in assets, $265.6 million in net loans, $211.4 million of deposits, and $39.7 million in consolidated stockholders’ equity as of September 30, 2023. The transaction, which was completed November 1, 2023, significantly increased LCNB’s existing presence in the Cincinnati market and expanded LCNB’s community banking franchise across the Ohio River into the Northern Kentucky market.

Subject to the terms of the merger agreement, which was approved by the Board of Directors of each company, CNNB shareholders had the opportunity to elect to receive either 0.9274 shares of LCNB stock or $17.21 per share in cash for each share of CNNB common stock owned, subject to 80% of all CNNB shares being exchanged for LCNB common stock. As of March 31, 2023, CNNB reported 2,884,171 shares of common stock outstanding, as well as 296,350 options with a weighted average strike price of $10.65 per share. Any unexercised stock options of CNNB were canceled in exchange for a cash payment of $17.21 less the per share exercise price of the option. The transaction consideration was subject to dollar-for-dollar downward adjustment if CNNB’s adjusted shareholders’ equity, as defined in the merger agreement, is less than $36.8 million as measured three business days immediately before the closing date.

At the time of closing, Cincinnati Federal branches become branches of LCNB National Bank. Going forward, LCNB has 33 banking offices in Ohio and one branch office in Northern Kentucky.

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


NOTE 3 - INVESTMENT SECURITIES
 
The amortized cost and estimated fair value of debt securities and the allowance for credit losses of securities held-to-maturity at September 30, 2023 and December 31, 2022 are summarized as follows (in thousands):
 Amortized CostUnrealized GainsUnrealized LossesFair Value
September 30, 2023
Debt Securities, Available-for-Sale:
U.S. Treasury notes$78,451 — 8,323 70,128 
U.S. Agency notes89,014 — 10,662 78,352 
Corporate bonds7,450 — 944 6,506 
U.S. Agency mortgage-backed securities83,613 — 13,061 70,552 
Municipal securities:
Non-taxable8,809 — 522 8,287 
Taxable46,005 — 5,330 40,675 
 $313,342 — 38,842 274,500 
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable$15,582 1,578 14,006 
Taxable3,431 — 514 2,917 
$19,013 2,092 16,923 
December 31, 2022
Debt Securities, Available-for-Sale:
U.S. Treasury notes$84,927 — 8,480 76,447 
U.S. Agency notes89,160 — 11,184 77,976 
Corporate Bonds7,450 13 778 6,685 
U.S. Agency mortgage-backed securities90,746 11,311 79,440 
Municipal securities:
Non-taxable8,892 — 368 8,524 
Taxable46,556 5,779 40,778 
 $327,731 $19 37,900 289,850 
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable$16,447 10 594 15,863 
Taxable3,431 — 409 3,022 
$19,878 10 1,003 18,885 

The Company estimated the expected credit losses at September 30, 2023 to be immaterial based on the composition of the securities portfolio.




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

NOTE 3 - INVESTMENT SECURITIES (continued)

Information concerning debt securities with gross unrealized losses at September 30, 2023 and December 31, 2022, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (dollars in thousands):
 Less than Twelve MonthsTwelve Months or Greater
 Fair ValueUnrealized LossesFair ValueUnrealized Losses
September 30, 2023
Available-for-Sale:
U.S. Treasury notes$— — 70,128 8,323 
U.S. Agency notes— — 78,352 10,662 
Corporate bonds720 30 5,786 914 
U.S. Agency mortgage-backed securities528 70,024 13,058 
Municipal securities:
Non-taxable1,965 53 6,322 469 
Taxable180 — 40,495 5,330 
 $3,393 86 271,107 38,756 
Held-to-Maturity:
Municipal securities:
  Non-taxable$5,888 798 7,389 780 
  Taxable— — 2,917 514 
$5,888 798 10,306 1,294 
December 31, 2022
Available-for-Sale:
U.S. Treasury notes$16,521 931 59,927 7,549 
U.S. Agency notes7,729 543 70,247 10,641 
Corporate Bonds2,667 283 3,255 495 
U.S. Agency mortgage-backed securities41,543 3,597 37,282 7,714 
Municipal securities:
Non-taxable6,831 248 893 120 
Taxable22,162 1,951 18,435 3,828 
 $97,453 7,553 190,039 30,347 
Held-to-Maturity:
Municipal securities:
  Non-taxable$9,567 593 31 
  Taxable2,811 370 212 39 
$12,378 963 243 40 

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

NOTE 3 - INVESTMENT SECURITIES (continued)

Securities are reviewed on a quarterly basis to assess declines in fair value for credit losses. For available-for-sale debt securities in an unrealized loss position, LCNB first assesses whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis, which may be at maturity. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income with the establishment of an allowance. If the debt security does not meet the aforementioned criteria, LCNB evaluates whether the decline in fair value is due to credit loss factors. In making this assessment, LCNB considers any changes to the rating of the security by a rating agency and considers if there are any adverse conditions specifically related to the issuer of the security, among other factors. U.S. Treasury notes, U.S. Agency notes, and U.S. Agency mortgage-backed securities are issued or guaranteed by the U.S. federal government or agencies thereof and risk of credit loss is considered minimal for these securities. For available-for-sale debt securities outstanding at September 30, 2023, management concluded that, in all instances, fair values were less than carrying values due to market and other factors and that no credit loss provisions were required.

Debt securities with a market value of $143.7 million and $166.4 million at September 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits and for other purposes required or as permitted by law.

Excluding holdings in U.S. Treasury securities and U.S. Government Agencies, there were no investments in securities of any
issuer that exceeded 10% of LCNB's consolidated shareholders' equity at September 30, 2023.

Contractual maturities of debt securities at September 30, 2023 were as follows (in thousands).  Actual maturities may differ from contractual maturities when issuers have the right to call or prepay obligations.
 Available-for-SaleHeld-to-Maturity
Amortized CostFair ValueAmortized CostFair Value
Due within one year$8,904 8,846 280 281 
Due from one to five years172,144 153,515 3,586 3,444 
Due from five to ten years48,681 41,587 2,440 2,184 
Due after ten years— — 12,707 11,014 
 229,729 203,948 19,013 16,923 
U.S. Agency mortgage-backed securities83,613 70,552 — — 
 $313,342 274,500 19,013 16,923 
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 September 30, 2023 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 September 30, 2023 and December 31, 2022 are summarized as follows (in thousands):
September 30, 2023December 31, 2022
 Amortized
Cost
Fair
 Value
Amortized
Cost
Fair
 Value
Mutual Funds$1,406 1,177 1,429 1,234 
Equity Securities10 77 778 1,039 
Total equity securities with a readily determinable fair value$1,416 1,254 2,207 2,273 
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

NOTE 3 - INVESTMENT SECURITIES (continued)

Changes in the fair value of equity securities with a readily determinable fair value for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Net losses recognized during the period on equity securities$(33)(80)(78)(384)
Less net losses recognized during the period on equity securities sold during the period— — (61)— 
Net unrealized losses recognized during the reporting period on equity securities still held at period end$(33)(80)(17)(384)


NOTE 4 - LOANS
 
Major classifications of loans at September 30, 2023 and December 31, 2022 were as follows (in thousands):
September 30, 2023December 31, 2022
Commercial & industrial$125,882 120,327 
Commercial, secured by real estate:
Owner occupied 204,596 208,485 
Non-owner occupied 436,189 420,075 
Farmland38,232 36,340 
Multi-family 189,987 189,917 
Construction loans secured by 1-4 family dwellings 6,937 7,786 
Construction loans secured by other real estate 104,141 73,652 
Residential real estate:
Secured by senior liens on 1-4 family dwellings 276,525 269,822 
Secured by junior liens on 1-4 family dwellings 13,854 10,197 
Home equity line-of-credit loans 23,462 26,109 
Consumer27,186 28,414 
Agricultural11,333 10,073 
Other loans, including deposit overdrafts80 81 
  Loans, gross1,458,404 1,401,278 
Less allowance for credit losses7,932 5,646 
Loans, net$1,450,472 1,395,632 

Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $796,000 and $980,000 at September 30, 2023 and December 31, 2022, respectively.








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

NOTE 4 – LOANS (continued)

Non-accrual loans by class of receivable as of September 30, 2023 and December 31, 2022 were as follows (in thousands):
September 30, 2023December 31, 2022
Non-accrual Loans with no Allowance for Credit LossesTotal Non-accrual LoansInterest Income RecognizedNon-accrual Loans with no Allowance for Credit LossesTotal Non-accrual LoansInterest Income Recognized
Commercial & industrial$— — — — — 
Commercial, secured by real estate:
Owner occupied— — — 231 231 15 
Non-owner occupied— — — — — — 
Farmland85 85 88 88 12 
Multi-family— — — — — — 
Construction loans secured by 1-4 family dwellings— — — — — — 
Construction loans secured by other real estate— — — — — — 
Residential real estate:
Secured by senior liens on 1-4 family dwellings— — — 72 72 
Secured by junior liens on 1-4 family dwellings— — — — — — 
Home equity line-of-credit loans— — — — — — 
Consumer— — — — — — 
Agricultural— — — — — — 
Total$85 85 391 391 34 

Two residential real estate loans secured by senior liens on 1-4 family dwellings were added to the non-accrual classification during the first half of 2023. Accrued interest reversed and charged against interest income for these loans totaled approximately $3,000. Both loans were paid in full during the third quarter 2023.

