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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

            ☒ Yes         ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

            ☒ Yes         ☐ No

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

Large accelerated filer ☐                            Accelerated filer ☐

Non-accelerated filer ☒                             Smaller reporting company ☒

Emerging growth company ☐

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

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

            ☐ Yes         ☒ No

The number of shares outstanding of the issuer's common stock, without par value, as of November 7, 2023 was 11,124,072 shares.

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION			3
Item 1.  Financial Statements			3
CONSOLIDATED CONDENSED BALANCE SHEETS			3
CONSOLIDATED CONDENSED STATEMENTS OF INCOME			4
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)			5
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY			6
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS			7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS			8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations			39
Item 3.  Quantitative and Qualitative Disclosures about Market Risks			52
Item 4.  Controls and Procedures			53
PART II.  OTHER INFORMATION			54
Item 1.   Legal Proceedings			54
Item 1A.  Risk Factors			54
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 3.   Defaults Upon Senior Securities			55
Item 4.   Mine Safety Disclosures			55
Item 5.   Other Information			55
Item 6.   Exhibits			56
SIGNATURES			57

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Table of Contents

Glossary of Abbreviations and Acronyms

ACL						Allowance for Credit Losses
AFS						Available-for-Sale
ASC						Accounting Standards Codification
ASU						Accounting Standards Update
Bank						LCNB National Bank
CARES Act						Coronavirus Aid, Relief, and Economic Security Act
CECL						Current expected credit losses
CEO						Chief Executive Officer
CFO						Chief Financial Officer
CNNB						Cincinnati Bancorp, Inc.
Company						LCNB Corp. and its consolidated subsidiaries as a whole
DCF						Discounted Cash Flow
DDA						Demand Deposit Account
Dodd-Frank Act						Dodd-Frank Wall Street Reform and Consumer Protection Act
Economic Aid Act						Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
FASB						Financial Accounting Standards Board
FDIC						Federal Deposit Insurance Corporation
FFIEC						Financial Institutions Examination Council
FHLB						Federal Home Loan Bank
FOMC						Federal Open Market Committee of the Federal Reserve System
GAAP						Generally Accepted Accounting Principles
HTM						Held-to-Maturity
IRA						Individual Retirement Account
LCNB						LCNB Corp. and its consolidated subsidiaries as a whole
LDA						Loss Driver Analysis
LGD						Loss Given Default
LIBOR						London Interbank Offered Rate
LIHTC						Low Income Housing Tax Credit
OCC						Office of the Comptroller of the Currency
PD						Probability of Default
PPP						Paycheck Protection Program
SEC						Securities and Exchange Commission
TDRs						Troubled Debt Restructurings
WARM						Weighted Average Remaining Maturity

    

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Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1.			Financial Statements

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands)

