Glossary of Abbreviations and Acronyms

 

ACL		Allowance for Credit Losses
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
Bank		LCNB National Bank
CECL		Current expected credit losses
CNNB		Cincinnati Bancorp, Inc.
Company		LCNB Corp. and its consolidated subsidiaries as a whole
DCF		Discounted Cash Flow
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act
EFBI		Eagle Financial Bancorp, Inc.
FASB		Financial Accounting Standards Board
FDIC		Federal Deposit Insurance Corporation
FFIEC		Financial Institutions Examination Council
FHLB		Federal Home Loan Bank
FICO		Fair Isaac Corporation
FOMC		Federal Open Market Committee of the Federal Reserve System
FRB		Federal Reserve Bank
GAAP		Generally Accepted Accounting Principles
IRA		Individual Retirement Account
LCNB		LCNB Corp. and its consolidated subsidiaries as a whole
LDA		Loss Driver Analysis
LGD		Loss Given Default
OCC		Office of the Comptroller of the Currency
OAEM		Other Assets Especially Mentioned
PCD		Purchased Credit Deteriorated
PD		Probability of Default
SEC		Securities and Exchange Commission
TDR		Troubled Debt Restructuring

 

 

PART I – FINANCIAL INFORMATION

 

 

Item 1.         Financial Statements

 

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands)

 

 

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

 

 

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

 

 

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

 

 

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

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

 

 

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Dollars in thousands, except per share data)

(Unaudited)

 

 

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

 

 

LCNB CORP. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

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

 

 

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, 2023 has been derived from the audited consolidated balance sheet as of that date.

 

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

 

Results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024.  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 2023 Annual Report on Form 10-K filed with the SEC.

 

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

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, requiring additional disclosures.

 

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NOTE 1 - BASIS OF PRESENTATION (continued)

 

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				Impact of				As Reported
		Pre-ASC 326				ASC 326 Adoption				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

 

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, 2024. 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. Adoption of ASU No. 2022-02 did not have a material impact on LCNB's results of consolidated operations or financial position.

 

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 became effective for LCNB on January 1, 2024. It 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). Adoption of ASU No. 2023-02 did not have a material impact on LCNB's results of consolidated operations or financial position.

 

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NOTE 1 - BASIS OF PRESENTATION (continued)

 

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. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures"

ASU No. 2023-07 was issued in November 2023 and changes the requirements for segment disclosures, primarily through enhancing disclosure requirements for significant segment expenses, enhancing interim disclosure requirements, clarifying circumstances in which an entity can disclose multiple segment measures of profit or loss, providing new segment disclosure requirements for entities with a single reportable segment, and modifying other disclosure requirements. A public entity should apply the amendments retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. LCNB does not expect adoption of ASU No. 2023-02 will have a material impact on its results of consolidated operations or financial position.

 

ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.”

ASU No. 2023-09 was issued in December 2023. The amendments require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation, and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate). The amendments require that all entities disclose on an annual basis the following information about income taxes paid: (1) the amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes; and (2) the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). The amendments also require that all entities disclose the following information: (1) income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign; and (2) income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. The ASU is effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. LCNB will adopt this ASU for the reporting period beginning January 1, 2025, and does not expect the amendments to have a material impact to the financial statements of the Company.

 

ASU 2024-01 “Compensation - Stock Compensation (Topic 718) - Scope Application of Profits Interest and Similar Awards,”

ASU No. 2024-01 was issued in March 2024 and clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718 or is not a share-based payment arrangement and, therefore, is within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. ASU 2024-01 is effective January 1, 2025, including interim periods, and is not expected to have a material impact to the financial statements of the Company.

 

 

NOTE 2 - BUSINESS COMBINATIONS

 

Cincinnati Bancorp, Inc.

On November 1, 2023, LCNB acquired Cincinnati Bancorp, Inc. (“CNNB”), the holding company for Cincinnati Federal, a federally chartered stock savings and loan association. Under the terms of the definitive merger agreement, CNNB merged with and into LCNB Corp., immediately followed by the merger of Cincinnati Federal with and into LCNB National Bank. CNNB operated four full-service branch offices in Cincinnati, Ohio and 1 full-service office in Florence, Kentucky, which became offices of LCNB after the merger. The merger 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. During the quarter ended September 30, 2024, LCNB consolidated one of the full-service branches acquired from Cincinnati Federal with a full-service branch acquired from EAGLE.Bank resulting in the closure of one branch office in Cincinnati, Ohio.

 

CNNB results of operations were included in LCNB's results beginning November 1, 2023.

 

Under the terms of the merger agreement, CNNB shareholders had the opportunity to elect to receive either 0.9274 shares of LCNB Corp. stock or $17.21 in cash for each share of CNNB common stock owned, subject to the limitation that 80% of the consideration be in the form of LCNB Corp. common stock and 20% of the consideration be in the form of cash. The fair value of the common stock issued as part of the consideration was determined on the basis of the closing price of LCNB Corp.'s common stock on the acquisition date.

 

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NOTE 2 - BUSINESS COMBINATIONS (continued)

 

The following table summarizes the fair value of the total consideration transferred as a part of the CNNB acquisition and the fair value of identifiable assets acquired and liabilities assumed as originally reported at December 31, 2023 and as adjusted at  September 30, 2024 (in thousands):

 

		December 31, 2023				Adjustments				September 30, 2024
Consideration:
Cash consideration		$	9,475				—				9,475
Common stock (2,042,598 shares issued at $13.99 per share)			28,576				—				28,576
Fair value of total consideration transferred			38,051				—				38,051
Identifiable Assets Acquired:
Cash and cash equivalents			11,368				—				11,368
Debt securities, available-for-sale			5,210				—				5,210
Federal Home Loan Bank stock			7,508				—				7,508
Loans, net			236,692				(732	)			235,960
Premises and equipment			2,767				—				2,767
Operating lease right-of-use assets			64				—				64
Core deposit and other intangibles			8,391				—				8,391
Bank owned life insurance			4,413				—				4,413
Deferred income taxes			4,451				82				4,533
Other assets			12,950				122				13,072
Total identifiable assets acquired			293,814				(528	)			293,286
Liabilities Assumed:
Deposits			210,532				—				210,532
Short-term borrowings			55,999				—				55,999
Long-term debt			5,963				—				5,963
Operating lease liabilities			68				(4	)			64
Other liabilities			3,489				—				3,489
Total liabilities assumed			276,051				(4	)			276,047
Total Identifiable Net Assets Acquired			17,763				(524	)			17,239
Goodwill Resulting From Merger		$	20,288				524				20,812

 

The fair value and gross contractual amounts of non-PCD loans as of the acquisition date was $231.9 million and $258.6 million, respectively. LCNB recorded a provision for credit losses on these loans of $1,722,000.

 

As permitted by ASC No. 805-10-25, Business Combinations, the above estimated amounts may be adjusted up to one year after the closing date of the transaction to reflect any new information obtained about facts and circumstances existing at the acquisition date. While the Bank believes that the information available on the merger date provided a reasonable basis for estimating fair value, additional information and evidence may be provided during the fourth quarter of 2024 which will be utilized to finalize all valuations and record final adjustments during the one year subsequent measurement period. These adjustments may include: (i) changes in deferred tax assets or liabilities related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards due to tax calculations still in process, and (ii) changes in goodwill as a result of the net effect of any adjustments. As such, any changes in the estimated fair value of assets, including acquired loans, will be recognized in the period the adjustment is identified.

 

The loan adjustment in the table above was due to a fair value adjustment to deferred fees and costs on loans acquired. The other assets, operating lease liabilities and resulting deferred tax adjustments in the table above were related to the updated fair value adjustments. 

 

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NOTE 2 - BUSINESS COMBINATIONS (continued)

 

The amount of goodwill recorded reflects LCNB's expansion in the Cincinnati market and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable on LCNB's financial records and will not be deductible for tax purposes. Total goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be charged to expense at the time of impairment. The core deposit intangible will be amortized over the estimated weighted average economic life of the various core deposit types, which is ten years.

 

Direct expenses related to the CNNB acquisition totaled $10,000 and $332,000 during the three and nine months ended September 30, 2024, respectively, and totaled $290,000 and $705,000 during the three and nine months ended September 30, 2023, respectively. They were expensed as incurred and are recorded as merger-related expenses in the consolidated statements of income.

 

Eagle Financial Bancorp, Inc.

On April 12, 2024, LCNB acquired Eagle Financial Bancorp, Inc. (“EFBI”), the holding company for EAGLE.bank, an Ohio state-chartered bank. Under the terms of the definitive merger agreement, EFBI merged with and into LCNB Corp., immediately followed by the merger of EAGLE.bank with and into LCNB National Bank. EAGLE.bank operated three full-service banking offices in Cincinnati, Ohio, which became offices of LCNB after the merger. This transaction increased LCNB’s presence in the Cincinnati market.

 

Subject to the terms of the merger agreement, EFBI shareholders had the opportunity to elect to receive either 1.1401 shares of LCNB Corp. stock, $19.10 per share in cash for each share of EFBI common stock owned, or a combination thereof subject to at least 60%, but not more than 70%, of the shares of EFBI being exchanged for LCNB common stock. The fair value of the common stock issued as part of the consideration was determined on the basis of the closing price of LCNB's common stock on the acquisition date.

 

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NOTE 2 - BUSINESS COMBINATIONS (continued)

 

The following table summarizes the fair value of the total consideration transferred as a part of the EFBI acquisition and the fair value of identifiable assets acquired and liabilities assumed as originally reported at June 30, 2024 and as adjusted at  September 30, 2024 (in thousands):

 

		June 30, 2024				Adjustments				September 30, 2024
Consideration:
Cash consideration		$	10,256				(83	)			10,173
Common stock (918,128 shares issued at $14.04 per share)			12,891				(704	)			12,187
Fair value of total consideration transferred			23,147				(787	)			22,360
Identifiable Assets Acquired:
Cash and cash equivalents			8,029				—				8,029
Debt securities, available-for-sale			698				—				698
Federal Home Loan Bank stock			4,334				—				4,334
Loans, net			127,700				—				127,700
Premises and equipment			3,427				—				3,427
Operating lease right-of-use assets			48				—				48
Core deposit and other intangibles			3,760				—				3,760
Bank owned life insurance			3,004				—				3,004
Deferred income taxes			1,813				2,555				4,368
Other assets			2,590				482				3,072
Total identifiable assets acquired			155,403				3,037				158,440
Liabilities Assumed:
Deposits			132,435				—				132,435
Short-term borrowings			13,000				—				13,000
Operating lease liabilities			48				—				48
Other liabilities			773				(1	)			772
Total liabilities assumed			146,256				(1	)			146,255
Total Identifiable Net Assets Acquired			9,147				3,038				12,185
Goodwill Resulting From Merger		$	14,000				(3,825	)			10,175

 

The fair value and gross contractual amounts of non-PCD loans as of the acquisition date was $101.7 million and $112.5 million, respectively. LCNB recorded a provision for credit losses on these loans of $763,000.

 

As permitted by ASC No. 805-10-25, Business Combinations, the above estimated amounts may be adjusted up to one year after the closing date of the transaction to reflect any new information obtained about facts and circumstances existing at the acquisition date. While the Company believes that the information available on the merger date provided a reasonable basis for estimating fair value, additional information and evidence may be provided during the fourth quarter of 2024 or later which will be utilized to finalize all valuations and record final adjustments during the one year subsequent measurement period. These adjustments may include: (i) changes in deferred tax assets or liabilities related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards due to tax calculations still in process, and (ii) changes in goodwill as a result of the net effect of any adjustments. As such, any changes in the estimated fair value of assets will be recognized in the period the adjustment is identified.