The ratio of non-accrual loans to total loans outstanding at September 30, 2023 and December 31, 2022 was 0.01% and 0.03%, respectively. The ratio of the allowance for credit losses for loans to total non-accrual loans at September 30, 2023 and December 31, 2022 was 9,316.45% and 1,445.88%, respectively.

ALLOWANCE FOR CREDIT LOSSES
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 – Basis of Presentation - Adoption of New Accounting Pronouncements included in this Form 10-Q.

During the first quarter of 2023, the Company adopted ASC 326, including the CECL methodology for estimating the ACL. This standard was adopted using a modified retrospective approach on January 1, 2023. See Note 1 - Basis of Presentation - Adoption of New Accounting Pronouncements for a summary of the impact adoption of ASC 326 had on LCNB's ACL, retained earnings, and deferred taxes.





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

NOTE 4 – LOANS (continued)

QUANTITATIVE CONSIDERATIONS
The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below:
Forecast model - For each portfolio segment, an LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized peer FFIEC Call Report data for all pools. The Company plans to update the LDA when materially relevant.
Probability of default – PD is the probability that an asset will be in default within a given time frame. The Company has defined default as when a charge-off has occurred, a loan goes to non-accrual status, a loan is greater than 90 days past due, or financial difficulty modification status change. The forecast model is utilized to estimate PDs.
Loss given default – LGD is the percentage of the asset not expected to be collected due to default. The LGD is derived from company specific loss data.
Prepayments and curtailments – Prepayments and curtailments are calculated based on the Company’s own data. This analysis is updated annually.
Forecast and reversion – the Company as of January 1, 2023 established a one-quarter reasonable and supportable forecast period with a one-quarter straight line reversion to the long-term historical average. As of September 30, 2023, the Company established a two-quarter reasonable and supportable forecast period with a four-quarter straight line reversion to the long-term historical average. Extending the forecast and reversion periods from previous quarters has differing effects on pools based on the economic indicators used and the relation of the selected forecast range to the historical average. For example, the historical average for the bank’s unemployment indicator is 5.92% which is higher than the forecasted range utilized as of September 30, 2023. The extended forecast and reversion period ultimately decreases the reserve associated with the unemployment factor when compared to the historical average.
The historical averages for LCNB’s economic indicators are unemployment – 5.92%, change in Coincident Economic Activity – 1.79%, change in Commercial Real Estate Price Indexes – 5.41%, and change in Home Price Index – 3.33%
Economic forecast – the Company utilizes a third party to provide economic forecasts under various scenarios, which are assessed against economic indicators and management’s observations in the market. As of January 1, 2023, the date of CECL adoption, the Company selected a forecast which forecasted unemployment at 4.16%, the change in Coincident Economic Activity at 1.77%, the change in Commercial Real Estate Price Indexes at 9.35%, and the change in Home Price Index at -1.17% during the forecast periods. As of September 30, 2023, the Company selected a forecast which forecasts unemployment between 4.17% and 4.57%, the change in Coincident Economic Activity between 1.86% and 2.97%, the change in Commercial Real Estate Price Indexes between -6.96% and -4.92%, and the change in the Home Price Index between -1.22% and 3.17% during the forecast periods. Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks.

QUALITATIVE CONSIDERATIONS
In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:
Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Company operates that affect the collectability of financial assets;
The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics; and
Model risk including statistical risk, reversion risk, timing risk and model limitation risk.











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

NOTE 4 – LOANS (continued)

The following table presents activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2023 and 2022 (in thousands):
 Commercial
& Industrial
Commercial, Secured by
Real Estate
Residential
Real Estate
ConsumerAgriculturalOtherTotal
Three Months Ended September 30, 2023
Balance, beginning of period$1,065 5,023 1,326 535 7,956 
Provision for (recovery of) credit losses(70)125 (75)— 28 10 
Losses charged off— — (4)(1)— (54)(59)
Recoveries— — — — 24 25 
Balance, end of period$1,067 4,953 1,447 460 — 7,932 
Ratio of net charge-offs to average loans— %— %0.01 %— %— %154.44 %0.01 %
Nine Months Ended September 30, 2023
Balance, beginning of year, prior to adoption of ASC 326$1,300 3,609 624 86 22 5,646 
Impact of adopting ASC 326(512)1,440 836 446 (9)(5)2,196 
Provision for (recovery of) credit losses294 (96)(9)(66)(8)58 173 
Losses charged off(15)— (4)(10)— (115)(144)
Recoveries— — — — 57 61 
Balance, end of period$1,067 4,953 1,447 460 — 7,932 
Ratio of net charge-offs to average loans0.02 %— %— %0.03 %— %106.23 %0.01 %
Three Months Ended September 30, 2022
Balance, beginning of period$1,287 3,825 625 67 18 11 5,833 
Provision for (recovery of) credit losses(33)(164)19 12 (157)
Losses charged off— — — (14)— (39)(53)
Recoveries— — — — — 21 21 
Balance, end of period$1,254 3,661 632 72 20 5,644 
Ratio of net charge-offs to average loans— %— %— %0.19 %— %108.20 %0.01 %
Nine Months Ended September 30, 2022
Balance, beginning of year$1,095 3,607 665 105 30 5,506 
Provision for (recovery of) credit losses159 121 (47)(14)(10)60 269 
Losses charged off— (67)(5)(19)— (115)(206)
Recoveries— — 19 — — 56 75 
Balance, end of period$1,254 3,661 632 72 20 5,644 
Ratio of net charge-offs to average loans— %0.01 %(0.01)%0.08 %— %105.53 %0.01 %


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

NOTE 4 – LOANS (continued)

A breakdown of the allowance for credit losses and allowance for loan losses and the loan portfolio by portfolio segment at September 30, 2023 and December 31, 2022 were as follows (in thousands):
 Commercial
& Industrial
Commercial, Secured by
Real Estate
Residential
Real Estate
ConsumerAgriculturalOtherTotal
September 30, 2023
Allowance for credit losses:
Individually evaluated for credit losses$19 18 — — 45 
Collectively evaluated for credit loss1,064 4,934 1,442 442 — 7,887 
Balance, end of period$1,067 4,953 1,447 460 — 7,932 
Loans:
Individually evaluated for credit losses$138 3,425 802 74 — — 4,439 
Collectively evaluated for credit loss125,744 976,657 313,039 27,112 11,333 80 1,453,965 
Balance, end of period$125,882 980,082 313,841 27,186 11,333 80 1,458,404 
December 31, 2022
Allowance for loan losses:
Individually evaluated for credit losses$11 — — — 21 
Collectively evaluated for credit loss1,296 3,598 618 86 22 5,625 
Balance, end of period$1,300 3,609 624 86 22 5,646 
Loans:
Individually evaluated for credit losses$114 963 482 — — — 1,559 
Collectively evaluated for credit loss119,799 934,568 304,770 28,414 10,073 81 1,397,705 
Acquired credit impaired loans414 724 876 — — — 2,014 
Balance, end of period$120,327 936,255 306,128 28,414 10,073 81 1,401,278 

The ratio of the allowance for credit losses for loans to total loans at September 30, 2023 and December 31, 2022 was 0.54% and 0.40%, respectively.

For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan as of the measurement date.






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

NOTE 4 – LOANS (continued)

The following table presents the carrying value and related allowance of collateral dependent individually evaluated loans by class segment at the dates indicated (in thousands):

September 30, 2023December 31, 2022
Carrying ValueRelated AllowanceCarrying ValueRelated Allowance
Commercial & industrial$— — — — 
Commercial, secured by real estate:
Owner occupied73 — 230 — 
Non-owner occupied— — — — 
Farmland85 — 88 — 
Multi-family— — — — 
Construction loans secured by 1-4 family dwellings— — — — 
Construction loans secured by other real estate— — — 
Residential real estate:
Secured by senior liens on 1-4 family dwellings254 — 40 — 
Secured by junior liens on 1-4 family dwellings— — — — 
Home equity line-of-credit loans— — — — 
Consumer74 18 — — 
Agricultural— — — — 
Other loans, including deposit overdrafts— — — — 
Total$486 18 358 — 

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 a variety of purposes, including, for example, 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. Outstanding PPP loans at September 30, 2023 and December 31, 2022 totaled $27,000 and $40,000, 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.

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

NOTE 4 – LOANS (continued)

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 capacity.