						September 30, 2023 (Unaudited)						December 31, 2022
ASSETS:
Cash and due from banks						$	23,124					$	20,244
Interest-bearing demand deposits						20,298						2,457
Total cash and cash equivalents						43,422						22,701
Investment securities:
Equity securities with a readily determinable fair value, at fair value						1,254						2,273
Equity securities without a readily determinable fair value, at cost						2,099						2,099
Debt securities, available-for-sale, at fair value						274,500						289,850
Debt securities, held-to-maturity, at cost, net						19,006						19,878
Federal Reserve Bank stock, at cost						4,652						4,652
Federal Home Loan Bank stock, at cost						7,583						4,415
Loans, net						1,450,472						1,395,632
Premises and equipment, net						33,288						33,042
Operating lease right-of-use assets						6,093						6,525
Goodwill						59,221						59,221
Core deposit and other intangibles, net						1,351						1,827
Bank-owned life insurance						45,128						44,298
Interest receivable						8,087						7,482
Other assets, net						25,512						25,503
TOTAL ASSETS						1,981,668						1,919,398
LIABILITIES:
Deposits:
Noninterest-bearing						$	453,146					505,824
Interest-bearing						1,163,744						1,099,146
Total deposits						1,616,890						1,604,970
Short-term borrowings						30,000						71,455
Long-term debt						112,641						19,072
Operating lease liabilities						6,317						6,647
Accrued interest and other liabilities						14,471						16,579
TOTAL LIABILITIES						1,780,319						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 earnings						143,211						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' EQUITY						201,349						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,
			2023						2022						2023						2022
INTEREST INCOME:
Interest and fees on loans			$	17,875					15,026						50,781						43,360
Dividends on equity securities:
With a readily determinable fair value			9						14						34						40
Without a readily determinable fair value			29						6						79						16
Interest on debt securities:
Taxable			1,296						1,323						3,962						3,672
Non-taxable			173						190						523						567
Other investments			286						145						910						379
TOTAL INTEREST INCOME			19,668						16,704						56,289						48,034
INTEREST EXPENSE:
Interest on deposits			4,426						979						10,217						2,493
Interest on short-term borrowings			830						71						3,142						320
Interest on long-term debt			841						210						1,240						387
TOTAL INTEREST EXPENSE			6,097						1,260						14,599						3,200
NET INTEREST INCOME			13,571						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 LOSSES			13,685						15,601						41,831						44,565
NON-INTEREST INCOME:
Fiduciary income			1,736						1,513						5,263						4,851
Service charges and fees on deposit accounts			1,397						1,706						4,324						4,658
Bank-owned life insurance income			282						269						830						803
Gains from sales of loans			29						—						38						188
Other operating income			134						93						350						159
TOTAL NON-INTEREST INCOME			3,578						3,581						10,805						10,659
NON-INTEREST EXPENSE:
Salaries and employee benefits			7,044						7,062						21,454						21,291
Equipment expenses			397						398						1,175						1,234
Occupancy expense, net			805						790						2,367						2,300
State financial institutions tax			396						439						1,189						1,312
Marketing			223						215						735						845
Amortization of intangibles			113						113						336						365
FDIC insurance premiums, net			224						137						663						397
Contracted services			671						613						1,978						1,902
Other real estate owned, net			1						5						3						(874)
Merger-related expenses			302						—						742						—
Other non-interest expense			2,068						2,578						6,205						7,297
TOTAL NON-INTEREST EXPENSE			12,244						12,350						36,847						36,069
INCOME BEFORE INCOME TAXES			5,019						6,832						15,789						19,155
PROVISION FOR INCOME TAXES			949						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
Diluted			0.37						0.49						1.16						1.36
Weighted average common shares outstanding:
Basic			11,038,720						11,284,225						11,094,185						11,478,256
Diluted			11,038,720						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,
						2023						2022						2023						2022
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)						—						1						—						4
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 Outstanding						Common Stock						Retained Earnings						Treasury Shares						Accumulated Other Comprehensive Loss						Total Shareholders' Equity
Three Months Ended September 30, 2023
Balance at July 1, 2023						11,116,080						$	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 Plan						7,302						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, 2023						11,123,382						$	144,865					143,211						(56,015)						(30,712)						201,349
Nine Months Ended September 30, 2023
Balance at January 1, 2023						11,259,080						$	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, adjusted						11,259,080						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 Plan						20,065						315																								315
Repurchase of common stock						(199,913)																		(3,326)												(3,326)
Shares issued for restricted stock awards						44,150
Compensation expense relating to restricted stock												481																								481
Common stock dividends, $0.63 per share																		(7,037)																		(7,037)
Balance at September 30, 2023						11,123,382						$	144,865					143,211						(56,015)						(30,712)						201,349
Three Months Ended September 30, 2022
Balance at July 1, 2022						11,374,515						$	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 Plan						6,857						107																								107
Repurchase of common stock						(87,733)																		(1,380)												(1,380)
Compensation expense relating to restricted stock												113																								113
Common stock dividends, $0.20 per share																		(2,271)																		(2,271)
Balance at September 30, 2022						11,293,639						$	143,855					135,202						(52,009)						(31,609)						195,439
Nine Months Ended September 30, 2022
Balance at January 1, 2022						12,414,956						$	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 Plan						18,585						308																								308
Repurchase of common stock						(1,172,456)																		(22,980)												(22,980)
Shares issued for restricted stock awards						32,554
Compensation expense relating to restricted stock												417																								417
Common stock dividends, $0.60 per share																		(6,830)																		(6,830)
Balance at September 30, 2022						11,293,639						$	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,
						2023						2022
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 accretion						2,395						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 securities						78						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 loans						2,218						8,562
Compensation expense related to restricted stock						481						417
Changes in:
Accrued interest receivable						(605)						377
Other assets						1,497						2,075
Other liabilities						(2,300)						(1,303)
TOTAL ADJUSTMENTS						(670)						2,622
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES						12,251						18,342
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of equity securities						963						—
Proceeds from maturities and calls of debt securities:
Available-for-sale						14,262						17,797
Held-to-maturity						1,146						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 stock						1,369						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 equipment						514						874
NET CASH FLOWS USED IN INVESTING ACTIVITIES						(45,516)						(24,606)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits						11,920						28,551
Net increase (decrease) in short-term borrowings						(41,455)						4,000
Proceeds from long-term debt						95,000						15,000
Principal payments on long-term debt						(1,431)						(461)
Proceeds from issuance of common stock						315						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 ACTIVITIES						53,986						17,588
NET CHANGE IN CASH AND CASH EQUIVALENTS						20,721						11,324
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD						22,701						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 refunds						2,226						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 326						Impact of ASC 326 Adoption						As 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, net			6,639						511						7,150
Liabilities:
ACL on off-balance sheet credit exposures			—						571						571
Shareholders' Equity:
Retained earnings			139,249						(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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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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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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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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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 Cost						Unrealized Gains						Unrealized Losses						Fair Value
September 30, 2023
Debt Securities, Available-for-Sale:
U.S. Treasury notes			$	78,451					—						8,323						70,128
U.S. Agency notes			89,014						—						10,662						78,352
Corporate bonds			7,450						—						944						6,506
U.S. Agency mortgage-backed securities			83,613						—						13,061						70,552
Municipal securities:
Non-taxable			8,809						—						522						8,287
Taxable			46,005						—						5,330						40,675
			$	313,342					—						38,842						274,500
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable			$	15,582					2						1,578						14,006
Taxable			3,431						—						514						2,917
			$	19,013					2						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 notes			89,160						—						11,184						77,976
Corporate Bonds			7,450						13						778						6,685
U.S. Agency mortgage-backed securities			90,746						5						11,311						79,440
Municipal securities:
Non-taxable			8,892						—						368						8,524
Taxable			46,556						1						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
Taxable			3,431						—						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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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 Months												Twelve Months or Greater
			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
September 30, 2023
Available-for-Sale:
U.S. Treasury notes			$	—					—						70,128						8,323
U.S. Agency notes			—						—						78,352						10,662
Corporate bonds			720						30						5,786						914
U.S. Agency mortgage-backed securities			528						3						70,024						13,058
Municipal securities:
Non-taxable			1,965						53						6,322						469
Taxable			180						—						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 notes			7,729						543						70,247						10,641
Corporate Bonds			2,667						283						3,255						495
U.S. Agency mortgage-backed securities			41,543						3,597						37,282						7,714
Municipal securities:
Non-taxable			6,831						248						893						120
Taxable			22,162						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						1
Taxable			2,811						370						212						39
			$	12,378					963						243						40