 

The consideration adjustments are associated with the unearned portion of Eagle.bank's employee stock ownership plan. The other assets, other liabilities and resulting deferred tax adjustments in the table above were related to the updated fair value adjustments.

 

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NOTE 2 - BUSINESS COMBINATIONS (continued)

 

The amount of goodwill recorded reflects LCNB's expansion in the Cincinnati market and related synergies that are expected to result from the acquisition and represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill will not be amortizable on LCNB's financial records and will not be deductible for tax purposes. Total goodwill will be subject to an annual test for impairment and the amount impaired, if any, will be charged to expense at the time of impairment. The core deposit intangible will be amortized over the estimated weighted average economic life of the various core deposit types, which is nine years.

 

Direct expenses related to the EFBI acquisition totaled $271,000 and $3,044,000 during the three and nine months ended September 30, 2024, respectively, and totaled $12,000 and $37,000 during the three and nine months ended September 30, 2023, respectively. They were expensed as incurred and are recorded as merger-related expenses in the consolidated statements of income.

 

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NOTE 3 - INVESTMENT SECURITIES

 

The amortized cost and estimated fair value of debt securities at September 30, 2024 and December 31, 2023 are summarized as follows (in thousands):

 

		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
September 30, 2024
Debt Securities, Available-for-Sale:
U.S. Treasury notes		$	69,717				—				4,145				65,572
U.S. Agency notes			88,668				—				5,360				83,308
Corporate bonds			7,450				—				588				6,862
U.S. Agency mortgage-backed securities			75,422				7				7,090				68,339
Municipal securities:															—
Non-taxable			4,596				—				222				4,374
Taxable			36,674				1				2,508				34,167
		$	282,527				8				19,913				262,622
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable		$	15,454				10				765				14,699
Taxable			3,283				—				300				2,983
		$	18,737				10				1,065				17,682
December 31, 2023
Debt Securities, Available-for-Sale:
U.S. Treasury notes		$	74,404				—				6,202				68,202
U.S. Agency notes			88,978				—				8,077				80,901
Corporate Bonds			7,450				—				916				6,534
U.S. Agency mortgage-backed securities			81,634				2				8,846				72,790
Municipal securities:
Non-taxable			7,416				—				245				7,171
Taxable			44,923				1				3,921				41,003
		$	304,805				3				28,207				276,601
Debt Securities, Held-to-Maturity:
Municipal securities:
Non-taxable		$	13,580				4				872				12,712
Taxable			3,283				—				316				2,967
		$	16,863				4				1,188				15,679

 

The amortized cost of debt securities in the above table excludes accrued interest of $1.23 million and $1.07 million at September 30, 2024 and December 31, 2023, respectively, that is recorded in other assets on the consolidated balance sheets.

 

The Company estimated the expected credit losses at September 30, 2024 and December 31, 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, 2024 and December 31, 2023, aggregated by length of time that individual securities have been in a continuous loss position, is as follows (in thousands):

 

		Less than Twelve Months								Twelve Months or Greater
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
September 30, 2024
Available-for-Sale:
U.S. Treasury notes		$	1,982				6				63,590				4,139
U.S. Agency notes			—				—				83,308				5,360
Corporate bonds			—				—				6,862				588
U.S. Agency mortgage-backed securities			—				—				68,025				7,090
Municipal securities:			—				—				—				—
Non-taxable			—				—				4,374				222
Taxable			—				—				34,046				2,508
		$	1,982				6				260,205				19,907
Held-to-Maturity:
Municipal securities:
Non-taxable		$	—				—				11,707				765
Taxable			—				—				2,983				300
		$	—				—				14,690				1,065
December 31, 2023
Available-for-Sale:
U.S. Treasury notes		$	—				—				68,202				6,202
U.S. Agency notes			—				—				80,901				8,077
Corporate Bonds			734				16				5,800				900
U.S. Agency mortgage-backed securities			—				—				72,287				8,846
Municipal securities:
Non-taxable			1,540				10				5,631				235
Taxable			—				—				40,392				3,921
		$	2,274				26				273,213				28,181
Held-to-Maturity:
Municipal securities:
Non-taxable		$	6,012				476				5,975				396
Taxable			—				—				2,966				316
		$	6,012				476				8,941				712

 

At September 30, 2024, LCNB’s securities portfolio consisted of 167 securities, 161 of which were in an unrealized loss position. At December 31, 2023, LCNB's securities portfolio consisted of 207 securities, 176 of which were in an unrealized loss position. After considering the issuers of the securities, LCNB management determined that that the unrealized losses were due to changing interest rate environments. LCNB had no intent at September 30, 2024 to sell its debt securities before recovery of their cost basis and as it was more likely than not that it will not be required to sell its debt securities before recovery of their cost basis.

 

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NOTE 3 - INVESTMENT SECURITIES (continued)

 

Each quarter, LCNB performs an analysis to determine if any of the unrealized losses on available-for-sale debt securities are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. The assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and LCNB's ability and intent to hold the security for a period of time sufficient for a recovery in value. LCNB also considers the extent to which the securities are issued by the federal government or its agencies and any guarantee of issued amounts by those agencies. The portfolio continues to consist of a mix of fixed and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.3 years. No credit losses were determined to be present as of September 30, 2024, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on available-for-sale debt securities was recognized for the third quarter of 2024.

 

Debt securities with a market value of $148.7 million and $124.4 million at September 30, 2024 and December 31, 2023, 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, 2024.

 

Contractual maturities of debt securities at September 30, 2024 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		$	25,093				24,668				1,163				1,158
Due from one to five years			153,392				143,285				1,301				1,278
Due from five to ten years			28,620				26,331				10,459				9,919
Due after ten years			—				—				5,814				5,327
			207,105				194,284				18,737				17,682
U.S. Agency mortgage-backed securities			75,422				68,338				—				—
		$	282,527				262,622				18,737				17,682

 

Certain information concerning the sale of debt securities available-for-sale for the three and nine months ended September 30, 2024 and 2023 was as follows (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2024				2023				2024				2023
Proceeds from sales		$	—				—				9,615				—
Gross realized gains			—				—				—				—
Gross realized losses			—				—				214				—

 

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

 

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NOTE 3 - INVESTMENT SECURITIES (continued)

 

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, 2024 on its investments in equity securities without a readily determinable fair value.

 

The amortized cost and estimated fair value of equity securities with a readily determinable fair value at September 30, 2024 and December 31, 2023 are summarized as follows (in thousands):

 

		September 30, 2024								December 31, 2023
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Mutual Funds		$	1,442				1,294				1,415				1,240
Equity Securities			10				94				10				96
Total equity securities with a readily determinable fair value		$	1,452				1,388				1,425				1,336

 

Certain information concerning changes in the fair value of equity securities with a readily determinable fair value for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2024				2023				2024				2023
Net gains (losses) recognized during the period on equity securities		$	49				(33	)			25				(78	)
Less net losses recognized during the period on equity securities sold during the period			—				—				—				(61	)
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at period end		$	49				(33	)			25				(17	)

 

LCNB is a member of the FHLB system and its regional FRB. Members are required to own a certain amount of stock based on predetermined formulas. FHLB and FRB stock are carried at cost, which is equal to par value, and periodically evaluated for impairment based on ultimate recovery of par value.

 

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NOTE 4 - LOANS

 

Major classifications of loans at September 30, 2024 and December 31, 2023 were as follows (in thousands):

 

		September 30, 2024				December 31, 2023
Commercial & industrial		$	119,215				120,541
Commercial, secured by real estate:
Owner occupied			216,262				206,705
Non-owner occupied			509,978				501,108
Farmland			38,005				37,367
Multi-family			239,645				240,033
Construction loans secured by 1-4 family dwellings			15,341				9,058
Construction loans secured by other real estate			84,275				111,373
Residential real estate:
Secured by senior liens on 1-4 family dwellings			395,906				402,026
Secured by junior liens on 1-4 family dwellings			21,683				19,999
Home equity line-of-credit loans			42,970				38,579
Consumer			22,113				25,600
Agricultural			13,171				11,000
Other loans, including deposit overdrafts			496				82
Loans, gross			1,719,060				1,723,471
Less allowance for credit losses			11,867				10,525
Loans, net		$	1,707,193				1,712,946

 

Loans in the above table are shown net of deferred origination fees and costs. Deferred origination fees, net of related costs, were $861,000 and $181,000 at September 30, 2024 and December 31, 2023, respectively. Accrued interest receivable of $8.22 million and $7.33 million are excluded from the balances above as of September 30, 2024 and December 31, 2023, respectively, that are recorded in other assets on the consolidated balance sheets.

 

 

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NOTE 4 – LOANS (continued)

 

Non-accrual loans by class of receivable as of September 30, 2024 and December 31, 2023 were as follows (in thousands):

 

		September 30, 2024								December 31, 2023
		Non-accrual								Non-accrual
		Loans with no				Total				Loans with no				Total
		Allowance for				Non-accrual				Allowance for				Non-accrual
		Credit Losses				Loans				Credit Losses				Loans
Commercial & industrial		$	—				—				—				—
Commercial, secured by real estate:
Owner occupied			—				—				—				—
Non-owner occupied			—				2,642				—				—
Farmland			52				52				51				51
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			—				307				29				29
Secured by junior liens on 1-4 family dwellings			—				—				—				—
Home equity line-of-credit loans			—				—				—				—
Consumer			—				—				—				—
Agricultural			—				—				—				—
Total		$	52				3,001				80				80

 

Interest income recognized on nonaccrual loans totaled approximately $67,000 and $1,000 during the nine months ended  September 30, 2024  and 2023, respectively. Accrued interest reversed and charged against interest income for these loans totaled approximately $36,000 and $0 during the nine months ended  September 30, 2024  and 2023, respectively.

 

The ratio of non-accrual loans to total loans outstanding at September 30, 2024 and December 31, 2023 was 0.17% and 0.00%, 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.

 

During the first quarter of 2023, the Company adopted ASU No. 2016-13, 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 ASU No. 2016-13 had on LCNB's ACL, retained earnings, and deferred taxes.

 

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 utilized peer FFIEC Call Report data for all pools. The Company updated the LDA for the September 30, 2024 calculation. The new LDA utilized the same economic factor loss drivers as previous analyses but added an additional factor to three pools to improve correlation with loss data.

 

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NOTE 4 – LOANS (continued)

 

•

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, or a loan is greater than 90 days past due. 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 and peer loss data.

•

Prepayments and curtailments – Prepayments and curtailments are calculated based on the Company’s own data. This analysis is updated when materially relevant.

•

Forecast and reversion – the Company, as of June 30, 2024, established a two-quarter reasonable and supportable forecast period with a ten-quarter straight line reversion to the long-term historical average. As of September 30, 2024, the Company established a four-quarter reasonable and supportable forecast period with a six-quarter straight line reversion to the long-term historical average due to increased uncertainty surrounding the economy. Extending the forecast and shortening the 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 Company's unemployment indicator is 5.78%, which is higher than the forecasted range utilized as of September 30, 2024. The extended forecast and reversion period ultimately decreases the reserve associated with the unemployment factor when compared to the historical average.

•

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 September 30, 2024, the Company selected a forecast which forecasts unemployment between 4.86% and 5.48%, the change in Coincident Economic Activity between -0.04% and 0.83%, the change in Commercial Real Estate Price Indexes between -6.45% and -0.68%, and the change in the Home Price Index between -4.12% and 2.98% during the forecast periods. Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks.  As of June 30, 2024, the Company selected a forecast which forecasts unemployment between 4.50% and 4.85%, the change in Coincident Economic Activity between -0.06% and 0.07%, the change in Commercial Real Estate Price Indexes between -5.33% and -3.86%, and the change in the Home Price Index between 0.63% and 2.89% during the forecast periods. The historical averages for LCNB’s economic indicators are unemployment – 5.78%, change in Coincident Economic Activity – 1.99%, change in Commercial Real Estate Price Indexes – 5.95%, and change in Home Price Index – 2.71%

 

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.