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 also 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.  A substantial majority of home equity lines of credit have a variable rate of interest 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% or may require other credit enhancements for second lien mortgage loans.
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 collectability 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.

Other Loans, Including Deposit Overdrafts. Other loans may include loans that do not fit in any of the other categories, but it is primarily composed of overdrafts from transaction deposit accounts. Overdraft payments are recorded as a recovery and overdrafts are generally written off after 34 days with a negative balance.

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.
 
23

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

NOTE 4 – LOANS (continued)

The following table presents the amortized cost basis of loans by vintage and credit quality indicators at September 30, 2023 and December 31, 2022 (in thousands). The December 31, 2022 table is shown for comparison purposes.
Term Loans by Origination Year
 20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
September 30, 2023
Commercial & industrial
Pass$20,268 32,244 30,459 12,443 2,928 6,059 14,464 — 118,865 
OAEM— — 1,549 — — — — — 1,549 
Substandard— 1,813 — 111 1,732 154 1,658 — 5,468 
Doubtful— — — — — — — — — 
Total20,268 34,057 32,008 12,554 4,660 6,213 16,122 — 125,882 
Gross charge-offs — — — — — 15 — — 15 
Commercial, secured by real estate
Pass66,051 145,391 130,762 94,492 93,717 270,649 156,266 — 957,328 
OAEM— 7,737 — — — 7,272 — — 15,009 
Substandard— — — — 1,695 6,050 — — 7,745 
Doubtful— — — — — — — — — 
Total66,051 153,128 130,762 94,492 95,412 283,971 156,266 — 980,082 
Gross charge-offs— — — — — — — — — 
Residential real estate
Pass30,088 30,355 82,216 51,060 16,053 78,378 22,459 387 310,996 
OAEM— — — — — — — — — 
Substandard— — — 32 — 2,813 — — 2,845 
Doubtful— — — — — — — — — 
Total30,088 30,355 82,216 51,092 16,053 81,191 22,459 387 313,841 
Gross charge-offs— — — — — — — 
Consumer
Pass7,657 6,388 5,469 5,404 1,717 299 159 — 27,093 
OAEM— — — — — — — — — 
Substandard— 67 21 — — — — 93 
Doubtful— — — — — — — — — 
Total7,657 6,393 5,536 5,425 1,717 299 159 — 27,186 
Gross charge-offs— — 10 — — — — — 10 
Agricultural
Pass2,056 469 202 765 46 31 7,764 — 11,333 
OAEM— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total2,056 469 202 765 46 31 7,764 — 11,333 
Gross charge-offs— — — — — — — — — 
Other
Pass— — — — — — 80 — 80 
OAEM— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total— — — — — — 80 — 80 
Gross charge-offs— — — — — — 115 — 115 
Total loans$126,120 224,402 250,724 164,328 117,888 371,705 202,850 387 1,458,404 
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LCNB CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

NOTE 4 – LOANS (continued)

Term Loans by Origination Year
20222021202020192018PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
December 31, 2022     
Commercial & industrial
Pass$30,132 36,341 20,936 3,632 2,499 5,630 15,403 — 114,573 
OAEM— — — 2,142 — — 1,602 — 3,744 
Substandard1,540 — 106 — — 51 313 — 2,010 
Doubtful— — — — — — — — — 
Total31,672 36,341 21,042 5,774 2,499 5,681 17,318 — 120,327 
Gross charge-offs— — — — — — — — — 
Commercial, secured by real estate
Pass135,503 142,446 96,272 100,363 75,387 229,175 129,274 4,955 913,375 
OAEM7,931 — — — 7,413 — — — 15,344 
Substandard— — — — — 7,536 — — 7,536 
Doubtful— — — — — — — — — 
Total143,434 142,446 96,272 100,363 82,800 236,711 129,274 4,955 936,255 
Gross charge-offs— — — — — 67 — — 67 
Residential real estate
Pass27,892 86,952 54,144 17,804 13,298 78,969 24,359 1,095 304,513 
OAEM— — — — — — — — — 
Substandard— — — 37 — 1,572 — 1,615 
Doubtful— — — — — — — — — 
Total27,892 86,952 54,144 17,841 13,298 80,541 24,359 1,101 306,128 
Gross charge-offs— — — — — — — 
Consumer
Pass8,786 7,561 8,108 3,145 413 316 82 — 28,411 
OAEM— — — — — — — — — 
Substandard— — — — — — — 
Doubtful— — — — — — — — — 
Total8,789 7,561 8,108 3,145 413 316 82 — 28,414 
Gross charge-offs— 24 — — — — 37 
Agricultural
Pass533 243 865 63 116 29 8,224 — 10,073 
OAEM— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total533 243 865 63 116 29 8,224 — 10,073 
Gross charge-offs— — — — — — — — — 
Other
Pass— — — — — — 81 — 81 
OAEM— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total— — — — — — 81 — 81 
Gross charge-offs— — — — — — 157 — 157 
Total loans$212,320 273,543 180,431 127,186 99,126 323,278 179,338 6,056 1,401,278 





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

NOTE 4 – LOANS (continued)

A loan portfolio aging analysis by class segment at September 30, 2023 and December 31, 2022 is as follows (in thousands):
 30-59 Days
Past Due
60-89 Days
Past Due
90 Days or More Past DueTotal
Past Due
CurrentTotal Loans
Receivable
90 Days or More Past Due and
Accruing
September 30, 2023
Commercial & industrial$— — — — 125,882 125,882 — 
Commercial, secured by real estate:
Owner occupied— — 73 73 204,523 204,596 73 
Non-owner occupied— — — — 436,189 436,189 — 
Farmland95 — — 95 38,137 38,232 — 
Multi-family— — — — 189,987 189,987 — 
Construction loans secured by 1-4 family dwellings— — — — 6,937 6,937 — 
Construction loans secured by other real estate12 — — 12 104,129 104,141 — 
Residential real estate:
Secured by senior liens on 1-4 family dwellings1,061 — 29 1,090 275,435 276,525 29 
Secured by junior liens on 1-4 family dwellings— — — — 13,854 13,854 — 
Home equity line-of-credit loans— — — — 23,462 23,462 — 
Consumer62 74 141 27,045 27,186 74 
Agricultural— — — — 11,333 11,333 — 
Other80 — — 80 — 80 — 
Total$1,310 176 1,491 1,456,913 1,458,404 176 
December 31, 2022       
Commercial & industrial$— — — — 120,327 120,327 — 
Commercial, secured by real estate:
Owner occupied— — — — 208,485 208,485 — 
Non-owner occupied— — — — 420,075 420,075 — 
Farms— — — — 36,340 36,340 — 
Multi-family— — — — 189,917 189,917 — 
Construction loans secured by 1-4 family dwellings— — — — 7,786 7,786 — 
Construction loans secured by other real estate— — — — 73,652 73,652 — 
Residential real estate
Secured by senior liens on 1-4 family dwellings81 — 79 160 269,662 269,822 39 
Secured by junior liens on 1-4 family dwellings— — — — 10,197 10,197 — 
Home equity line-of-credit loans— — — — 26,109 26,109 — 
Consumer117 — 120 28,294 28,414 — 
Agricultural— — — — 10,073 10,073 — 
Other81 — — 81 — 81 — 
Total$279 79 361 1,400,917 1,401,278 39 

No residential consumer mortgage loans secured by residential real estate were in the process of foreclosure at September 30, 2023 or December 31, 2022.

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

NOTE 4 – LOANS (continued)

From time to time, the terms of certain loans are modified when 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.

One modification was granted to a borrower experiencing financial difficulties during the three and nine months ended September 30, 2023. The modification was made on a residential real estate loan secured by a senior lien on a single-family home with an outstanding balance of $325,000 at June 30, 2023 and involved a delay of monthly payments for a period of time. This loan was paid in full during the third quarter 2023. No loans meeting the above specifications were modified during the three and nine months ending September 30, 2022.
There were no modified loans that experienced a payment default within twelve months of the restructuring date during the nine months ended September 30, 2023 and 2022.
Mortgage loans sold to and serviced for the Federal Home Loan Mortgage Corporation and other investors are not included in the accompanying consolidated condensed balance sheets.  The unpaid principal balances of those loans at September 30, 2023 and December 31, 2022 were approximately $146.5 million and $148.4 million, respectively.


NOTE 5 - AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIP INVESTMENTS

LCNB is a limited partner in multiple 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 September 30, 2023 and December 31, 2022 (in thousands):
 September 30,
2023
December 31,
2022
Affordable housing tax credit investment$16,950 16,950 
Less amortization4,348 3,268 
Net affordable housing tax credit investment$12,602 13,682 
Unfunded commitment$5,462 7,185 

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 9.0 years.