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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-Sale												Held-to-Maturity
			Amortized Cost						Fair Value						Amortized Cost						Fair Value
Due within one year			$	8,904					8,846						280						281
Due from one to five years			172,144						153,515						3,586						3,444
Due from five to ten years			48,681						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 securities			83,613						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, 2023												December 31, 2022
			Amortized Cost						Fair  Value						Amortized Cost						Fair  Value
Mutual Funds			$	1,406					1,177						1,429						1,234
Equity Securities			10						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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(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,
			2023						2022						2023						2022
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, 2023						December 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
Farmland			38,232						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
Consumer			27,186						28,414
Agricultural			11,333						10,073
Other loans, including deposit overdrafts			80						81
Loans, gross			1,458,404						1,401,278
Less allowance for credit losses			7,932						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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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, 2023																		December 31, 2022
			Non-accrual Loans with no Allowance for Credit Losses						Total Non-accrual Loans						Interest Income Recognized						Non-accrual Loans with no Allowance for Credit Losses						Total Non-accrual Loans						Interest Income Recognized
Commercial & industrial			$	—					—						—						—						—						3
Commercial, secured by real estate:
Owner occupied			—						—						—						231						231						15
Non-owner occupied			—						—						—						—						—						—
Farmland			85						85						9						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						4
Secured by junior liens on 1-4 family dwellings			—						—						—						—						—						—
Home equity line-of-credit loans			—						—						—						—						—						—
Consumer			—						—						—						—						—						—
Agricultural			—						—						—						—						—						—
Total			$	85					85						9						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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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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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						Consumer						Agricultural						Other						Total
Three Months Ended September 30, 2023
Balance, beginning of period			$	1,065					5,023						1,326						535						5						2						7,956
Provision for (recovery of) credit losses			2						(70)						125						(75)						—						28						10
Losses charged off			—						—						(4)						(1)						—						(54)						(59)
Recoveries			—						—						—						1						—						24						25
Balance, end of period			$	1,067					4,953						1,447						460						5						—						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						5,646
Impact of adopting ASC 326			(512)						1,440						836						446						(9)						(5)						2,196
Provision for (recovery of) credit losses			294						(96)						(9)						(66)						(8)						58						173
Losses charged off			(15)						—						(4)						(10)						—						(115)						(144)
Recoveries			—						—						—						4						—						57						61
Balance, end of period			$	1,067					4,953						1,447						460						5						—						7,932
Ratio of net charge-offs to average loans			0.02		%				—		%				—		%				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)						7						19						2						12						(157)
Losses charged off			—						—						—						(14)						—						(39)						(53)
Recoveries			—						—						—						—						—						21						21
Balance, end of period			$	1,254					3,661						632						72						20						5						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						4						5,506
Provision for (recovery of) credit losses			159						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						5,644
Ratio of net charge-offs to average loans			—		%				0.01		%				(0.01)		%				0.08		%				—		%				105.53		%				0.01		%