•

Changes in the nature and volume of the portfolio and terms of loans.

•

Lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries.

 

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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, 2024 and 2023 (in thousands):

 

						Commercial,
		Commercial				Secured by				Residential
		& Industrial				Real Estate				Real Estate				Consumer				Agricultural				Other				Total
Three Months Ended September 30, 2024
Balance, beginning of period		$	1,568				6,228				3,222				212				38				2				11,270
Acquisition of Eagle Financial Bancorp, Inc. - PCD Loans			—				—				—				—				—				—				—
Provision for (recovery of) credit losses			(214	)			258				572				—				41				24				681
Acquisition of Eagle Financial Bancorp, Inc. - provision for credit losses on non-PCD loans charged to expense			—				—				—				—				—				—				—
Losses charged off			(22	)			—				—				—				(57	)			(43	)			(122	)
Recoveries			—				—				—				19				—				19				38
Balance, end of period		$	1,332				6,486				3,794				231				22				2				11,867
Ratio of net charge-offs to average loans			0.07	%			—	%			—	%			(0.34	)%			1.82	%			26.19	%			0.02	%
Nine Months Ended September 30, 2024
Balance, beginning of year		$	1,039				5,414				3,816				238				18				—				10,525
Acquisition of Eagle Financial Bancorp, Inc. - PCD Loans			101				8				79				—				—				—				188
Provision for (recovery of) credit losses			163				818				(576	)			(32	)			61				104				538
Acquisition of Eagle Financial Bancorp, Inc. - provision for credit losses on non-PCD loans charged to expense			51				246				466				—				—				—				763
Losses charged off			(22	)			—				—				(43	)			(57	)			(164	)			(286	)
Recoveries			—				—				9				68				—				62				139
Balance, end of period		$	1,332				6,486				3,794				231				22				2				11,867
Ratio of net charge-offs (recoveries) to average loans			0.02	%			—	%			—	%			(0.14	)%			0.63	%			61.65	%			0.01	%

 

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NOTE 4 – LOANS (continued)

 

						Commercial,
		Commercial				Secured by				Residential
		& Industrial				Real Estate				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	%

 

The ratio of the allowance for credit losses for loans to total loans at  September 30, 2024 and December 31, 2023 was 0.69% and 0.61%, 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.

 

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, 2024								December 31, 2023
		Carrying				Related				Carrying				Related
		Value				Allowance				Value				Allowance
Commercial & industrial		$	—				—				—				—
Commercial, secured by real estate:
Owner occupied			52				—				72				—
Non-owner occupied			2,642				1,180				—				—
Farmland			52				—				51				—
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			421				52				—				—
Secured by junior liens on 1-4 family dwellings			—				—				—				—
Home equity line-of-credit loans			73				41				—				—
Consumer			—				—				—				—
Agricultural			—				—				—				—
Other loans, including deposit overdrafts			—				—				—				—
Total		$	3,240				1,273				123				—

 

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NOTE 4 – LOANS (continued)

 

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

 

Commercial & Industrial Loans. LCNB’s commercial & industrial loan portfolio consists of loans for 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.

 

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

 

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

 

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NOTE 4 – LOANS (continued)

 

LCNB’s management monitors the credit quality of its loans on an ongoing basis. This monitoring includes annual reviews for loans with a principal balance greater than $1 million and bi-annual reviews for loans with a principal balance of more than $500,000 through $1 million. LCNB also has a loan grade monitoring system in place to track and report loan grades and classifications, enabling the identification and management of non-performing loans. ​ Major factors used in determining loan grades vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden. ​Commercial real estate loans rated OAEM or worse are reviewed at least quarterly for credit deterioration.

 

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.

 

An independent consultant is contracted to conduct a review of LCNB's loan portfolio on an annual basis. The independent review examines LCNB's underwriting activities, documentation, credit quality, and includes an assessment of proper risk ratings. Loans selected for review include all loans meeting certain pre-determined criteria and a sample of other loans. The independent review provides assurance that LCNB’s loan portfolio and credit quality complies with the policies set forth by the board of directors and senior management and with regulatory requirements.

 

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NOTE 4 – LOANS (continued)

 

The following table presents the amortized cost basis of loans by vintage and credit quality indicators at September 30, 2024 and December 31, 2023 (in thousands):

 

		Term Loans by Origination Year
																										Revolving				Revolving
																										Loans				Loans
																										Amortized				Converted
		2024				2023				2022				2021				2020				Prior				Cost Basis				to Term				Total
September 30, 2024
Commercial & industrial
Pass		$	11,721				12,284				33,311				25,803				9,878				6,895				14,947				—				114,839
OAEM			—				—				1,966				—				—				—				—				—				1,966
Substandard			—				—				1,788				—				88				103				431				—				2,410
Doubtful			—				—				—				—				—				—				—				—				—
Total			11,721				12,284				37,065				25,803				9,966				6,998				15,378				—				119,215
Gross charge-offs (1)			—				—				—				22				—				—				—				—				22
Commercial, secured by real estate
Pass			22,944				118,628				182,884				168,066				102,689				347,233				141,309				—				1,083,753
OAEM			—				—				3,788				1,507				—				3,361				—				—				8,656
Substandard			—				—				7,468				—				—				3,629				—				—				11,097
Doubtful			—				—				—				—				—				—				—				—				—
Total			22,944				118,628				194,140				169,573				102,689				354,223				141,309				—				1,103,506
Gross charge-offs (1)			—				—				—				—				—				—				—				—				—
Residential real estate
Pass			27,265				61,429				75,446				88,665				53,705				108,750				40,522				—				455,782
OAEM			—				—				—				—				—				235				—				—				235
Substandard			—				231				191				291				487				3,170				172				—				4,542
Doubtful			—				—				—				—				—				—				—				—				—
Total			27,265				61,660				75,637				88,956				54,192				112,155				40,694				—				460,559
Gross charge-offs (1)			—				—				—				—				—				—				—				—				—
Consumer
Pass			5,895				5,840				4,015				3,163				2,434				654				71				—				22,072
OAEM			—				—				—				—				—				—				—				—				—
Substandard			—				—				25				11				—				5				—				—				41
Doubtful			—				—				—				—				—				—				—				—				—
Total			5,895				5,840				4,040				3,174				2,434				659				71				—				22,113
Gross charge-offs (1)			—				1				39				3				—				—				—				—				43
Agricultural
Pass			950				1,471				384				154				318				29				9,865				—				13,171
OAEM			—				—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				—				—				—
Doubtful			—				—				—				—				—				—				—				—				—
Total			950				1,471				384				154				318				29				9,865				—				13,171
Gross charge-offs (1)			—				—				—				—				57				—				—				—				57
Other
Pass			—				—				—				—				—				—				496				—				496
OAEM			—				—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				—				—				—
Doubtful			—				—				—				—				—				—				—				—				—
Total			—				—				—				—				—				—				496				—				496
Gross charge-offs (1)			—				—				—				—				—				—				164				—				164
Total loans		$	68,775				199,883				311,266				287,660				169,599				474,064				207,813				—				1,719,060

 

(1) - for the nine months ended September 30, 2024.

 

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NOTE 4 – LOANS (continued)

 

		Term Loans by Origination Year
																										Revolving				Revolving
																										Loans				Loans
																										Amortized				Converted
		2023				2022				2021				2020				2019				Prior				Cost Basis				to Term				Total
December 31, 2023
Commercial & industrial
Pass		$	17,169				30,518				29,587				11,426				2,732				5,641				16,919				113				114,105
OAEM			—				—				1,474				—				—				—				—				—				1,474
Substandard			—				1,813				—				105				1,592				137				1,315				—				4,962
Doubtful			—				—				—				—				—				—				—				—				—
Total			17,169				32,331				31,061				11,531				4,324				5,778				18,234				113				120,541
Gross charge-offs (2)			—				—				—				—				—				15				—				—				15
Commercial, secured by real estate
Pass			99,055				200,735				156,865				109,810				92,895				283,564				141,354				6,056				1,090,334
OAEM			—				7,671				—				—				—				3,004				—				—				10,675
Substandard			—				—				—				—				1,648				2,987				—				—				4,635
Doubtful			—				—				—				—				—				—				—				—				—
Total			99,055				208,406				156,865				109,810				94,543				289,555				141,354				6,056				1,105,644
Gross charge-offs (2)			—				—				—				—				—				—				—				—				—
Residential real estate
Pass			55,232				83,511				107,120				62,177				19,208				95,643				33,800				—				456,691
OAEM			—				—				—				—				—				18				—				—				18
Substandard			—				446				—				217				—				3,062				170				—				3,895
Doubtful			—				—				—				—				—				—				—				—				—
Total			55,232				83,957				107,120				62,394				19,208				98,723				33,970				—				460,604
Gross charge-offs (2)			—				—				—				—				4				—				—				—				4
Consumer
Pass			8,087				5,820				4,868				4,671				1,382				304				460				—				25,592
OAEM			—				—				—				—				—				—				—				—				—
Substandard			—				—				—				—				8				—				—				—				8
Doubtful			—				—				—				—				—				—				—				—				—
Total			8,087				5,820				4,868				4,671				1,390				304				460				—				25,600
Gross charge-offs (2)			—				—				62				21				—				—				—				—				83
Agricultural
Pass			1,883				464				197				694				46				31				7,685				—				11,000
OAEM			—				—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				—				—				—
Doubtful			—				—				—				—				—				—				—				—				—
Total			1,883				464				197				694				46				31				7,685				—				11,000
Gross charge-offs (2)			—				—				—				—				—				—				—				—				—
Other
Pass			—				—				—				—				—				—				82				—				82
OAEM			—				—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				—				—				—
Doubtful			—				—				—				—				—				—				—				—				—
Total			—				—				—				—				—				—				82				—				82
Gross charge-offs (2)			—				—				—				—				—				—				166				—				166
Total loans		$	181,426				330,978				300,111				189,100				119,511				394,391				201,785				6,169				1,723,471

 

(2) - for the year ended December 31, 2023.

 

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NOTE 4 – LOANS (continued)

 

A loan portfolio aging analysis by class segment at September 30, 2024 and December 31, 2023 is as follows (in thousands):

 

																										90 Days
										90 Days																or More
		30-59 Days				60-89 Days				or More				Total								Total Loans				Past Due
		Past Due				Past Due				Past Due				Past Due				Current				Receivable				and Accruing
September 30, 2024
Commercial & industrial		$	—				—				—				—				119,215				119,215				—
Commercial, secured by real estate:
Owner occupied			—				—				—				—				216,262				216,262				—
Non-owner occupied			—				—				2,642				2,642				507,336				509,978				—
Farmland			52				—				—				52				37,953				38,005				—
Multi-family			—				—				—				—				239,645				239,645				—
Construction loans secured by 1-4 family dwellings			—				—				—				—				15,341				15,341				—
Construction loans secured by other real estate			—				—				—				—				84,275				84,275				—
Residential real estate:
Secured by senior liens on 1-4 family dwellings			4				626				436				1,066				394,840				395,906				198
Secured by junior liens on 1-4 family dwellings			—				—				—				—				21,683				21,683				—
Home equity line-of-credit loans			98				49				73				220				42,750				42,970				73
Consumer			25				25				11				61				22,052				22,113				11
Agricultural			—				—				—				—				13,171				13,171				—
Other			496				—				—				496				—				496				—
Total		$	675				700				3,162				4,537				1,714,523				1,719,060				282
December 31, 2023
Commercial & industrial		$	—				—				—				—				120,541				120,541				—
Commercial, secured by real estate:
Owner occupied			—				—				72				72				206,633				206,705				72
Non-owner occupied			2,645				—				—				2,645				498,463				501,108				—
Farms			—				—				—				—				37,367				37,367				—
Multi-family			—				—				—				—				240,033				240,033				—
Construction loans secured by 1-4 family dwellings			—				—				—				—				9,058				9,058				—
Construction loans secured by other real estate			—				—				—				—				111,373				111,373				—
Residential real estate
Secured by senior liens on 1-4 family dwellings			1,020				414				29				1,463				400,563				402,026				—
Secured by junior liens on 1-4 family dwellings			27				—				—				27				19,972				19,999				—
Home equity line-of-credit loans			174				30				—				204				38,375				38,579				—
Consumer			136				—				—				136				25,464				25,600				—
Agricultural			—				—				—				—				11,000				11,000				—
Other			82				—				—				82				—				82				—
Total		$	4,084				444				101				4,629				1,718,842				1,723,471				72

 

Residential consumer mortgage loans secured by residential real estate in the process of foreclosure at September 30, 2024 totaled $54,000. No residential consumer mortgage loans secured by residential real estate were in the process of foreclosure at December 31, 2023.