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

NOTE 5 - AFFORDABLE HOUSING TAX CREDIT LIMITED PARTNERSHIP INVESTMENTS (continued)

The following table presents other information relating to LCNB's affordable housing tax credit investments for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Tax credits and other tax benefits recognized$438 357 1,302 1,071 
Tax credit amortization expense included in provision for income taxes362 306 1,080 907 


NOTE 6 - DEPOSITS
The following table presents the composition of LCNB's deposits at September 30, 2023 and December 31, 2022 (in thousands):
September 30,
2023
December 31,
2022
Demand deposits$453,146 505,824 
Interest-bearing demand and money fund deposits554,700 510,324 
Savings deposits370,917 432,322 
IRA and time certificates238,127 156,500 
Total$1,616,890 1,604,970 

Contractual maturities of time deposits at September 30, 2023 were as follows (in thousands):
October 1, 2023 - September 30, 2024$138,134 
October 1, 2024 - September 30, 202585,359 
October 1, 2025 - September 30, 20266,492 
October 1, 2026 - September 30, 20276,443 
October 1, 2027 - September 30, 2028976 
Thereafter723 
 $238,127 

The aggregate amount of time deposits in denominations of $250,000 or more at September 30, 2023 and December 31, 2022 was $36.8 million and $16.1 million, respectively.

NOTE 7 – BORROWINGS

Long-term debt at September 30, 2023 and December 31, 2022 was as follows (dollars in thousands):
September 30, 2023December 31, 2022
AmountRateAmountRate
Term loan$12,641 4.25 %$14,072 4.25 %
FHLB long-term advances100,000 4.74 %5,000 3.02 %
$112,641 4.69 %$19,072 3.93 %

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

NOTE 7 – BORROWINGS (continued)



The term loan with a correspondent financial institution bears a fixed interest rate of 4.25%, amortizes quarterly, and has a final balloon payment due on June 15, 2025.

Contractual maturities of long-term debt at September 30, 2023 and December 31, 2022 were as follows ( in thousands):
September 30,
2023
December 31,
2022
Maturing within one year $5,000 6,918 
Maturing after one year through two years 1,980 2,001 
Maturing after two years through three years 35,661 10,153 
Maturing after three years through four years 25,000 — 
Maturing after four years through five years 25,000 — 
Thereafter20,000 — 
Total$112,641 19,072 

Short-term borrowings at September 30, 2023 and December 31, 2022 were as follows (dollars in thousands):
September 30, 2023December 31, 2022
AmountRateAmountRate
Revolving line of credit$— — %$3,000 7.25 %
Overnight lines of credit— — %18,455 5.00 %
FHLB short-term advances30,000 5.63 %50,000 4.40 %
$30,000 5.63 %$71,455 4.67 %

At September 30, 2023, LCNB Corp. had a short-term revolving line of credit arrangement with a financial institution for a maximum amount of $5 million at an interest rate equal to the Wall Street Journal Prime Rate minus 25 basis points. This agreement expires on June 15, 2024. No borrowings were outstanding under this arrangement at September 30, 2023.

At September 30, 2023, LCNB had overnight line of credit borrowing arrangements with three correspondent financial institutions. Under the terms of the first arrangement, LCNB can borrow up to $30 million at an interest rate equal to the lending institution’s federal funds rate plus a spread of 50 basis points. No borrowings were outstanding under this arrangement at September 30, 2023. Under the terms of the second arrangement, LCNB can borrow up to $25 million at an interest rate equal to the FOMC rate plus a spread of 25 basis points. No borrowings were outstanding under this arrangement at September 30, 2023. Under the terms of the third arrangement, LCNB can borrow up to $25 million at the interest rate in effect at the time of borrowing. No borrowings were outstanding under this arrangement at September 30, 2023.

All long- and short-term 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 $276 million and $270 million at September 30, 2023 and December 31, 2022, respectively. Remaining borrowing capacity with the FHLB, including both long- and short-term borrowings, at September 30, 2023 was approximately $61.1 million. LCNB could increase its remaining borrowing capacity by purchasing more stock in the FHLB.









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

NOTE 7 – BORROWINGS (continued)




NOTE 8 - 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 and nine months ended September 30, 2023 were as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended 
September 30,
2023202220232022
Operating lease expense$219 117 661 461 
Short-term lease expense16 100 62 184 
Variable lease expense
Other15 25 
Total lease expense$252 220 753 654 

Other information related to leases at September 30, 2023 were as follows (dollars in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$649 
Right-of-use assets obtained in exchange for new operating lease liabilities$— 
Weighted average remaining lease term in years for operating leases33.0
Weighted average discount rate for operating leases3.51 %


NOTE 9 – INCOME TAXES

A reconciliation between the statutory income tax and LCNB's effective tax rate on income from continuing operations follows:
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Statutory tax rate21.0 %21.0 %21.0 %21.0 %
Increase (decrease) resulting from:    
Tax exempt interest(0.7)%(0.6)%(0.6)%(0.6)%
Tax exempt income on bank-owned life insurance(1.2)%(0.8)%(1.1)%(0.9)%
Captive insurance premium income(0.5)%(0.7)%(0.7)%(0.8)%
Affordable housing tax credit limited partnerships (1.5)%(0.7)%(1.4)%(0.9)%
Nondeductible merger-related expenses1.7 %— %0.7 %— %
Other, net0.1 %0.1 %0.3 %0.1 %
Effective tax rate18.9 %18.3 %18.2 %17.9 %


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



NOTE 10 - 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.

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 September 30, 2023 and December 31, 2022 were as follows (in thousands):
September 30, 2023December 31, 2022
Commitments to extend credit:
Commercial loans$45,953 22,823 
Other loans  
Fixed rate906 191 
Adjustable rate1,375 1,422 
Unused lines of credit:  
Fixed rate28,860 41,558 
Adjustable rate162,050 238,876 
Unused overdraft protection amounts on demand accounts16,468 16,566 
Standby letters of credit
Total commitments$255,617 321,441 

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.  

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

LCNB evaluates each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained is based on management's credit evaluation of the borrower and 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 September 30, 2023 totaled approximately $3.2 million.

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 LCNB's consolidated financial position or results of operations.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)


NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in accumulated other comprehensive loss for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
 Unrealized Losses on Available-for-Sale Debt SecuritiesChanges in Pension Plan Assets and Benefit ObligationsTotalUnrealized Losses on Available-for-Sale Debt SecuritiesChanges in Pension Plan Assets and Benefit ObligationsTotal
2023
Balance at beginning of period$(27,744)(27)(27,771)(29,927)(27)(29,954)
Other comprehensive income (loss), net of taxes(2,941)— (2,941)(758)— (758)
Balance at end of period$(30,685)(27)(30,712)(30,685)(27)(30,712)
2022   
Balance at beginning of period$(21,670)(270)(21,940)(1,536)(273)(1,809)
Other comprehensive (loss) income, net of taxes(9,670)(9,669)(29,804)(29,800)
Balance at end of period$(31,340)(269)(31,609)(31,340)(269)(31,609)

There were no reclassifications out of accumulated other comprehensive loss during the three and nine months ended September 30, 2023 and 2022.

NOTE 12 – 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 and nine-month period ended September 30, 2023 and 2022 were as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended 
September 30,
 2023202220232022
Qualified noncontributory defined benefit retirement plan$267 342 944 958 
401(k) plan164 157 529 494 



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


NOTE 12 – 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 and nine months ended September 30, 2023 and 2022 are summarized as follows (in thousands):
 Three Months Ended
September 30,
Nine Months Ended 
September 30,
 2023202220232022
Interest cost19 14 57 40 
Amortization of unrecognized net loss— — 
Net periodic pension cost$19 16 $57 46 

Amounts recognized in accumulated other comprehensive loss, net of tax, for the nonqualified defined benefit retirement plan for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended 
September 30,
2023202220232022
Amortization of net actuarial loss$— (1)— (4)


NOTE 13 – STOCK BASED COMPENSATION
 
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 could be subject to earlier termination by the Compensation Committee.

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

Restricted stock awards granted under the 2015 Plan during the three and nine months ended September 30, 2023 and 2022 were as follows:
20232022
  
 
Shares
Weighted Average Grant Date Fair Value 
 
Shares
Weighted Average Grant Date Fair Value
Outstanding, January 1,58,314 $17.99 44,512 $17.08 
Granted44,150 17.84 32,554 19.25 
Vested(23,447)17.89 (18,814)18.01 
Forfeited— — — — 
Outstanding, September 30,79,017 $17.94 58,252 $17.99 



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

NOTE 13 – STOCK BASED COMPENSATION (continued)
The following table presents expense recorded in salaries and employee benefits for restricted stock awards and the related tax information for the three and nine months ended September 30, 2023 and 2022 (in thousands):
 Three Months Ended
September 30,
Nine Months Ended 
September 30,
2023202220232022
Restricted stock expense$82 113 480 417 
Tax effect18 24 101 88 

Unrecognized compensation expense for restricted stock awards was $1,008,000 at September 30, 2023 and is expected to be recognized over a period of 4.4 years.