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(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						Consumer						Agricultural						Other						Total
September 30, 2023
Allowance for credit losses:
Individually evaluated for credit losses			$	3					19						5						18						—						—						45
Collectively evaluated for credit loss			1,064						4,934						1,442						442						5						—						7,887
Balance, end of period			$	1,067					4,953						1,447						460						5						—						7,932
Loans:
Individually evaluated for credit losses			$	138					3,425						802						74						—						—						4,439
Collectively evaluated for credit loss			125,744						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			$	4					11						6						—						—						—						21
Collectively evaluated for credit loss			1,296						3,598						618						86						22						5						5,625
Balance, end of period			$	1,300					3,609						624						86						22						5						5,646
Loans:
Individually evaluated for credit losses			$	114					963						482						—						—						—						1,559
Collectively evaluated for credit loss			119,799						934,568						304,770						28,414						10,073						81						1,397,705
Acquired credit impaired loans			414						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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(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, 2023												December 31, 2022
			Carrying Value						Related Allowance						Carrying Value						Related Allowance
Commercial & industrial			$	—					—						—						—
Commercial, secured by real estate:
Owner occupied			73						—						230						—
Non-owner occupied			—						—						—						—
Farmland			85						—						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 dwellings			254						—						40						—
Secured by junior liens on 1-4 family dwellings			—						—						—						—
Home equity line-of-credit loans			—						—						—						—
Consumer			74						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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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.

 

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(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
			2023						2022						2021						2020						2019						Prior						Revolving Loans Amortized Cost Basis						Revolving Loans Converted to Term						Total
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			—						—						—						—						—						—						—						—						—
Total			20,268						34,057						32,008						12,554						4,660						6,213						16,122						—						125,882
Gross charge-offs			—						—						—						—						—						15						—						—						15
Commercial, secured by real estate
Pass			66,051						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			—						—						—						—						—						—						—						—						—
Total			66,051						153,128						130,762						94,492						95,412						283,971						156,266						—						980,082
Gross charge-offs			—						—						—						—						—						—						—						—						—
Residential real estate
Pass			30,088						30,355						82,216						51,060						16,053						78,378						22,459						387						310,996
OAEM			—						—						—						—						—						—						—						—						—
Substandard			—						—						—						32						—						2,813						—						—						2,845
Doubtful			—						—						—						—						—						—						—						—						—
Total			30,088						30,355						82,216						51,092						16,053						81,191						22,459						387						313,841
Gross charge-offs			—						—						—						—						4						—						—						—						4
Consumer
Pass			7,657						6,388						5,469						5,404						1,717						299						159						—						27,093
OAEM			—						—						—						—						—						—						—						—						—
Substandard			—						5						67						21						—						—						—						—						93
Doubtful			—						—						—						—						—						—						—						—						—
Total			7,657						6,393						5,536						5,425						1,717						299						159						—						27,186
Gross charge-offs			—						—						10						—						—						—						—						—						10
Agricultural
Pass			2,056						469						202						765						46						31						7,764						—						11,333
OAEM			—						—						—						—						—						—						—						—						—
Substandard			—						—						—						—						—						—						—						—						—
Doubtful			—						—						—						—						—						—						—						—						—
Total			2,056						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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(Unaudited)

(Continued)

NOTE 4 – LOANS (continued)