 

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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.

 

The following table presents the amortized cost basis at September 30, 2024 of all loan modifications made to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted (in thousands):

 

																		Combination -				Combination -
		Interest Rate				Extended				Principal				Payment				Extended Maturity and				Interest Rate Reduction and				Total				Percent of
		Reduction				Maturity				Forgiveness				Deferral				Payment Deferral				Payment Deferral				Modifications				Total Class
Three Months Ended September 30, 2024
Residential real estate, secured by senior liens on 1-4 family dwellings			—				—				—				—				—				—				—				—	%
Consumer			—				—				—				—				—				—				—				—	%
Total		$	—				—				—				—				—				—				—
Nine Months Ended September 30, 2024
Residential real estate, secured by senior liens on 1-4 family dwellings			—				—				—				—				—				21				21				0.01	%
Consumer			—				—				—				—				29				—				29				0.13	%
Total		$	—				—				—				—				29				21				50

 

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NOTE 4 – LOANS (continued)

 

The amortized cost basis of loan modifications made to borrowers experiencing financial difficulty during 2023 was zero at September 30, 2023.

 

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, 2024 and December 31, 2023 were approximately $335.1 million and $391.8 million, respectively.

 

NOTE 5 - PURCHASED CREDIT DETERIORATED LOANS

 

LCNB acquired loans through the merger with EFBI for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of these loans at acquisition on April 12, 2024 is as follows (in thousands):

 

Purchase price of loans at acquisition			2,811
Allowance for credit losses at acquisition			189
Non-credit discount (premium) at acquisition			253
Par value of acquired loans at acquisition		$	3,253

 

The following table provides, as of September 30, 2024, the major classifications of purchased credit deteriorated loans acquired from EFBI (in thousands):

 

Commercial & industrial		$	182
Commercial, secured by real estate			373
Residential real estate			2,379
Total		$	2,934

 

The following table provides the outstanding balance and related carrying amount for purchased credit deteriorated loans acquired from EFBI as of September 30, 2024 (in thousands):

 

Outstanding balance		$	3,185
Carrying amount			2,934

 

Activity during 2024 for the accretable discount related to purchased credit deteriorated loans acquired from EFBI and CNNB is as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2024				2023				2024				2023
Accretable discount, beginning of period		$	1,159				—				1,467				—
Accretable discount acquired during period from merger with EFBI			—				—				253				—
Less loans transferred to held-for-sale			—				—				396				—
Less accretion			17				—				182				—
Accretable discount, end of period		$	1,142				—				1,142				—

 

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NOTE 6 - 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, 2024 and December 31, 2023 (in thousands):

 

		September 30,				December 31,
		2024				2023
Affordable housing tax credit investment		$	18,950				16,950
Less amortization			5,721				4,626
Net affordable housing tax credit investment		$	13,229				12,324
Unfunded commitment		$	4,775				4,527

 

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 anticipates to fund the unfunded commitment over 12.0 years.

 

The following table presents other information relating to LCNB's affordable housing tax credit investments for the three and nine months ended September 30, 2024 and 2023 (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2024				2023				2024				2023
Tax credits and other tax benefits recognized		$	450				438				1,338				1,302
Tax credit amortization expense included in provision for income taxes			355				362				1,096				1,080

 

NOTE 7 - DEPOSITS

 

The following table presents the composition of LCNB's deposits at September 30, 2024 and December 31, 2023 (in thousands):

 

		September 30,				December 31,
		2024				2023
Demand deposits		$	446,626				462,267
Interest-bearing demand and money fund deposits			571,452				643,989
Savings deposits			365,781				379,162
IRA and time certificates			533,146				338,971
Total		$	1,917,005				1,824,389

 

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NOTE 7 - DEPOSITS (continued)

 

Contractual maturities of time deposits at September 30, 2024 were as follows (in thousands):

 

Three months or less		$	94,032
Over three through six months			86,915
Over six through twelve months			195,593
October 1, 2024 - September 30, 2025			376,540
October 1, 2025 - September 30, 2026			145,448
October 1, 2026 - September 30, 2027			7,613
October 1, 2027 - September 30, 2028			1,586
October 1, 2028 - September 30, 2029			1,477
Thereafter			482
		$	533,146

 

The aggregate amount of time deposits in denominations of $250,000 or more at September 30, 2024 and December 31, 2023 was $110.0 million and $50.2 million, respectively. While the acquisition of EFBI contributed to the increase in the total amount of time deposits in denominations of $250,000 or more, most of the growth was generated organically. LCNB had a special rate promotion for time deposits, accompanied by a bonus rate promotion for new deposits, during much of the 2024 period.

 

NOTE 8 – BORROWINGS

 

Long-term debt at September 30, 2024 and December 31, 2023 was as follows (dollars in thousands):

 

		September 30, 2024								December 31, 2023
		Amount				Rate				Amount				Rate
Term loan		$	10,662				4.25	%		$	12,154				4.25	%
FHLB long-term advances			145,000				4.62	%			100,969				4.87	%
		$	155,662				4.60	%		$	113,123				4.80	%

 

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, 2024 and December 31, 2023 were as follows (in thousands):

 

		September 30,				December 31,
		2024				2023
Maturing within one year		$	10,662				4,988
Maturing after one year through two years			25,000				13,135
Maturing after two years through three years			35,000				25,000
Maturing after three years through four years			45,000				25,000
Maturing after four years through five years			30,000				25,000
Thereafter			10,000				20,000
Total		$	155,662				113,123

 

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NOTE 8 – BORROWINGS (continued)

 

Short-term borrowings at September 30, 2024 and December 31, 2023 were as follows (dollars in thousands):

 

		September 30, 2024								December 31, 2023
		Amount				Rate				Amount				Rate
Lines of credit		$	—				—	%		$	21,395				6.00	%
FHLB short-term advances			—				—	%			76,000				5.53	%
		$	—				—	%		$	97,395				5.63	%

 

At September 30, 2024, LCNB had a short-term revolving line of credit arrangement with a financial institution for a maximum amount of $10 million at an interest rate equal to the Wall Street Journal Prime Rate minus 25 basis points. This agreement expires on June 15, 2025.

 

At September 30, 2024, 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. Under the terms of the second arrangement, LCNB can borrow up to $50 million at an interest rate equal to the FOMC targeted federal funds rate plus a spread of 25 basis points. 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.

 

All long-term 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 $452 million and $417 million at September 30, 2024 and December 31, 2023, respectively. Remaining borrowing capacity with the FHLB, including both long-term and short-term borrowings, at September 30, 2024 was approximately $120.9 million.

 

NOTE 9 - 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, 2024 were as follows (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2024				2023				2024				2023
Operating lease expense		$	249				219				714				661
Short-term lease expense			8				16				43				62
Variable lease expense			11				2				31				5
Other			14				15				32				25
Total lease expense		$	282				252				820				753

 

Other information related to leases at September 30, 2024 were as follows (dollars in thousands):

 

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	779
Right-of-use assets obtained in exchange for new operating lease liabilities		$	62
Weighted average remaining lease term in years for operating leases			33.3
Weighted average discount rate for operating leases			3.65	%

 

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NOTE 10 – 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,
		2024				2023				2024				2023
Statutory tax rate			21.0	%			21.0	%			21.0	%			21.0	%
Increase (decrease) resulting from:
Tax exempt interest			(0.6	)%			(0.7	)%			(1.0	)%			(0.6	)%
Tax exempt income on bank-owned life insurance			(2.6	)%			(1.2	)%			(3.2	)%			(1.1	)%
Captive insurance premium income			(1.4	)%			(0.5	)%			(2.5	)%			(0.7	)%
Affordable housing tax credit limited partnerships			(1.8	)%			(1.5	)%			(2.9	)%			(1.4	)%
Nondeductible merger-related expenses			0.2	%			1.7	%			1.6	%			0.7	%
Other, net			0.2	%			0.1	%			0.3	%			0.3	%
Effective tax rate			15.0	%			18.9	%			13.3	%			18.2	%

 

NOTE 11 - 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 and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated condensed 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.

 

In addition to such commitments to extend credit, LCNB may have services for customers in place that, though they obligate LCNB to provide credit on certain terms, do not constitute commitments to extend credit for purposes of this Note 11. For example, the Bounce Protection product, LCNB's deposit overdraft program, is offered as a service by the Bank and does not constitute a contract between the customer and LCNB.

 

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

 

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NOTE 11 – COMMITMENTS AND CONTINGENT LIABILITIES (continued)

 

Financial instruments whose contract amounts represent off-balance-sheet credit risk at September 30, 2024 and December 31, 2023 were as follows (in thousands):

 

		September 30, 2024				December 31, 2023
Commitments to extend credit:
Commercial loans		$	39,257				28,111
Other loans
Fixed rate			30,368				15,349
Adjustable rate			2,162				1,946
Unused lines of credit:
Fixed rate			14,360				21,532
Adjustable rate			240,896				184,056
Unused overdraft protection amounts on demand accounts			16,333				16,418
Standby letters of credit			5				5
Total commitments		$	343,381				267,417

 

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

 

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

 

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

 

Activity in the allowance for credit losses on off-balance sheet credit exposures, recorded in other liabilities on the consolidated balance sheets, for the three and nine months ended September 30, 2024 and 2023 is as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2024				2023				2024				2023
Balance, beginning of period		$	362				381				281				—
Impact of adopting ASC 326			—				—				—				571
Acquisition of Eagle Financial Bancorp, Inc.			—				—				48				—
Provision for (recovery of) credit losses			(22	)			(123	)			11				(313	)
Balance, end of period		$	340				258				340				258

 

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, 2024 totaled approximately $92,000.

 

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

 

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

 

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NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss for the three and nine months ended September 30, 2024 and 2023 were as follows (in thousands):

 

		Three Months Ended September 30,												Nine Months Ended September 30,
						Changes in												Changes in
		Unrealized				Pension Plan								Unrealized				Pension Plan
		Losses on				Assets and								Losses on				Assets and
		Available-for-				Benefit								Available-for-				Benefit
		Sale Debt Securities				Obligations				Total				Sale Debt Securities				Obligations				Total
2024
Balance at beginning of period		$	(22,794	)			(55	)			(22,849	)			(22,281	)			(55	)			(22,336	)
Other comprehensive income (loss), net of taxes			7,069				—				7,069				6,387				—				6,387
Reclassifications			—				—				—				169				—				169
Balance at end of period		$	(15,725	)			(55	)			(15,780	)			(15,725	)			(55	)			(15,780	)
2023
Balance at beginning of period		$	(27,744	)			(27	)			(27,771	)			(29,927	)			(27	)			(29,954	)
Other comprehensive (loss) income, net of taxes			(2,941	)			—				(2,941	)			(758	)			—				(758	)
Balance at end of period		$	(30,685	)			(27	)			(30,712	)			(30,685	)			(27	)			(30,712	)

 

Reclassifications out of accumulated other comprehensive loss during the three and nine months ended September 30, 2024 and 2023 and the affected line items in the condensed consolidated statements of income were as follows (in thousands):

 

		Three Months Ended								Nine Months Ended							Affected Line Item in the
		September 30,								September 30,							Consolidated Condensed
		2024				2023				2024				2023			Statements of Income
Realized losses from sales of debt securities, available-for-sale		$	—				—				(214	)			—		Net losses from sales of debt securities, available-for-sale
Income tax benefit			—				—				(45	)			—		Provision for income taxes
Reclassification adjustment, net of taxes		$	—				—				(169	)			—

 

NOTE 13 – 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.