NOTE 14 – 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 No. 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 and nine months ended September 30, 2023 and 2022 were calculated as follows (dollars in thousands, except share and per share data):
Three Months Ended
September 30,
Nine Months Ended 
September 30,
 2023202220232022
Net income$4,070 5,579 12,921 15,720 
Less allocation of earnings and dividends to participating securities29 28 92 81 
Net income allocated to common shareholders$4,041 5,551 12,829 15,639 
Weighted average common shares outstanding, gross11,117,737 11,342,539 11,173,810 11,537,078 
Less average participating securities79,017 58,314 79,625 58,822 
Adjusted weighted average number of shares outstanding used in the calculation of basic and diluted earnings per common share11,038,720 11,284,225 11,094,185 11,478,256 
Earnings per common share:    
Basic$0.37 0.49 $1.16 1.36 
Diluted0.37 0.49 1.16 1.36 


NOTE 15 - 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.


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

NOTE 15 - FAIR VALUE MEASUREMENTS (continued)
The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:
Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
Level 3 – inputs that are unobservable for the asset or liability.

EQUITY SECURITIES WITH A READILY DETERMINABLE FAIR VALUE
Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the consolidated condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). At December 31, 2022, LCNB had investments in two mutual funds that were traded in active markets and their fair values were based on market quotations (level 1). These two mutual funds were sold during the first quarter of 2023. 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 individually evaluated collateral dependent loans (or impaired loans prior to the adoption of ASC 326), other real estate owned, and other repossessed assets.

LCNB does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent loans are recorded to reflect partial write-downs or specific reserves that are based on the observable market price or current estimated value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of significant borrower distress and on an ongoing basis until recovery or charge-off. The fair values of distressed loans are determined using either the sales comparison approach or income approach. Respective unobservable inputs for the approaches consist of adjustments for differences between comparable sales and the utilization of appropriate capitalization rates.

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

NOTE 15 - FAIR VALUE MEASUREMENTS (continued)
The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of September 30, 2023 and December 31, 2022 (in thousands):
Fair Value Measurements at the End of
the Reporting Period Using
 Fair Value MeasurementsQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
September 30, 2023
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
     Equity securities$77 77 — — 
     Mutual funds measured at net asset value1,177 1,177 — — 
Debt securities, available-for-sale:
     U.S. Treasury notes70,128 70,128 — — 
     U.S. Agency notes78,352 — 78,352 — 
     Corporate bonds6,506 — 6,506 — 
     U.S. Agency mortgage-backed securities70,552 — 70,552 — 
     Municipal securities:   
          Non-taxable8,287 — 8,287 — 
          Taxable40,675 — 40,675 — 
Total recurring fair value measurements$275,754 71,382 204,372 — 
Nonrecurring fair value measurements:   
Individually evaluated loans$56 — — 56 
     Total nonrecurring fair value measurements$56 — — 56 
December 31, 2022    
Recurring fair value measurements:    
Equity securities with a readily determinable fair value:
     Equity securities$1,039 1,039 — — 
     Mutual funds41 41 — — 
     Mutual funds measured at net asset value1,193 1,193 — — 
Debt securities, available-for-sale:    
     U.S. Treasury notes76,447 76,447 — — 
     U.S. Agency notes77,976 — 77,976 — 
     Corporate bonds6,685 — 6,685 — 
     U.S. Agency mortgage-backed securities79,440 — 79,440 — 
     Municipal securities:    
          Non-taxable8,524 — 8,524 — 
          Taxable40,778 — 40,778 — 
Total recurring fair value measurements$292,123 78,720 213,403 — 
Nonrecurring fair value measurements:    
Individually evaluated loans$923 — — 923 
     Total nonrecurring fair value measurements$923 — — 923 


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

NOTE 15 - FAIR VALUE MEASUREMENTS (continued)
The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at September 30, 2023 and December 31, 2022 (dollars in thousands):
Range
Fair ValueValuation TechniqueUnobservable InputsHighLowWeighted Average
September 30, 2023
Individually evaluated collateral dependent loans$56 Estimated sales priceAdjustments for comparable properties, discounts to reflect current market conditionsNot applicable
December 31, 2022
Individually evaluated loans923 Discounted cash flowsDiscount rate8.13 %4.63 %6.04 %

Carrying amounts and estimated fair values of financial instruments as of September 30, 2023 and December 31, 2022 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)
September 30, 2023
FINANCIAL ASSETS:
Cash and cash equivalents$43,422 43,422 43,422 — — 
Debt securities, held-to-maturity, net19,006 16,923 — — 16,923 
Loans, net1,450,472 1,249,268 — — 1,249,268 
  Accrued interest receivable8,087 8,087 — 8,087 — 
FINANCIAL LIABILITIES:  
Deposits1,616,890 1,616,033 1,378,762 237,271 — 
Short-term borrowings30,000 30,000 — 30,000 — 
Long-term debt112,641 112,430 — 112,430 — 
  Accrued interest payable1,204 1,204 — 1,204 — 
December 31, 2022
FINANCIAL ASSETS:
Cash and cash equivalents$22,701 22,701 22,701 — — 
Debt securities, held-to-maturity, net19,878 18,885 — — 18,885 
Loans, net1,395,632 1,219,112 — — 1,219,112 
  Accrued interest receivable7,482 7,482 — 7,482 — 
FINANCIAL LIABILITIES:  
Deposits1,604,970 1,604,380 1,448,470 155,910 — 
Short-term borrowings71,455 71,455 — 71,455 — 
Long-term debt19,072 18,573 — 18,573 — 
Accrued interest payable311 311 — 311 — 
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)

NOTE 15 - FAIR VALUE MEASUREMENTS (continued)
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 September 30, 2023 and December 31, 2022.
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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, 2022, 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.LCNB’s ability to integrate future acquisitions may be unsuccessful or may be more difficult, time-consuming, or costly than expected;
3.LCNB may incur increased loan charge-offs in the future and the allowance for credit losses may be inadequate;
4.LCNB may face competitive loss of customers;
5.changes in the interest rate environment, which may include further interest rate increases, may have results on LCNB’s operations materially different from those anticipated by LCNB’s market risk management functions;
6.changes in general economic conditions and increased competition could adversely affect LCNB’s operating results;
7.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;
8.LCNB may experience difficulties growing loan and deposit balances;
9.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;
10.global geopolitical relations and/or conflicts could create financial market uncertainty and have negative impacts on commodities and currency, which could adversely affect LCNB's operating results and financial condition;
11.difficulties with technology or data security breaches, including cyberattacks, could negatively affect LCNB's ability to conduct business and its relationships with customers, vendors, and others;
12.adverse weather events and natural disasters and global and/or national epidemics could negatively affect LCNB's customers given its concentrated geographic scope, which could impact LCNB's operating results; and
13.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, the Tax Cuts and Jobs Act, changes in deposit insurance premium levels, and any such future regulatory actions or reforms. 

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)
Critical Accounting Estimates

Allowance for Credit Losses.  The allowance is maintained at a level LCNB management believes is adequate to absorb estimated credit losses identified and inherent in the loan portfolio. The allowance is established through a provision for credit losses charged to expense.  Loans are charged against the allowance for credit losses when management believes that the collectability 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 estimated losses over the contractual terms in the loan portfolio based on evaluations of the collectability 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 and forecasted 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.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This standard replaced the “incurred loss” approach with an “expected loss” model. Referred to as the CECL model, this standard applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. The standard also expanded disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.

LCNB adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance of $2.4 million, and a $1.9 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on the Consolidated Balance Sheet, with the $0.5 million tax impact portion being recorded as part of the deferred tax asset in other assets in the Consolidated Balance Sheet.

See Note 1- Basis of Presentation - Adoption of New Accounting Pronouncements in this Quarterly Report on Form 10-Q for further detailed descriptions of LCNB's estimation process and methodology related to the allowance. See also Note 4 – Loans in this Quarterly Report on Form 10-Q for further information regarding LCNB's loan portfolio and allowance.

Accounting for Intangibles. LCNB’s intangible assets are composed primarily of goodwill and core deposit intangibles related to acquisitions of other financial institutions. They also include 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 and CFB.

Goodwill is not subject to amortization, but is reviewed annually for impairment. A review for impairment may be conducted more frequently than annually if circumstances indicate a possible impairment. Impairment indicators that may be considered include the condition of the economy and banking industry; estimated future cash flows; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of LCNB’s stock; and other relevant events. These and other factors could lead to a conclusion that goodwill is impaired, which would require LCNB to write off the difference between the estimated fair value of the Company and the carrying value.

Core deposit intangibles acquired from business combinations are initially measured at their estimated fair values and are then amortized on a straight-line basis over their estimated useful lives. Management evaluates whether events or circumstances have occurred that indicate the remaining useful life or carrying value of the amortizing intangible should be revised.