			Term Loans by Origination Year
			2022						2021						2020						2019						2018						Prior						Revolving Loans Amortized Cost Basis						Revolving Loans Converted to Term						Total
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
Substandard			1,540						—						106						—						—						51						313						—						2,010
Doubtful			—						—						—						—						—						—						—						—						—
Total			31,672						36,341						21,042						5,774						2,499						5,681						17,318						—						120,327
Gross charge-offs			—						—						—						—						—						—						—						—						—
Commercial, secured by real estate
Pass			135,503						142,446						96,272						100,363						75,387						229,175						129,274						4,955						913,375
OAEM			7,931						—						—						—						7,413						—						—						—						15,344
Substandard			—						—						—						—						—						7,536						—						—						7,536
Doubtful			—						—						—						—						—						—						—						—						—
Total			143,434						142,446						96,272						100,363						82,800						236,711						129,274						4,955						936,255
Gross charge-offs			—						—						—						—						—						67						—						—						67
Residential real estate
Pass			27,892						86,952						54,144						17,804						13,298						78,969						24,359						1,095						304,513
OAEM			—						—						—						—						—						—						—						—						—
Substandard			—						—						—						37						—						1,572						—						6						1,615
Doubtful			—						—						—						—						—						—						—						—						—
Total			27,892						86,952						54,144						17,841						13,298						80,541						24,359						1,101						306,128
Gross charge-offs			—						—						—						—						—						—						5						—						5
Consumer
Pass			8,786						7,561						8,108						3,145						413						316						82						—						28,411
OAEM			—						—						—						—						—						—						—						—						—
Substandard			3						—						—						—						—						—						—						—						3
Doubtful			—						—						—						—						—						—						—						—						—
Total			8,789						7,561						8,108						3,145						413						316						82						—						28,414
Gross charge-offs			—						4						24						9						—						—						—						—						37
Agricultural
Pass			533						243						865						63						116						29						8,224						—						10,073
OAEM			—						—						—						—						—						—						—						—						—
Substandard			—						—						—						—						—						—						—						—						—
Doubtful			—						—						—						—						—						—						—						—						—
Total			533						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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(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 Due						Total Past Due						Current						Total 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						—
Farmland			95						—						—						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 estate			12						—						—						12						104,129						104,141						—
Residential real estate:
Secured by senior liens on 1-4 family dwellings			1,061						—						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						—
Consumer			62						5						74						141						27,045						27,186						74
Agricultural			—						—						—						—						11,333						11,333						—
Other			80						—						—						80						—						80						—
Total			$	1,310					5						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 dwellings			81						—						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						—
Consumer			117						3						—						120						28,294						28,414						—
Agricultural			—						—						—						—						10,073						10,073						—
Other			81						—						—						81						—						81						—
Total			$	279					3						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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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 amortization			4,348						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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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,
			2023						2022						2023						2022
Tax credits and other tax benefits recognized			$	438					357						1,302						1,071
Tax credit amortization expense included in provision for income taxes			362						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 deposits			554,700						510,324
Savings deposits			370,917						432,322
IRA and time certificates			238,127						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, 2025			85,359
October 1, 2025 - September 30, 2026			6,492
October 1, 2026 - September 30, 2027			6,443
October 1, 2027 - September 30, 2028			976
Thereafter			723
			$	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, 2023												December 31, 2022
			Amount						Rate						Amount						Rate
Term loan			$	12,641					4.25		%				$	14,072					4.25		%
FHLB long-term advances			100,000						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						—
Thereafter			20,000						—
Total			$	112,641					19,072

Short-term borrowings at September 30, 2023 and December 31, 2022 were as follows (dollars in thousands):

			September 30, 2023												December 31, 2022
			Amount						Rate						Amount						Rate
Revolving line of credit			$	—					—		%				$	3,000					7.25		%
Overnight lines of credit			—						—		%				18,455						5.00		%
FHLB short-term advances			30,000						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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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,
			2023						2022						2023						2022
Operating lease expense			$	219					117						661						461
Short-term lease expense			16						100						62						184
Variable lease expense			2						1						5						2
Other			15						2						25						7
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 leases			33.0
Weighted average discount rate for operating leases			3.51		%

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,
			2023						2022						2023						2022
Statutory tax rate			21.0		%				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 expenses			1.7		%				—		%				0.7		%				—		%
Other, net			0.1		%				0.1		%				0.3		%				0.1		%
Effective tax rate			18.9		%				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, 2023						December 31, 2022
Commitments to extend credit:
Commercial loans			$	45,953					22,823
Other loans
Fixed rate			906						191
Adjustable rate			1,375						1,422
Unused lines of credit:
Fixed rate			28,860						41,558
Adjustable rate			162,050						238,876
Unused overdraft protection amounts on demand accounts			16,468						16,566
Standby letters of credit			5						5
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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(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 Securities						Changes in Pension Plan Assets and Benefit Obligations						Total						Unrealized Losses on Available-for-Sale Debt Securities						Changes in Pension Plan Assets and Benefit Obligations						Total
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)						1						(9,669)						(29,804)						4						(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,
			2023						2022						2023						2022
Qualified noncontributory defined benefit retirement plan			$	267					342						944						958
401(k) plan			164						157						529						494

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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,
			2023						2022						2023						2022
Interest cost			19						14						57						40
Amortization of unrecognized net loss			—						2						—						6
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,
			2023						2022						2023						2022
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:

			2023												2022
			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
Granted			44,150						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,
			2023						2022						2023						2022
Restricted stock expense			$	82					113						480						417
Tax effect			18						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,
			2023						2022						2023						2022
Net income			$	4,070					5,579						12,921						15,720
Less allocation of earnings and dividends to participating securities			29						28						92						81
Net income allocated to common shareholders			$	4,041					5,551						12,829						15,639
Weighted average common shares outstanding, gross			11,117,737						11,342,539						11,173,810						11,537,078
Less average participating securities			79,017						58,314						79,625						58,822
Adjusted weighted average number of shares outstanding used in the calculation of basic and diluted earnings per common share			11,038,720						11,284,225						11,094,185						11,478,256
Earnings per common share:
Basic			$	0.37					0.49						$	1.16					1.36
Diluted			0.37						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 Measurements						Quoted 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 value						1,177						1,177						—						—
			Debt securities, available-for-sale:
			U.S. Treasury notes						70,128						70,128						—						—
			U.S. Agency notes						78,352						—						78,352						—
			Corporate bonds						6,506						—						6,506						—
			U.S. Agency mortgage-backed securities						70,552						—						70,552						—
			Municipal securities:
			Non-taxable						8,287						—						8,287						—
			Taxable						40,675						—						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 funds						41						41						—						—
			Mutual funds measured at net asset value						1,193						1,193						—						—
			Debt securities, available-for-sale:
			U.S. Treasury notes						76,447						76,447						—						—
			U.S. Agency notes						77,976						—						77,976						—
			Corporate bonds						6,685						—						6,685						—
			U.S. Agency mortgage-backed securities						79,440						—						79,440						—
			Municipal securities:
			Non-taxable						8,524						—						8,524						—
			Taxable						40,778						—						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 Value

Valuation Technique

Unobservable Inputs

High

Low

Weighted Average

September 30, 2023

Individually evaluated collateral dependent loans

$

56

Estimated sales price

Adjustments for comparable properties, discounts to reflect current market conditions

Not applicable

December 31, 2022

Individually evaluated loans

923

Discounted cash flows

Discount rate

8.13

%

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, net						19,006						16,923						—						—						16,923
Loans, net						1,450,472						1,249,268						—						—						1,249,268
Accrued interest receivable						8,087						8,087						—						8,087						—
FINANCIAL LIABILITIES:
Deposits						1,616,890						1,616,033						1,378,762						237,271						—
Short-term borrowings						30,000						30,000						—						30,000						—
Long-term debt						112,641						112,430						—						112,430						—
Accrued interest payable						1,204						1,204						—						1,204						—
December 31, 2022
FINANCIAL ASSETS:
Cash and cash equivalents						$	22,701					22,701						22,701						—						—
Debt securities, held-to-maturity, net						19,878						18,885						—						—						18,885
Loans, net						1,395,632						1,219,112						—						—						1,219,112
Accrued interest receivable						7,482						7,482						—						7,482						—
FINANCIAL LIABILITIES:
Deposits						1,604,970						1,604,380						1,448,470						155,910						—
Short-term borrowings						71,455						71,455						—						71,455						—
Long-term debt						19,072						18,573						—						18,573						—
Accrued interest payable						311						311						—						311						—

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LCNB CORP. AND SUBSIDIARIES

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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LCNB CORP. AND SUBSIDIARIES

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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LCNB CORP. AND SUBSIDIARIES

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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LCNB CORP. AND SUBSIDIARIES

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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LCNB CORP. AND SUBSIDIARIES

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

Net Interest Income

Three Months Ended 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,
						2023																		2022
						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 deposits						10,891						152						5.54		%				13,212						80						2.40		%
Federal Reserve Bank stock						4,652						—						—		%				4,652						—						—		%
Federal Home Loan Bank stock						7,007						134						7.59		%				4,369						65						5.90		%
Investment securities:
Equity securities						3,382						38						4.46		%				4,387						20						1.81		%
Debt securities, taxable						274,494						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 assets						1,775,713						19,714						4.40		%				1,736,031						16,755						3.83		%
Non-earning assets						203,514																		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 deposits						379,515						129						0.13		%				453,420						159						0.14		%
IRA and time certificates						230,030						1,999						3.45		%				168,358						398						0.94		%
Short-term borrowings						63,018						830						5.23		%				5,728						71						4.92		%
Long-term debt						72,550						841						4.60		%				24,920						210						3.34		%
Total interest-bearing liabilities						1,286,600						6,097						1.88		%				1,191,654						1,260						0.42		%
Demand deposits						459,476																		508,926
Other liabilities						21,226																		23,524
Equity						203,967																		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 liabilities						138.02		%																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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LCNB CORP. AND SUBSIDIARIES