 

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NOTE 13 – RETIREMENT PLANS (continued)

 

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, 2024 and 2023 were as follows (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2024				2023				2024				2023
Qualified noncontributory defined benefit retirement plan		$	350				267				1,004				944
401(k) plan			210				164				630				529

 

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 net periodic pension cost of the nonqualified defined benefit retirement plan consists solely of interest cost of $18,000 and $54,000 for the three and nine months ended September 30, 2024, respectively, and $19,000 and $57,000 for the three and nine months ended September 30, 2023, respectively.

 

NOTE 14 – STOCK BASED COMPENSATION

 

The 2015 Ownership Incentive Plan (the "2015 Plan") was ratified by LCNB Corp.'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 Board 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, 2024 and 2023 were as follows:

 

		2024								2023
						Weighted								Weighted
						Average								Average
						Grant Date								Grant Date
		Shares				Fair Value				Shares				Fair Value
Nonvested at January 1,			79,017			$	17.94				58,314			$	17.99
Granted			41,703				13.87				44,150				17.84
Vested			(36,127	)			16.39				(23,447	)			17.89
Forfeited			—				—				—				—
Nonvested at September 30,			84,593			$	16.59				79,017			$	17.94

 

At September 30, 2024, there were 84,593 restricted stock awards outstanding with an approximate stock value of $1,275,000 based on that day's closing stock price. At September 30, 2023, there were 79,017 restricted stock awards outstanding with an approximate stock value of $1,166,000 based on that day's closing stock price. The fair value of restricted stock awards was $578,000 on the grant date of March 4, 2024 and $788,000 on the grant date of January 23, 2023. Grants to officers of LCNB vest over a period of five years while grants to members of the board of directors vest immediately. The grant date fair value is recognized ratably into expense over the vesting period.

 

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NOTE 14 – 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, 2024 and 2023 (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2024				2023				2024				2023
Restricted stock expense		$	94				82				501				480
Tax effect			20				18				105				101

 

Unrecognized compensation expense for restricted stock awards was $988,000 at September 30, 2024 and is expected to be recognized over a period of 4.5 years.

 

NOTE 15 – 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, 2024 and 2023 were calculated as follows (dollars in thousands, except share and per share data):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2024				2023				2024				2023
Net income		$	4,532				4,070				7,372				12,921
Less allocation of earnings and dividends to participating securities			28				29				46				92
Net income allocated to common shareholders		$	4,504				4,041				7,326				12,829
Weighted average common shares outstanding, gross			14,187,951				11,117,737				13,846,175				11,173,810
Less average participating securities			84,593				79,017				84,593				79,625
Adjusted weighted average number of shares outstanding used in the calculation of basic and diluted earnings per common share			14,103,358				11,038,720				13,761,582				11,094,185
Earnings per common share:
Basic		$	0.31				0.37				0.53				1.16
Diluted			0.31				0.37				0.53				1.16

 

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NOTE 16 - FAIR VALUE MEASUREMENTS

 

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

 

The inputs to the valuation techniques used to measure fair value are assigned to one of three broad levels:

 

•

Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.

 

•

Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.

 

•

Level 3 – inputs that are unobservable for the asset or liability.

 

EQUITY SECURITIES WITH A READILY DETERMINABLE FAIR VALUE

 

Equity securities with a readily determinable fair value are reported at fair value with changes in fair value reported in other operating income in the consolidated condensed statements of income. Fair values for equity securities are determined based on market quotations (level 1). LCNB has an investment in a mutual fund that is measured at fair value using net asset values, which 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, except for loans held-for-sale. 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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NOTE 16 - 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, 2024 and December 31, 2023 (in thousands):

 

						Fair Value Measurements at the End of
						the Reporting Period Using
						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
		Fair Value				Identical Assets				Inputs				Inputs
		Measurements				(Level 1)				(Level 2)				(Level 3)
September 30, 2024
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
Equity securities		$	94				94				—				—
Mutual funds measured at net asset value			1,294				1,294				—				—
Debt securities, available-for-sale:
U.S. Treasury notes			65,572				65,572				—				—
U.S. Agency notes			83,308				—				83,308				—
Corporate bonds			6,862				—				6,862				—
U.S. Agency mortgage-backed securities			68,339				—				68,339				—
Municipal securities:
Non-taxable			4,374				—				4,374				—
Taxable			34,167				—				34,167				—
Total recurring fair value measurements		$	264,010				66,960				197,050				—
Nonrecurring fair value measurements:
Individually evaluated collateral dependent loans		$	1,678				—				—				1,678
Total nonrecurring fair value measurements		$	1,678				—				—				1,678
December 31, 2023
Recurring fair value measurements:
Equity securities with a readily determinable fair value:
Equity securities		$	96				96				—				—
Mutual funds measured at net asset value			1,240				1,240				—				—
Debt securities, available-for-sale:
U.S. Treasury notes			68,202				68,202				—				—
U.S. Agency notes			80,901				—				80,901				—
Corporate bonds			6,534				—				6,534				—
U.S. Agency mortgage-backed securities			72,790				—				72,790				—
Municipal securities:
Non-taxable			7,171				—				7,171				—
Taxable			41,003				—				41,003				—
Total recurring fair value measurements		$	277,937				69,538				208,399				—
Nonrecurring fair value measurements:
Individually evaluated collateral dependent loans		$	—				—				—				—
Total nonrecurring fair value measurements		$	—				—				—				—

 

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NOTE 16 - FAIR VALUE MEASUREMENTS (continued)

 

The following table presents quantitative information about unobservable inputs used in nonrecurring level 3 fair value measurements at September 30, 2024 and December 31, 2023 (dollars in thousands):

 

Range

Valuation

Unobservable

Weighted

Fair Value

Technique

Inputs

High

Low

Average

September 30, 2024

Individually evaluated collateral dependent loans

$

1,678

Estimated sales price

Adjustments for comparable properties, discounts to reflect current market conditions

Not applicable

December 31, 2023

Individually evaluated collateral dependent loans

$

—

Estimated sales price

Adjustments for comparable properties, discounts to reflect current market conditions

Not applicable

 

Carrying amounts and estimated fair values of financial instruments as of September 30, 2024 and December 31, 2023 were as follows (in thousands):

 

										Fair Value Measurements at the End of
										the Reporting Period Using
										Quoted
										Prices				Significant
										in Active				Other				Significant
										Markets for				Observable				Unobservable
		Carrying				Fair				Identical Assets				Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
September 30, 2024
FINANCIAL ASSETS:
Cash and cash equivalents		$	39,374				39,374				39,374				—				—
Debt securities, held-to-maturity, net			18,730				17,675				—				17,675				—
Loans, net			1,707,193				1,700,822				—				—				1,700,822
Loans held-for-sale			35,687				35,687				—				35,687				—
Accrued interest receivable			9,450				9,450				—				9,450				—
FINANCIAL LIABILITIES:
Deposits			1,917,005				1,930,109				1,383,859				546,250				—
Short-term borrowings			—				—				—				—				—
Long-term debt			155,662				155,964				—				155,964				—
Accrued interest payable			2,127				2,127				—				2,127				—
December 31, 2023
FINANCIAL ASSETS:
Cash and cash equivalents		$	39,723				39,723				39,723				—				—
Debt securities, held-to-maturity, net			16,858				15,679				—				—				15,679
Loans, net			1,712,946				1,534,406				—				—				1,534,406
Accrued interest receivable			8,405				8,405				—				8,405				—
FINANCIAL LIABILITIES:
Deposits			1,824,389				1,824,105				1,485,418				338,687				—
Short-term borrowings			97,395				97,395				—				97,395				—
Long-term debt			113,123				112,986				—				112,986				—
Accrued interest payable			1,697				1,697				—				1,697				—

 

The methodology to derive the fair value of loans at September 30, 2024 is consistent with the methodology utilized to determine the fair value of loans acquired in the Company’s recent acquisitions of CNNB and EFBI

 

 

Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions. In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of LCNB.

 

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NOTE 17 - SUBSEQUENT EVENT

 

On September 20, 2024, LCNB received a non-binding letter of intent from a third party intending to purchase a pool of loans with an unpaid principal balance of $39.5 million. The sale of these loans is expected to close in November of 2024 and is not expected to result in a material gain or loss.

 

 

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

 

Forward Looking Statements

 

Certain statements made in this document regarding LCNB’s financial condition, results of operations, plans, objectives, future performance and business, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as “anticipate”, “could”, “may”, “feel”, “expect”, “believe”, “plan”, and similar expressions. Please refer to LCNB’s Annual Report on Form 10-K for the year ended December 31, 2023, 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 recent and future acquisitions, including CNNB and EFBI, 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, either by interest rate increases or decreases, 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 and/or domestic geopolitical relations and/or conflicts could create financial market uncertainty and have negative impacts on commodities, currency, and stability, which could adversely affect LCNB's operating results and financial condition;

11.

difficulties with technology or data security breaches, including cyberattacks or widespread outages, 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 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, 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. 

 

 

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

 

Critical Accounting Estimates

 

The accounting policies of LCNB conform to U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management’s estimates. As this information changes, management’s estimates and assumptions used to prepare LCNB’s financial statements and related disclosures may also change. The most significant accounting policies followed by LCNB are presented in Note 1 of the Notes to Consolidated Financial Statements included in LCNB's 2023 Annual Report on Form 10-K filed with the SEC. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the items described below to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available.

 

Business Combinations. Assets acquired, including identified intangible assets such as core deposit intangibles, and liabilities assumed as a result of a merger or acquisition transaction are recorded at their estimated fair values. The difference between the consideration paid and the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Management engages third-party specialists to assist in the development of fair value estimates. Significant estimates and assumptions used to value acquired assets and liabilities assumed include, but are not limited to, projected cash flows, future growth rates, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses for PCD loans is recognized within acquisition accounting. The allowance for credit losses for non-PCD assets is recognized as provision for credit losses in the same reporting period as the merger or acquisition. Fair value adjustments are amortized or accreted into the income statement over the estimated lives of the acquired assets and assumed liabilities. The purchase date valuations and any subsequent adjustments determine the amount of goodwill recognized in connection with the merger or acquisition.

 

Preliminary estimates of fair values may be adjusted for a period of time no greater than one year subsequent to the merger or acquisition date if new information is obtained about facts and circumstances that existed as of the merger or acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this period are recognized in the current reporting period.

 

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 as an 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.

 

 

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

 

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 condensed consolidated balance sheet.

 

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

 

Accounting rules require LCNB to determine the fair value of all the assets and liabilities of an acquired entity and to record their fair values on the date of acquisition. LCNB employs a variety of means in determining fair values, including the use of discounted cash flow analysis, market comparisons and projected future revenue streams. For those items for which management concludes that LCNB has the appropriate expertise to determine fair value, management may choose to use its own calculation of fair value. In other cases, where the fair value is not readily determined, consultation with outside parties is used to determine fair value. Once valuations have been determined, the net difference between the price paid for the acquired entity and the fair value of the balance sheet is recorded as goodwill. Goodwill is assessed at least annually for impairment, with any such impairment recognized in the period identified. A more frequent assessment is performed if there are material changes in the market place or within the organizational structure.