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.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
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 and nine months ended September 30, 2023 was $4,070,000 (total basic and diluted earnings per share of $0.37) and $12,921,000 (total basic and diluted earnings per share of $1.16), respectively. This compares to net income of $5,579,000 (total basic and diluted earnings per share of $0.49) and $15,720,000 (total basic and diluted earnings per share of
$1.36) for the same respective three and nine-month periods in 2022.

Net interest income for the three and nine months ended September 30, 2023 was $13,571,000 and $41,690,000, respectively. This compares to net interest income of $15,444,000 and $44,834,000 for the same respective three- and nine-month periods in 2022. The decrease in net interest income was primarily due to interest paid on a higher amount of average short-term and long-term borrowings and to higher interest expense associated with the rapid year-over-year increase in the Effective Federal Funds Rate. LCNB's tax equivalent net interest margin for the first nine months of 2023 was 3.20%, compared to 3.48% for the same period last year.

LCNB recorded a net recovery of credit losses of $114,000 and $141,000 for the three and nine months ended September 30, 2023. This compares to a net recovery of credit losses of $157,000 for the three months ended September 30, 2022 and a provision for credit losses of $269,000 for the nine months ended September 30, 2022, respectively.

Non-interest income for the three and nine months ended September 30, 2023 was $3,578,000 and $10,805,000, respectively. This compares to non-interest income of $3,581,000 and $10,659,000 for the same respective three- and nine-month periods in 2022.

Non-interest expense for the three and nine months ended September 30, 2023 was $12,244,000 and $36,847,000, respectively, compared to $12,350,000 and $36,069,000 for the same respective three and nine-month periods in 2022. The three- and nine-month periods in 2023 benefited from a $425,000 gain recognized on the sale of a decommissioned office building and the nine-month period in 2022 benefited from an $889,000 gain recognized on the sale of other real estate owned. Reasons for the increases include merger-related expenses recognized in 2023 and higher FDIC insurance premiums. These higher costs were partially offset by a decrease in state financial institutions tax expense.


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

Three Months Ended September 30, 2023 vs. September 30, 2022
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 September 30, 2023 and September 30, 2022, 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 September 30,
20232022
Average
Outstanding
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
(Dollars in thousands)
Loans (1)$1,451,153 17,875 4.89 %$1,384,520 15,026 4.31 %
Interest-bearing demand deposits10,891 152 5.54 %13,212 80 2.40 %
Federal Reserve Bank stock4,652 — — %4,652 — — %
Federal Home Loan Bank stock7,007 134 7.59 %4,369 65 5.90 %
Investment securities:
Equity securities3,382 38 4.46 %4,387 20 1.81 %
Debt securities, taxable274,494 1,296 1.87 %297,001 1,323 1.77 %
Debt securities, non-taxable (2)24,134 219 3.60 %27,890 241 3.43 %
Total earnings assets1,775,713 19,714 4.40 %1,736,031 16,755 3.83 %
Non-earning assets203,514 198,954 
Allowance for credit losses(7,958)(5,830)
Total assets$1,971,269 $1,929,155 
Interest-bearing demand and money market deposits$541,487 2,298 1.68 %$539,228 422 0.31 %
Savings deposits379,515 129 0.13 %453,420 159 0.14 %
IRA and time certificates230,030 1,999 3.45 %168,358 398 0.94 %
Short-term borrowings63,018 830 5.23 %5,728 71 4.92 %
Long-term debt72,550 841 4.60 %24,920 210 3.34 %
Total interest-bearing liabilities1,286,600 6,097 1.88 %1,191,654 1,260 0.42 %
Demand deposits459,476 508,926 
Other liabilities21,226 23,524 
Equity203,967 205,051 
Total liabilities and equity$1,971,269 $1,929,155 
Net interest rate spread (3)2.52 %3.41 %
Net interest income and net interest margin on a taxable-equivalent basis (4)13,617 3.04 %15,495 3.54 %
Ratio of interest-earning assets to interest-bearing liabilities138.02 %145.68 %

(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
(3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.




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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended September 30, 2023 as compared to the same period in 2022.  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 
September 30, 2023 vs. 2022
Increase (decrease) attributable to:
 VolumeRateTotal
 (In thousands)
Interest-earning Assets:
Loans$749 2,100 2,849 
Interest-bearing demand deposits(16)88 72 
Federal Reserve Bank stock— — — 
Federal Home Loan Bank stock47 22 69 
Investment securities: 
Equity securities(5)23 18 
Debt securities, taxable(104)77 (27)
Debt securities, non-taxable(34)12 (22)
Total interest income637 2,322 2,959 
Interest-bearing Liabilities:  
Interest-bearing demand and money market deposits1,874 1,876 
Savings deposits(25)(5)(30)
IRA and time certificates193 1,408 1,601 
Short-term borrowings754 759 
Long-term debt527 104 631 
Total interest expense1,451 3,386 4,837 
Net interest income$(814)(1,064)(1,878)

Net interest income on a fully taxable-equivalent basis for the three months ended September 30, 2023 totaled $13,617,000, a decrease of $1,878,000 from the comparable period in 2022.  Total interest income increased $2,959,000, which was more than offset by an increase in total interest expense of $4,837,000.

The $2,959,000 increase in total interest income was due primarily to a $2,849,000 increase in loan interest income. The increase in loan interest income was primarily due to a net 58 basis point (a basis point equals 0.01%) increase in the average rate earned on the loan portfolio due to higher market rates and secondarily to a $66.6 million increase in average loan balances.

The $4,837,000 increase in total interest expense was primarily due to a $1,876,000 increase in interest expense for interest-bearing demand and money market deposits, a $1,601,000 increase in interest expense for IRA and time certificates, a $759,000 increase in interest expense for short-term borrowings, and a $631,000 increase in interest expense for long-term debt. Interest expense on interest-bearing demand and money market deposits increased primarily due to a 137 basis point increase in the average rate paid for these deposits and interest expense on IRA and time certificates increased primarily due to a 251 basis point increase in the average rate paid. Interest expense on short-term borrowings increased primarily due to a $57.3 million increase in the average balance outstanding. Interest expense on long-term debt increased primarily due to a $47.6 million increase in the average balance outstanding.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Increases in market rates during 2022 and 2023 were primarily caused by FOMC increases in the Targeted Federal Funds rate. The Targeted Federal Funds rate increased by 425 basis points during 2022 and by an additional 100 basis points during the first nine months of 2023.

Nine Months Ended September 30, 2023 vs. September 30, 2022
The following table presents, for the nine months ended September 30, 2023 and September 30, 2022, 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.
 Nine Months Ended September 30,
 20232022
Average
Outstanding
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
 (Dollars in thousands)
Loans (1)$1,415,719 50,781 4.80 %$1,379,080 43,360 4.20 %
Interest-bearing demand deposits11,051 453 5.48 %10,546 109 1.38 %
Federal Reserve Bank stock4,652 140 4.02 %4,652 140 4.02 %
Federal Home Loan Bank stock6,840 317 6.20 %4,922 130 3.53 %
Investment securities:
Equity securities3,698 113 4.09 %4,484 56 1.67 %
Debt securities, taxable280,998 3,962 1.89 %297,162 3,672 1.65 %
Debt securities, non-taxable (2)24,518 662 3.61 %27,831 718 3.45 %
Total earnings assets1,747,476 56,428 4.32 %1,728,677 48,185 3.73 %
Non-earning assets200,897   196,750   
Allowance for credit losses(7,782)  (5,623)  
Total assets$1,940,591   $1,919,804   
Interest-bearing demand and money market deposits$522,896 5,140 1.31 %$515,868 762 0.20 %
Savings deposits396,785 402 0.14 %451,597 465 0.14 %
IRA and time certificates210,407 4,675 2.97 %179,514 1,266 0.94 %
Short-term borrowings78,916 3,142 5.32 %12,140 320 3.52 %
Long-term debt36,878 1,240 4.50 %15,907 387 3.25 %
Total interest-bearing liabilities1,245,882 14,599 1.57 %1,175,026 3,200 0.36 %
Demand deposits469,580   510,422  
Other liabilities21,633   22,292   
Equity203,496   212,064   
Total liabilities and equity$1,940,591   $1,919,804   
Net interest rate spread (3)  2.75 %  3.37 %
Net interest income and net interest margin on a taxable-equivalent basis (4) 41,829 3.20 % 44,985 3.48 %
Ratio of interest-earning assets to interest-bearing liabilities140.26 %  147.12 %  

(1)Includes non-accrual loans.
(2)Income from tax-exempt securities is included in interest income on a taxable-equivalent basis.  Interest income has been divided
    by a factor comprised of the complement of the incremental tax rate of 21%.
(3)The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(4)The net interest margin is the taxable-equivalent net interest income divided by average interest-earning assets.