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

The following table presents the changes in taxable-equivalent basis interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume and rate changes for the three months ended 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:
						Volume						Rate						Total
						(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 stock						47						22						69
Investment securities:
Equity securities						(5)						23						18
Debt securities, taxable						(104)						77						(27)
Debt securities, non-taxable						(34)						12						(22)
Total interest income						637						2,322						2,959
Interest-bearing Liabilities:
Interest-bearing demand and money market deposits						2						1,874						1,876
Savings deposits						(25)						(5)						(30)
IRA and time certificates						193						1,408						1,601
Short-term borrowings						754						5						759
Long-term debt						527						104						631
Total interest expense						1,451						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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LCNB CORP. AND SUBSIDIARIES

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,
						2023																		2022
						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 deposits						11,051						453						5.48		%				10,546						109						1.38		%
Federal Reserve Bank stock						4,652						140						4.02		%				4,652						140						4.02		%
Federal Home Loan Bank stock						6,840						317						6.20		%				4,922						130						3.53		%
Investment securities:
Equity securities						3,698						113						4.09		%				4,484						56						1.67		%
Debt securities, taxable						280,998						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 assets						1,747,476						56,428						4.32		%				1,728,677						48,185						3.73		%
Non-earning assets						200,897																		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 deposits						396,785						402						0.14		%				451,597						465						0.14		%
IRA and time certificates						210,407						4,675						2.97		%				179,514						1,266						0.94		%
Short-term borrowings						78,916						3,142						5.32		%				12,140						320						3.52		%
Long-term debt						36,878						1,240						4.50		%				15,907						387						3.25		%
Total interest-bearing liabilities						1,245,882						14,599						1.57		%				1,175,026						3,200						0.36		%
Demand deposits						469,580																		510,422
Other liabilities						21,633																		22,292
Equity						203,496																		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 liabilities						140.26		%																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:
						Volume						Rate						Total
						(In thousands)
Interest-earning Assets:
Loans						$	1,178					6,243						7,421
Interest-bearing demand deposits						5						339						344
Federal Reserve Bank stock						—						—						—
Federal Home Loan Bank stock						64						123						187
Investment securities:
Equity securities						(11)						68						57
Debt securities, taxable						(208)						498						290
Debt securities, non-taxable						(88)						32						(56)
Total interest income						940						7,303						8,243
Interest-bearing Liabilities:
Interest-bearing demand and money market deposits						11						4,367						4,378
Savings deposits						(56)						(7)						(63)
IRA and time certificates						253						3,156						3,409
Short-term borrowings						2,582						240						2,822
Long-term debt						661						192						853
Total interest expense						3,451						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,
			2023						2022						Difference						2023						2022						Difference
Fiduciary income			$	1,736					1,513						223						5,263						4,851						412
Service charges and fees on deposit accounts			1,397						1,706						(309)						4,324						4,658						(334)
Bank-owned life insurance income			282						269						13						830						803						27
Gains from sales of loans			29						—						29						38						188						(150)
Other operating income			134						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,
			2023						2022						Difference						2023						2022						Difference
Salaries and employee benefits			$	7,044					7,062						(18)						21,454						21,291						163
Equipment expenses			397						398						(1)						1,175						1,234						(59)
Occupancy expense, net			805						790						15						2,367						2,300						67
State financial institutions tax			396						439						(43)						1,189						1,312						(123)
Marketing			223						215						8						735						845						(110)
Amortization of intangibles			113						113						—						336						365						(29)
FDIC insurance premiums, net			224						137						87						663						397						266
Contracted services			671						613						58						1,978						1,902						76
Other real estate owned, net			1						5						(4)						3						(874)						877
Merger-related expenses			302						—						302						742						—						742
Other non-interest expense			2,068						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, 2023						December 31, 2022						Difference $						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 value			1,254						2,273						(1,019)						(44.83)		%
Equity securities without a readily determinable fair value, at cost			2,099						2,099						—						—		%
Debt securities, available-for-sale, at fair value			274,500						289,850						(15,350)						(5.30)		%
Debt securities, held-to-maturity, net, at cost			19,006						19,878						(872)						(4.39)		%
Federal Reserve Bank stock, at cost			4,652						4,652						—						—		%
Federal Home Loan Bank stock, at cost			7,583						4,415						3,168						71.76		%
Loans, net			1,450,472						1,395,632						54,840						3.93		%
Premises and equipment, net			33,288						33,042						246						0.74		%
Operating lease right-of-use assets			6,093						6,525						(432)						(6.62)		%
Goodwill			59,221						59,221						—						—		%
Core deposit and other intangibles			1,351						1,827						(476)						(26.05)		%
Bank-owned life insurance			45,128						44,298						830						1.87		%
Interest receivable			8,087						7,482						605						8.09		%
Other assets			25,512						25,503						9						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-bearing			1,163,744						1,099,146						64,598						5.88		%
Total deposits			1,616,890						1,604,970						11,920						0.74		%
Short-term borrowings			30,000						71,455						(41,455)						(58.02)		%
Long-term debt			112,641						19,072						93,569						490.61		%
Operating lease liabilities			6,317						6,647						(330)						(4.96)		%
Accrued interest and other liabilities			14,471						16,579						(2,108)						(12.71)		%
Total liabilities			1,780,319						1,718,723						61,596						3.58		%
SHAREHOLDERS' EQUITY:
Common shares			144,865						144,069						796						0.55		%
Retained earnings			143,211						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' equity			201,349						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 Requirement						Minimum Requirement with Capital Conservation Buffer						To Be Considered Well-Capitalized
Ratio of Common Equity Tier 1 Capital to risk-weighted assets						4.5		%				7.0		%				6.5		%
Ratio of Tier 1 Capital to risk-weighted assets						6.0		%				8.5		%				8.0		%
Ratio of Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets						8.0		%				10.5		%				10.0		%
Leverage Ratio (Tier 1 Capital to adjusted quarterly average total assets)						4.0		%				N/A						5.0		%