 

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 triggering events or circumstances have occurred that indicate the remaining useful life or carrying value of the amortizing intangible should be revised.

 

Fair Value Accounting for Debt Securities. Debt securities classified as available-for-sale are recorded at fair value with unrealized gains and losses recorded in other comprehensive income (loss), net of tax. Available-for-sale debt securities in unrealized loss positions are evaluated to determine if the decline in fair value should be recorded in income or in other comprehensive income (loss). LCNB first determines if it intends to sell or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through income. If neither of these criteria is met, LCNB evaluates whether the decline in fair value resulted from credit factors. In making this determination, management considers, among other factors, the extent to which fair value is less than the amortized cost basis, any changes to the rating of the security by rating agencies, and any adverse conditions specifically related to the security or issuer. If the present value of cash flows expected to be collected is less than the amortized cost basis, a provision is recorded to the allowance for credit losses. Any decline in fair value not recorded through an allowance for credit losses is recognized in accumulated other comprehensive income (loss), net of applicable taxes.

 

Loans Held-For-Sale. Loans held-for-sale (“LHFS”) represent mortgage loans intended to be sold in the secondary market and other loans that management has an active plan to sell. LHFS are carried at the lower-of-cost-or-fair value as determined on an aggregate basis by type of loan. Any writedowns to fair value upon the transfer of loans to LHFS are reflected in loan charge-offs. Any further decreases are recognized in non-interest income and increases in fair value above the loan cost basis are not recognized until the loans are sold.

 

 

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

 

Results of Operations

 

Net income for the respective three and nine months ended September 30, 2024 was $4,532,000 (total basic and diluted earnings per share of $0.31) and $7,372,000 (total basic and diluted earnings per share of $0.53). This compares to net income of $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) for the same respective three and nine-month periods in 2023. Results for the 2024 periods were affected by the expenses incurred in connection with the acquisition of Eagle Financial Bancorp, Inc. on April 12, 2024 and Cincinnati Bancorp, Inc. on November 1, 2023.

 

Net interest income for the three and nine months ended September 30, 2024 was $14,970,000 and $44,082,000, respectively. This compares to net interest income of $13,571,000 and $41,690,000 for the same respective three and nine-month periods in 2023. The increase in net interest income was primarily due to increased loan interest income caused by higher average loan balances and an increase in the average rate earned on the loan portfolio. This increase was partially offset by increased interest expense recognized on higher amounts of average interest-bearing demand and money market deposits, IRA and time certificates, and long-term borrowings and to higher interest expense paid for these liabilities. The higher average loan and deposit balances during the 2024 periods were due to the acquisition of EFBI and CNNB. The increases in average rates earned on loans and paid for deposits and debt is associated with the rapid increase in the Effective Federal Funds Rate. LCNB's tax equivalent net interest margin for the first nine months of 2024 was 2.81%, compared to 3.20% for the same period last year.

 

LCNB recorded a provision for credit losses of $660,000 and $1,313,000 for the three and nine months ended September 30, 2024, respectively. This compares to net recoveries of credit losses of $114,000 and $141,000 for the same respective three and nine month periods in 2023.  The provision for the nine months ended September 30, 2024 includes $763,000 recognized on non-PCD loans acquired through the Eagle Financial Bancorp merger.

 

Non-interest income for the three and nine months ended September 30, 2024 was $6,407,000 and $14,416,000, respectively. This compares to non-interest income of $3,578,000 and $10,805,000 for the same respective periods in 2023. The increase for both the three and nine-month periods was primarily due to higher amounts of fiduciary income, service charges and fees on deposit accounts, bank-owned life insurance income, and net gains recognized on the sale of residential mortgage loans.  Partially offsetting non-interest income during the nine months ended September 30, 2024 was an $843,000 pretax loss on the sale of approximately $48.9 million of below market rate loans acquired from Cincinnati Bancorp during the second quarter.

 

 

Non-interest expense for the three and nine months ended September 30, 2024 was $15,387,000 and $48,684,000, respectively, compared to $12,244,000 and $36,847,000 for the same three and nine-month periods in 2023. The increases were primarily due to higher expenses associated with the additional personnel and offices resulting from the acquisitions of Eagle Financial Bancorp and Cincinnati Bancorp and, for the nine month comparative periods, the increase in one-time expenses associated with the two acquisitions.

 

 

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

 

Net Interest Income

 

Three Months Ended September 30, 2024 vs. September 30, 2023

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, 2024 and September 30, 2023, 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,
		2024												2023
		Average				Interest				Average				Average				Interest				Average
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		Balance				Paid				Rate				Balance				Paid				Rate
										(Dollars in thousands)
Loans (1)		$	1,770,330				24,342				5.47	%		$	1,451,153				17,875				4.89	%
Interest-bearing demand deposits			15,369				209				5.41	%			10,891				152				5.54	%
Federal Reserve Bank stock			6,393				(1	)			(0.06	)%			4,652				—				0.00	%
Federal Home Loan Bank stock			20,710				464				8.91	%			7,007				134				7.59	%
Investment securities:
Equity securities			5,026				40				3.17	%			3,382				38				4.46	%
Debt securities, taxable			262,220				1,181				1.79	%			274,494				1,296				1.87	%
Debt securities, non-taxable (2)			19,906				206				4.12	%			24,134				219				3.60	%
Total earnings assets			2,099,954				26,441				5.01	%			1,775,713				19,714				4.40	%
Non-earning assets			277,003												203,514
Allowance for credit losses			(11,281	)											(7,958	)
Total assets		$	2,365,676											$	1,971,269
Interest-bearing demand and money market deposits		$	585,823				3,006				2.04	%		$	541,487				2,298				1.68	%
Savings deposits			367,045				274				0.30	%			379,515				129				0.13	%
IRA and time certificates			538,070				6,298				4.66	%			230,030				1,999				3.45	%
Short-term borrowings			11				—				0.00	%			63,018				830				5.23	%
Long-term debt			158,419				1,850				4.65	%			72,550				841				4.60	%
Total interest-bearing liabilities			1,649,368				11,428				2.76	%			1,286,600				6,097				1.88	%
Demand deposits			445,663												459,476
Other liabilities			21,275												21,226
Equity			249,370												203,967
Total liabilities and equity		$	2,365,676											$	1,971,269
Net interest rate spread (3)											2.25	%											2.52	%
Net interest income and net interest margin on a taxable-equivalent basis (4)							15,013				2.84	%							13,617				3.04	%
Ratio of interest-earning assets to interest-bearing liabilities			127.32	%											138.02	%

 

(1)	Includes non-accrual loans and loans held-for-sale.
(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.

 

 

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, 2024 as compared to the same period in 2023.  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, 2024 vs. 2023
		Increase (decrease) attributable to:
		Volume				Rate				Total
		(In thousands)
Interest-earning Assets:
Loans		$	4,231				2,236				6,467
Interest-bearing demand deposits			61				(4	)			57
Federal Reserve Bank stock			—				(1	)			(1	)
Federal Home Loan Bank stock			303				27				330
Investment securities:
Equity securities			15				(13	)			2
Debt securities, taxable			(57	)			(58	)			(115	)
Debt securities, non-taxable			(41	)			28				(13	)
Total interest income			4,512				2,215				6,727
Interest-bearing Liabilities:
Interest-bearing demand and money market deposits			199				509				708
Savings deposits			(4	)			149				145
IRA and time certificates			3,414				885				4,299
Short-term borrowings			(415	)			(415	)			(830	)
Long-term debt			1,003				6				1,009
Total interest expense			4,197				1,134				5,331
Net interest income		$	315				1,081				1,396

 

Net interest income on a fully taxable-equivalent basis for the three months ended September 30, 2024 totaled $15,013,000, an increase of $1,396,000 from the comparable period in 2023.  Total interest income increased $6,727,000, which was partially offset by an increase in total interest expense of $5,331,000.

 

The $6,727,000 increase in total interest income was primarily due to a $6,467,000 increase in loan interest income. The increase in loan interest income was primarily due to a $319.2 million increase in average loan balances and secondarily to a 58 basis point (a basis point equals 0.01%) increase in the average rate earned on the loan portfolio due to consistent market rates. Loan balances increased primarily due to loans acquired in the mergers with EFBI and CNNB.

 

The $5,331,000 increase in total interest expense was primarily due to a $708,000 increase in interest expense for interest-bearing demand and money market deposits, a $4,299,000 increase in interest expense for IRA and time certificates, and a $1,009,000 increase in interest expense for long-term debt. Interest expense on interest-bearing demand and money market deposits increased primarily due to a 36 basis point increase in the average rate paid for these deposits and secondarily to a $44.3 million increase in average deposit balances. Interest expense on IRA and time certificates increased due to a $308.0 million increase in average deposit balances and to a 121 basis point increase in the average rate paid. Deposit balances increased due to a combination of organic growth and to balances obtained in the mergers with EFBI and CNNB.

 

Interest expense on long-term debt increased primarily due to a $85.9 million increase in the average balance outstanding caused by new FHLB advances, which were used to pay down short-term borrowings, promote loan growth, and increase liquidity.

 

 

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

 

Market rates were consistent throughout the beginning two months of the quarter as the targeted federal funds rate remained unchanged for the previous ten months. In September of 2024, the FOMC decreased the targeted federal funds rate by 50 basis points.

 

Nine Months Ended September 30, 2024 vs. September 30, 2023

The following table presents, for the nine months ended September 30, 2024 and September 30, 2023, 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,
		2024												2023
		Average				Interest				Average				Average				Interest				Average
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
		Balance				Paid				Rate				Balance				Paid				Rate
										(Dollars in thousands)
Loans (1)		$	1,770,383				71,860				5.42	%		$	1,415,719				50,781				4.80	%
Interest-bearing demand deposits			17,602				747				5.67	%			11,051				453				5.48	%
Federal Reserve Bank stock			6,051				176				3.89	%			4,652				140				4.02	%
Federal Home Loan Bank stock			19,040				1,172				8.22	%			6,840				317				6.20	%
Investment securities:
Equity securities			5,002				119				3.18	%			3,698				113				4.09	%
Debt securities, taxable			262,360				3,596				1.83	%			280,998				3,962				1.89	%
Debt securities, non-taxable (2)			19,098				571				3.99	%			24,518				662				3.61	%
Total earnings assets			2,099,536				78,241				4.98	%			1,747,476				56,428				4.32	%
Non-earning assets			266,641												200,897
Allowance for credit losses			(11,064	)											(7,782	)
Total assets		$	2,355,113											$	1,940,591
Interest-bearing demand and money market deposits		$	625,785				10,498				2.42	%		$	522,896				5,140				1.31	%
Savings deposits			369,104				787				0.28	%			396,785				402				0.14	%
IRA and time certificates			467,425				16,173				4.62	%			210,407				4,675				2.97	%
Short-term borrowings			25,358				1,116				5.88	%			78,916				3,142				5.32	%
Long-term debt			157,056				5,465				4.65	%			36,878				1,240				4.50	%
Total interest-bearing liabilities			1,644,728				34,039				2.76	%			1,245,882				14,599				1.57	%
Demand deposits			446,832												469,580
Other liabilities			20,724												21,633
Equity			242,829												203,496
Total liabilities and equity		$	2,355,113											$	1,940,591
Net interest rate spread (3)											2.22	%											2.75	%
Net interest income and net interest margin on a taxable-equivalent basis (4)							44,202				2.81	%							41,829				3.20	%
Ratio of interest-earning assets to interest-bearing liabilities			127.65	%											140.26	%

 

(1)	Includes non-accrual loans and loans held-for-sale.
(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.