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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the nine months ended September 30, 2023 as compared to the same period in 2022.  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.
Nine Months Ended 
September 30, 2023 vs. 2022
Increase (decrease) attributable to:
 VolumeRateTotal
 (In thousands)
Interest-earning Assets:
Loans$1,178 6,243 7,421 
Interest-bearing demand deposits339 344 
Federal Reserve Bank stock— — — 
Federal Home Loan Bank stock64 123 187 
Investment securities: 
Equity securities(11)68 57 
Debt securities, taxable(208)498 290 
Debt securities, non-taxable(88)32 (56)
Total interest income940 7,303 8,243 
Interest-bearing Liabilities:  
Interest-bearing demand and money market deposits11 4,367 4,378 
Savings deposits(56)(7)(63)
IRA and time certificates253 3,156 3,409 
Short-term borrowings2,582 240 2,822 
Long-term debt661 192 853 
Total interest expense3,451 7,948 11,399 
Net interest income$(2,511)(645)(3,156)

Net interest income on a fully taxable-equivalent basis for the nine months ended September 30, 2023 totaled $41,829,000, a decrease of $3,156,000 from the comparable period in 2022.  Total interest income increased $8,243,000, which was more than offset by an increase in total interest expense of $11,399,000.

The $8,243,000 increase in total interest income was due primarily to a $7,421,000 increase in loan interest income. The increase in loan interest income was primarily due to a net 59 basis point increase in the average rate earned on the loan portfolio due to higher market rates and secondarily to a $36.6 million increase in average loan balances.

The $11,399,000 increase in total interest expense was primarily due to a $4,378,000 increase in interest expense for interest-bearing demand and money market deposits, a $3,409,000 increase in interest expense for IRA and time certificates, a $2,822,000 increase in interest expense for short-term borrowings, and an $853,000 increase in interest expense for long-term debt. Interest expense on interest-bearing demand and money market deposits increased primarily due to a 111 basis point increase in the average rate paid for these deposits and interest expense on IRA and time certificates increased primarily due to a 203 basis point increase in the average rate paid. Interest expense on short-term borrowings increased primarily due to a $66.8 million increase in the average balance outstanding. Interest expense on long-term debt increased primarily due to a $21.0 million increase in the average balance outstanding.



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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Provision and Allowance For Credit Losses

LCNB recorded a net recovery of credit losses of $114,000 and $141,000 for the three and nine months ended September 30, 2023, respectively. This compares to a recovery of credit losses of $157,000 for the three months ended September 30, 2022 and provision of $269,000 for the nine months ended September 30, 2022. The provision for the three and nine months ended September 30, 2023 included a provision for credit losses on loans of $9,000 and $173,000, respectively, more than offset by a recovery of credit losses on off-balance sheet credit exposures of $123,000 and $313,000 for the same respective three- and nine-month periods in 2023. The provision for credit losses on loans includes an increase in the allowance for individually evaluated loans resulting from loans that were evaluated for the first time. In the pooled loan categories for the nine months ended September 30, 2023, there was a provision for commercial and industrial loans, largely offset by recoveries in the commercial and residential real estate categories. The allowance for commercial and industrial loans increased largely due to an increase in outstanding balances and to an increase in the qualitative part of the loss rate. The residential real estate loan category had a recovery primarily due to decreases in loss rates, reflecting a change in the forecasted period from one quarter with a one quarter reversion to the long-term historical average to a forecasted period of two quarters with a four quarter reversion period. Off-balance sheet credit exposures had recoveries due to a decrease in commitments outstanding and to decreases in the loss rates.

Calculating an appropriate level for the allowance and provision for credit 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 and nine months ended September 30, 2023 totaled $34,000 and $83,000, respectively, compared to net charge-offs of $32,000 and $131,000 for the same respective three and nine-month periods in 2022.

Non-Interest Income

A comparison of non-interest income for the three and nine months ended September 30, 2023 and September 30, 2022 is as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended 
September 30,
 20232022Difference20232022Difference
Fiduciary income$1,736 1,513 223 5,263 4,851 412 
Service charges and fees on deposit accounts1,397 1,706 (309)4,324 4,658 (334)
Bank-owned life insurance income282 269 13 830 803 27 
Gains from sales of loans29 — 29 38 188 (150)
Other operating income134 93 41 350 159 191 
Total non-interest income$3,578 3,581 (3)10,805 10,659 146 

Reasons for changes include:
Fiduciary income increased primarily due to increases in the fair values of trust and brokerage assets managed, on which fees are based. The increases in fair value are due to the opening of new Wealth Management customer accounts and to an increase in the market values of managed assets.
Service charges and fees on deposit accounts decreased primarily due to decreases in most fee categories, including fees received from check cards, overdraft fees, ATM usage fees, and deposit accounts in general.
Gains from sales of loans decreased during the nine month-period primarily due to a lower volume of residential real estate loans sold.
Other operating income increased primarily because of realized and unrealized net gains on equity securities due to a partial recovery in market values.






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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 and nine months ended September 30, 2023 and September 30, 2022 is as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended 
September 30,
 20232022Difference20232022Difference
Salaries and employee benefits$7,044 7,062 (18)21,454 21,291 163 
Equipment expenses397 398 (1)1,175 1,234 (59)
Occupancy expense, net805 790 15 2,367 2,300 67 
State financial institutions tax396 439 (43)1,189 1,312 (123)
Marketing223 215 735 845 (110)
Amortization of intangibles113 113 — 336 365 (29)
FDIC insurance premiums, net224 137 87 663 397 266 
Contracted services671 613 58 1,978 1,902 76 
Other real estate owned, net(4)(874)877 
Merger-related expenses302 — 302 742 — 742 
Other non-interest expense2,068 2,578 (510)6,205 7,297 (1,092)
Total non-interest expense$12,244 12,350 (106)36,847 36,069 778 

Reasons for changes include:
FDIC insurance premiums increased because of a two basis point increase in the FDIC's initial base deposit insurance assessment rate that took effect at the beginning of 2023.
Other real estate owned increased during the nine-month period because the 2022 period benefited from an $889,000 gain recognized on the sale of other real estate owned.
Merger-related expenses reflect costs incurred in connection with the acquisition of Cincinnati Bancorp, Inc., which closed in the fourth quarter of 2023.
Other non-interest expense decreased in 2023 primarily due to the absence of losses recognized during the 2022 periods on the sale of two decommissioned office buildings, one recognized during the second quarter 2022 and the other recognized during the third quarter 2022. The 2023 nine-month period also benefited from a $425,000 gain recognized on the sale of LCNB's Hunter property located in Franklin, Ohio.

Income Taxes

LCNB's effective tax rate for the three and nine months ended September 30, 2023 was 18.9% and 18.2%, respectively, compared to 18.3% and 17.9% for the respective three and nine months ended September 30, 2022.  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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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 September 30, 2023 and December 31, 2022 is as follows (dollars in thousands):
 September 30, 2023December 31, 2022Difference $Difference %
ASSETS:
Total cash and cash equivalents$43,422 22,701 20,721 91.28 %
Investment securities:
Equity securities with a readily determinable fair value, at fair value1,254 2,273 (1,019)(44.83)%
Equity securities without a readily determinable fair value, at cost2,099 2,099 — — %
Debt securities, available-for-sale, at fair value274,500 289,850 (15,350)(5.30)%
Debt securities, held-to-maturity, net, at cost19,006 19,878 (872)(4.39)%
Federal Reserve Bank stock, at cost4,652 4,652 — — %
Federal Home Loan Bank stock, at cost7,583 4,415 3,168 71.76 %
Loans, net1,450,472 1,395,632 54,840 3.93 %
Premises and equipment, net33,288 33,042 246 0.74 %
Operating lease right-of-use assets6,093 6,525 (432)(6.62)%
Goodwill59,221 59,221 — — %
Core deposit and other intangibles1,351 1,827 (476)(26.05)%
Bank-owned life insurance45,128 44,298 830 1.87 %
Interest receivable8,087 7,482 605 8.09 %
Other assets25,512 25,503 0.04 %
Total assets$1,981,668 1,919,398 62,270 3.24 %
LIABILITIES:
Deposits:
Non-interest-bearing$453,146 505,824 (52,678)(10.41)%
Interest-bearing1,163,744 1,099,146 64,598 5.88 %
Total deposits1,616,890 1,604,970 11,920 0.74 %
Short-term borrowings30,000 71,455 (41,455)(58.02)%
Long-term debt112,641 19,072 93,569 490.61 %
Operating lease liabilities6,317 6,647 (330)(4.96)%
Accrued interest and other liabilities14,471 16,579 (2,108)(12.71)%
Total liabilities1,780,319 1,718,723 61,596 3.58 %
SHAREHOLDERS' EQUITY:
  Common shares144,865 144,069 796 0.55 %
  Retained earnings143,211 139,249 3,962 2.85 %
  Treasury shares, at cost(56,015)(52,689)(3,326)6.31 %
  Accumulated other comprehensive loss, net of taxes(30,712)(29,954)(758)2.53 %
  Total shareholders' equity201,349 200,675 674 0.34 %
  Total liabilities and shareholders' equity$1,981,668 1,919,398 62,270 3.24 %