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

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, 2023						December 31, 2022
Regulatory Capital:
Shareholders' equity			$	210,202					213,052
Goodwill and other intangibles			(59,841)						(60,177)
Accumulated other comprehensive loss, net			30,709						29,945
Tier 1 risk-based capital			181,070						182,820
Eligible allowance for credit losses			8,197						5,646
Total risk-based capital			$	189,267					188,466
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets			11.72		%				11.94		%
Tier 1 Capital to risk-weighted assets			11.72		%				11.94		%
Total Capital to risk-weighted assets			12.25		%				12.31		%
Leverage			9.32		%				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 Points						Amount						$ Change in NII						% Change in NII						Limits
						(Dollars in thousands)
Up 300						59,964						(3,194)						(5.06)		%				20		%
Up 200						60,968						(2,190)						(3.47)		%				15		%
Up 100						61,881						(1,277)						(2.02)		%				10		%
Base						63,158						—						—		%				—		%
Down 100						63,518						360						0.57		%				10		%
Down 200						64,348						1,190						1.88		%				15		%
Down 300						65,157						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 Points						Amount						$ Change in EVE						% Change in EVE						Limits
						(Dollars in thousands)
Up 300						136,743						(14,441)						(9.55)		%				25		%
Up 200						147,303						(3,881)						(2.57)		%				20		%
Up 100						157,254						6,070						4.01		%				15		%
Base						151,184						—						—		%				—		%
Down 100						174,669						23,485						15.53		%				15		%
Down 200						182,618						31,434						20.79		%				20		%
Down 300						191,607						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:

Period			Total Number of Shares Purchased						Average Price Paid Per Share						Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs						Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
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			Agreement and Plan of Merger dated as of May 17, 2023 by and between LCNB Corp. and Cincinnati Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on May 18, 2023, Exhibit 2.1.
3.1			Amended and Restated Articles of Incorporation of LCNB Corp., as amended. (This document represents the Amended and Restated Articles of Incorporation of LCNB Corp. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) - incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, Exhibit 3.1.
3.2			Code of Regulations of LCNB Corp. – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, Exhibit 3(ii).
10.1			LCNB Corp. Ownership Incentive Plan – incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 15, 2002, Exhibit A (000-26121).
10.2			LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to Registrant's Form DEF 14A Proxy Statement pursuant to Section 14(a), dated March 13, 2015, Exhibit A (001-35292)
10.3			Form of Option Grant Agreement under the LCNB Corp. Ownership Incentive Plan – incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, Exhibit 10.2.
10.4			Nonqualified Executive Retirement Plan – incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2009, Exhibit 10.4.
10.5			Form of Restricted Share Grant Agreement under the LCNB Corp. 2015 Ownership Incentive Plan - incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2015, Exhibit 10.7.
10.6			Form of Business Loan Agreement for the revolving line of credit between LCNB Corp. and Bankers' Bank - incorporated by reference to Registrant's Form 8-K filed on June 21, 2022, Exhibit 10.1.
10.7			Form of Business Loan Agreement for the term loan between LCNB Corp. and Bankers' Bank - incorporated by reference to Registrant's Form 8-K filed on June 21, 2022, Exhibit 10.2.
31.1			Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32			Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
101			The following financial information from LCNB Corp.'s Quarterly Report on Form 10-Q for the quarter ended 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.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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Table of Contents

LCNB CORP. AND SUBSIDIARIES

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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