 

 

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, 2024 as compared to the same period in 2023.  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, 2024 vs. 2023
		Increase (decrease) attributable to:
		Volume				Rate				Total
		(In thousands)
Interest-earning Assets:
Loans		$	13,819				7,260				21,079
Interest-bearing demand deposits			277				17				294
Federal Reserve Bank stock			41				(5	)			36
Federal Home Loan Bank stock			722				133				855
Investment securities:
Equity securities			34				(28	)			6
Debt securities, taxable			(258	)			(108	)			(366	)
Debt securities, non-taxable			(157	)			66				(91	)
Total interest income			14,478				7,335				21,813
Interest-bearing Liabilities:
Interest-bearing demand and money market deposits			1,167				4,191				5,358
Savings deposits			(30	)			415				385
IRA and time certificates			7,896				3,602				11,498
Short-term borrowings			(2,327	)			301				(2,026	)
Long-term debt			4,180				45				4,225
Total interest expense			10,886				8,554				19,440
Net interest income		$	3,592				(1,219	)			2,373

 

Net interest income on a fully taxable-equivalent basis for the nine months ended September 30, 2024 totaled $44,202,000, an increase of $2,373,000 from the comparable period in 2023.  Total interest income increased $21,813,000, which was partially offset by an increase in total interest expense of $19,440,000.

 

The $21,813,000 increase in total interest income was primarily due to a $21,079,000 increase in loan interest income. The increase in loan interest income was primarily due to a $354.7 million increase in average loan balances and secondarily to a 62 basis point increase in the average rate earned on the loan portfolio due to higher market rates. Loan balances increased primarily due to loans acquired in the mergers with EFBI and CNNB.

 

The $19,440,000 increase in total interest expense was primarily due to a $5,358,000 increase in interest expense for interest-bearing demand and money market deposits, an $11,498,000 increase in interest expense for IRA and time certificates, and a $4,225,000 increase in interest expense for long-term debt. Interest expense on interest-bearing demand and money market deposits increased primarily due to a 93 basis point increase in the average rate paid for these deposits and secondarily to a $102.9 million increase in average deposit balances. Interest expense on IRA and time certificates increased due to a $257.0 million increase in average deposit balances and to a 165 basis point increase in the average rate paid. Deposit balances increased due to a combination of organic growth and to balances obtained in the mergers with EFBI and CNNB.

 

Interest expense on long-term debt increased primarily due to a $120.2 million increase in the average balance outstanding caused by new FHLB advances, which were used to pay down short-term borrowings, promote loan growth, and increase liquidity.

 

 

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

 

Provision and Allowance For Credit Losses

 

LCNB continuously reviews the loan portfolio for credit risk through the use of its lending and loan review functions. Independent loan reviews analyze specific loans, providing validation that credit risks are appropriately identified, graded, and reported to the Loan Committee, Board of Directors, and the Audit Committee of the Board of Directors. New credits meeting specific criteria are analyzed prior to origination and are reviewed by the Loan Committee, the Loan Committee of the Board of Directors, and the Board of Directors.

 

The total provision for credit losses is determined based upon management's evaluation as to the amount needed to maintain the allowance for credit losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. For analysis purposes, the loan portfolio is separated into pools of similar loans. These pools include commercial and industrial loans, owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, real estate loans secured by farms, real estate loans secured by multi-family dwellings, residential real estate loans secured by senior liens on 1-4 family dwellings, residential real estate loans secured by junior liens on 1-4 family dwellings, home equity line of credit loans, consumer loans, loans for agricultural purposes not secured by real estate, construction loans secured by 1-4 family dwellings, construction loans secured by other real estate, and several smaller classifications. Within each pool of loans, LCNB examines a variety of factors to determine the adequacy of the allowance for credit losses, including historic charge-off percentages, overall pool quality, a review of specific problem loans, current economic trends and conditions that may affect borrowers' ability to pay, and the nature, volume, and consistency of the loan pool.

 

LCNB recorded a provision for credit losses of $660,000 for the third quarter of 2024, compared to a recovery of credit losses of $114,000 for the comparable period in 2023. The provision for the 2024 period included a provision for credit losses on loans of $681,000 and a recovery of credit losses for off-balance-sheet credit exposures of $22,000. The provision for the 2023 period included a provision for credit losses on loans of $9,000 and a recovery of credit losses for off-balance-sheet credit exposures of $123,000. For the nine months ended September 30, 2024, LCNB recorded a provision for credit losses of $1,313,000, compared to a recovery of credit losses of $141,000 for the comparable period in 2023. The provision for the 2024 nine-month period included a provision for credit losses on loans of $1,300,000 and a provision for off-balance-sheet credit exposures of $11,000. The recovery of credit losses for the 2023 nine-month period included a provision for credit losses on loans of $173,000 and a recovery of credit losses for off-balance-sheet credit exposures of $123,000.

 

The provisions for credit losses on loans during the nine-month 2024 period included $763,000 recognized on non-PCD loans acquired through the EFBI merger and a $1.2 million increase for a commercial real estate, non-owner occupied loan that was individually evaluated for the first time during the first quarter 2024. These increases were largely offset by a recovery of credit losses in the pooled real estate mortgage loan category. The residential real estate mortgage loan category had a recovery of credit losses primarily due to a decrease in loan balances caused by a transfer to the loans held-for-sale category.

 

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 or if market conditions change.

 

Net charge-offs for the three and nine months ended September 30, 2024 totaled $84,000 and $147,000, respectively, compared to net charge-offs of $34,000 and $83,000 for the respective periods in 2023.

 

 

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

 

Non-Interest Income

 

A comparison of non-interest income for the three and nine months ended September 30, 2024 and September 30, 2023 is as follows (in thousands):

 

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
		2024				2023				Difference				2024				2023				Difference
Fiduciary income		$	2,097				1,736				361				6,137				5,263				874
Service charges and fees on deposit accounts			1,899				1,397				502				4,820				4,324				496
Net losses from sales of debt securities, available-for-sale			—				—				—				(214	)			—				(214	)
Bank-owned life insurance income			654				282				372				1,313				830				483
Net gains from sales of loans			1,625				29				1,596				2,197				38				2,159
Other operating income (loss)			132				134				(2	)			163				350				(187	)
Total non-interest income		$	6,407				3,578				2,829				14,416				10,805				3,611

 

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 increased primarily due to increases in check card income, ATM usage fees, and fee income received on the ICS product, partially offset by a decrease in overdraft fees and deposit account fees in general. LCNB reduced overdraft fees from $35 per occurrence to $25 effective November 1, 2023.

•

Net losses from sales of debt securities during the nine months ended September 30, 2024 reflect losses recognized on the sale of municipal securities with an amortized cost basis of approximately $9.8 million.

	•	Bank-owned life insurance ("BOLI") income increased primarily due to mortality proceeds recognized during 2024. The 2023 periods did not include mortality proceeds. Other BOLI income increased to a lesser extent due to insurance policies acquired in the mergers with EFBI and CNNB.
	•	Net gains from sales of loans increased due to a higher volume of residential real estate loan sales. Partially offsetting these gains for the nine-month period was an $843,000 pretax loss on the sale of approximately $48.9 million of below market rate loans acquired from CNNB.

•

Other operating income decreased during the nine-month period primarily due to an increase in amortization of capitalized mortgage servicing rights, which amortization is netted for accounting purposes against fee income recognized from the servicing of sold residential mortgage loans.

 

 

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, 2024 and September 30, 2023 is as follows (in thousands):

 

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
		2024				2023				Difference				2024				2023				Difference
Salaries and employee benefits		$	9,025				7,044				1,981				26,585				21,454				5,131
Equipment expenses			420				397				23				1,205				1,175				30
Occupancy expense, net			966				805				161				2,915				2,367				548
State financial institutions tax			505				396				109				1,409				1,189				220
Marketing			320				223				97				704				735				(31	)
Amortization of intangibles			304				113				191				838				336				502
FDIC insurance premiums, net			547				224				323				1,445				663				782
Contracted services			807				671				136				2,435				1,978				457
Merger-related expenses			281				302				(21	)			3,376				742				2,634
Other non-interest expense			2,212				2,069				143				7,772				6,208				1,564
Total non-interest expense		$	15,387				12,244				3,143				48,684				36,847				11,837

 

Reasons for changes include:

•

Salaries and employee benefits increased due to overall wage and benefit increases, an increased number of employees due to the acquisition of EFBI and CNNB, higher sales commissions, and higher health insurance costs.

•

Occupancy expense increased primarily due to increased utility and depreciation expenses caused by the additional offices acquired from EFBI and CNNB. Maintenance and repair costs related to LCNB's office facilities also contributed to the increase for the nine-month period.

•

Amortization of intangibles increased due to the amortization of core deposit intangibles recognized from the acquisitions of EFBI and CNNB.

•

FDIC insurance premiums increased due to a higher assessment base, partially reflecting increased assets resulting from the acquisitions of EFBI and CNNB, and to an increase in the assessment rate charged.

•

Merger-related expenses reflect costs incurred in connection with the acquisitions of EFBI and CNNB.

•

Other non-interest expense for the 2024 third quarter benefited from a $454,000 gain recognized on the sale of a closed office building.  Likewise, the 2023 second quarter benefited from a $425,000 gain recognized on the sale of a closed office building. The remaining net increases for the three and nine-month periods can be attributed to smaller increases in various other accounts.

 

Income Taxes

 

LCNB's effective tax rate for the three and nine months ended September 30, 2024 was 15.0% and 13.3%, respectively, compared to 18.9% and 18.2% for the same respective periods in 2023.  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. The effective tax rates for 2024 were lower due to tax-exempt items not decreasing in proportion to the overall decrease in earnings.

 

 

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, 2024 and December 31, 2023 is as follows (dollars in thousands):

 

		September 30, 2024				December 31, 2023				Difference $				Difference %
ASSETS:
Total cash and cash equivalents		$	39,374				39,723				(349	)			(0.88	)%
Investment securities:
Equity securities with a readily determinable fair value, at fair value			1,388				1,336				52				3.89	%
Equity securities without a readily determinable fair value, at cost			3,666				3,666				—				0.00	%
Debt securities, available-for-sale, at fair value			262,622				276,601				(13,979	)			(5.05	)%
Debt securities, held-to-maturity, net, at cost			18,730				16,858				1,872				11.10	%
Federal Reserve Bank stock, at cost			6,429				5,086				1,343				26.41	%
Federal Home Loan Bank stock, at cost			20,710				15,176				5,534				36.47	%
Loans, net			1,707,193				1,712,946				(5,753	)			(0.34	)%
Loans held-for-sale			35,687				—				35,687				NM
Premises and equipment, net			41,233				36,302				4,931				13.58	%
Operating lease right-of-use assets			5,853				6,000				(147	)			(2.45	)%
Goodwill			90,209				79,509				10,700				13.46	%
Core deposit and other intangibles			11,605				9,494				2,111				22.24	%
Bank-owned life insurance			53,650				49,847				3,803				7.63	%
Interest receivable			9,450				8,405				1,045				12.43	%
Other assets			39,109				30,643				8,466				27.63	%
Total assets		$	2,346,908				2,291,592				55,316				2.41	%
LIABILITIES:
Deposits:
Non-interest-bearing		$	446,626				462,267				(15,641	)			(3.38	)%
Interest-bearing			1,470,379				1,362,122				108,257				7.95	%
Total deposits			1,917,005				1,824,389				92,616				5.08	%
Short-term borrowings			—				97,395				(97,395	)			(100.00	)%
Long-term debt			155,662				113,123				42,539				37.60	%
Operating lease liabilities			6,152				6,261				(109	)			(1.74	)%
Accrued interest and other liabilities			14,843				15,121				(278	)			(1.84	)%
Total liabilities			2,093,662				2,056,289				37,373				1.82	%
SHAREHOLDERS' EQUITY:
Common shares			186,716				173,637				13,079				7.53	%
Retained earnings			138,325				140,017				(1,692	)			(1.21	)%
Treasury shares, at cost			(56,015	)			(56,015	)			—				0.00	%
Accumulated other comprehensive loss, net of taxes			(15,780	)			(22,336	)			6,556				(29.35	)%
Total shareholders' equity			253,246				235,303				17,943				7.63	%
Total liabilities and shareholders' equity		$	2,346,908				2,291,592				55,316				2.41	%

 

NM - Not Meaningful

 

Reasons for changes include:

•

Available-for-sale debt securities decreased due to maturities, paydowns, sales, and calls, partially offset by purchases of new securities and increases in market valuation.