Reasons for changes include:
Available-for-sale debt securities decreased due to maturities, paydowns, calls, and decreases in market valuation. There were no security purchases during 2023.
Federal Home Loan Bank stock increased due to the purchase of additional stock to support additional short-term borrowings and long-term debt, partially offset by the FHLB's repurchase of excess stock.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net loans increased primarily due the origination of new loans, partially offset by payments and payoffs received from borrowers. Also offsetting the increase was a $2.3 million increase in the allowance for credit losses primarily due to adoption of ASC 326.
Total deposits increased slightly during the first nine months of 2023. There was, however significant movement from non-interest-bearing deposits to interest-bearing deposits during 2023, reflecting the increase in market rates.
Long-term debt increased due to additional advances from the FHLB of Cincinnati. The new debt was used to pay down short-term borrowings and to support an increase in liquidity and loan portfolio growth.
Accrued interest and other liabilities decreased due to a combination of decreases in accrued bonuses and a decrease in LIHTC liabilities due to funding payments made during the first nine months of 2023, partially offset by an increase in accrued interest payable on deposits and borrowings.
Treasury shares increased because of the repurchase of 199,913 shares of common stock during the first nine months of 2023, which represents almost 1.8% of the shares outstanding at December 31, 2022.
Accumulated other comprehensive loss, net of taxes increased because of continuing declines in the market valuation of LCNB's available-for-sale 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 RequirementMinimum Requirement with Capital Conservation BufferTo Be Considered
Well-Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets4.5 %7.0 %6.5 %
Ratio of Tier 1 Capital to risk-weighted assets6.0 %8.5 %8.0 %
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets8.0 %10.5 %10.0 %
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)4.0 %N/A5.0 %

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

Federal banking regulatory agencies allow an optional phase-in period of three years for banks to absorb the impact to regulatory capital of implementing CECL. LCNB has elected not to exercise this option and the full impact of adopting ASC 326 is included in regulatory capital as of September 30, 2023.









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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
A summary of the Bank's regulatory capital and capital ratios follows (dollars in thousands):
September 30, 2023December 31, 2022
Regulatory Capital:
Shareholders' equity$210,202 213,052 
Goodwill and other intangibles(59,841)(60,177)
Accumulated other comprehensive loss, net30,709 29,945 
Tier 1 risk-based capital181,070 182,820 
Eligible allowance for credit losses8,197 5,646 
Total risk-based capital$189,267 188,466 
Capital ratios:  
Common Equity Tier 1 Capital to risk-weighted assets11.72 %11.94 %
Tier 1 Capital to risk-weighted assets11.72 %11.94 %
Total Capital to risk-weighted assets12.25 %12.31 %
Leverage9.32 %9.72 %

Qualifications for community banking organizations to use a simplified measure of capital adequacy 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 September 30, 2023 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 and overnight line of credit arrangements with correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios.

LCNB's depositors include consumers, businesses, non-profit organizations, and public entities such as municipalities, school districts, and county governments. A diverse portfolio of deposit products includes checking accounts, savings accounts, IRAs, and certificates of deposits of various maturities. Management closely monitors local deposit rates offered by various institutions and adjusts rates as needed. Deposit funding levels and the related interest costs are reviewed regularly and compared to alternate sources of funding, primarily long- and short-term borrowings. LCNB has not entered the brokered CD market, but monitors it as a potential alternative funding source. LCNB's does not have a concentration in any deposit sector.
Total remaining borrowing capacity with the Federal Home Loan Bank at September 30, 2023 was approximately $61.1 million. Additional borrowings of approximately $80.0 million were available through overnight line of credit arrangements with correspondent banks at September 30, 2023 and another $5.0 million was available through a revolving line of credit arrangement with a correspondent bank.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Bank Term Funding Program ("BTFP") is an emergency lending program created by the Federal Reserve in March 2023 in response to two bank failures that occurred that month and was designed to provide emergency liquidity to depository institutions. The BTFP offers loans of up to one year in length to depository institutions that pledge U.S. Treasury securities, agency securities, mortgage-backed securities, and other qualifying securities as collateral for the loans. The BTFP is scheduled to discontinue on March 11, 2024 unless renewed by the Federal Reserve. To date, LCNB management has chosen not to participate in the BTFP, but monitors the program as a potential future funding source.

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.  See NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES of this document for information on LCNB's commitments to extend credit and fund unused lines of credit. LCNB experienced no liquidity or operational problems as a result of current liquidity levels.
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Item 3.Quantitative and Qualitative Disclosures about Market Risk

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

The Bank's Asset and Liability Management Committee 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, and 300 basis points.  The base projection uses a current interest rate scenario.  As shown below, the September 30, 2023 IRSA indicates that an increase in interest rates will have a negative effect on NII and a decrease in interest rates will have a positive effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.
Rate Shock Scenario in Basis PointsAmount$ Change in
NII
% Change in
NII
Limits
 (Dollars in thousands)
Up 30059,964 (3,194)(5.06)%20 %
Up 20060,968 (2,190)(3.47)%15 %
Up 10061,881 (1,277)(2.02)%10 %
Base63,158 — — %— %
Down 10063,518 360 0.57 %10 %
Down 20064,348 1,190 1.88 %15 %
Down 30065,157 1,999 3.17 %20 %

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 September 30, 2023 EVE analysis indicates that an increase in interest rates of 200 or 300 basis points will have a negative effect on the EVE and an increase in interest rates of 100 basis points or a decrease in interest rates will have a positive effect on the EVE.  The changes in the EVE for all upward rate shocks are within LCNB's acceptable ranges. The changes in the EVE for all downward rate shocks are outside LCNB's acceptable ranges as shown below. Management has determined the downward shifts to be acceptable due to the positive nature of the results.
Rate Shock Scenario in Basis PointsAmount$ Change in
EVE
% Change in
EVE
Limits
 (Dollars in thousands)
Up 300136,743 (14,441)(9.55)%25 %
Up 200147,303 (3,881)(2.57)%20 %
Up 100157,254 6,070 4.01 %15 %
Base151,184 — — %— %
Down 100174,669 23,485 15.53 %15 %
Down 200182,618 31,434 20.79 %20 %
Down 300191,607 40,423 26.74 %25 %

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 NII 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 September 30, 2023, 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
In addition to the following, 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, 2022.

Risks Related to Recent Events Impacting the Financial Services Industry
Recent events impacting the financial services industry, including the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank, have led to a decrease in confidence in banks among consumer and commercial depositors, other counterparties and investors, as well as caused significant disruption, volatility, and reduced valuations of equity and other securities of banks and bank holding companies in the capital markets. These events are occurring during a period of continued rises to interest rates which, among other things, have resulted in unrealized losses in longer-duration securities and loans held by banks, increased competition for bank deposits, and the possibility of an increase in the risk of a potential recession. These recent events have, and could continue to have, an adverse impact on the market price and volatility of LCNB's common stock.

These recent events may also result in potentially adverse changes to laws and/or regulations governing banks and bank holding companies or result in the imposition of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on LCNB's business. LCNB may be impacted by concerns from depositors, investors, and other counterparties regarding the soundness or creditworthiness of other financial institutions, which could cause substantial and cascading disruption within the financial markets and increase Company expenses.


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 February 27, 2023, LCNB's Board of Directors authorized a new Issuer Stock Repurchase Plan Agreement (the "Plan"). Under the terms of the Plan, LCNB is authorized to repurchase up to 500,000 of its outstanding common shares. The Plan replaced and superseded LCNB’s prior Issuer Stock Repurchase Plan Agreement, which was adopted on May 27, 2022.

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

The following table sets forth information relating to repurchases made under the February 27, 2023 plan during the three months ended September 30, 2023:
PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - 31, 2023$— 315,047
August 1 - 31, 2023$— 315,047
September 1 - 30, 2023$— 315,047
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Item 3.Defaults Upon Senior Securities
None.

Item 4.Mine Safety Disclosures
Not applicable.

Item 5.Other Information
None.
 
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Item 6.Exhibits
Exhibit No.Exhibit Description
2.1
3.1
  
3.2
10.1
10.2
  
10.3
  
10.4
10.5
10.6
10.7
  
31.1
  
31.2
  
32
  
101
The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 is formatted in Extensible Business Reporting Language:  (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Shareholders' Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (vi) the Notes to Consolidated Condensed Financial Statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 LCNB Corp. 
   
November 8, 2023/s/ Eric J. Meilstrup 
 Eric J. Meilstrup 
 Chief Executive Officer and President 
   
November 8, 2023/s/ Robert C. Haines, II 
 Robert C. Haines, II 
 Executive Vice President and Chief Financial Officer
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