•

Net loans decreased primarily due to loans transferred to the held-for-sale category, partially offset by the addition of loans acquired through the merger with EFBI.  During the nine months ended September 30, 2024, approximately $104.3 million of single-family residential loans were sold in secondary market.

 

 

 

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

 

	•	Goodwill increased primarily due to additional goodwill recorded as a result of the merger with EFBI and secondarily to goodwill adjustments for the merger with CNNB.
	•	Core deposit and other intangibles increased due to the addition of a core deposit intangible rights obtained in the merger with EFBI.
	•	Total deposits increased due to a combination of deposits acquired through the merger with EFBI and through organic deposit growth. There was, however, significant movement from non-interest-bearing deposits to interest-bearing deposits during 2023 and 2024, likely due to the increases 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 growth in liquidity and the loan portfolio.

	•	Common shares increased primarily due to stock issued as part of the acquisition price for EFBI.
	•	Accumulated other comprehensive loss, net of taxes decreased because of market-driven partial recoveries in the fair value of LCNB's available-for-sale debt securities investments.

 

LCNB's loan portfolio represents its largest asset category and is its most significant source of interest income. Loan classifications have been identified as Commercial & Industrial, Commercial Real Estate, Residential Real Estate, Consumer, Agricultural, and Other. Commercial real estate is the largest classification in LCNB's loan portfolio, comprising about 64% of total loans at September 30, 2024.

 

Loans secured by commercial real estate consist of owner-occupied, non-owner-occupied, farmland, multi-family, and construction loans. A commercial real estate, owner-occupied loan finances the purchase, construction, or refinance of a building or other property for which the repayment of principal is dependent upon cash flows from ongoing operations conducted by the party, or an affiliate of the party, who owns the property. A commercial real estate, non-owner occupied loan finances the purchase, construction or refinance of a building or other property for which the repayment of principal is dependent upon rental income associated with the property or the subsequent sale of the property. The values of these loans are primarily impacted by the level of interest rates associated with the debt and to local economic conditions, which dictate occupancy rates and the amount of rent charged. The increase in debt service due to higher interest rates may not be able to be passed on to tenants. As part of the origination process, loan interest rates and occupancy rates are stressed to determine the impact on the borrower’s ability to maintain adequate debt service under different economic conditions. Further, LCNB monitors the concentration in any one industry and has established limits relative to the total of the Bank's tier 1 and tier 2 capital for each category of loan. Credit quality trends are monitored by industry to determine if a change in the risk exposure to a certain industry may warrant a change in underwriting standards.

 

The following table provides a breakdown of amortized cost of commercial real estate loans by property-type classification as of September 30, 2024, excluding loans which are junior in lien or covered by collateral secured with varying classes of assets (dollars in thousands):

 

		Amount				% of Total
Multi-family		$	261,558				26	%
Retail			163,800				16	%
Office			124,168				12	%
Mixed use			97,455				10	%
Hotel/Motel			87,147				9	%
Self storage			46,274				5	%
Warehouse (one tenant)			43,828				4	%
Light industrial			31,444				3	%
Healthcare facilities			25,092				3	%
Manufacturing			20,301				2	%
Warehouse (more than one tenant)			17,737				2	%
Dental			10,853				1	%
Other			69,369				7	%
Total		$	999,026				100	%

 

 

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

 

Most of LCNB's commercial real estate loans are made within its general market area of Southwest and South-Central Ohio and Northern Kentucky. The following table provides a breakdown of amortized cost of commercial real estate loans by real estate collateral location as of September 30, 2024, excluding loans which are junior in lien or covered by collateral secured with varying classes of assets (dollars in thousands):

 

		Amount				% of Total
Franklin County, Ohio		$	290,624				29	%
Hamilton County, Ohio			197,976				20	%
Butler County, Ohio			91,764				9	%
Warren County, Ohio			88,364				9	%
Montgomery County, Ohio			87,214				9	%
Delaware County, Ohio			40,258				4	%
Boone County, Kentucky			29,443				3	%
Greene County, Ohio			28,225				3	%
Kenton County, Kentucky			20,865				2	%
Clermont County, Ohio			19,130				2	%
Licking County, Ohio			14,871				1	%
Fayette County, Ohio			13,578				1	%
Other, Ohio			65,305				7	%
Other, Kentucky			7,110				1	%
Other, Indiana			3,425				0	%
Other, West Virginia			874				0	%
Total		$	999,026				100	%

 

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 the 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				To Be
						with Capital				Considered
		Minimum				Conservation				Well-
		Requirement				Buffer				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	%		NA					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.

 

 

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, 2024				December 31, 2023
Regulatory Capital:
Shareholders' equity		$	259,897				242,528
Goodwill and other intangibles			(98,518	)			(84,897	)
Accumulated other comprehensive loss, net			15,775				22,336
Tier 1 risk-based capital			177,154				179,967
Eligible allowance for credit losses			11,735				10,318
Total risk-based capital		$	188,889				190,285
Capital ratios:
Common Equity Tier 1 Capital to risk-weighted assets			9.81	%			10.17	%
Tier 1 Capital to risk-weighted assets			9.81	%			10.17	%
Total Capital to risk-weighted assets			10.46	%			10.75	%
Leverage			7.74	%			8.05	%

 

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, 2024 regulatory capital calculations.

 

Liquidity

 

LCNB Corp. depends on dividends from the Bank for the majority of its liquid assets, including the cash needed to pay dividends to its shareholders. Federal 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. If dividends exceed net income for a year, a bank is generally not required to carry forward the negative amount resulting from such excess if the bank can attribute the excess to the preceding two years. If the excess is greater than the Bank's previously undistributed net income for the preceding two years, prior OCC approval of the dividend is required and a negative amount would be carried forward in future dividend calculations. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines.

 

At December 31, 2023, the Bank had paid $650,000 in excess of the previous two years' Bank net income to the holding company due to an $8.75 million dividend for the acquisition of CNNB. In addition, dividend payments during 2024 were also in excess of the previous two years' Bank net income due to a $10.5 million dividend for the acquisition of EFBI. The Company does not expect the excess dividends will result in any adverse supervisory action by the OCC.

 

Effective liquidity management ensures that cash is available to meet the cash flow needs of borrowers and depositors, pay dividends to shareholders, and meet 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, line of credit arrangements totaling $115.0 million with three correspondent banks, and interest and repayments received from LCNB's loan and investment portfolios. In addition, LCNB has approximately $162 million in off-balance sheet insured cash sweeps immediately available for liquidity.

 

Total remaining borrowing capacity with the Federal Home Loan Bank at September 30, 2024 was approximately $120.9 million. Additional borrowings of approximately $115.0 million were available through line of credit arrangements with correspondent banks.

 

Management closely monitors the level of liquid assets available to meet ongoing funding needs.  It is management's intent to maintain adequate liquidity so that sufficient funds are readily available at a reasonable cost.  LCNB experienced no liquidity or operational problems as a result of current liquidity levels. Management believes LCNB has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short and long-term.

 

Commitments to extend credit at September 30, 2024 totaled $349.8 million and are more fully described in Note 11 - Commitments and Contingent Liabilities to LCNB's condensed consolidated financial statements. Since many commitments to extend credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash required to satisfy the commitment reported prior to its expiration.

 

 

Item 3.         Quantitative and Qualitative Disclosures about Market Risk

 

Market risk for LCNB is primarily due to 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, 2024 IRSA indicates that an increase in interest rates or a decrease in interest rates of 100 basis points will have a negative effect on NII and a decrease in interest rates of 200 or 300 basis points will have a positive effect on NII. The changes in NII for all rate assumptions are within LCNB's acceptable ranges.

 

						$ Change in				% Change in
Rate Shock Scenario in Basis Points		Amount				NII				NII				Limits
		(Dollars in thousands)
Up 300		$	74,740				(1,332	)			(1.75	)%			15	%
Up 200			75,171				(901	)			(1.19	)%			10	%
Up 100			75,428				(644	)			(0.85	)%			5	%
Base			76,072				—				—	%			—	%
Down 100			75,877				(195	)			(0.26	)%			5	%
Down 200			76,110				38				0.05	%			10	%
Down 300			76,244				172				0.23	%			15	%

 

The IRSA shows the effect on NII during a one-year period only.  A more long-range model is the EVE analysis, which shows, accounting for the same rate shocks, 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, 2024 EVE analysis indicates that an increase in interest rates will have a negative effect on the EVE and 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 the down 200 and 300 basis point rate shocks are outside LCNB's acceptable ranges as shown below. Management has determined the downward shifts would be acceptable, despite being outside of acceptable ranges, due to the positive nature of the results with respect to cash flows. 

 

						$ Change in				% Change in
Rate Shock Scenario in Basis Points		Amount				EVE				EVE				Limits
		(Dollars in thousands)
Up 300		$	158,722				(36,037	)			(18.50	)%			25	%
Up 200			175,726				(19,034	)			(9.77	)%			20	%
Up 100			192,724				(2,036	)			(1.05	)%			15	%
Base			194,760				—				—	%			—	%
Down 100			222,702				27,942				14.35	%			15	%
Down 200			236,782				42,022				21.58	%			20	%
Down 300			246,248				51,488				26.44	%			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 conditions, 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.

 

 

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, 2024, 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.

 

 

PART II.  OTHER INFORMATION

 

 

Item 1.         Legal Proceedings

 

Except for routine litigation incidental to its business, LCNB is not a party to any material pending legal proceedings and none of its property is the subject of any material proceedings.

 

Item 1A.      Risk Factors

 

Readers should carefully consider the risk factors previously disclosed in Part I, Item 1A. Risk Factors in LCNB's Form 10-K for the year ended December 31, 2023.

 

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.

 

Under the Issuer Stock Repurchase Plan Agreement (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 Plan during the three months ended September 30, 2024:

 

										Total Number of				Maximum Number
										Shares Purchased				of Shares that May
		Total Number								as Part of Publicly				Yet Be Purchased
		of Shares				Average Price				Announced Plans				Under the Plans
Period		Purchased				Paid Per Share				or Programs				or Programs
July 1 - 31, 2024			—			$	—				—				315,047
August 1 - 31, 2024			—			$	—				—				315,047
September 1 - 30, 2024			—			$	—				—				315,047

 

On February 27, 2023, LCNB's Board of Directors authorized 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.

 

Item 3.         Defaults Upon Senior Securities

 

None.

 

Item 4.         Mine Safety Disclosures

 

Not applicable.

 

Item 5.         Other Information

 

During the three months ended September 30, 2024, none of our directors or officers informed us of the adoption, modification, or termination of a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as those terms are defined in Regulation S-K, Item 408.

 

---

 

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.
2.2	Agreement and Plan of Merger dated as of November 28, 2023 by and between LCNB Corp. and Eagle Financial Bancorp, Inc. - incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 29, 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, 2024 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).

 

 

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 6, 2024	/s/ Eric J. Meilstrup
	Eric J. Meilstrup
	Chief Executive Officer and President
November 6, 2024	/s/ Robert C. Haines, II
	Robert C. Haines, II
	Executive Vice President and Chief Financial Officer